Consequences of Inflationism: Caracas (Venezuela) and Kiev (Ukraine) Burns

Sad to see of what seems as escalating political instability around the world (mostly in emerging markets).

The backlash from hyperinflation by the Venezuelan government has become apparent as rioting has been intensifying. 

First the crashing bolivar and spiraling price inflation.  

Now writes Zero Hedge (bold original)

the situation in Venezuela has once again escalated as protest leader Leopoldo Lopez' arrest (and possible 10 year jail sentence) prompted more violence overnight. However, as we warned, the government crackdown is starting to raise concerns about the stability of the government.

• *VENEZUELA PROTESTS ESCALATING INTO NATIONWIDE UNREST: IHS
• *ESCALATION OF PROTESTS PUTS STABILITY OF GOVT AT RISK: IHS
• *RISING VIOLENCE COULD LEAD TO MADURO OUSTER BY MILITARY: IHS

As opposition leader Capriles asks Venezuela's military to uphold the constitution, he exclaims that "the poor' must participate for government to change.

• *VENEZUELA HATILLO MAYOR DAVID SMOLANSKY SPEAKS IN CARACAS
• *VENEZUELA PEOPLE WON'T STAY QUIET: SMOLANSKY
• *SMOLANSKY SAYS VENEZUELA SUFFERED TERROR LAST NIGHT
• *SMOLANSKY CALLS FOR MASSIVE VENEZUELA PROTESTS SATURDAY

The opposition leader speaks:

• *VENEZUELA OFFICIALS SHOT AT PROTESTERS YDAY: CAPRILES
• *VENEZUELA ARMED FORCES SHOULD ALLOW PEACEFUL MARCHES: SMOLANSKY
• *VENEZUELA STRENGTHENING TIES WITH CUBA, RAMIREZ SAYS
• *VENEZUELA GOVT USING VIOLENCE TO HIDE ECO PROBLEMS: CAPRILES
• *CAPRILES SAYS SOME IN VENEZUELA GOVT WANT MADURO OUT
• *CAPRILES ASKS VENEZUELA ARMED FORCES TO UPHOLD CONSTITUTION
• *VENEZUELA POOR MUST PARTICIPATE FOR GOVT TO CHANGE: CAPRILES
• *CAPRILES SAYS HE WON'T BE FORCED TO TALK TO VENEZUELA GOVT

And IHS warns:

• *VENEZUELA PROTESTS ESCALATING INTO NATIONWIDE UNREST: IHS
• *ESCALATION OF PROTESTS PUTS STABILITY OF GOVT AT RISK: IHS
• *RISING VIOLENCE COULD LEAD TO MADURO OUSTER BY MILITARY: IHS

Images from last night suggest this is getting considerably worse...despite Maduro's claims of "absolute calm"

The populist government recently even put a Happiness Ministry and promoted the public’s looting of “greedy”companies to enforce price controls.

The result has been obvious: the cumulative demand (printing money) and supply side (price controls) interventions has prompted businesses to refrain from operations. Thus all money printed by the government has emptied shelves and sent prices skyrocketing. The ensuing hunger now drives people into the streets. The riots even claimed the life of a Venezuelan beauty queen. 

Nonetheless Venezuela’s stock market continues to remain buoyant amidst all the unrest as people use stocks as shield against a collapsing currency.

In Ukraine, anti-government protests seem to have turned into a civil war as the riots have now claimed 26 lives as of this counting.

One region the Lviv has even declared independence from the Ukraine’s government

It is easy to look at the riveting rivalry between areas supportive of Europe on the one hand and areas supportive of Russia as causing the current troubles.

But there may be more than meets the eye.

Ukraine’s currency the hryvnia has seen a massive devaluation in 2008 and remained at this level prior to the political upheaval. Currently the hryvnia has been sold off as rioting spread.

But there has been a sharp deterioration in external and domestic financing even prior to the unrest. 

Ukraine’s government budget deficit has been widening since 2008. Ukraine has also swelling deficits in both trade and current accounts. 

Over the same period, loans to the private sector has been exploding to the upside, which likely means both the private sector and the government contributing to broadening deficits in the merchandise trade. 

Meanwhile Ukraine’s external debt has risen by almost 3.5x from 2006…

…as forex reserves plunge by almost half.

And soaring private and public sector loans has led to a spike in M3 from 2009 onwards.

And of course, driving all the soaring debt and money supply levels has been the same zero bound rates.

So Ukraine has been financing the splurge with debt which has resulted to the current financial and economic strains

And despite the so-called low inflation rate figures, what the above data suggests is that inflationism has driven a deep chasm to Ukraine’s fragmented society that has enflamed today’s violent riots.

Amazingly Ukraine’s easy money policies inflated a stock market bubble twice which also blew up in a span of 5 years. The above is a shining example of bubble driven volatility in both directions but with a downside bias.

Ukraine is largely a commodity commodity and energy based economy. The shadow economy has been estimated to contribute to about 40%. 

And energy geopolitics may have played a secondary role in the growing schism. The zero hedge quotes one analyst… (bold original)

BOTH the USA and EU will now fund the rebels as Russia will fund Yanukovych. At the political level, Ukraine is the pawn on the chessboard. The propaganda war is East v West. However, those power plays are masking the core issue that began with the Orange Revolution – corruption. Yanukovych is a dictator who will NEVER leave office. It is simple as that. There will be no REAL elections again in Ukraine. This is starting to spiral down into a confrontation that the entire world cannot ignore

Political instability seem to percolate into emerging markets, as we see the same violence in Thailand, Saravejo Bosnia and Conakry Guinea, which represents troubling signs of contagion (from economic sphere to the political sphere).

Yet political problems in Thailand, Ukraine and Venezuela has a common largely "invisible"denominator: inflationism

The advocate of inflationism John Maynard Keynes saw of  the destructive capacity of inflationism on society (yet ironically he still promoted this): 

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Political instability in the above countries reveals how “Lenin was certainly right” on how inflationism destroys society.

Venezuela’s Hyperinflation: When Fair Prices equals Government Sanctioned Looting

Here is a recent video of looting in action

No this isn’t from Tacloban, Leyte Philippines. This is from Venezuela. (video from Liveleak.com)

Severe shortages of goods and services combined with skyrocketing prices has forced the Venezuelan government to resort to populist squid tactics by pushing the blame of societal malaise to the private sector enterprises, where government “occupation” of businesses to impose “fair prices” has motivated widespread looting.

Also this is a prime example of the conditioning of people’s actions based on what I call as “steep cultural dependency on political solutions”.

From the International Business Times editorial

Looters: Venezuelan troops storm a local electronics retailer in the name of enforcing "fair prices," brazenly blaming the private sector for state policies. Sounds familiar — and not just because it's a communist takeover.

With municipal elections just around the corner on Dec. 8, it's no surprise to see Venezuela's failing socialist government turning to pork-barrel handouts to lure voters — as it always has.

