Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

An election is a moral horror, as bad as a battle except for blood; a mud bath for every soul concerned in it—George Bernard Shaw

In this issue

Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

I. US Election Narrative: Fear the Trump Trade!

II. Market Chaos Erupts after Fed’s September Rate Cut

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

V. The Biden-Harris Legacy of "Proxy Wars"

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

Fear the Trump Trade or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us 

Is the "Trump Trade" responsible for recent market convulsions, or does this represent a pushback against the Fed’s actions? Why political-economic trends in motion tend to stay in motion. 

I. US Election Narrative: Fear the Trump Trade!

Trump's Rising Election Odds Sends Emerging Markets Into Tailspin, Causes Biggest Stock Drop In 10 Months (Yahoo, October 27) 

The Bangko Sentral ng Pilipinas (BSP) might have to do more to support the Philippine economy if former US President Donald Trump returns to power and starts a global trade war, which can hurt the entire world and, in turn, dim local growth prospects. (Inquirer.net, October 28, 2024) 

THE RETURN of Donald J. Trump to the US presidency could cause Asian currencies such as the Philippine peso to weaken, analysts said. (Businessworld, October 29, 2024) 

At first glance, it may seem that the following headlines or excerpts were conveyed for Halloween. 

Then, I realized that the U.S. elections are coming up this week. 

Mainstream media has painted an impression that the recent setbacks in the marketplace mean that a Trump win/presidency, or the "Trump Trade," could be detrimental to the markets. 

Let us examine what led to this perspective. 

In October, the Bloomberg spot U.S. dollar index surged by nearly 3% compared to the previous month. The S&P 500 slipped by 0.99%, the iShares MSCI Emerging Market ETF (EEM) dived by 3.07%, and the Global X FTSE ASEAN ETF (ASEA) tanked by 3.9%. The U.S. 10-year Treasury yield surged by 48 basis points (12.7%). 

Meanwhile, at home, the Philippine peso plunged by 3.6%, and the PSEi 30 plummeted by 1.78%. 

The prevailing sentiment in the speculative marketplace has shifted from excessive optimism to risk aversion.

Who else to blame but the leading contender in the prediction markets, Trump!

II. Market Chaos Erupts after Fed’s September Rate Cut 

But does this widely accepted perception accurately reflect causation, or is it intended to shift the Overton Window in favor of the opposing contender, Kamala Harris?

Figure 1 

The rising 10-year yield actually started just after the US Federal Reserve initiated its 50-basis-point rate cut on September 18th. (Figure 1, topmost chart)

It is rare to witness such a combination of powerful forces ripple through other market indicators.

Figure 2

Rising Treasury yields have been accompanied by an appreciating U.S. dollar index, which has also contributed to increased volatility in the bond market (MOVE Index) and volatility premiums across asset markets—including equities, oil, and foreign exchange—as well as a spike in U.S. Credit Default Swaps (CDS). (Figure 1, middle and lower graphs, Figure 2 topmost and lower images)

Figure 3

This dynamic coincided with a spike in the Economic Surprise Index and gold's widening outperformance against the TLT iShares 20-Year U.S. Treasury bond prices. (Figure 3, middle topmost and middle visuals) 

Incredible. 

The most striking indicator of the impact of the Fed's rate-cutting cycle that began in September is that it occurred under the loosest financial conditions since at least December 2022. (Figure 3, lowest diagram) 

In other words, global financial markets have significantly pushed back against the Fed’s easing policy by effectively re-tightening conditions! 

Of course, one could interpret this as "buy the rumor, sell the news." 

Still, other factors are at play—such as unrestrained public spending, surging debt levels, escalating debt servicing costs, geopolitics and more!

Nevertheless, resonating with the "Overton Window" during the pandemic in support of lockdowns and vaccines, the Gramsci-cult elite-controlled media shifted the rhetoric to blame Trump’s predilection for tariffs.

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card 

First and foremost, yes, while it is true that global trade restrictions did rise in during Trump 1.0 (2017-2021) regime, his successors, the Biden-Harris tandem, pushed for MORE trade barriers, which hit a record high in at least 2022! 

Figure 4

As the IMF chart reveals, the global economic conflict spans both parties, with both candidates appearing inclined toward de-globalization. 

(Note this shouldn’t be seen in a simplistic lens but related to geopolitical developments) 

Second, financial easing amidst the loosest monetary conditions translates to a potential comeback of inflation, which aligns with the perspective that Trump’s trade war results in higher inflation. 

However, that shouldn’t hold water; inflation under Trump’s administration was milder than the inflation epidemic during the Biden-Harris administration. 

Consequently, with higher inflation came higher interest rates as well. 

Third, Trump’s push for tariffs represents a carryover from his 2016 campaign trail. 

He used tariffs as leverage for negotiation but eased up on strict currency regulations, as noted in this Yahoo article. 

Trump has likened his tariff plan to a new "ring around the collar" of the US, with tariffs often described not as part of negotiations but with those high duties as an end goal in themselves to protect US industry… 

He promised during that campaign to impose tariffs, renegotiate NAFTA, and withdraw from the Trans-Pacific Partnership. "Promise kept," PolitiFact said of all three. 

Trump also took action on a fourth promise to declare China a currency manipulator but ended up compromising, according to the group. 

