Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

“The most disgraceful thing in the world, they think, is to tell a lie; the next worst, to owe a debt: because, among other reasons, the debtor is obliged to tell lies.”—Herodotus: On The Customs of the Persians

In this issue:

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

-Differentiating Primary from Secondary Cause

-The Link between Typhoon Yolanda and Economic Growth? Coconuts!

-Fishing for Truth

-Construction Slump Amidst a Bank Lending Boom??? Yikes!

Phisix: First Quarter GDP Drop to 5.7% has hardly been about Typhoon Yolanda

Sorry but I have to play again the role of the unpopular spoiler.

I am not supposed to write this weekend but recent developments have been compelling enough for me to deliver a shorter than usual outlook.

Differentiating Primary from Secondary Cause

In the realization of what seems as widespread misinformation that has been unquestioningly accepted and imbued by the public as ‘fact’, such requires some counterbalancing.

Let me state my position clearly. I do NOT deny that Typhoon (Haiyan) Yolanda has contributed to the economic decline.

However my position is that the embedded imputation that the deadly and costly storm accounts for as the main source of the unexpected slowdown in the statistical economy or “The relatively slow growth is expected given the magnitude of destruction by typhoon “Yolanda” to agriculture as proposed by Philippine officials has been patently misguided.

Secondary causes or aggravating factors are not the same as the primary driver.

Of course, officials can be slippery enough to deny such association as shown by this newspaper narrative “while provinces directly affected by Yolanda accounted for a relatively small part of the economy, the damage in those areas disrupted supply chains nationwide, dragging down the entire country” 

The following table is from the National Statistical Coordination Board (NSCB) is a reconstruction of the 1^st quarter GDP intended to reveal the relationship between two important factors: the share contribution and the growth rates of each sector, subsector and the GDP-GNI. Since my concern is of the risks from the supply side, I will focus on the statistical data based on the industrial origin of the GDP methodology. All data in this discussion will be based on 2000 constant prices.

The last column represents the growth data as shown in media: 5.7% GDP growth, .9% growth in Agriculture, 5.5% expansion in industry and the 6.8% outperformance of the service sector which lifted the statistical data.

The prior column shows the difference in the context of the distributional share of sectoral performance of the economic pie. The reason I’d like to exhibit the distribution is to examine whether alleged growth has been inclusive or exclusive. Put differently, to know whether growth has been broad based or concentrated.

The blue colored numbers represent the significant gainers, while the red numbers have been the decliners whereas the black numbers are industries that posted marginal changes.

Let me further clarify that a loss in the share means either that the sector suffered losses or other sectors have outweighed the growth performance of the given industry.

We will have to revert back to the table once in a while.

The faithful crowd will likely construe the following as needless caviling. But remember movements in the stock markets have been anchored in the entrenched conviction that the stock market performance equals economic growth. Even more important is the deeply held misperception that the Philippine economy has reached an immutable and irreversible new paradigm.

So a balanced perspective has to be presented to guide the mature audience why the boom should not only be questioned or doubted, but also to show that such has been founded on an unsustainable model that has been destined to crumble.

The Link between Typhoon Yolanda and Economic Growth? Coconuts!

Mainstream media associates the following figures as related to the claim of “disrupted supply chains nationwide”; “Slowdowns were noted in several key sectors. For instance, agricultural output growth slowed to 0.9 percent in the first quarter from 3.2 percent in the same period last year. The manufacturing industry also suffered, growing by just 6.8 percent from last year’s 9.5 percent. In construction, growth slowed to 0.9 percent from 31.1 percent in 2013, dragged down mainly by the private sector.”

Yet media and domestic officials hardly even exerted any effort to explain HOW this supposed association or supply chain links ever occurred. The connection had simply just been presumed or rationalized.

Let us take on Agriculture first.

Agriculture has been reported to have slowed by .9%. Looking at the table, as a share to the overall economy the industry has declined from 11.15% to 10.64% for year on year even when this sector posted a positive growth. The implication is that growth in the other industries outshined agriculture that resulted to its loss of share.

Meanwhile, fishing represents the only subsector of the agricultural industry. Fishing accounts for 16.63% of the agricultural pie in the 1^st quarter data down from 17.3% during the first quarter of 2013.

The reason for this quarter’s share reduction has been because y-o-y fishing economic activity has posted a substantial loss of 3% that virtually chipped away the 1.7% gain of the land based agriculture industry.