Shovel the goodies to the red-shirted low-information voters and gain just enough votes in upcoming elections to claim a dictatorship is really a democracy.

Not coincidentally, President Nicolas Maduro declared that Venezuela would celebrate the beginning of Christmas in October — to distribute goodies.

But there's a new twist here: Venezuela is out of money to shovel pork. Its foreign reserves have fallen to $21.4 billion as oil prices slump. Instead of using its vast oil earnings to buy votes, as in the past, Venezuela's Marxist government is now making do by stealing from Venezuela's battered private sector.

Which is what brought the bizarre spectacle of the Venezuelan military occupation of Daka — the country's five-store equivalent of Best Buy, loaded with the flat-screen TVs, computers and smartphones favored by looters everywhere.

As troops stood by, crowds looted one Daka store, stripping its shelves bare. Call it government by looting.

Or in reality, call it communism. Because such destruction of private property in the name of redistribution has been a feature of every communist takeover from Russia to China, to Vietnam, to Cuba.

One would note that Venezuela’s currency the bolivar's collapse on the black market has been accelerating…

And this has reflected on Venezuela's intensifying hyperinflation. (from Cato’s Troubled Currencies)

After hitting a high of 475% return year-to-date, the Venezuelan stock market, as seen via the Caracas Index, has tumbled. That’s partly due to the crackdown by the Maduro government on alleged "speculators" whom the government accuses of engaging in an “economic war” with Venezuelans. 

So the newly instituted “happiness ministry” of Venezuela extrapolates to the pursuit of happiness of those in power to remain in power by appeasing voters through policies that encourage plunder. 

As the great Austrian economist Ludwig von Mises warned:

those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are masquerading their endeavors as a fight against inflation. While fighting the symptoms, they pretend to fight the root causes of the evil. And because they do not comprehend the causal relation between the increase in money in circulation and credit expansion on the one hand and the rise in prices on the other, they practically make things worse.

The unfolding currency crisis of Venezuela will deteriorate further until either the Venezuelan government desists from more financial repression and inflationism or a complete societal breakdown. 

Venezuela is real time paradigm to what governments will do to remain in power.

Venezuelan Hyperinflation: Prostitutes as Currency Traders

Implied inflation rates in Venezuela has been about 153% as against official rates of 59.34% (as of March 2014). This is based on estimates by CATO’s troubled currency project. 

So how are Venezuelans coping with such scenario? Well, aside from the government, prostitutes have been the biggest beneficiary. How? Because they are being paid in foreign currency!

From Bloomberg: (bold mine)

The arrival of a Liberian-flagged freighter with Ukrainian, Arab and Filipino sailors spells one thing for Elena -- dollars. And greenbacks are king in Venezuela, the 32-year-old prostitute says.

Within hours of hearing of the ship’s imminent arrival, she has packed her bags and is heading to the crumbling city of Puerto Cabello. It is a 450-kilometer (280-mile) journey from her home in the Western state of Zulia that Elena finds herself doing more often now as Venezuela’s economy contracts, the bolivar slumps and prices soar. 

Prostitutes more than double their earnings by moonlighting as currency traders in Puerto Cabello. They are the foreign exchange counter for sailors in a country where buying and selling dollars in the streets is a crime -- and prostitution isn’t. Greenbacks in the black market are worth 11 times more than the official rate as dollars become more scarce in an economy that imports 70 percent of the goods it consumes…

More…

The bolivar has fallen to 71 to the dollar from 23 on the black market since President Nicolas Maduro succeeded his mentor Hugo Chavez in April 2013. The government tightened currency handouts to stem the outflow of foreign reserves, which are near a decade low. The official exchange rate, reserved for imports of food and medicine, is 6.3 bolivars per dollar.

The dollar shortage is turning Venezuela into a two-tier society similar to the Soviet Union and Cuba, said Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore. Those with access to dollars such as prostitutes, tour agents, airport taxi drivers and expatriates are able to shield themselves from inflation by trading their greenbacks at ever higher rates. Those who can’t are seeing their living standards decline.

As the government smothers financial and economic activities the natural result has been a boom on the prostitution industry:

Officials have tried jailing traders, shutting down brokerages and setting up four parallel exchange systems to stem the rise of the unofficial rate in the 11 years since Chavez began controlling the bolivar’s price.

Prostitution has become the only boom industry in Venezuela’s biggest port. The Blue House brothel is clean and well-kept, with a patio and kitchen where women get three meals a day. Outside, the squares and cobbled streets of the colonial center stand in ruins, with the smell of sewage pervading the piles of garbage.

See what a policy of inflation does? It does not only destroy the people’s standard of living, they degrade humanity’s moral fiber.

This is a real time example of chief inflation exponent John Maynard Keynes’ observation of how inflationism annihilates society:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

But neighboring Columbia has also been benefiting from the senseless hyperinflation policies by the Venezuelan government. Many of the Venezuelan government’s subsidized goods has found their way across the borders.

From the Wall Street Journal (old mine)

Venezuelan President Nicolás Maduro's sliding popularity amid persistent street protests can be partly blamed on the humming smuggling market on this border, which shows how Colombia's unbridled free-market capitalism is eclipsing Venezuela's socialism and hurting ordinary Venezuelans.

When Norbis Berrocal, a homemaker on the Colombian side, buys baby formula in a bustling street market here in Cúcuta for a fraction of the usual retail price, Venezuela indirectly pays the rest.

"We're lucky to have Venezuela so close by," said Ms. Berrocal, as she bought a case of infant formula for shipment to relatives in Colombia's interior.

She is one of many Colombian consumers who benefit from a massive smuggling trade involving subsidized and price-controlled goods from oil-rich Venezuela—including near-free gasoline, car parts, corn flour and deodorant, all bought cheap in Venezuela and marked up before being sold here.

With its heavy intervention in the economy, Venezuela now imports three-quarters of what it consumes but loses a third of its goods to illegal cross-border trade, its government estimates. Some economists say Caracas exaggerates the smuggling problem to mask its own inability to keep supermarkets stocked.

The scarcity has eroded Mr. Maduro's popularity to a low of 37%, as recent polls show food shortages surpass rampant crime as citizens' top concern.

The informal economy pushes back against repressive regimes. This is real life economics in action.

Venezuela's Stagflation In Graphs

In yesterday's post Why The Current Market Volatility Does Not Imply A Repeat Of 2008, I made many references to Venezuela as example.

Here are some revealing charts...(except for the Bolivar money base all the rest are from tradingeconomics.com)

Venezuela's deep recession

The crashing bolivar!

surging inflation!

caused by massive money printing!

yet a soaring stock market!

While Venezuela is clearly in a stagflation phase there seems to be a big possibility that these would transmogrify into a hyperinflation, which I think could occur anytime within the next 3 years, given the current pace by which Mr. Chavez seems to be financing his conversion of Venezuela into a socialist nation.