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

Figure 5

Fourth, stock markets haven’t been exactly hostile to Trump.

The ASEAN ETF (ASEA) reached an all-time high in 2018 or during the early phase of his administration, and the Emerging Markets ETF (EEM) also hit a milestone that year and also surged to a fresh record toward the close of Trump’s term. Both markets, however, eventually succumbed to the pandemic recession.

Similarly, the Philippine PSEi 30 hit a significant peak in January 2018, also coinciding with Trump’s administration.

On the currency front, the Philippine peso rallied from October 2018 to the end of 2021.

In fact, contrary to contemporary analysis, the USDPHP fell by 3.7% from January 20, 2017, to January 20, 2021 (Trump’s tenure).

In contrast, under the Biden-Harris administration, the USDPHP has increased by an astounding 21% from January 20, 2021, to the present (October 31, 2024)!

While past performance does not guarantee future outcomes, the scorecard between the contending parties shows a stark difference in the accuracy of the current predominating narratives. 

In a word, propaganda. 

Nota Bene: Past performance is not a guarantee of future results. Our purpose is to highlight inaccuracies in media claims. We don’t endorse any candidates. 

V. The Biden-Harris Legacy of "Proxy Wars"

Fifth, the world is on the brink of, or already embroiled in, a form of World War III, fought across multiple spheres. 

The U.S. suffered a humiliating defeat in the 20-year Afghanistan War, ultimately withdrawing in the face of a relentless war of attrition led by the Taliban’s guerilla tactics. Both the Trump and Biden administrations negotiated withdrawal terms, but the Biden-Harris administration oversaw a controversial chaotic exit in August 2021. 

That aside, a series of conflicts has marked the Biden-Harris administration’s legacy. 

The kinetic conflict began with the Russia-Ukraine war in 2022, spread to the Israel-Palestine/Hamas war in 2023, and has since escalated to include confrontations involving Israel-Hezbollah or the "Third Lebanon War," and even the precursory phase of Israel-Iran Conflict in 2024. 

Simultaneously, following Obama’s failed "Pivot to Asia," geopolitical tensions have been mounting in the Taiwan Straits, the South China Sea, Central Asia, and other parts of the world. 

Notably, these ongoing and emerging conflicts are interconnected.

For example, the U.S. has been supplying not only aid but also arms to its allies to counter hegemonic rivals.

Figure 6

Aside from supplying 70% of conventional weapons, U.S. military aid/grants to Israel soared to all-time highs in 2024! (Figure 6, topmost chart)

That is to say, the current conflicts represent "proxy wars" where the U.S. led NATO forces engage indirectly to pursue hegemonic objectives.

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

The Global Warfare has also entered the economic and financial spheres—seen in the weaponization of the U.S. dollar through asset confiscations targeting so-called "axis of evil" nations, and in the reinforcement of a modern-day "Iron Curtain" marked by significant restrictions on trade, investments, capital flows, and social mobility.

Mounting trade imbalances, which helped fuel the rise in trade barriers from the Trump administration to Biden-Harris, have also laid the groundwork for today’s outbreak of kinetic conflicts.

Geopolitical tensions have surfaced as a growing cold war in other regions as well.

This hegemonic competition to expand sphere of influences has percolated to Africa, Latin America, the South Pacific, and the Global South (BRICs), some of which channeled through mercenary or gang wars and local civil wars. (Dr. Malmgren, 2024)

Ironically, four of the five ASEAN majors, specifically, Indonesia, Thailand, Malaysia and Vietnam recently signed up for the BRICs membership.

The implicit cold war has also extended into previously uncharted areas: underwater territories, space, the Arctic, the Pacific, mineral resources (like rare earth elements), and technological domains such as DNA research, cyberspace, and microchips (Malmgren, 2023).

The point is that these evolving conflicts underscore the interconnectedness of U.S. foreign and domestic policy.

Given the powerful forces behind this trajectory or the "deep state"—including the Military-Industrial Complex, the National Security State, Straussian neoconservatives promoting the "Wolfowitz Doctrine," the energy industrial complex, Big Tech, and Wall Street—it is unlikely these developments will cease, whether under a Trump 2.0 administration or (Biden carryover through) a Harris regime.

Put simply, while media narratives may further lobotomize or impair the public’s critical thinking, potentially deepening societal division, a meaningful change in the U.S. and global sociopolitical and economic landscape remains unlikely if elections continue to focus on what I call as "personality-based politics."

As investor-philosopher Doug Casey rightly observed, "Trends in motion tend to stay in motion until they reach a crisis."

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

Lastly, the public tends to overlook that current trends are merely symptoms of deeper issues or mounting disorders stemming from the decadent U.S. dollar standard.

As investor Doug Noland astutely wrote 

Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But late in the cycle, perceptions shift. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold. It bears repeating: Things turn crazy at the end of cycles. (bold mine) [Noland, 2024] 

Easy money has long fueled, or been instrumental in financing, the global war machine, leading to today's bellicose conditions.

Easy money has also powered the growth of big government and contributed to economic bubbles and their eventual backlash, as evidenced by China’s unparalleled panicked bailout policies to prevent a confidence crisis from imploding. 

The push for easy money is likely to persist, whether under a Trump 2.0 or a Harris administration. 

