Monday, May 12, 2014

Showbiz S&P Upgrade & BSP Actions Sends Phisix and the Peso into a Frenzied Blow off Top

The power of accurate observation is frequently called cynicism by those who don't have it.–George Bernard Shaw

In this issue

Showbiz S&P Upgrade & BSP Actions Sends Phisix and the Peso into a Frenzied Blow off Top
-Mounting ASEAN Risks
-Thailand’s Conundrum: Will Blowing Bubbles Offset Political Woes?
-Peso and the Phisix Zoom on Showbiz S&P Upgrade and BSP Jawboning
-Reserve Requirements: Has the BSP Pulled A Rabbit Out of the Hat Trick?
-On Philippine Trade Balance and Gross International Reserves
-Behind the Philippine Education Inflation
-Phisix: Déjà vu 2013? Déjà vu 1994-1997?

S&P Upgrade & BSP Actions Sends Phisix and the Peso into a Frenzied Blow off Top

Current developments have been a marvel of crowd behavior dynamics.
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Stock markets—not limited to the Philippines—have been in a frantic parabolic melt-up phase. Malaysia’s KLCI drifts at record highs, Indonesia’s JCI seems fast approaching June 2013 highs and Singapore’s STI has seen an amazing resurgence. Only Thailand’s SET has seen a curtailment of the feverish speculative momentum enveloping ASEAN. 

Such developments, for me, serve as reminder of the wisdom of the crowds.

The improbable writes French psychologist, sociologist and author Gustave Le Bon noted that does not exist for a crowd.

Why? More from Mr. Le Bon[1] (bold mine)
Just as is the case with respect to persons in whom the reasoning power is absent, the figurative imagination of crowds is very powerful, very active and very susceptible of being keenly impressed. The images evoked in their mind by a personage, an event, an accident, are almost as lifelike as the reality. Crowds are to some extent in the position of the sleeper whose reason, suspended for the time being, allows the arousing in his mind of images of extreme intensity which would quickly be dissipated could they be submitted to the action of reflection. Crowds, being incapable both of reflection and of reasoning, are devoid of the notion of improbability; and it is to be noted that in a general way it is the most improbable things that are the most striking.

This is why it happens that it is always the marvellous and legendary side of events that more specially strike crowds. When a civilisation is analysed it is seen that, in reality, it is the marvellous and the legendary that are its true supports. Appearances have always played a much more important part than reality in history, where the unreal is always of greater moment than the real. Crowds being only capable of thinking in images are only to be impressed by images. It is only images that terrify or attract them and become motives of action.

Crowds being only capable of thinking in images are only to be impressed by images. It is only images that terrify or attract them and become motives of action.
In short, as I pointed out last week, to paraphrase a quote from Jackie Chan who played the role of mentor Mr. Han in the movie Karate Kid 2010, the crowd thinks with their eyes, so they are easily fooled.

Mounting ASEAN Risks

Recall that I raised Warren Buffett’s favorite stock market metric, market capitalization to GDP, which when applied to ASEAN equities reveals that except for Singapore, all of ASEAN majors have either reached (Thailand and Indonesia), surpassed (Philippines) if not has been drifting within the proximity (Malaysia) of critical inflection points that lead to major bear markets.

Of course aside from market cap-to-gdp, ASEAN valuations whether in Price to Book Value or Price Earnings Ratio, particularly for the Philippines, have surpassed pre-Asian Crisis 1995-1996 levels. Yet hardly any from the mainstream has come forward to explain how such valuations have come into being and how such valuations are sustainable except to utter incantations of “growth”.

Such frenetic buying spree comes even as three of the four ASEAN majors have signaled a policy tightening. Notes the Wall Street Journal[2], “Central banks in the Philippines, Malaysia and Indonesia held benchmark interest rates steady Thursday but signaled that further policy tightening is on the cards, reflecting building price pressures throughout the region”. Only the Philippines moved to raise reserve requirements for the second time.