Jonathan Finegold Catalan at mises.org dwells deeper into the Venezuelan disease.

Here is an excerpt,

``By printing money, Venezuela's central bank and government are not creating capital, they are only funding their ability to bid it away from the private sector and squander it on uneconomical public programs. Imagine the average Venezuelan who receives nothing but a currency that is consistently falling in value in exchange for his resources. Simultaneously, his savings are confiscated, because they are progressively worth less in the face of rising prices. How can anybody consider this a basis for a rise in wealth?

``In Venezuela, entrepreneurship is condoned when it doesn't interfere with the plans of Hugo Chavez. Unsurprisingly, entrepreneurs in the utility industries are not part of Chavez's plans, and as such the Venezuelan utility market has been almost completely nationalized. While prior to the recent global depression Chavez stuck to nationalizing certain sectors at a relatively slow (yet steady) pace, the onset of global crisis accelerated the socialization of Venezuela's economy. Indeed, few foreign-owned oil companies were left untouched after Chavez decided to solve his debt problem by simply taking over those businesses he owed money to.

``Other key industries nationalized include the telecommunication and electrical markets. Admittedly, Chavez's nationalizations did not consist solely of expropriating the property of others for the benefit of the "people of Venezuela." Like any good politician, Chavez pandered to big business, offering two Spanish electrical companies, Iberdrola and Elecnor, a total of nearly two billion dollars to build a 1000Mw electrical plant in the city of Cumaná, in eastern Venezuela. The average construction cost for the specific type of plant being built was $0.75 a watt. Chavez paid Iberdrola and Elecnor $2 a watt."

Read the rest here

Venezuela’s Socialist Disaster: Stock Market Crashes as Recession Deepens, Heightened Risk of War with Columbia

While updating on the end of week quotes of global stocks, I discovered that the once sizzling hot Venezuelan stock market has recently crashed.

The Caracas Stock Exchange Index cratered 8.61% this week. But the benchmark remains up for 214.13% for the year! From end 2012, the index has returned a fantastic 25.7 times!

Of course, the Venezuelan stock market episode isn’t what it seems.

Venezuela interests me, not only because of their gorgeous looking women, but because the nation have been a modern day or real-time epitome of the socialist disaster currently being manifested as hyperinflation. And the other symptoms of hyperinflation can be seen in the previous streak of record breaking stock market index and a crashing currency.

As previously discussed, unlike the popular establishment myth that sees rising stocks as equivalent only to G-R-O-W-T-H, since stocks are titles to capital goods, they also serve as safehaven to a system benighted by monetary abuse. And the Venezuela experience represents an extreme account of such dynamic.

So my guess was that the crash in Venezuelan stocks must have also reflected on the currency and CPI.

Well yes, the charts of implied inflation (top) and the bolivar (bottom) from Cato’s troubled currency project have coincided with the recent stock market crash.

This means the Maduro regime’s easy money has now transformed into tight money!

Perhaps Venezuela’s deepening economic downturn may be offsetting the hyperinflationary environment.

Bloomberg has an article on Barclay’s take on the Venezuelan economy:

Venezuela is suffering the deepest economic crisis in its history with output expected to contract 9.1 percent this year, Barclays Plc said Friday.

The economic contraction will likely reach 16.5 percent between 2014 and 2016, while inflation over that period will exceed 1,000 percent, Barclays wrote in a note to clients.

Moreover, the government may be relying more on asset sales than from more money pumping.

Instead of taking fiscal measures, the government is selling all its liquid assets to maintain an “extremely inefficient” exchange rate system and pay the external debt, Barclays said, adding that it would likely have enough money to pay its foreign debt at least through the first quarter of next year with a moderate increase in oil prices and further cut in imports.

If the above is true, then this could likely mean a hiatus in Venezuela’s hyperinflationary chapter.

Asset liquidations have limits. So unless the government overhauls its political system which has led to the deepening fiscal woes, those balance sheet problems will resurface again and spur more reliance by the government on the printing press or its digital equivalent.

But Venezuela’s socialist disaster doesn’t just stop with CPI, the bolivar, stocks and the economy. Since everything is interconnected, her economic woes has spread to escalate or drum up tensions with her neighbor Colombia, which has raised the risk of war. 

That’s partly because subsidized gasoline prices in Venezuela has found its way to be commercially sold in Colombia. And as previously pointed out, aside from gas, many of the other free or subsidized goodies that the Venezuelan government imported to give to her constituents has only flowed out into Colombia. Also, the deepening economic crisis may impel Venezuelans to emigrate to her neighbor.

So these has prompted the Venezuelan government mount a crackdown on smuggling, close its borders, tighten people (social mobility) movements and deport Colombians that has worsened diplomatic relations with the Colombian government.

So Venezuela’s socialist made economic crisis may even lead to war!

(updated to add: there has been ongoing peace talks between the two nations, which includes plans to reopen the border, as well as, to send their ambassadors  back into respective posts. The question is, given Venezuela's deteriorating economic conditions, will such peace agreement hold or last?)

In Socialist Venezuela, Even Money Printers Run Out of Money to Print

When governments spend more than the tax revenues and or resources it generates, they eventually first run out of money. And if they continue to do so, they then eventually lose access to credit or money.

And given the dearth of resources, desperate governments usually resort to internal financing or the monetization of political spending via the printing press or the modern day printers the digital press (inflationism).

These usually ends up with the destruction of the currency via inflationism—hyperinflation

All these goes to show that the more a society relies on government, the more funding pressures, the greater the risk of inflation or even hyperinflation.

Well, when it comes to impoverishing constituencies through inflationism, socialism provides many modern day examples.

And one of the shining template has been current developments at Venezuela

UK’s former Prime Minister Margaret Thatcher once said that “The problem with socialism is that eventually you run out of other people's money [to spend].”

In socialist Venezuela, Ms. Thatcher’s keen observations can be construed literally. To paraphrase: The problem with socialism is that eventually you run out of money to print.

From Bloomberg:

Venezuela’s epic shortages are nothing new at this point. No diapers or car parts or aspirin -- it’s all been well documented. But now the country is at risk of running out of money itself.

In a tale that highlights the chaos of unbridled inflation, Venezuela is scrambling to print new bills fast enough to keep up with the torrid pace of price increases. Most of the cash, like nearly everything else in the oil-exporting country, is imported. And with hard currency reserves sinking to critically low levels, the central bank is doling out payments so slowly to foreign providers that they are foregoing further business.

Venezuela, in other words, is now so broke that it may not have enough money to pay for its money.

This article is based on interviews with a dozen industry executives, diplomats and former officials as well as internal company and central bank documents. All of the companies declined official comment; the central bank did not respond to numerous requests for interviews and comment.

Here’s more

The story began last year when the government of President Nicolas Maduro tried to tamp down a growing currency shortfall. Multi-million-dollar orders were placed with a slew of currency makers ahead of December elections and holidays, when Venezuelans throng banks to cash their bonuses.