Aside from geothermal industries and the “two of the country’s top dollar earners: the Philippine Phosphate Fertilizer Corporation (PHILPHOS) and the Philippine Associated Smelting and Refinery Corporation (PASAR)” according to the NSCB Eastern Visayas Region branch, Region 8 “is rich in natural resources, including vast agricultural lands with fertile soil, abundant water and wet climate.  Among its major crops are palay, coconut, banana, camote, corn, abaca and sugarcane.  It is the country’s second largest producer of coconut and abaca among the 17 regions.  It is also rich in freshwater fish and other marine resources.” (bold mine)

Let us see how Typhoon Yolanda’s impact on Region 8’s major produce affected the national growth during 1^st quarter by looking at the national performance.

Palay grew by 3.3%, coconut suffered a setback of a considerable 6%, banana gained 1.8%, camote and abaca (perhaps under other crops fell by .8%), corn advanced 1.5% and also sugarcane which jumped by 6.1%.

If there has been any major impact on agriculture, it has mainly been conspicuous in the coconut sector. This is understandable given that Region 8 has been “the country’s second largest producer of coconut”.

Yet with national agricultural data suggesting that losses from the Typhoon have been neutralized for MOST of the crops, then this leaves the fishing industry as the possible other link.

Now let us put into context whether the decline in the agricultural industry has been an aberration. If there is one then this would reveal the extent of the damage from the typhoon.

Typhoon Haiyan slammed the Philippines on November 3-11, 2013, that’s about halfway the fourth quarter period.

Yet agriculture ironically posted gains of 2.3% despite the steep decline in the fishing industry at -4.4% at the last quarter of 2013. So from day zero of the storm’s impact going into the end of the quarter from the impact, the last quarter 2013’s growth rate still posted a positive .9% (blue rectangle). Apparently, the 1^st quarter performance seems like carryover of the last quarter performance. So this hardly looks like a deviation.

Notice too that agricultural-fishing industry has been very volatile. 

Even BEFORE to the storm, specifically during the second and third quarter of 2013, the main agricultural sector posted marginal loss (-.9%) and a very much slower (+.3%) than the 1^st quarter 2014 gains (1.7%). This has also been reflected on the gross value added -.2 and .3, respectively as against +.9%. 

The crowd may blame it on Typhoon “Bopha” Pablo that struck in November 25-December 9, 2012, which Wikipedia.org considers as the most destructive. But this wouldn’t square with robust 3.2% annualized gains during the first quarter of 2013.

So the post Typhoon Yolanda performance has even been STRONGER than the two quarters of output preceding the advent of the calamity.

In short, except for the coconuts, most of the attributions to Typhoon Yolanda as the main source of slowdown in the agricultural sector looks more like a post hoc ergo propter hoc fallacy.

Fishing for Truth

Let us proceed to fishing.

Based on the data from Philippine Fisheries Development Authority, commercial fishing volume of fish unloading in the first quarter on major fish ports* has shown an 8% growth in terms of metric tons (left pane). Note there has been no major port from Region 8.

Metro Manila’s Navotas Fish Port Complex (NFPC), which posted a decline of 5%, has been toe to toe with General Santos Fish Port Complex (GSFPC) whose growth offset the loss in Navotas, as the leader for the largest drop off point for commercial fishing.

This is in contrast to processed products which posted a sharp a decline. The reduction of output in Zamboanga can be traced to the three month fish ban on sardines and red herring.

*Navotas Fish Port Complex (NFPC), Sual Fish Port, Lucena Fish Port Complex (LFPC), Camaligan Fish Port, Iloilo Fish Port Complex (IFPC), Davao Fish Port Complex (DFPC), Zamboanga Fish Port Complex (ZFPC) and General Santos Fish Port Complex (GSFPC)

There are two other categories in fishing; this is the field of municipal fisheries and aquaculture. The latter seems the most likely candidate for Region 8’s potential given the description of “rich in freshwater fish”. Unfortunately I don’t have access to the other data to determine the depth of link between Region’s 8 contributions to the national economy in the context of these areas.

But such data would not be necessary. The region’s GDP would be enough.

If we look at Region’s GDP based on NSCB data, in 2011, the fishing sector contributed to only 4% of the region’s output. Region 8’s fishing output represented about 4.6% of the national fishing industry (see page 9 of the link) for the same period. So it would be difficult to explain how 4.6% will have a material spillover effect on the 95.4%.

If the far larger agricultural sector, where Region 8’s share of the national has been at 5.67% based on 2011 data, has been outweighed by the national performance, then the same dynamics should apply to the much smaller fishing industry. Therefore the decline in the fishing industry must have been less likely from Region 8 but from elsewhere.

Meanwhile, the manufacturing sector accounts for the largest share of the region’s economy at 26.8% in 2011. From the national level, the sector’s contribution has been a puny 3%! So I am also at a loss to see or comprehend how 3% would have “disrupted supply chains nationwide”.