As Professor William Anderson noted, 

The unhappy truth is that both platforms will need the Federal Reserve System to expand its easy money policies, despite the massive damage the Fed has already done by bringing back inflation. While Harris claims to defer to the “experts” at the Fed, Trump wants the president to have more power to set interest rates. Obviously, neither candidate is acknowledging the economically perilous situation in which the government ramps up spending, which distorts the markets, and then depends upon the Fed to monetize the resulting federal deficits. As the debt grows and the economy becomes progressively less responsive to financial stimulus, the threat of stagflation grows. The present path of government borrowing and spending all but guarantees this outcome, and the candidates have neither the political will nor the economic understanding to do what needs to be done. (Anderson, 2024) 

U.S. debt is fast approaching $36 trillion, while global debt reached $315 trillion in Q2 2024 and counting. (Figure 6, middle and lower charts) 

"Trends in motion tend to stay in motion until they reach a crisis."

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

While the "Trump trade" provides a convenient pretext for the current tremors in the global financial market, this narrative relies on inaccurate premises and misleading speculative claims that are unsupported by empirical evidence. Instead, these assertions aim to sway the voting audience ahead of this week’s elections. 

In contrast, the current financial market convulsions reflect a significant pushback against the Fed’s and global central banks’ prolonged easy-money policies. As investor Louis Gave of Gavekal recently noted, "Zero rates were a historical aberration that need not be repeated." 

Needless to say, regardless of who wins the U.S. presidency, political agendas will continue to advocate for easy money and various forms of social entropy and conflict. 

Unfortunately, there is no such thing as free lunch forever. 

Although trends in motion tend to stay in motion, the era of the bond vigilantes is upon us.  

Things have been turning a whole lot crazy. 

___

References 

Yahoo Finance, What Trump promised in 2016 on tariffs. And what he delivered (a lot). October 28, 2024, 

Dr. Pippa Malmgren The Cold War in Hot Places, March 12, 2024 

Dr. Pippa Malmgren WWIII: Winning the Peace, October 28, 2023 drpippa.substack.com 

Doug Noland, Vigilantes Mobilizing, Credit Bubble Bulletin, November 1,2024 

William L. Anderson  The Great Retreat: How Trump and Harris Are Looking Backward, August 30, 2024 Mises.org 

Louis-Vincent Gave, Behind The Bond Sell-Off, Evergreen Gavekal October 31, 2024

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

 

A failure to correct unsustainable fiscal trajectories poses major risks to growth, inflation and financial stability—Agustín Carstens, General Manager, Bank for International Settlements 

In this issue

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus

II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance

III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes

IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!

V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!

VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!

VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending

VIII. The Inflation Tax: BSP and Banking System’s QE

IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy

September 2024 Fiscal Deficit Highlights the "Marcos-nomics Stimulus"; How Deficit Spending Drives a WEAKER Philippine Peso

There seems to be little recognition that September's deficit was a milestone of a kind; it actually highlights "Marcos-nomics" in action. With a quarter to go, debt servicing costs hit an all-time high as the USD-Peso mounts a ferocious recovery.

I. September Deficit Highlights Three of the Five Phases of Marcos-nomics Stimulus

Everyone has been conditioned to believe that current economic conditions are "normal."

To reinforce this notion, media narratives often highlight selective aspects of growth while ignoring other salient parts and related data.

That’s right: when the public’s dependence on "political interventions"—referred to as ‘stimulus’—becomes entrenched, this deepening addiction becomes the norm.

As the great Nobel Laureate Milton Friedman presciently stated, "Nothing is so permanent as a temporary government program."

But have you heard any expert mention this? You might read piecemeal allusions; for example, the BSP's rate-cutting cycle is expected to boost household spending and business activity.

Nonetheless, the public hardly understands the interconnectedness of what are sold as disparate policies.

As previously discussed, we identify the five phases of the "Marcos-nomics stimulus," subtly operating under the Pandemic Bailout Template (PBT).

The first phase involves record-setting public spending, contributing to a significant deficit.

The second phase highlights the BSP’s monetary policy, characterized by the latest round of interest rate cuts.

The third phase signifies the BSP and bank injections, partially fulfilled by the recent reduction in the banking system’s Reserve Requirement Ratio.

The fourth and fifth phases encompass various subsidies, such as the current credit card interest rate ceiling, along with pandemic relief measures.

The National Government and the BSP have yet to expand their coverage in this area, but it is expected to happen soon.

This step-by-step approach underlines the structure of the stimulus, which subtly mirrors the Pandemic Bailout Template.

September’s deficit highlights its first phase.

II. Untold Aspects of Fiscal Health: How the Shift in Monthly Revenue Reports Impact Quarterly Performance

Inquirer.net, October 25, 2024: The country’s budget deficit widened by 8.9 percent to P273.3 billion in September from P250.9 billion in the same month last year, as the increase in revenues was not enough to cover the hike in expenses, the Bureau of the Treasury reported on Thursday. Revenue collections increased by 17.32 percent to P299.7 billion last month, from P255.4 billion last year, while state expenditures also grew by 13.15 percent to P572.9 billion. But for the first nine months, the budget deficit narrowed by 1.35 percent to P970.2 billion from the P983.5-billion budget gap a year ago.