At one point, instead of a public bidding process, the central bank called an emergency meeting and asked companies to produce as many bills as possible. The companies complied, only to find payments not fully forthcoming.

Last month, De La Rue, the world’s largest currency maker, sent a letter to the central bank complaining that it was owed $71 million and would inform its shareholders if the money were not forthcoming. The letter was leaked to a Venezuelan news website and confirmed by Bloomberg News.

“It’s an unprecedented case in history that a country with such high inflation cannot get new bills,” said Jose Guerra, an opposition law maker and former director of economic research at the central bank. Late last year, the central bank ordered more than 10 billion bank notes, surpassing the 7.6 billion the U.S. Federal Reserve requested this year for an economy many times the size of Venezuela’s.

The above shows of the continuing to collapse by Venezuela’s currency the bolivar

The following accounts for Venezuela’s implied inflation rates (monthly and annually). (charts from Cato's Troubled Currencies web page)

Socialism has populist appeal, but they are uneconomical or unviable. 

At the end of the day, the socialism equates to social decay. Venezuela should serve as a paragon.

Venezuela’s Hugo Chavez Legacy: Hyperinflation

Venezuela’s controversial President Hugo Chavez passed away last March 5, 2013

I have frequently used Venezuela as an example of how inflationism influences stock prices

Let us see what the leader who promoted “Socialism in the 21st century” accomplished

From the Wall Street Journal, (bold mine)

The winner of the election will inherit an economy that has grown quickly over the past decade thanks largely to high oil prices and ramped up government spending, but which faces strains that could spell growing trouble in months and years to come.

A recent currency devaluation of the Strong Bolivar to 6.3 per dollar from 4.3 sent shock waves through the economy. The measure helped narrow a growing gap between what the government spends and takes in—mostly by making dollars earned via oil exports go further in local currency terms. But it also put renewed pressure on prices in a country where inflation is running at about 20%.

The devaluation also did little to stop growing shortages of basics like flour and meat, which are scarce due to a lack of dollars. Worse, the Strong Bolivar weakened after the devaluation on the black market, falling to about 25 per dollar from about 10 per dollar last October…

Venezuela's industrial base has largely been hollowed out by widespread nationalizations under Mr. Chávez, leaving the country increasingly dependent on imports. It also has a growing foreign debt load, at about $90 billion.

Even as Venezuela’s statistical inflation remains subdued (22%), it is important to realize that myriad price controls have been imposed to limit the statistical effects of Venezuela’s inflationism. 

When I wrote about the 32% official devaluation of Venezuela’s currency, the bolivar, a month ago, the black market rate was at 19.53. Currently the black market rate has been reported at 25, which implies that the bolivar devalued by 28% in a month! This also suggests that real inflation rate in Venezuela has now been over 50% which falls under the technical definition of hyperinflation.

Venezuela’s stock market continues to skyrocket where the major benchmark has been up 31% as of last Friday’s close (March 1) which adds to last year’s 302% gains in one year.

above charts from tradingeconomics.com

Soaring stock markets can represent symptoms of hyperinflation.

The other heritage of the Chavez regime has been corruption, criminality and poverty.

Writes Tad DeHaven at the Cato Blog, 

Chavez also centralized political power as he gained control of the main institutions of Venezuelan society—the military, the judiciary, the congress, the central bank, the electoral council, the most important broadcast media, etc.—and did so by trampling on due process and basic civil and political liberties.

The vast expansion of state power led to a neglect of traditional functions of government such security or keeping up infrastructure, and to an increase in corruption. Crime under Chavez skyrocketed. When he came to power in 1999, the country experienced less than 6,000 homicides per year; in 2012 that number reached about 21,700. By 2012, Venezuela’s ranking in Transparency International’s Corruption Perceptions Index fell to 165 out of 174 countries. The systematic corruption of the Chavez regime that Gustavo Coronel documented in a 2006 Cato study only got worse in subsequent years.

At the end of the day, Mr. Chavez will be remembered as typical dictators who run their economy aground.

As this article from Huffington Post blog observed,

Chavez will go the way of many highly theatrical dictators. Once upon a time there was a statue of Francisco Franco in almost every city and town in Spain, his profile appeared on Spanish coins, and he paraded himself from the King's Balcony at Madrid's Royal Palace, resplendent banners dating from the Spanish Empire draped in front of him.

Now? Franco is seen for what he truly was -- a dictator with a megalomaniacal self-regard and a willingness to commit violence in order to stay in power. Today, no more statues, no more coins, nada. That is the fate of Hugo Chavez's place in history as well.

Socialism of the 21st century will be remembered as a great hoax.

Venezuela's Path To Hyperinflation

My prime candidate for the next episode of hyperinflation (which I mentioned here) has long been Venezuela.

That's because accelerating socialism, espoused by the dictatorship regime translates to profligate spending which generates intractable financial claims and economic inefficiencies (which impedes the capacity to pay the incurred liabilities) that has resulted to ballooning deficits.

And this translates to massive printing of money in order to fill or cover such shortfalls for the preservation of power by the incumbent political leader. In short, using the printing press as political tool.

So while hyperinflation is technically about sustained excessive money printing, the underlying incentives that beckons it is political.

The end result: the demonetization of money.

According to Professor Ludwig von Mises from his Stabilization of the Monetary Unit? From the Viewpoint of Theory,

``If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency. In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity.” [all bold emphasis mine]

Seen in the context of Venezuela, which massively devalued its currency last week, this from Wall Street Journal account, (hat tip Douglas French and Mises Blog) [bold highlights mine]

``President Hugo Chávez's decision to devalue Venezuela's bolivar and impose a complicated new currency regime may paper over some growing cracks in the economy, but it is also setting the stage for bigger problems down the road for the country's oil-rich nation and its populist leader.

``Over the weekend, there were signs that Mr. Chávez's slashing of the "strong bolivar" currency could create as many problems as it solves in Venezuela's economy, provoking a wave of anxiety that sent Venezuelans scurrying to spend cash they feared could soon be worthless.

``At Caracas's middle-class Sambil shopping mall, lines at cashiers reached 50-deep. Carmen Blanco, a 28-year-old accountant, waited to buy a 42-inch flat-screen television she doesn't need because she already has one at home.

``"It doesn't make any sense to keep my savings," Ms. Blanco said Saturday. "I'd love to see how things work in a normal country."

``On Sunday, Mr. Chávez vowed to fight speculation and price increases that could result from the devaluation, which raises the price of imports.

``Harried by recession and sliding popularity, Mr. Chávez on Friday weakened the bolivar to 4.3 per dollar from 2.15 in a bid to shore up government finances, which have been hit by weaker oil prices, and to stimulate economic growth ahead of key elections."

And where does Mr. Chavez gets his ideas? Unfortunately from the stereotyped self-righteous protectionist mindset.