The article says the Philippine central bank, the Bangko Sentral ng Pilipinas balked at raising rates for “for fear of driving the peso to uncompetitive levels and discouraging foreign investment at a time when Manila desperately needs outside help to upgrade infrastructure.” I don’t think that this is an accurate representation of the actions by the BSP.

Based on a recent World Bank study[3], I noted that the Philippines “in October 2012, expanded the number of restricted sectors and activities” in the list of Foreign Ownership Restrictions (FOR), only to partially lessen FORs to casinos and large retailers. Beats me, but how does expanding restricted sectors and activities encourage investments?

And obviously partial liberalization of casinos and large retailers has been designed as part of accommodation for the grand pirouette from diminishing dependence on external demand towards increasing exposure to “domestic demand” through bubble blowing policies. Even the most recent FDI data (as of January 2014[4]) reveals that equity based FDIs have been mostly directed to bubble sectors, specifically financial and insurance; wholesale and retail trade; real estate; manufacturing and information and communication activities.

The real reason why the BSP refrains from either enforcing her own self-imposed rule of banking cap on real estate loans* and or raising rates, is that financial repression conducted mainly through bubble blowing paradigm—that supports the government’s lifeblood through inflated taxes and repressed debt servicing rates that has been subsidized by peso holders—will be jeopardized by a bubble bust.

*Recent banking loan data continues to show significant loan growth to the real estate sector.

In short, governments promote bubbles or “something for nothing” in order to gain access to credit, especially cheap credit to finance their boondoggles, junkets, pork and other welfare-warfare based political projects. The Philippines government has been addicted to such subsidies coursed through demand based monetary policies, thus will resist such changes until forced by the markets.

The same article further notes that the Indonesia’s central bank, the Bank of Indonesia (BI) will “maintain its tightening bias”, in spite of the accrued 175 bps interest rate hike in 2013 in response to the “taper tantrum”.

Nonetheless in the acknowledgement of the effects of tightening, the BI “expects GDP to grow 5.1%-5.5% this year, down from a previous forecast of 5.5%-5.9%”. Indonesia’s statistical GDP slowed to 5.21% in the 1st quarter of 2014 from the highs of 6.5-6.9% in 2011.

So while Indonesia’s statistical consumer price inflation rate has indeed declined from a high of 8.79% in September 2013 to April 2014’s 7.25%, as loans to the private sector and money aggregate M2 seem to have plateaued, Indonesia’s stocks have spiraled upwards! As of Friday, the JCI runs second to the Philippine Phisix, with a year-to-date return of 14.6%!!

Meanwhile yields of Indonesia’s 10 year bonds have been off by only 84 bps from the September high of 8.889%. Indonesia’s currency the rupiah following a ferocious rally against the US dollar in February to March appears to be foundering anew.

In effect, Indonesia’s inflation moved from consumer prices into the stock market.

Yet declining statistical growth, leveling growth in money supply and credit, uncooperative bonds and the currency and a central bank signaling a tightening—in the face of skyrocketing stocks looks like a recipe for a Wile E. Coyote moment for Indonesia’s immensely mispriced and overvalued stocks as well as the economy dependent on credit, too.

The chronic addiction to easy money has Indonesian stock market participants bamboozled into believing in the return of the old environment.

Meanwhile, Malaysia’s central bank, the Bank Negara Malaysia, seems anxious of the growing risk of a bubble, and has reportedly “reiterated an earlier warning that financial imbalances are growing” as “Household debt has risen to nearly 87% of Malaysia’s gross domestic product, with the loan-to-GDP ratio at a multi-year high” according to the same report.

Aside from the stock market (KLCI unchanged for the year) and property bubbles, being fueled by household credit inflation which can be seen through her money supply aggregate M3 growth trend, Malaysia’s statistical consumer price inflation has reached 2011 highs which seems consistent with yields of Malaysia’s 10 year bonds also at 2011 highs.