While the Bureau of the Treasury (BuTr) issues a monthly report, recent changes in tax revenue reporting and end-of-quarter budget compliance targets make quarterly reports far more significant.

In fact, monthly reports can be considered largely meaningless without considering the quarterly performance.

For instance, the latest BuTr report sheds light on the reasons behind recent revenue surges.

The increase in VAT collections in 2024 is partly due to the impact of the change in payment schedule introduced by the TRAIN law provision which allows the tax filers to shift from monthly to quarterly filing of VAT return [bold mine] (Bureau of Treasury, October 2024) 

Distortions brought about by changes in the BuTr’s reporting methods pose a crucial factor in analyzing the fiscal health of the Philippines. 

This brings us to September’s performance. 

Indeed, public revenue in September grew by 17.3%, but this increase is primarily due to base effects. 

Additionally, administrative policy changes and one-off charges contributed to the month’s revenue growth.         

This is attributed to higher personal income tax (PIT) particularly on withholding on wages due to the release of salary differentials of civilian government personnel pursuant to Executive Order No. 64, series of 20242 , which updated from the Salary Standardization Law (SSL) of 2019… 

Non-tax revenues surged to P46.2 billion in September, more than twice the level attained a year ago primarily due to the one-off windfall from the Public-Private Partnership (PPP) concession agreement…the higher outturn for the period was attributed to the P30.0 billion remittance from the Manila International Airport Authority (MIAA), representing the upfront payment for the MIAA-Ninoy Aquino International Airport (NAIA) PPP Project [bold added] (Bureau of Treasury, October 2024) 

Importantly, aside from the factors mentioned above, as noted by the BuTr, the shift in VAT payment timing played a crucial role in boosting 2024 revenues.

Figure 1

That is to say, since VAT payments are made at the end of each quarter but recorded in the first month of the following quarter, this quarterly revenue cycle inflates reported revenues for January, April, July and October, often resulting in a narrowed deficit or even a surplus for these months. (Figure 1, topmost chart) 

Therefore, we should anticipate either a surplus or a narrower deficit this October.

In any case, Q3 2024 revenues increased by 16.95%—the highest growth rate since Q3 2022, which was a record in nominal terms for Q3 historically. However, this was also the second-highest quarterly revenue in pesos after Q2 2024. (Figure 1, middle image)

What might collections look like if we consider only “core” operations? Would deficits be larger without these reporting distortions? Or could the government be “padding” its revenue reports? 

III. Revealing Hidden Dynamics: How Quarterly Expenditures Shape Fiscal Outcomes 

The mainstream media and their expert cohorts rarely mention the most critical segment: historic public (deficit) spending. 

Although public spending rose by only 13.2% in September due to a high base effect, it marked the largest non-December outlay on record. It was also the third-largest overall, trailing only the year-end budget expenditures of December 2023 and December 2022. (Figure 1, lowest graph) 

Notably, 2024 has already seen three months of spending exceeding Php 500 billion—even before the year-end budget allocations. This pattern isn’t an anomaly but rather a path-dependent trajectory of political decisions. 

Figure 2

In the context of quarterly performance, Q3 spending grew by 6.4% year-over-year, also constrained by high base effects. Still, this represents the third-highest quarterly outlay on record, following Q2 2024 and Q4 2023, and a milestone high when compared with previous Q3 performances. (Figure 2, topmost diagram)

Similarly, the monthly deficit resulting from September’s historic expenditure constituted the second largest non-December monthly deficit, following the pandemic recession in April 2020, which saw a deficit of Php 273.9 billion. This was the sixth largest deficit when including the year-end closing budget.

Furthermore, the pressure to meet quarterly compliance targets push the burden of expenditures to the closing month of each period; thus, the largest deficits occur at the end of each quarter (March, June, September, and December). (Figure 2, middle pane) 

Simply put, this new schedule has introduced significant distortions in the Bureau of Treasury’s (BuTr) fiscal balance reporting. 

Revenues at the start of each quarter are likely to close the gap with expenditures in October, potentially leading to a surplus or a narrowed deficit. In contrast, end-of-month spending for each quarter should boost expenditures and consequently increase deficits. 

However, for now, the alteration in BuTr reporting has artificially inflated the government’s fiscal health. 

Still, it goes without saying that the year-end expenditure target will likely push December 2024’s fiscal deficit to a fresh milestone! 

From a quarterly perspective, revenues remain above their polynomial trendline, while spending hovers slightly below it, reflecting revenue outperformance in comparison to trend-aligned spending. (Figure 2, lower graph) 

Meanwhile, the widening gap between the deficit and its trendline may signal increased volatility ahead. 

IV. September Debt-Servicing Costs Hits an All-Time High Relative to Historical Annualized Data!

Despite the potential embellishment of budget statistics through inflated revenues or understated deficits, it remains essential to recognize that this spending requires funding. 

Some mainstream experts have attributed the recent decline in Bureau of Treasury (BuTr) financing to prudent “rationalization” by budget overseers. 

However, we have consistently argued that this perspective is grotesquely misguided; it is the government’s default action to indulge in a spending binge. 

This behavior serves not only to advance its political agenda of centralizing the economy and promoting its interests in the upcoming elections but also because such fiscal transfers create a temporary illusion of economic boom. 