Again from the same WSJ article, (all bold highlights mine; comments added)

``In Mr. Chávez's favor, a weaker currency helps narrow a growing budget shortfall by instantly giving his oil-rich government more local currency to spend per barrel of oil exported by the state petroleum company, PDVSA. That is a key consideration with congressional elections looming in September.

[yes inflationism shifts spending power to the government and his allies at the cost of less spending power for the people-Benson]

``Mr. Chávez has watched his popularity slide amid corruption scandals, a shrinking economy, rising crime and shortages of food and electricity. Increased spending could boost Mr. Chávez's popularity.

[note: Venezuela is a major oil exporter-Benson]

``Mr. Chávez also predicted a weaker currency would breathe life into a domestic economy that depends on imports for everything from beef and milk to cars.

[this is an example of the currency magic wand mindset at work-Benson]

``The measure may buttress the banking system, which has been rocked by the closure of several institutions amid an embezzling scandal. Many Venezuelan banks head into the devaluation holding large stocks of dollars.

[governments almost always favors the banking system because it can help in the financing of its political goals-Benson]

``Holders of dollar-denominated bonds issued by Venezuela and PDVSA will be encouraged by the move. Devaluation narrows Venezuela's financing gap to around 3% of economic output from around 7%, said Boris Segura, a Royal Bank of Scotland economist."

``However, the devaluation does little to assuage the deeper problems plaguing the Venezuelan economy, economists say. Devaluation isn't enough to revive the domestic manufacturing base. Few investors are willing to brave Venezuela's maze of price caps, currency controls and the ever-present fear of nationalization."

[Here's the rub: the rubber finally meets the road, this is a vivid example where fallacious theories don't square with reality. The currency magic wand can't offset domestic policy distortions-Benson]

``Higher inflation from the move will also keep chipping away at the value of the bolivar, even at its new peg."

``What is more, by keeping a subsidized dollar rate for importing food, medicine and essential items, Mr. Chávez removes any incentive for Venezuelans to produce what they need most."

From Murray Rothbard in Mystery of Banking, ``But if government follows its own inherent inclination to counterfeit and appeases the clamor by printing more money so as to allow the public’s cash balances to “catch up” to prices, then the country is off to the races. Money and prices will follow each other upward in an ever-accelerating spiral, until finally prices “run away,” doing something like tripling every hour. Chaos ensues, for now the psychology of the public is not merely inflationary, but hyperinflationary, and Phase III’s runaway psychology is as follows: “The value of money is disappearing even as I sit here and contemplate it. I must get rid of money right away, and buy anything, it matters not what, so long as it isn’t money.”

We seem to be witnessing unfolding chaos from the demonetization process.

Another observation: It's been a common fallacious notion that stock markets respond negatively to intensified inflation.

In Venezuela, this hasn't been the case.

Perhaps this could be true depending on the degree of inflation.

But in cases where the state of money swiftly deteriorates, where its store of value comes into question or comes under severe strain, stock markets become haven from the demonetization process.

Why?

Again from Professor von Mises, ``If the future prospects for a money are considered poor, its value in speculations, which anticipate its future purchasing power, will be lower than the actual demand and supply situation at the moment would indicate. Prices will be asked and paid which more nearly correspond to anticipated future conditions than to the present demand for, and quantity of, money in circulation. The frenzied purchases of customers who push and shove in the shops to get something, anything, race on ahead of this development; and so does the course of the panic on the Bourse where stock prices, which do not represent claims in fixed sums of money, and foreign exchange quotations are forced fitfully upward."

And this has been the case of Weimar Germany and just recently Zimbabwe.

If present political trends won't reverse, then Venezuela would be another real time example of paper money based system that will evaporate soon.

Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.—Charles Mackay, The South Sea Bubble, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds

In this issue:

Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

-Record Stocks as Symptoms of Monetary Abuse: The Venezuela and Argentina Model

-Record Stocks NOT EQUAL to G-R-O-W-T-H: Japan and China

-Record Stocks NOT EQUAL to G-R-O-W-T-H: US, Europe and ex-China and Japan Asia

-Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

-What the Philippine President’s Dream of Phisix 10,000 Means

-Dismal Rebound in February Philippine OFW Remittances

Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

I will open this outlook with this splendid quote from nineteenth century Scottish poet and author Charles Mackay from his epic book, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds[1]

IN READING THE HISTORY OF NATIONS, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first…

Some delusions, though notorious to all the world, have subsisted for ages, flourishing as widely among civilised and polished nations as among the early barbarians with whom they originated,—that of duelling, for instance, and the belief in omens and divination of the future, which seem to defy the progress of knowledge to eradicate them entirely from the popular mind. Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

Record Stocks as Symptoms of Monetary Abuse: The Venezuela and Argentina Model

Has stocks markets been about economic growth?

Let me frame this question under contemporary popular wisdom, has record stocks really been about booming economies?

The above equity benchmarks are from the Latin American nations of Venezuela and Argentina whose stocks have been racing to record highs since 2013.

Year to date as of Friday’s close, local currency returns for these indices have been at 39.45% and 38.94% respectively. In 2014, the same bourses returned a spectacular 41.01% and 59.14% while in 2013 returns have been at a shocking nosebleed 480.48% for the IBVC and a breathtaking but less stellar 88.87% for the Merval!!!

Yet a short glimpse of their respective statistical (annual) economic growth data suggests of mediocre performance for Venezuela and lethargic activities for Argentina. 

But economic numbers don’t represent food on the table. The reality has been that basic supplies appear as being rationed in Venezuela. As aptly described by the New York Times last January: “the situation has grown so dire that the government has sent troops to patrol huge lines snaking for blocks. Some states have barred people from waiting outside stores overnight, and government officials are posted near entrances, ready to arrest shoppers who cheat the rationing system.”

In Venezuela, tourists have been even asked to bring their own toilet papers due to the near absence of supplies! It has been a little less desperate for the Argentine economy, but goods shortages exists nonetheless. And such scarcity of supply has been highlighted by the recent sensational shortages of tampons!

If the economies of both nations has been in dire straits, so why has their respective stocks been racing to record highs?

A concise answer has been that because of the lack of access to credit, the governments of both countries has been relying on the monetary printing press to finance political economic spending, the result of which has been massive devaluation of their currencies and HYPERINFLATION!

And given the rigorous clampdown on capital and currency flows by their governments, and since residents of both countries have sought safety of their savings from devaluation and from the severe loss of purchasing power, equities—which signify as titles to capital goods—have served as refuge from monetary abuse. Said differently, the store of value function of currencies of both countries has shifted to stocks!

Venezuela and Argentina represents the extreme episodes of stocks functioning as shock absorbers from monetary debasement.

But the buck doesn’t stop here.

Record Stocks NOT EQUAL to G-R-O-W-T-H: Japan and China

Venezuela and Argentina’s symptoms seem as being replicated everywhere but at a tempered basis that comes in different shades or form.