The central bank’s hawkish statements have boosted the ringgit against the US dollar this week. The USD-ringgit fell 1.16% second only to the USD-Philippine peso. The ringgit has been rallying against the US dollar since her trough in February. Unless forced by the markets, central banks can’t be expected to impose radical measures. Thus so far, the Bank Negara Malaysia has been resorting to the signaling channel. Nonetheless, rising inflation and higher rates materially increases risks in the Malaysian economy and her stock markets.

Thailand’s Conundrum: Will Blowing Bubbles Offset Political Woes?

It’s been a different dimension for Thailand. Political ruckus continues to plague the Thai political economy. This week the Thai Prime Minister along with some cabinet members has been ousted from her office by the Supreme Court for “relatively obscure offense of improperly removing a senior bureaucrat from his job three years ago” according to another Wall Street Journal report[5].

Central bankers think that bubble blowing will do away with real social problems. Last March despite rising statistical consumer price inflation and deteriorating statistical economic growth rate, the Thai central bank the Bank of Thailand cut official interest rates by a quarter of a % point to 2%[6]. Loans to the private sector in February (prior to the rate cut) and money supply growth in March (post cut) continue to ascend.

Credit creation means fresh nominal spending power. If credit has not been used in the real economy, they will be used somewhere. Part of this can be seen in fueling the Thai stock market bubble. However Thai’s stock market which earlier mirrored the Philippine Phisix appears to have lost momentum. The SET lost 3.1% this week, as the Thai PM was ousted, paring down a third of her annual gains to 6.05% as of Friday’s close.

When the property rights have been rendered unclear due to uncertainty in the political climate, then it is natural for investors to dawdle at undertaking long term investments. Return of investments is a subsidiary priority to the return of one’s money. So the Bank of Thailand’s actions will not only increase the risks of a bubble cycle, but will lead to more political and economic uncertainties that would fortify the current predicament.

Curiously yields of Thai’s 10 year bonds have fallen nearly to 2013 lows as the Thai currency the baht—also after a strong February to March rally—appears to be flagging anew. Has some of the money borrowed help in pushing up of bond prices or has these been sent elsewhere abroad?

Thai’s financial markets and statistical economy appear to have been sending mixed signals. Rising inflation, slowing economic growth rate and a weak baht appear as signaling deeper stagflation, while rising bonds could be indicative of asset deflation.

Clearly whether it is Indonesia, Malaysia or Thailand, signs are that market risks have materially been increasing due to higher consumer inflation, unwieldy growth rate of debt, prospective tightening or even policy errors.

Thinking with your eyes can lead to severe losses.

Peso and the Phisix Zoom on Showbiz S&P Upgrade and BSP Jawboning

This week the peso appears to have eclipsed the Phisix. The US Dollar-Philippine peso stumbled by a whopping 1.91% over the week, where the gist—64% of the week’s losses by the US dollar occurred on Friday alone (USD fell by 1.22%).

Going into Friday, the peso has already been gaining momentum. Almost daily the BSP has been in the news from pressures to raise interest rates.

This quote from the BSP governor is an example[7]: “We will not hesitate to make preemptive adjustments to any of our policy levers in measured pace if the inflation target would be at risk or financial stability pressure heightens” (bold mine)

Past trading hour Thursday, the BSP made a move as they announced that interest rates will remain as they are but raised reserve requirements by one percentage point for the second time this year.

Friday morning, Philippine headlines screamed “Philippine credit ratings upgraded-the highest ever given to the country”. Boom. The peso and the Phisix went into an orgy.

I will deal first with the S&P upgrade.

The S&P awarded the Philippine government a BBB rating.