The same holds true with construction industry where in 2011, the sector generated 5.3% of the region’s output. In the context of the national level, the region’s construction activity only accounted for 2.63% level in 2011. So to assume that 2.63% would have a significant supply chain drag on the national level would seem quite perplexing for me.

I hope officials can enlighten us on this supposed causal chain of flows. But I suspect that they won’t.

I am even more confused to see how construction has not taken off in the region despite the reported whopping 34 billion peso worth of donations which accounts for 22% of the 2011 regional GDP. 

What happened to all those contributions?

Construction Slump Amidst a Bank Lending Boom??? Yikes!

Both media and officials have sparsely treated the unforeseen plunge in the construction industry which obviously has been meant to downplay the message.

The construction activity on the national level has shriveled to a still positive but miniscule .9% growth. The public’s sector’s substantial 22.3% gains have barely lifted the industry from an evolving slump! This is because of the astonishing 6% dive by private sector spending which provided the heft of construction activities at 77% share in April. 

Yet with buzzing of the construction activities going on here in the metropolis, how can this be?

Has government construction spending been ‘crowding out’ private sector spending or has government been using resources at the expense of the private sector?

Viewed from annualized q-o-q changes from 2012, each time private sector grew, the public sector contracted and vice versa (left pane).

Such are signs of the tradeoff between the competing use of resources by the private and the public sector.

Nonetheless, what seems troubling is that the deterioration of private sector spending seems to have been mirrored in the in the decline in the gross value added in the construction industry, which apparently peaked in Q4 2012. This reveals an ongoing loss of productivity coming in the face of a supposed boom.

Even more baffling has been the still blistering pace of bank lending growth to the construction and real estate sectors.

The drop in construction activities has been rationalized as government tightening.

Media quotes Philippine officials as saying that “prudential measures implemented by the Bangko Sentral ng Pilipinas (BSP) aimed at keeping banks’ exposure to the sensitive real estate sector could have constrained lending to property companies”

Perhaps they are right.

Bank lending to the construction industry fell from an average of 51.82% [FIFTY ONE PERCENT] in the 1^st quarter of 2013 to an average of 46.64 [FORTY SIX PERCENT] in the first quarter of 2014 (right window)! Despite the 5% drop, FORTY SIX percent would still be about SEVEN times the economic growth rate of the 1^st quarter! Some constrain huh?

And this juggernaut in bank credit expansion to both the real estate sector and construction industry has still been apparent based on the latest April BSP lending data.

Bank lending to the real estate industry still hovers at 20% (20.18% in April; see left pane) while construction loans have fallen to 40.53% (FORTY Percent).

This comes even AFTER the April 4^th implementation of the first series of the twin One Percent increases in the banking system’s reserve requirements.

As a side note: I told you so (!), reserve requirements under the modern central banking system will barely constrain bank lending. General loans even climbed to 18.8% in April (y-o-y) from 18.07% last March. The BSP and the government will not tolerate the end of the subsidies to the government from financial repression policies. They have been incredibly HOOKED to it.

This validates my view of the bluff pulled by the BSP which has been embraced by the clueless and gullible public.

Well folks, that’s how the government defines “macro prudential” or “keeping banks’ exposure to the sensitive real estate sector” constrained.

But don’t worry, the public or the crowd so agrees with them.

Yet despite the FOURTY SIX percent bank issued loans to the construction industry and TWENTY percent loans to REAL ESTATE companies, PRIVATE sector construction output FELL SIX percent???

Huge loans producing negative growth, why? What’s been going on??!!

Not only has bank lending been roaring as output have been in a sharp decline in the construction industry, money supply as of April continues to stagnate(!), as shown by the chart above, thereby galvanizing my suspicions of a fast expanding use of debt in-debt out.

No systemic risk eh?

Let me tell you that the recent downturn in the construction industry may represent the initial signs of fissure from stagnating money supply growth. If these events persist, as stated last week, then this will mark the process reversing this illusory boom where the new paradigm will be faced with gravity from planet earth.

Going back to the GDP table, it has been notable that the drop in the share of the construction sector has more been covered by the gains of the real estate sector. Notice too that the share of the bubble sectors (excluding the hotel) have gained from 38.27% to 38.38% as the share of agriculture, electricity, and others have shrunk.

This again translates to a growing concentration of risks.

Watch it though, the trade (wholesale and retail) sector seem to be showing signs of fracture! While y-o-y growth posted 5.5%, the share of trade has contracted along with the construction industry.

Hmmmm…

At the end of the day, massaging of data would hardly bring about the relevance or connection between the partialities of Typhoon Yolanda—bank ending “macro prudential measures” rationalization against the slowing economic growth.

Oh, the Phisix fell 2.4% this week for its first official correction.