For a spending-based GDP, ramping up expenditures is necessary to increase tax revenue and, more importantly, to depress interest rates, which allows the government to access public savings cheaply to fund its expenditures. 

True, revenue expansion in August reduced that month’s deficit, which led to an improvement in the 9-month deficit, dropping from last year’s level. However, we suspect this improvement may be short-lived, as December 2024’s massive spending is likely to push the deficit above last year’s figures. 

Still, it is noteworthy that the 9-month deficit for 2024 remains the fourth largest since the pandemic bailout template (PBT) measures began in 2020. 

Any improvement in the deficit has been inconsequential, as the post-PBT deficits have remained in an “emergency” mode. 

It only takes a substantial downturn in GDP for this deficit to set a new high—which is likely what its polynomial trendline suggests.

Figure 3

Despite improvements in the 9-month deficit, financing reversed its downward trend, rising 12.6% year-over-year to Php 1.875 trillion. (Figure 3, topmost chart)

This trend reversal means not only an increase in the public debt stock—recently improved due to the peso’s substantial gains against the USD—but also higher costs of servicing public debt.

The BuTr will report on September’s public debt figures next week, but with the substantial V-shaped recovery of the USD, October is expected to yield interesting data.

Nevertheless, the 9-month cost of servicing public debt has reached an ALL-TIME HIGH relative to annual historical data, with a full quarter left to go! (Figure 3, middle graph)

Interestingly, amortizations have exceeded the annual 2023 data by 8.7%, while interest payments remain just 7.2% below this benchmark.

Signs of normal times?

V. How Deficit Spending Drives a WEAKER Philippine Peso; the USD-PHP V-Shape Recovery!

Although the 9-month growth rate for debt servicing slowed to 17.4% due to base effects, it set a record in peso terms.

More importantly, the share of external financing has been increasing, which not only indicates rising credit levels in the local currency but also amplifies external borrowing, effectively exacerbating "USD shorts" (implied short positions on the USD). (Figure 3, lowest window)

Borrowings ultimately need repayment. However, if organic USD revenue sources prove insufficient to meet debt obligations and refinance existing loans, the government will need to take on more debt to cover existing obligations—essentially, a recycling of debt, or what is known as Ponzi finance.

Figure 4 

Compounding these challenges, debt-financed government spending, a preference for easy-money conditions, and domestic banks’ bias toward consumer lending all contribute to a widening savings-investment gap, fueling the country’s "twin deficits." This combination of factors will likely increase reliance on external financing, leading to a structural depreciation of the peso. 

The crux of the matter is this: the widening fiscal deficit results in a weaker Philippine peso, raising external credit risks. (Figure 4, upper image) 

Oddly enough, some media outlets and pseudo-experts have recently attributed the recent V-shape recovery of the USDPHP exchange rate to a “Trump presidency!” 

Huh? Are they suggesting that a Harris administration would result in a strong peso? 

As I recently posted on x.com: During the Trump 1.0 presidency 1/20/17 (49.92) -1/20/21 (48.054), the USDPHP fell by 3.74%! How about Biden? So far, at 58.32, the USDPHP is up 21.4% (as of October 25, 2024)! 

Certainly, the recent strength of the dollar has played a role, contributing to a broad-based rebound of Asian currencies this week. While the USD Index (DXY) rose by 0.8%, the Philippine peso fell by 1.39%. 

In the context of the USD-Philippine USDPHP reclaiming its old trendline, this represents a "signal," while the peso’s recent bounce signifies "noise" or an anomaly. (Figure 4, lower chart) 

On the other hand, the DXY remains below its immediate broken trendline. 

So, is the USDPHP market suggesting a retest of 59 soon? 

This partially illustrates the "exorbitant privilege" of the US dollar standard, where global central banks rely on building up their USD reserves, to "back" or "anchor" their domestic monetary or currency operations that fund their economies and imports. 

In any case, over the long term, the relative performance of a currency against regional peers vis-à-vis the USD might signal developing vulnerabilities within that currency.

This inability to recognize causality represents the heuristic of attribution bias— giving credit to endogenous activities while attributing deficiencies to exogenous forces.

VI. All Time High in Interest Payment as Share of Expenditures Soar to 2009 High!

Circling back to debt servicing, it's important to note that amortizations are not included in the published budget. As the government defines it, this represents "a financing transaction rather than an expenditure" (Ombudsman, 2012). 

Consequently, this aspect has barely been addressed by the headlines or the experts.

Figure 5

Despite attempts to downplay discussions around interest payments, the nine-month interest payments have surged to an all-time high, with their share of disbursements climbing to 13.7%—the highest level since 2009! (Figure 5, topmost diagram)

The growing debt burden from deficit spending, amid elevated rates, translates into an even larger cost of servicing, impacting both the budget’s allocated expenditures and its mandatory cash flows.

How’s that for "prudential" debt management or "rationalizing" the budget?

VII. Pre-Election Spending? All Time High in 9-Month Government Disbursements, Second Highest LGU spending

Aside from interest payments, what might be the other major spending items? 

The nine-month central government’s disbursement growth surged by 11.64% to an all-time high of Php 2.78 trillion, which, according to the Bureau of the Treasury (BuTr), signifies "the implementation of capital outlay projects by the Department of Public Works and Highways and larger personnel services expenditures due to the implementation of the first tranche of salary adjustments." (Figure 5, middle window)

It is worth noting that, aside from aiming for GDP targets, this spending appears to be tactically timed for pre-election purposes.