The Inquirer headline story says[8] “The S&P said it expected recent reforms that had paved the way for the country’s economic boom to be sustained beyond President Aquino’s term…A sovereign rating is the credit rating of a government and serves as an indicator for the perceived health of a national economy as well as its attractiveness to foreign investors. This is in addition to the more immediate effect of lowering the interest costs of the government and local corporations whenever they borrow funds from overseas.” (bold mine)

As I have been saying the ultimate goal of bubbles has been government access to credit, particularly cheap credit, the S&P upgrade only proves this point. What the Philippine government has so far succeeded to do has been to create the illusions of sustainability of the credit financed boom. This has been enough to beguile institutions such as the credit rating agencies to buy into the subterfuge with an upgrade.

But my fidgety and naughty mind also tells me that the timing looks suspicious and there may be other factors involved.

Has this been associated with President Obama’s recent visit to the Philippines? In particular, has this been implicitly linked with the military bases agreement reached by executive offices of the both governments? Has this been part of the reward for the bases agreement and also possibly an appeasement by the US government, where after the signing of the agreement, President Obama gave “no categorical commitment” on the 62-year-old Mutual Defense Treaty (MDT)[9]? In other words, following the sellout by the Philippine government on the US-Philippine military bases agreement, in order to reverse negative sentiment from this, the S&P pulls the proverbial wool over the public’s eyes with a credit rating upgrade.

Funny but nowhere in the report have I seen how the S&P treated 30+% money supply growth. Does the S&P think that 30+% can “be sustained beyond” the current administration? Does the S&P with their whole army of economists, actuarial analysts, accountants and statisticians understand the impact of fantastic growth rates of money supply on the economy? Does the S&P know that sustained escalation of money supply growth rates leads to hyperinflation? 

Another outlandish comment from the same article: “The government has a more ambitious growth target of 6.5 to 7.5 percent. By 2016, it aims to drive economic growth to as much as 8.5 percent. “The Philippines proved that it is able to sustain high economic growth despite external volatility and in the case of last year, successive domestic natural disasters,” Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said in a statement. (bold mine)

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I actually try to avoid repeating charts I have shown as to reduce the size of my literature but necessity requires its re-exhibition.

But the above data shows where the 6.5-7.5% growth has been coming from and how they are being financed. The above shows why the goal of 8.5% is utter fantasy.

The basic difference between the mainstream and the business cycle observes like me, is in the treatment of debt. For the mainstream, debt has always been a function of growth. No if and no buts. That’s why debt has been a sideshow to the panoply of statistics they always show.

For instance the mainstream will depict on the relative debt levels of countries. Seen from a contrast effect, because Philippines debt levels are nominally low, relative to the others, they immediately write-off or dismiss any risks. The mainstream hardly explains of the distinctive political, legal, economic, financial, geographic and cultural characters of each country necessary for the construction of a debt profile.

As example the reason why Philippine debt levels are relatively low is that only 2 to 3 out 10 households are banked or have access to the formal banking system. How useful will be a comparison between the Philippines with a 20% penetration level in the formal banking system with that of other nations with 50% or more penetration levels?

And as I have previously shown, debt tolerance level differs from country to country as seen when a crisis hit. Even during the onset of the Asian crisis, statistical figures like bank lending to the property sector, property exposure and non-performing loans or even vacancy rates had all been different for ASEAN nations. The Philippines has generally the “lowest” among all these variables. Paradoxically lowest does NOT translate to immunity.

Such comprises on the category errors of the mainstream

For business cycle observers, while debt can be consequence of growth, growth can also be a function of debt, particularly in response to suppressed interest rate regimes. When governments desire to attain subsidies for their deficit spending programs by imposing negative real rates via interest rate caps, such redistributive policies alters the incentives of people which creates imperceptible imbalances that eventually unravels. This is what bubble cycles are made of.