Eyes on money supply growth now!

Expect euphoria to segue into a deep acrimonious denial phase. This means that IF the statistical economic slowdown persists, then finger pointing will become the du jour talking point. There will clarion calls by the public for the government to do more and more interventions that will only deepen the predicament.

Let me end with a quote from English enlightenment writer François Marie Arouet or more popularly known by his nom de plume “Voltaire” (1694-1778)

"Prejudices are what fools use for reason."

Enjoy the weekend!

Kenneth Rogoff’s War on Cash

Sovereign Man’s Simon Black warns of the suggestions for a cashless Society: (bold mine)

Rogoff begins asking the question: “Has the time come to consider phasing out anonymous paper currency, starting with large-denomination notes?”

He goes on to explain that getting rid of paper currency would provide two critical benefits:

1) It would reduce crime and tax evasion;

2) It would allow central banks to drop interest rates BELOW ZERO.

I was stunned. Though given the status quo thinking we have to put up with today, I really shouldn’t have been.

In fairness, Mr. Rogoff is an academic. It’s his job to dispassionately analyze data and render conclusions, whatever they may be. What’s scary is that some dim-witted politician will likely jump all over this.

People have been deluded into believing that only criminals and tax cheats hold cash in large denominations. And the conclusion is that if we ban cash, criminals will simply quit their craft because they’ll no longer have an officially-sanctioned medium of exchange.

This is total baloney, obviously. Banning cash doesn’t eliminate crime. It just creates a new cottage industry for cash alternatives.

Drug deals can just as easily go down swapping share certificate of Apple. Or title to a new car. Any number of things.

Perhaps the more important point, however, is the notion that eliminating cash frees up central bankers to force interest rates into negative territory.

The contention is that the official data tells us that inflation is tame. Consequently, central banks should be free to expand the money supply and ratchet down interest rates even more. 

There’s just one problem: interest rates are basically at zero already.

Technically a central banker could drop interest rates to below zero.

But if they did that, who in his/her right mind would hold their savings at a bank where they would have to PAY THE BANK to make wild bets with their money? 

People would just go to physical cash instead.

Solution? Eliminate cash! Then people would be forced to suffer NEGATIVE interest rates… and thus have a HUGE INCENTIVE to spend as much as they can as quickly as they can. Forget about putting something aside for a rainy day.

But hey, at least the stock market would probably rise.

Now, I highly doubt that physical cash is going to be sucked out of the system… tomorrow. But the War on Cash is very real indeed.

As I travel around the world, I’ve seen with my own eyes– CASH has become the #1 hot button item for customs agents everywhere. They even have highly trained cash sniffing dogs now.

It’s becoming more and more obvious that people should divorce themselves from this system and consider holding at least a portion of their savings in something other than fiat currency.

And of all the options out there, it’s hard to beat the convenience and tradition of precious metals.

Indeed governments have increasingly been waging war on cash. 

The latest: Israel’s government has recently declared limits on cash transactions.

From Reuters: Cash transactions between businesses will be limited to 5,000 shekels ($1,400) under an Israeli government plan to fight money laundering and tax evasion.

I have previously shown that various governments have waged war on cash like Mexico, Italy, Russia, Nigeria and Ghana or even in the US.

In the Philippines I had my share of nightmare with the domestic authorities at the domestic airport whom harassed me for bringing slightly excess cash (based on the mandated limits) for an outbound trip predicated on a regulation that I wasn’t even aware of then. As a side note, the slightly excess cash was meant as gift for my Mom who resides overseas!!

Money laundering or tax evasion has served as the stereotyped alibi or scapegoat for the war on cash. But such is a sign of desperation. Remember cash as currency or medium of exchange, are issued to the citizenry by the respective governments who wield the monopoly seignorage. So by waging war on cash, governments have not only assailed on their basic function, they reveal signs of dissatisfaction with current revenues from such seignorage privilege.

War on cash serves as an extension of financial repression policies. 

The fundamental reason is that governments intend to capture even more of the public’s resources (directly and indirectly) to fund the interest of political agents and their private sector allies. It's is a sign of unmitigated greed imposed on society by force.

The real targets are really not money laundering or tax evasion but the cash holding society, particularly the informal economy. Again this is a sign of desperation.

Statist always conjure up reasons for state control over everything.They always point to so-called benefits without looking at the costs. But costs are not benefits. 

For instance, the importance of cash came into the limelight when the western banking system nearly collapsed in 2008. In Europe, many took shelter by hoarding € 500 cash. So the assumption to migrate to a cashless society extrapolates that the banking sector and the governments are risk free.

But this is something untrue. In fact both the government and banks are the major sources of risks. Just look at the massive build up of debt levels of major economies. What happens when all these unravels? 