In the case of Japan, milestone high stocks have been diverging from the statistical economy. Japan’s economy has been laboring to climb out of an economic rut or particularly intermittent recessions.

But the Japanese government thinks that they have found an elixir to her economic predicament. They believe that stock market boom and destruction of a currency translates to economic salvation.

So they have mandated the Bank of Japan to devalue her currency, the yen, by  expanding the her balance sheets by buying enormous amounts of bonds and stocks since 2013. And the government has extended and expanded the same program in November 2014. Japan’s largest pension fund, the Government Pension Investment Fund (GPIF) has likewise been enlisted to the stock market buying program.

Unfortunately the result has been devastatingly opposite to what has been intended: stocks continue to diverge with the real economy as resident (individual and institutional) money continues to gush out of the nation.

Aside from the BoJ and GPIF, foreign money has largely been responsible for driving Japan’s stocks to record levels.

Chinese stocks have also frantically been skyrocketing as the statistical economy has been dramatically slowing.

Chinese property prices continue to fall in March but at a much subdued pace. However, China’s new built houses as of February crashed to its lowest level or by 6.1% year on year!

Broad indicators reveal that the Chinese economy’s downtrend appears to be accelerating. The continuing downshift includes fixed asset investments, retail sales and industrial production which has all contributed to the statistical economic growth of 7%, the slowest since 2009.

The Lombard Street Research (LRC) counters that real economic growth in China has CONTRACTED in 1Q 2015 Q-on-Q where the Chinese economy endured a ‘historic collapse’.

From Breibart (bold mine)[2]: Lombard Street Research (LSR) has reported that China’s “real” (after-inflation) GDP actually fell -0.2% for the quarter ending March 2015. Despite the official government claim of +1.3 percent growth for the quarter and +7 percent annualized growth. China’s quarterly performance was the worst showing since the Global Financial Crisis as, “real” domestic demand suffered a historic collapse. LSR’s Diana Choyleva has been the best Western economist at untangling China’s less-than-authentic economic statistics. She reveals that after peaking in 2014 at +2 percent on real domestic demand growth, China has collapsed by over 4 percent and to a -2.1 percent. Choyleva says this is the first negative performance observed since LSR began recasting China’s quarterly economic reports in 2004.

Trouble in the real economy has been more than a slowdown, as credit risks mounts.

Aside from the recent missed interest rate payment by Cloud Live Technology, another company, power-transformer maker Baoding Tianwei Group Co. expressed doubts whether it can make interest payments on April 21, signaling risks of another potential default.

Yet despite the economic fragilities, the Chinese government continues to force feed credit into system. The Chinese government appears to either be buying time from a bubble bust or hoping that blowing new bubbles may cure problems caused by previous bubbles.

Chinese loan growth beat expectations in March even as money supply growth continues to ebb. Those loans appear as being rechanneled into the frenzied bidding of stocks. Even funds from China’s shadow banks have reportedly been increasingly used for wanton stock market speculation.

Worst, despite recent imposition of regulatory controls, margin debt used to finance stock market speculation has reportedly more than doubled the US counterpart.

From Bloomberg[3]: Securities firms’ outstanding loans to investors for stock purchases were a record 1.64 trillion yuan ($264 billion) as of April 10, up 50 percent in less than three months, despite bans imposed by the CSRC in January and April on lending to new clients by four Chinese brokerages…China’s margin finance now stands at about double the amount outstanding on the New York Stock Exchange, after adjusting for the relative size of the two markets.

The serial record breaking Chinese stock market benchmark has already surpassed the Japan contemporary in terms of market capitalization.

At the close of Friday’s trading session for Chinese stocks, Chinese regulators once again say that they will tighten margin trade as exchanges announced expanding shorting facilities.

From the Wall Street Journal[4] (bold mine): The CSRC warned small investors, who have been big drivers of the rally, not to borrow money or sell property to buy stocks, ratcheting up its rhetoric about the market. Mainland investors opened stock-trading accounts at the fastest pace ever in the week ended April 10, and margin account balances reached a record 1.16 trillion yuan ($187 billion) as of Thursday, according to the Shanghai Stock Exchange. The regulator banned a type of financing called umbrella trusts that provided cash for margin trading, the practice of borrowing against the value of common shares held at a brokerage, and placed limits on margin trading for highly risky small stocks that trade over the counter, rather than on exchanges. The regulator said customer accounts needed to be better classified, potentially a warning that limits will be placed on the type of trading permitted for small investors. The exchanges issued rules that would make it easier for investors to short, or bet against, stocks. To short a stock, an investor borrows shares and sells them, hoping the price will fall and so let them repay with cheaper shares. It has been difficult to short stocks in China even as valuations soared because it has been virtually impossible to borrow shares. The exchanges said they would push for an increase in the supply of shares available for lending and increase the number of stocks whose shares can be borrowed.

This seems like another superficial or political staged attempt to curb or control the stock market bubble that has been going berserk.

The Shanghai index pole-vaulted 6.27% last week.

With Chinese stock market futures as indicated by China A50 futures suffering a 5.97% loss Friday, Chinese stocks may be headed for a sharp selloff in Monday’s opening.

And it has not just been about stocks, Chinese junk bonds have been enjoying a record run.

From Bloomberg[5] (bold mine): Investors in Chinese junk bonds are taking the biggest gamble in at least a decade. Leverage for speculative-grade Chinese companies is at its highest since at least 2004, whether measured by earnings relative to interest expense or total debt to a measure of cash-flow, according to data compiled by Bloomberg using a Bank of America Merrill Lynch index. Borrowers have also piled on the most debt relative to their assets since 2007. The deterioration in credit quality coincides with the slowest annual growth since 1990 for Asia’s biggest economy, and helps explain why Fitch Ratings Ltd. predicts defaults will climb. That’s bad timing for bond investors who swallowed a record $209.2 billion of Chinese-company notes denominated in either dollars, euros or yen last year, Bloomberg data show.

As one can see for Japan and China, record stocks have been a function of monetary abuse.

Record Stocks NOT EQUAL to G-R-O-W-T-H: US, Europe and ex-China and Japan Asia

You think it is different for the US or for Europe? Well think again.

Record US stocks has been about growth? Hardly

The US Federal Reserve of Atlanta, one of the twelve regional Federal Reserve banks, has a NOWcasting or real time forecasts of the US statistical economy.

Here is what they see for the 1Q 2015 as of this writing: The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2015 was 0.1 percent on April 16, down from 0.2 percent on April 14. The decline came after Wednesday morning's industrial production release from the Federal Reserve Board

Record stocks on a .1% G-R-O-W-T-H??!!

Additionally, whatever growth that had been posted in the recent past has been below the 3.24% average. Yet again record stocks.

More.

Factset, a company that provides financial information, recently noted that for 1Q 2014 negative earning guidance has dominated earnings announcements. Importantly, they note that stock markets have been rewarding companies posting negative earnings announcement more than those with positive earnings[6]!