Meanwhile, local government spending growth rebounded sharply from a 16.6% contraction in 2023 to 8.8% this year, reaching the second highest level in 2024. (Figure 5, lowest image)

A crucial segment of this substantial recovery may involve direct and indirect financing of local pre-election campaign activities.

The nine-month share of national disbursement was 65.24%, slightly higher than 2023’s 65.2%, while the share of local government unit (LGU) spending declined from 18.2% in 2023 to 17.72% in 2024.

In any event, given the embedded accelerated trajectory in deficit spending for socio-political (pre-elections, war economy, infrastructure-led GDP) and financing goals in the face of volatile economically sensitive revenues or collections, what could go wrong?

VIII. The Inflation Tax: BSP and Banking System’s QE

Direct taxation and debt have not only served as the primary sources of financing for the increasing scale of spending and deficits; the inflation tax has also taken on a more significant role in funding deficit spending.

It's important to remember that the Bangko Sentral ng Pilipinas (BSP) operates under an "inflation targeting" regime.

The unstated objective is not to "eliminate" inflation—since that is never the goal—but rather to contain the inflation "genie" within manageable limits.

The BSP aims to utilize the inflation tax alongside direct taxes and borrowing, while carefully controlling it to prevent social discord.

Consequently, attributing the current inflationary episode solely to supply-side factors has proven to be a convenient way to deflect blame from the BSP to the broader market economy, often framing it as “greedflation.”

Given this context, it’s hardly surprising that none of the establishment experts anticipated the surge in inflation, despite our repeated warnings about the inflation cycle.

Figure 6

When authorities began ramping up spending even before the pandemic in 2019, the BSP’s net claims on the central government (NCoCG)—essentially a local version of quantitative easing—started to escalate and has remained on an upward trajectory ever since. (Figure 6, topmost chart)

Even as mainstream narratives tout the aspiration of achieving "upper middle-income status," little has changed in the BSP’s NCoCG since their historic Php 2.3 trillion bailout of the banking system during 2020-2021.

The same holds true for the Philippine banking system’s NCoCG, which continues to be a vital source of financing for public debt. (Figure 6, middle window)

As of last August, the banking system’s holdings of government securities were just shy of the all-time high reached in July.

Although bank holdings of held-to-maturity (HTM) assets dipped in August, they remained tantalizingly close to the record high set in December 2023. Philippine NCoCG are entwined with HTMs. (Figure 6, lowest chart)

When have these been signs of "normal?"

IX. Conclusion: Big Government Comes at The Expense of a Healthy Market Economy

Figure 7

We shouldn’t overlook the fact that the accelerating surge in the nominal value of public debt has diverged from the rising trajectory of public spending, suggesting a potential understatement of the fiscal deficit. (Figure 7, topmost graph)

The establishment often emphasizes the importance of public spending, claiming it has a ‘multiplier effect.’ However, from the perspective of the banking system, the reality appears to be the opposite: instead of stimulating growth, increased public spending has led to a diminishment of savings, as evidenced by the declining growth of peso deposits. (Figure 7, middle chart)

The impact of diminishing savings is also evident in the capital markets, with trading volumes on the Philippine Stock Exchange (PSE) declining further due to the surge in pandemic-era deficits. Yes, PSEi 30 have risen on the backdrop of declining volumes. Amazing! (Figure 7, lowest diagram)

In short, the greater the centralization of the economy— through: (1) intensifying public spending, (2) increasing political control over the economy—such as Public-Private Partnerships (PPPs), which can be viewed as a neo-fascist or crony capitalist model, (3) the expansion of the bureaucratic state due to welfare and warfare sectors, and (4) the increasing reliance on the inflation tax, the lower the productivity.

Simply put, a big government comes at the expense of a healthy market economy.

Given these circumstances, could this scenario catalyze a third wave of inflation?

When has the Philippine economy truly returned to a pre-pandemic "normal?"

___

References:

Bureau of Treasury September 2024 Budget Deficit at P273.3 Billion Nine-Month Deficit Narrowed to P970.2 Billion, October 24, 2024 Treasury.gov.ph

Office of the Ombudsman, I. Basic Concepts in Budgeting, December 2012, www.ombudsman.gov.ph

 

Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

 

Causa remota of any crisis is the expansion of credit and speculation while causa proxima is some incident that saps the confidence of the system and induces investors to sell commodities, stocks, real estate, bills of exchange, or promissory notes and increase their money holdings. The causa proxima may be trivial: a bankruptcy, a suicide, a flight, a revelation of fraud, a refusal of credit to some borrowers, or some change of view that leads a market participant with a large position to sell. Prices fall. Expectations are reversed. The downward price movement accelerates—Charles P. Kindelberger 

In this issue

Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

I. US Banks Powered Global Financials ETF to a Record High!

II. Melt-up! The Philippine Financial-Bank Index Carves a Fresh All-Time High!

III. Tightening, what Tightening? Finance Outperformed the PSE Since 2020, Banks Centralize Financial Resources

IV. The Paradox of Financial and Real-Estate Performance; Year-To-Date Performances of Listed Banks

V. Record Financial Index: From the Perspective of Volume and Foreign Money Flows

VI. Cross-Border Leveraged Speculation Powered the Record High of the Financial/Bank Index

VII. Bank Borrowings in a Melt-UP Phase too! Conclusion

Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

The share prices of many Philippine banks have been in a melt-up. But what’s been driving this surge?