Yet the war on cash is also based on the mirage that growth in debt and transfer of resources will have little or even NO limits or repercussions. This is utterly wrong. The war on cash only allows the establishment to buy time before their unsustainable system implodes.

US Economy Contracts in the 1st Quarter 2014, But Stocks are at Record Highs!

Has any expert anticipated this?

Chart from Tradingeconomics.com

From Bloomberg:

The economy in the U.S. contracted for the first time in three years from January through March as companies added to inventories at a slower pace and curtailed investment.

Gross domestic product fell at a 1 percent annualized rate in the first quarter, a bigger decline than projected, after a previously reported 0.1 percent gain, the Commerce Department said today in Washington. The last time the economy shrank was in the same three months of 2011. The median forecast of economists surveyed by Bloomberg called for a 0.5 percent drop.

This m-o-m data has originally shown a scanty .1% growth in 1Q14 which I said has been the significants effects of the Emerging Market contagion but had been revised lower. The y-o-y data still shows a positive but unimpressive 2% growth.

Has the stock market factored this in? Apparently not. And perhaps they never will. That’s because some major indices like the Dow Industrials and the S&P 500 are at record highs.

But again like all rationalization, this slowdown has been justified as an anomaly brought about by weather.

From the same article:

A pickup in receipts at retailers, stronger manufacturing and faster job growth indicate the first-quarter setback will prove temporary as pent-up demand is unleashed. Federal Reserve policy makers said at their April meeting that the economy has strengthened after adverse weather took its toll.

“Will prove temporary’'” exudes  the confidence to justify stock market actions. So the “growth” story, whether real or not, has metastasized into a fairy (DEBT) godmother meant to justify stocks market prices bound for the never-never land.

Also the above divergences serves as more evidence that the stock market hasn’t about the economy. Today's world has been warped into parallel universes.

China Politics: The Price of Security or Safety: More Repression

In the name of public security and safety, the Chinese government has waged an implicit war against her constituency.

Photos from Wall Street Journal

From the Wall Street Journal

Already difficult commutes in China’s capital became even more punishing this week, as Beijing beefed up subway security checks in the wake of deadly attacks targeting civilians.

Hundreds of unhappy commuters stood in long lines across the city Wednesday morning to undergo enhanced security screenings, which now include body checks as well as bag screenings in several stations. At stations in the city’s north, subway staff said passengers had to wait between 20-30 minutes to get through the security line, up from about 10-15 minutes prior to the new screening requirements.

Why is this? (bold mine)

Security measures have stiffened across China in recent weeks, following a series of violent attacks since the start of the year. In the most recent incident, 31 people were killed last week in an attack at a market in northwest Urumqi. In March, dozens were killed in an assault by knife-wielding assailants at a train station in southwest Kunming. Authorities have labeled such episodes terrorist attacks and attributed them to separatists in northwestern Xinjiang.

Additional security measures in Beijing now include helicopter patrols, while cities across the country have been further arming their police forces, as well.

So treating the average citizenry as suspects have been responses to the growing internal political troubles plaguing the alarmed Chinese government.

Yet if the Chinese government can’t respect her own people what more the neighbors? 

And as her asset bubbles deflate which should mean an acceleration in economic downturn, more incidences of social upheavals is to be expected which will be met by even more political 'tyrannical' repression.

The above seem as more signs that the Chinese government has been preparing for the worst.

So the next thing that Chinese government will be exporting will hardly be goods and services but social turmoil.

All these reminds me of Benjamin Franklin who once said,

They who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety.

But don't worry be happy. Stocks will always go up.

Capital Flight in Japan Dressed Up as Foreign Direct Investments

Last year I wrote: (I removed the footnote and replaced it with a link)

ASEAN and the Philippines will likely become beneficiaries of BoJ’s inflationism

The foremost reason why many Japanese may invest in the Philippines under the cover of “the least problematic” technically represents euphemism for capital fleeing Japan because of devaluation policies—capital flight!

Capital flight will be masqueraded with technical terminologies of portfolio flows and Foreign Direct Investments (FDIs)

Bingo! 

The latest external investments data from Japan, from the Wall Street Journal: (bold mine)

The total value of foreign direct investment by Japanese companies rose 35% from a year earlier to a record ¥13.248 trillion ($130 billion) during 2013, according to data released by the Ministry of Finance Tuesday.

Unfazed by a sharp decline in the yen’s value that makes foreign ventures more expensive, Japanese companies sharply expanded their investments in the world’s major markets, including Southeast Asia, the U.S. and the European Union.