Even more. Record US stocks comes as bankruptcies climb to its fastest level since 2010.

From Reuters[7] (bold mine): The number of bankruptcies among publicly traded U.S. companies has climbed to the highest first-quarter level for five years, according to a Reuters analysis of data from research firm bankruptcompanynews.com. Plunging prices of crude oil and other commodities is one of the major reasons for the increased filings, and bankruptcy experts said a more aggressive stance by lenders may also be hurting some companies. While U.S. stocks have climbed to near record levels and the jobless rate has fallen to a six-year low, 26 publicly traded U.S. corporations filed for bankruptcy in the first three months of 2015. The number doubled from 11 in the first quarter of last year and was the highest since 27 in the first quarter of 2010, which was in the immediate aftermath of the financial crisis. In addition, many of the bankruptcies were large. Six companies had reported at least a billion dollars in assets when they filed in the first quarter of this year, the most in the first quarter of any year since 2009. The $34 billion in assets held by the 26 companies is the second highest for a first quarter in the past decade. The highest was the $102 billion held by the public companies that filed in the first quarter of 2009 when the crisis was at its worst.

Yet it has been pretty bizarre for Fed officials and Wall Street to quibble over a measly proposed quarter of a percent (.25%) rate hike, which goes to show how hooked on credit the entire economy and financial markets has been founded on.

As for Europe, this earnings chart indicates why Europe’s turbocharged stocks have hardly been about growth!

Record or near record stocks has become a dominant feature even in ex-Japan and China Asia. Yet if one looks at their respective economic G-R-O-W-T-H trends since 2011, they have MOSTLY been on a decline: Australia, South Korea, Taiwan, Singapore, Hong Kong, Indonesia and Thailand. Only India, Vietnam and New Zealand appear to beat the region’s dominant trend.

On the other hand, what the establishment has mostly ignored has been the relationship of debt with record stocks…that is with the exception of a few…

For instance, German Finance Minister Wolfgang Schaeuble expressed concerns last week that that “high debt levels remain a source of concern for the global economy”, where the Chinese economy has been "built on debt".

Moreover, research company MSCI recently warned against global property bubbles (bold mine): “Fears of a renewed global property bubble are rising as prices and yields hit records last seen before the financial crisis” as “the pricing of real estate around the world had become ‘increasingly aggressive’….The main factor behind the pricing is “exceptionally low” bond yields, which made property much more appealing to investors in relative terms, Mr Hobbs said, citing “frenzied buying”.

In sum, record stocks (as well as record property prices and bonds) have mostly been about unbridled and rampaging speculative activities financed by credit that has been pillared on zero (or negative) bound rates, QEs and other monetary easing tools than they have been about G-R-O-W-T-H.

Reasoning from price changes will be detrimental for one’s portfolio.

Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

This bring us to the Philippines where popular wisdom has been to tie record stocks with to confidence from economic G-R-O-W-T-H

The following represents the hazards of rationalizing from price changes, or the recency bias or serial position bias or ticker tape mentality.

The Philippine president graced the opening ceremony at the PSE last Tuesday where officials of the Philippine Stock Exchange cajoled to the honored guest[8]. (bold mine)

In his welcome remarks during the event, PSE Chairman Jose T. Pardo said, "At the 8,000 point level, the index is giving returns just this year of already more than 10 percent. It is interesting to note that the unprecedented ascent to 8,000 comes with other remarkable market indicators."

Mr. Pardo cited the brisk trading activity in the first quarter of 2015 which soared by 40 percent from the same period a year ago. He also mentioned that in the first three months of the year, total market capitalization of listed firms rose by 18 percent to P14.98 trillion from the same period in 2014 and that foreign funds registered a net buying of P48.87 billion in the January to March period, a 182 percent increase year-on-year. There was also an increase in local investor participation as they accounted for 53 percent of trading activity in the first quarter of the year.

"This can only mean one thing, confidence in the economy under your leadership, Mr. President", Mr. Pardo stated.

Last week’s 2.2% correction came with a net foreign trade of NEGATIVE Php 5.71 billion, the largest since October 2014.

If record Phisix 8,000 has allegedly been about ‘confidence’ partly predicated on foreign trade, then the above indicates an OOPS moment!!!

With the above and this week’s correction, has confidence on G-R-O-W-T-H been reversed? Or will this be explained or justified away by sidestepping the selling activities as mere profit taking? So rising stocks equals G-R-O-W-T-H but falling stocks equals denial?

The problem with rationalization has always been the inconsistency of the logic presented.

And here is what the PSE officials forgot to say…

…that record stocks has been engineered by index managers. 

Massaging or manipulating the index via “marking the close”, which represents a violation of the SEC Securities Regulation Code, has been used with blatant regularity and has apparently been condoned by the authorities.

And to add to last week’s discussion[9] of the growing concentration of trade activities, here are more facts about record Phisix 8,000.

On market cap distribution

As of the close of April 17, the market cap weighting of the top 15 issues of the Phisix constitutes a staggering 79.57% of the domestic bellwether!

Meanwhile, the 10 best performers as measured by year to date gains (as of last week) has an accrued market cap share of an astounding 55.23%!

So movements of the 10 best performers or the top 15 biggest market caps determine the direction of the Phisix!

On Peso volume distribution

Peso volume trades of the 30 members of the Phisix basket relative to total volume (Phisix issues+ non-Phisix issues+ special block sales + odd lot) on a daily basis have been climbing since February. They have now ranged from over 60% to 80% of total volume.

Yet if adjusted for major special block sales to include Friday’s Php 26 billion Meralco special block sales, the volume from Phisix trade expands to the range of 65% to 95%. The above doesn’t even include minor special block sales. Firms from the Phisix basket constitute a large majority of special block sales even from the perspective of minor block sales

So this translates to a massive gravitation of trading activities towards Phisix companies.

And it has been more than just the entire Phisix.

Aside from valuations, gains and market cap weightings, like a centripetal force, trading activities has been converging into the top 15 biggest firms.

The same top 15 issues have increasingly been taking the bulk of the daily peso trade volume based on gross basis (left) especially if adjusted for major block sales (right).

Additionally, with the top 15 garnering the market’s attention and or signifying the index managers’ maneuvering, the 10 outperformers from the 15 biggest market caps have also been absorbing an increasingly significant share of the daily peso volume trades (left). This has been magnified by the special block sales (right)!

So since record Phisix 8,000 has been a function of an increasing concentration in terms of trading, price setting, valuations and performance activities towards the biggest market cap issues, in particular, the 10 best performers, it can be construed that record Phisix 8,000 has hardly accounted for as a genuine product of market confidence, but rather about stealth publicity measures to “project” market confidence that has been engineered from rampant market manipulations.

What the Philippine President’s Dream of Phisix 10,000 Means

Yet the Philippine president hopes to see 10,000 Phisix at the end of his term.