I. US Banks Powered Global Financials ETF to a Record High!

Thanks to the extraordinary loosening of financial conditions, which has spurred booming credit and stock market activity, some of the top U.S. banks reported exceptional performance in Q3 2024 last week.

As a result, share prices of Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) soared to all-time highs.

In turn, BlackRock’s iShares Global Financials ETF, the IXG (NYSE ARCA: IXG), which has been on an uptrend since the lows of October 2020, also reached a fresh record high after surpassing its previous peak set in 2007.

The IXG's portfolio consists of 209 global equities primarily in financial services and banking, with over 55% of its holdings in US markets. This week, the IXG surged 2.25% and has generated a 26.13% return in 2024 (as of October 18).

Figure 1

Financials ranked fourth among the best-performing sectors in the S&P 500, with a 26.5% return, trailing Information Technology at 33.25%, Utilities at 29.3%, and Communications at 28.3% (as of October 18). [Figure 1, topmost table]

Despite the backdrop of supposedly high interest rates, October 2022 marked a turning point for the financial sector. This followed the Bank of England’s (BoE) intervention to rescue its troubled pension funds during the selloff of UK bonds.

The subsequent bailout of U.S. banks during the 2023 crisis further emboldened speculative activity, as central bank interventions have created what many view as a "moral hazard"—the belief that central banks will always step in to support the markets.

Expectations of easing by the Federal Reserve and other central banks have fueled the blistering rise of the IXG. The rapid pace of this ascent bears an unsettling resemblance to the 2007 episode, which preceded the Great Financial Crisis (GFC). [Figure 1, middle image]

II. Melt-up! The Philippine Financial-Bank Index Carves a Fresh All-Time High!

What does this have to do with the PSE?

The PSEi 30 closed the week ending October 18th up 1.44%, pushing 2024 Year-to-Date (YTD) returns to 14.97%.

Leading the gains this week was the Financial/Bank Index, with a 3.5% spike, followed by the Property Index, which climbed 2.11%.

The strong performance of the banking and property sectors supposedly reflects the Bangko Sentral ng Pilipinas' (BSP) announcement of its second round of rate cuts, effective October 17.

With this week’s surge, Financials have swiftly secured the second spot YTD with a 39.3% return, closing in on the ICT-led Service Sector, which holds the top position with 40.7%.

Since the PSEi 30 hit its June 2021 lows—mirroring trends in the U.S.—financials have sprinted ahead of other sectors. The Financial Index returned 29.9%, followed by the Property Index at 25%, both contributing to the PSEi 30’s overall 20.4% gain over this period. (Figure 1, lowest graph)

Figure 2

Here’s the thing: the Financial/Bank Index set a new record last September, surpassing its January 2018 high of 2,325.65. In a parabolic fashion, similar to global markets, the financial/bank index decisively reinforced its end-September breakout with this week’s push to 2,421.6. (Figure 2, topmost chart) 

Once again, China Bank’s incredible vertical rise is unprecedented, showcasing price volatility that is unbecoming of traditional banks. (Figure 2 middle chart) 

As previously pointed out, similar to the Lehman episode, skyrocketing prices tend to disguise underlying problems. 

In essence, the parabolic rise of financials hardly indicates a healthy bull market. If history serves as a guide (as seen in 2012 and 2018), this could be a sign of an interim top. 

Or could this time be different? 

III. Tightening, what Tightening? Finance Outperformed the PSE Since 2020, Banks Centralize Financial Resources 

The Financial/Bank Index currently consists of eight constituents: seven banks—Asia United Bank [AUB], BDO Unibank [BDO], Bank of the Philippine Islands [BPI], China Banking [CBC], Metrobank [MBT], Philippine National Bank [PNB], and Security Bank [SECB]—and one non-bank entity, the Philippine Stock Exchange [PSE].

Three of the bank members in the Financial Index are also part of the PSEi 30 composite, with two of them ranking among the top five.

While recent mainstream discussions have focused on how banks benefit from the liquidity injections via significant Reserve Requirement Ratio (RRR) cuts, and BSP rate cuts, the Financial Index has been outperforming the PSEi 30 since 2020. (Figure 2, lowest diagram) 

This trend began when the BSP implemented historic measures to support the industry, including quantitative easing (QE), rate cuts, RRR cuts, and relief measures.

This indicates that current dynamics represent a continuation of an underlying trend.

Figure 3

The BSP’s Total Resources of the Financial System (TRFS) data reveals that not only is it outgrowing GDP, but the share of banking resources—particularly from universal commercial (UC) banks—has been driving most of this growth. Philippine bank and UC bank share of the TRFS accounted for 83.4% and 78.05% last August. (Figure 3, topmost window) 

This highlights a concentration of resources and a deepening dependence of the economy on bank credit and liquidity. Thus, when officials claim they are promoting capital markets, it only holds true if banks benefit from it. 

Ironically, despite previous rate hikes, the TRFS suggests there has been little actual "tightening" or "restrictiveness" in the system. 