One notable exception was China, where the amount of Japanese FDI shrank by 18% to ¥887 billion, the first decline in three years. The drop signals that as bilateral tensions continue to soar over a territorial dispute, Japanese companies are growing more cautious about business prospects in China after pouring money into its fast-growing economy for years. Corporate executives have said rising production costs and a slowdown in domestic demand in China are also worrisome.

In contrast, companies showed strong appetite for expanding operations in other Asian markets, such as Thailand and the Philippines. The amount of new FDI in the member countries of the Association of Southeast Asian Nations rose to ¥2.33 trillion, nearly triple the previous year’s level and sharply higher than the previous record of ¥1.55 trillion reported in 2011.

The above further confirms my predictions in 2012

The bottom line is that YES we should expect Japanese FDI and portfolio investments into the Philippines and the region to swell.

But since (inward) capital flows into ASEAN will reflect on global central bank activities, this dynamic would not be limited to Japan but would likely include western economies as well.

(bold added) 

Oh while this looks positive on the surface, the question is in what areas have the Japanese been investing at? Have these monies been channeled into the bubble sectors?  

For the Philippines as I explained here, restrictions on FDI’s  have increased since October 2012.  Liberalization has been limited to bubble areas such as large retailers and casinos. And as I also pointed out the January 2014 data confirms that FDIs have flowed into these sectors.

The recent BoJ impelled FDI’s flows have an uncanny resemblance to pre-Asian crisis conditions

Again as I also noted in 2012

Today’s FDI flows eerily resonates or resembles on the time window of the 1985 Plaza Accord to the post Japan bubble in 1990s until the climax, the 1997 Asian Crisis.

The Business Insider quotes author and former Deputy Chief of the Hong Kong Monetary Authority Andrew Sheng in the latter’s book From Asian to Global Financial Crisis

… shift production to countries that not only welcomes Japanese FDI but also had cheap land and labour… By the late 1980s, Japan had become the single largest source of FDI for the fast-growing emerging Asian economies. This trend was particularly clear when another surge of Japanese FDI into Asia took place between 1993 and 1997, with Japanese FDI rising nearly twofold from US$6.5 billion to US$ 11.1 billion during this period…

… banks followed their manufacturing customers into non-Japan Asia in earnest… From 1985 to 1997 Japanese banks supplied over 40 percent of the total outstanding international bank lending to Asia in general… The massive expansion in Japanese bank lending, in both yen and foreign currency, created huge capital flows globally.”

So could we be experiencing a déjà vu, Asian Crisis 2.0?

To repeat déjà vu, Asian Crisis 2.0 courtesy of Abenomics? [updated to add Again the main culprit here are the national central banks, Abenomics serves as an aggravating factor]

China Bubble: Chinese tycoon jumps ship, another declares the “end of the Golden Era” for China’s property Industry

More Chinese tycoons appear to be jumping ship or has been expressing reservations on the Chinese economy. 

Earlier I pointed to  Li Ka Shing, who sold his entire holdings in China, and to Soho China Ltd. Pan Shiyi who equated the current economic slowdown in the face of mounting debt as the “Titanic moment”.

Another tycoon, Song Weiping has been reported to be in the process of selling his holdings while blaming the government for his troubles

From Marketwatch.com  (bold mine) [hat tip Zero Hedge]

A prominent property tycoon in China on Friday lashed out at government real estate policies, took a verbal swipe at a former premier and said authorities shouldn't be squeezing small- and medium-size developers out of business.

Song Weiping, who is selling most of his stake in luxury-property developer Greentown China Holdings and is stepping down as chairman amid a worsening market downturn, told a news briefing that local and central governments were to blame for the industry's problems, having interfered too much in the market.

China's property developers face increasing pressure from falling sales and stringent government limits on home purchases. Since 2010, Beijing has rolled out tight measures such as curbs on second or subsequent homes and price ceilings to rein in market speculation and high housing prices.

Property developers have complained that such measures distort the market, and the recent downturn in the country's housing market has brought more of such comments to surface. Mr. Song said he is tired of operating in an environment in which the market isn't free.

So far this year, housing sales have been hit by excessive supply and bouts of price slashing, with expectations of more discounting to come.

Every credit inspired boom is a distortion. The attendant bust has been the  market’s response to the uncovering of the imbalances brought about by the phony boom. Government regulations certainly add more to the such distortions. But the point is that during the bust cycle, there will be lots of finger pointing. It’s part of the denial stage.

Yet this serves as more evidence of resident elites or "smart money" anticipating a black swan in China. 

And if these monies move out of China, they will continue to pressure on the currency the renminbi

While not as dreary another bigwig from the industry has called for the end of China’s golden era for the property market

From Bloomberg: (bold mine)

China Vanke Co. (3333), the nation’s biggest developer, is focused on developing homes for owner occupiers rather than investors because the country’s property industry has passed its “golden era,” President Yu Liang said.