Given the appalling or revolting degree of current overvaluations even at 8,000, what the president proposes will be a transmogrification of the Philippine stock exchange into a destructive hub of casino speculators.

What he seems to also be suggesting is for stock market’s basic function as channel to intermediate savings into investments, enabled and facilitated by price discovery predicated on the discounting dynamics of finance, to be totally obliterated or dismantled!

He appears to also implicitly promulgate that—since soaring stocks will extrapolate to a redistribution of resources in favor of the beneficiaries, particularly the elites, many of whom has already been basking in glory to be included in the roster of the world’s richest, all coming at the expense of the average citizens—inequality must be promoted!

Of course, Phisix 10,000 can be achieved. All he has to do is to mimic the monetary policy aspects of Japan’s Abenomics. He can instruct the Bangko Sentral ng Pilipinas and public pension funds to emerge from the shadows and to openly buy stocks.

Yet this will crash the peso and send price inflation to the skies, while at the same time inflating the already inflated balance sheets of the many companies particularly the publicly listed ones.

So instead of positively contributing to the economy, Phisix 10,000 will lead to a total collapse of the real economy!

Of course, the other way to do it is for market manipulators to stay their course. But where will the index managers get their funding to sustain present activities?

I am reminded of the fateful BW bubble that turned into a scandal. BW’s preposterous 52x run climaxed with the visit of Macau’s casino mogul Stanley Ho to the PSE. This eventually was followed by the stock’s monumental collapse back to its origins!

Dismal Rebound in February Philippine OFW Remittances

Low or zero growth even in the government’s own statistical accounts has now been reckoned as taboo and has even been subject to implied censorship!

In the perspective of remittance statistics, in the past where rate of growth falls in line with government projections, the BSP headlines will ostensibly indicate of the N% of the increase, or be accompanied by acclaims such as “Sustain Robust Growth” or “Continue to Rise”.

But with recent accounts of low growth, the BSP headlines will just denote of, or frame remittance data as having “reach” X levels. This seems designed to sanitize the unpopular event or to put a positive spin on the below expectation numbers.

Yet, framing aside, the reality has been February’s remittance growth rates continue to disappoint.

The BSP on personal remittances[10]: Personal remittances from overseas Filipinos (OFs) amounted to US$2.1 billion in February 2015, an increase of 4.0 percent compared to the same period in 2014. As a result, remittance inflows for the first two months of the year reached US$4.1 billion, posting a year-on-year growth of 2.1 percent, Bangko Sentral ng Pilipinas Officer-in-Charge Nestor A. Espenilla, Jr. announced today.  For the period January-February 2015, personal remittances from land-based workers with work contracts of one year or more, and migrants’ transfers totaled US$3.1 billion. Meanwhile those from sea-based and land-based workers with work contracts of less than one year aggregated US$1.0 billion.

The BSP on cash remittances (bold added): Cash remittances from OFs coursed through banks summed up to US$1.9 billion in February 2015, higher by 4.2 percent than the level posted a year ago. This brought cash remittances for the first two months of 2015 to US$3.7 billion, representing a 2.4 percent increase relative to the year-ago level. In particular, cash remittances from land-based and sea-based workers rose to US$2.8 billion and US$0.9 billion, respectively.  The bulk of cash remittances came from the United States, Saudi Arabia, the United Arab Emirates, the United Kingdom, Singapore, Japan, Hong Kong, and Canada.  The slowdown in growth in recent months could be due to base effect as remittances last year were relatively high given higher transfers from overseas Filipinos that were intended for the rehabilitation and rebuilding efforts in Eastern Visayas due to the damage caused by Typhoon Yolanda.

This month’s numbers marks the third in four months of dismal or below expectations growth figures.

February 2015 remittance growth rates have sunk below 2009 levels, or have been worse than 2009, or accounts for as the lowest growth rate since 2002!

Key questions:

One, should ‘base effects’ of low growth in February data—allegedly due to the previous ‘high growth’ in response to Typhoon Yolanda according to the BSP—occur immediately or a year after the event?

Typhoon Yolanda occurred in first week of November 2013. November and December remittances soared, but since, remittance trend has been on a steady decline. However the recent downshift appears to have sharply intensified. These are base effects?

Has the BSP been reasoning from price changes?

Two, has the decline in remittances been instead a function of diminishing returns (see chart above lower pane)?

Three: If the much touted OFW remittances growth rate remains muted or subdued, then where will demand come from?

Yet how will high expectations of consumer based statistical economic G-R-O-W-T-H be met? More importantly, how will this be financed? Will income (wages, dividends, earnings, profits, rents and interests) from BPOs, construction, shopping malls, hotel and casinos offset the decline in remittance growth rates? Or will credit growth recover and zoom?

[As a side note, following a landmark spike in 1 month Philippine treasury bills last Thursday, index managers—who may be reading me—came back to contain recent bouts of volatility in the short term spectrum, Friday. We’ll see how this goes.]

What will be the effect of diminishing growth of remittances to the supply side? The supply side has been in a frantic race to build shopping malls, housing, condos, hotels and allied industries, so where will these industries get their customers? What happens if expectations won’t be met?

Unlike establishment analysis, where demand seems to just pop out of statistics, demand will only emanate from income or savings or borrowing. OFW remittances mostly account for as wages earned from employment. And OFW employers depend on economic activities of their  respective locality.

Since remittances and BPOs depend on global political economic developments, which represent most of their sources of income, how then will a sustained downshift in global economic conditions (or even a prospective crisis) impact these economic agents? Or have these agents acquired superhuman or divine powers to become ‘immune’ to external economic developments? The consensus seem to assume such conclusion for them to project fantastically high economic growth rates.

Expectations that will eventually crash into reality like share prices of the infamous Enron—previously billed as the “seventh largest company in the world”.

---

[1] Charles Mackay Preface to the First Edition, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Library of Economics and Liberty

[2] Breibart.com REPORT: ‘REAL’ CHINA GDP SHRINKS AS DEMAND COLLAPSES April 16, 2015

[3] Bloomberg.com China Walks $264 Billion Tightrope as Margin Debt Powers Stocks April 13, 2015

[4] Wall Street Journal China Raises Red Flag on Its Stock Markets April 17, 2015

[5] Bloomberg.com China Junk Bonds Pose Most Risk Since ’04 on Credit-Quality Dips April 14, 2015

[6] See US Stock Market Bubble: In 1Q 2015, Firms with Bad Earnings Have Been Rewarded More than those with Good Earnings April 2, 2015

[7] Reuters.com U.S. public companies seek bankruptcy at fastest first-quarter rate since 2010 April 14, 2015

[8] PSE.com PSE cites President Aquino's leadership for market’s ascent to 8,000 April 14, 2015

[9] See Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment April 12, 2015

[10] Bangko Sentral ng Pilipinas, January-February 2015 Personal Remittances Reach US$4.1 Billion April 15,2015