The outperformance of the Financial/Bank Index further confirms this. Yet, even with the availability of public data, discussions surrounding these insights are often sparse. 

IV. The Paradox of Financial and Real-Estate Performance; Year-To-Date Performances of Listed Banks 

In contrast, despite the substantial rebound in the Property Index from June 21 through September, it has yet to break its pattern of underperformance relative to the PSEi 30. (Figure 3, middle graph) 

These divergent trends suggest that, regardless of the measures undertaken by the BSP, the property sector remains hindered by internal challenges. 

In fact, contrary to most predictions, low interest rates have contributed to the real estate sector's struggles. As the BSP eased monetary policy over the past decade, the sector's value-added share of GDP fell to recent all-time lows—an indication of malinvestment. (Figure 3, lowest chart)

Figure 4 

Still, the Year-to-Date (YTD) performance of all listed banks, which has averaged a return of 27.08% as of October 18, has been skewed in favor of the banks that are part of the financial/bank index. (Figure 4, topmost image) 

Rocketing stock prices of Financial Index members AUB and CBC have delivered impressive YTD returns of 91.3% and 94.59%, respectively. (Figure 4, middle visual) 

Meanwhile, PSEi 30 mainstays BDO, BPI, and MBT produced returns of 25.7%, 37.9%, and 56.5%, respectively. SECB also saw a solid return of 36.5%. 

Have CBC and AUB struck a "gold mine" that the market has only recently discovered? 

V. Record Financial Index: From the Perspective of Volume and Foreign Money Flows 

Volume and foreign money flows offer another perspective.

Although the PSEi 30 briefly surged past 7,500 before retreating, trading volume remains relatively sluggish.  (Figure 4, lowest graph) 

But that’s only part of the story. 

What remains less known to many is that despite this overall lethargy, financials and banks have captured the bulk of the trading volume or a significant portion has been concentrated in financials and banks. 

The BSP and PSE have yet to release transaction data for August and September.

Figure 5 

However, using July data, the 7-month share of financials' volume relative to total market volume reached an all-time high of 23.7% in 2023. It has since retreated to 19.1% this year, the second-highest on record. That number, however, could reach a new high in October. (Figure 5, topmost image) 

As of October 18, the financial sector's share of gross trading volume had soared to 26.5% (and its share of mainboard volume to 29.6%). 

In other words, the financial/banking sector has absorbed about a quarter of the PSE's sluggish trading volume! That’s an astonishing level of concentration risk—Incredible! 

Given my limited access to sophisticated database organizing tools, I have only managed to tabulate foreign flows using October data, which is limited to the top five Financial Index members: AUB, BDO, BPI, CBC, and SECB. 

There is no question that these top five banks dominate the turnover share, accounting for 90.7% during the week leading up to October 18 and 84.8% for the entire month of October. 

VI. Cross-Border Leveraged Speculation Powered the Record High of the Financial/Bank Index 

But here are some additional insights: 

Net foreign inflows of Php 892.5 million for the top five banks represented 20.94% of the Php 4.261 billion total foreign inflows for October.

Notably, a substantial portion of this, accounting for 87.8% or Php 953.2 million, originated from last week alone, out of a total inflow of Php 1.086 billion.

In short, the recent surge to a record high in the Financial/Bank Index was largely driven by foreign capital, likely bolstered by the "national team" (such as the treasury departments of banks, Maharlika SWF and other financial corporations or OFCs?).

Stunning.

It’s looks likely that some of the foreign money chasing the U.S.-based IXG (iShares Global Financials ETF) rally has been positioning itself in emerging market banks like those in the Philippines. 

What we are witnessing appears to be unadulterated, leveraged speculative cross-border allocations, primarily focused on banks and, to a lesser extent, communications companies (telcos). [See returns of S&P 500 sector above] 

Further, the PSEi 30’s weekly breadth was overwhelmingly positive, with 19 of the 30 issues gaining and three remaining unchanged, averaging a 1.43% increase—almost mirroring the index’s actual weekly return of 1.44%. Two stocks, Meralco and Century Pacific Food (CNPF), hit all-time highs this week. (Figure 5, middle chart)

Weekly gains in the three banks contributed significantly to the PSEi 30’s performance. These banks accounted for 22.6% of the index, while the top five heavyweights—two of which are banks—commanded over half (50.83%) of the PSEi 30 as of October 18. (Figure 5, lowest pane) 

VII. Bank Borrowings in a Melt-UP Phase too! Conclusion

Before we conclude, as we await the PSE and the BSP to release September and Q3 data on individual banks and the overall banking system, it is noteworthy that some banks, such as PBCOM and PNB, have recently announced plans to raise funds through debt issuance in the capital markets.

Figure 6

It’s not just share prices that are surging—Philippine banks are also experiencing a sharp increase in borrowing—bonds and bills soared 32.3% in August. (Figure 6, topmost and middle graphs)

Why the rush to raise funds?

The answer lies in the ongoing deterioration of liquidity within the banking system, as indicated by declining cash-to-deposit and liquid-assets-to-deposit ratios. (Figure 6, lowest chart) 

The pressing question is: How will banks continue to fund the government under these conditions? The BSP’s response: Cut their Reserve Requirements, unleash liquidity! 

To wrap up, what you see in the media or mainstream discourse often doesn’t reflect the full picture.