“The period in which everybody makes money out of property is gone,” Yu told reporters May 26 in Dongguan, a southern city in Guangdong province. “Vanke will take a cautiously optimistic approach to face the slowdown and target those buyers who need homes for self-use.”

Yu joins Vanke Chairman Wang Shi in flagging a slowdown in China’s property market and follows Moody’s Investors Service’s revision of its credit outlook for Chinese developers to negative from stable last week. Home sales slumped 10 percent in the first four months of this year amid tight credit and slower economic growth, reversing last year’s 27 percent jump and prompting developers including Vanke to cut prices.

It’s quite odd to declare the passing of the golden era while taking on a cautiously “optimistic” approach. The implication is that not all of China’s property sector have been fated for a bust. But doesn't look like the case.

The most probable reason why the Vanke hasn’t been as bearish is because they are looking into investing in the Chinese government's privatization of state owned firmed that had been hit from the recent slowdown. According to a Reuters report “As part of the government's reform plans, Beijing has promised to allow more private participation in state-owned enterprises. Many of those state-owned enterprises have expanded into property development in recent years, drawn by big profits.”

So perhaps the Vanke group will be doing some special crony deals with the government in the so-called reforms. Most likely, political deals redounds to cautiously "optimistic" approach.

In the meantime Chinese government reported a surge in Non Performing loans. From Bloomberg:

China’s biggest banks are poised to report the highest proportion of bad debts since 2009 after late payments on loans surged to a five-year high, indicating borrowers are struggling amid an economic slowdown.

The nation’s 10 largest lenders reported overdue loans reached 588 billion yuan ($94 billion) at the end of 2013, a 21 percent increase from a year earlier to the highest level since at least 2009. The rise in late payments portends more losses on soured loans for banks in coming months as China’s slowing economy crimps companies’ earnings, while a government crackdown on nonbank funding makes it tougher for borrowers to get new credit or finance older debt.

“Overdue loans are a leading indicator of asset-quality deterioration and show the rising liquidity constraints among borrowers,” said Liao Qiang, a Beijing-based director at Standard & Poor’s. “While we believe Chinese banks’ credit woes will unfold gradually, the disturbing thing is that the end is nowhere in sight.”

Overdue loans, those late by at least a day, were 31 percent greater for the banks as of Dec. 31 than nonperforming ones, which are debts they don’t expect to recoup in full. That’s the biggest gap in at least five years, signaling lenders may be resisting acknowledging the deterioration to avoid setting aside funds to cover potential losses.

More signs of big trouble in big China. But for the "be happy" crowd, stocks has been destined to always go up.

Thailand’s Junta Government Clamps down on Facebook and Media

Thailand’s coup regime has just censored Facebook. 

From Reuters:

Thailand's information technology ministry blocked Facebook on Wednesday and planned to hold talks with other social networking sites to stem protests against the military government, a senior official said.

"We have blocked Facebook temporarily and tomorrow we will call a meeting with other social media, like Twitter and Instagram, to ask for cooperation from them," Surachai Srisaracam, permanent secretary of the Information and Communications Technology Ministry, told Reuters.

So the new military government will open only media sites for as long as they sing hallelujahs on them

This applies to Mainstream Media too…

Print and broadcast media have already been instructed to refrain from critical reporting of the military's May 22 takeover.

As I noted last weekend, Thailand has a gigantic bubble that appears to be in the process of unraveling. And Thai junta government’s increasing recourse to repression may just aggravate the current deteriorating conditions.

So what’s next? Will the new Thai government impose capital controls?

Nonetheless even in the face of Thailand’s contracting economy and the recent putsch, such factors hasn’t been a barrier for the stock market bulls. 

Notice the contradictory forces at work: contracting economy and rising stocks. So who says stock markets are about the economy?

And if there is any sign of financial market pressure it has been in Thai’s currency, the USD-baht…

…which seems poised for a breakout.

Again these are evidences of massive disregard for risks or "peak complacency".

Tim Price: I’ve been investing since January and I’ve never seen anything like it.

At the Sovereign Man website, Tim Price Director of Investment at PFP Wealth Management in the UK shares some important tips on investing in an environment resembling the pre-Asian crisis 

[Bold fonts mine. My comment are in unquoted sections and will deal with Philippines conditions unless stated otherwise ]

“I don’t know what to say. I’ve been investing since January and I’ve never seen anything like it.” – Unnamed Hong Kong housewife during the Asian financial crisis of 1997/8.

What follows is a continued personal perspective on some of the challenges facing today’s investor:

1. For many investors, capital preservation in real terms should be more important than capital growth in notional ones.

Note capital PRESERVATION should be the priority

2. Investors – as humans – are typically loss-averse. We feel the emotional impact of equivalent gains and losses disproportionately. This does not mean we should avoid considered risks, but to invest dispassionately.

In the Philippines, I have never seen so much or intense “passion” in the belief of a supposed "riskless" one way trade, based on a new “growth” paradigm. Even dissenting opinions are now considered a taboo!

3. Investing dispassionately is difficult when most of the investment media comprise the participants in a 24/7 circus. If the business of investing is either entertaining or exciting, you’re doing it wrong.

When people argue that one’s position should echo with the crowd’s opinion, then this is about entertainment and or having a dopamine “trip”. One may add "ego trip" to that. In a bullmarket everyone is a genius. 

This certainly is not about investing but about social desirability bias.

4. The answer is obvious: turn off CNBC. (Judging by their viewing figures, plenty of investors already have.)

Turn off mainstream media: newspaper, tv, radio, or even populist internet circles.

5. True diversification remains the last free lunch in finance.

When the rising tide lifts almost all boats there are very small windows for diversification

6. Having fatally tainted monetary policy, the dismal science of economics has wrought damage across investment theory as well: ‘homo economicus’ does not actually exist, and markets will never be wholly efficient until all people are, too. 

7. “The investor’s chief problem – and even his worst enemy – is likely to be himself.” (Benjamin Graham)

The seventh rule will be discovered by crowd soon.

8. The general principles of investing are not arcane. They should begin with the avoidance of loss.

Again avoidance of loss is capital preservation

9. Starting valuation is the most important characteristic of any investment.

When a stock tout tells you that PERs of 30,40,50,60s+ and PBV 4,5,,6,7,8+ of mature companies represent a "buy", then this hasn’t been about investing. Rather this is about the delusional belief of a one way trade where “Growth” serves as a fictitious slogan for stock market prices rising to eternity. 

10. Risk is poorly defined as volatility. It is better defined as the possibility of a permanent loss of capital.

In the Philippines, the public sees little or no risks even even when money supply growth rate has soared to 30++% for nine straight months.

11. “Operations for profit should be based not on optimism but on arithmetic.” (Also Benjamin Graham)

The inflationary boom has lobotomized arithmetic, or most importantly, common sense.

12. Don’t buy poor quality investments pushed by sell-side interests; don’t overpay for quality investments.

Beneficiaries of  the inflationary boom naturally want the public to overpay for pseudo investments which they say is about "quality". But the real reason behind the spin is this that due to financial repression, negative real rates enables and facilitates the redistribution of risks and resources from the unsuspecting public to politically connected vested interest groups.

13. The ‘equity / bond / property / cash’ paradigm struggles fundamentally in an environment where all of these asset classes appear overvalued.

Again little window for diversification

14. Friends are unlikely to share their worst investment outcomes at the golf club.

The stock market is a social phenomenon. During booms, stock market becomes THE talking point in social gatherings. During depressionary busts, the stock market is seen as operating in oblivion.

15. Liquidity is overrated. For capital that can be safely committed to the longer term, it is irrelevant.

Central bank injected liquidity is the ultimate source of the boom-bust cycle.

16. Private investors are often poorly served by the asset management industry.

17. The medical profession has the Hippocratic Oath: first, do no harm. The asset management profession lacks such an explicit expression of fiduciary commitment to its clients.

For both 16 and 17 when asset managers commit resources of depositors to overvalued assets, this would account for as the Wolf of Wall street model. It’s a combination of principal agent problem (asset managers benefiting at the expense of depositors) and Keynes’ sound banker (lead the crowd during booms and hide under the skirt of the crowd during busts).

18. Private investors may, all things being equal, be better served by small, unlisted, private partnerships than by global, publicly listed, full service investment brands.

19. Rising compliance and regulatory pressure reduce variety in the asset management business. This is unlikely to be in the best interests of private investors.

Increase in regulations mostly skew the benefits to the interests of entrenched groups.

20. When interest rates are close to all-time lows and the printing presses are running, the merits of ‘deep value,’ profitable, well-managed businesses are more than usually compelling – compared to just about any other asset or asset class.

Value is a rarity in today’s central bank driven deeply overvalued global markets. As Warren Buffett aptly noted, it's only when the tide goes out do you discover who has been swimming naked. That's when value will surface.

21. Distrust anybody who claims to have all the answers. Especially today.

Oh yes, this is very important. Please do your own research based on objectivity, independence, “arithmetic” and common sense. And avoid the mainstream.

Do it in the way of value investor and mentor of Warren Buffett Ben Graham

You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.