As the great Austrian Economist Ludwig von Mises warned[10]: (bold mine)
But increases in the quantity of money and fiduciary media will not enrich the world or build up what destructionism has torn down. Expansion of credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must land the nation in profounder catastrophe. For the damage such methods inflict on national well-being is all the heavier, the longer people have managed to deceive themselves with the illusion of prosperity which the continuous creation of credit has conjured up
What I consider as the main bubble sectors specifically trade, financial intermediation, real estate and hotel constitutes 44.84% of the 2013 Philippine statistical economic formal economy growth which came at 7.2%. Yet the same sectors absorbed 49.61% of banking sector loans of general production loans (left window). This is outside the manufacturing sector where parts of the said industry have catered to the bubble industries. In short, the risks of bubbles may be understated given the above data.

The explosion of banking loan growth translated into soaring 30+% money supply growth rate for the second semester of the 2013. As of March 2014, loans to these sectors continue to swell and have now gobbled up 50.31% share of overall production banking loans (right window). This has been accompanied by 30+% money supply growth rate, particularly 34.8% for the NINTH straight month!

As I noted last week[11], “Where exactly has the bulk of money supply flowed into? Let us read this from the Philippine central bank, the Bangko ng Sentral ng Pilipinas (BSP) report, “Domestic claims rose by 12.4 percent in March as bank lending accelerated further, with the bulk going to real estate, renting, and business services, utilities, wholesale and retail trade, manufacturing, as well as financial services.” [italics mine] 

And just look at how the massive bank credit expansion into these sectors translated into statistical GDP. The three sectors real estate, construction and hotel have been borrowing 2-3 pesos for every peso statistical output generated. As you can see this is a sign not only of inefficient use and patent misallocation of resources, but importantly, how growth has been a consequence of debt rather than vice versa. The above data shows what the mainstream like the S&P sorely misses, that current demand springs from supply side leveraging. Curtail this leveraged based demand and the sand castle washes away.

What does the above points at? What the mainstream touts as “the perceived health of a national economy” has actually been a growing concentration of risks in the system as both resources and debt are being massively diverted or funneled into bubble sectors. And those risks are now being manifested via price inflation. 

And for the idea that Philippine economic growth would reach 8.5% based on the current growth model, is the BSP proposing to have money supply growth rates balloon from the current 30+% levels to 40% or 50%? That’s would be suicide for the peso holders and for the residents of the Philippines, including me.

Reserve Requirements: Has the BSP Pulled A Rabbit Out of the Hat Trick?

This brings me to the second point, the risks of price inflation.

And as I wrote last week, “if the supposed “robust domestic demand” is hardly matched by an equally “robust” domestic supply growth then systemic risks are being magnified through the inflation, interest rate and credit channels. Yet the longer such outrageous rate of money supply growth is maintained, the larger the build up of imbalances and the bigger risks of a financial and economic destabilizing “shock”

Remember 68% of money supply growth has largely been from these areas. Why do you think the BSP raised reserve requirements last Thursday?

Here is the BSP’s official statement[12] “At the same time, the Monetary Board noted that the balance of risks to the inflation outlook continues to lean toward the upside, with potential price pressures emanating from the possible uptick in food prices, as a result of expected drier weather conditions, as well as pending petitions for adjustments in transport fares and power rates. The adjustments in the reserve requirements are expected to help mitigate potential risks to financial stability that could arise from the strong growth in domestic liquidity. The Monetary Board believes that solid domestic economic activity provides room for the hike in the reserve requirements.’ (bold mine)

As you can see, the BSP acknowledges the growing risks of inflation which they say “continues to lean toward the upside”, but downplays its significance with assurance that the BSP’s magic wand will “help mitigate potential risks”

Yet such disclosure reveals that the BSP’s inflation figures hardly captures on the real economic inflation. The growing black market in the cement industry which has prompted the DTI to “intensify monitoring” of the regulated product is an example I cited last week. This signifies a symptom of such simmering inflation underneath the statistical numbers. And that’s why the BSP have been forced to act.

Moreover, look at the BSP’s waffling. The BSP traces “potential price pressures” from the supply side (food, utilities and transport). Yet the “adjustments in the reserve requirements” has been aimed at the demand side supposedly “to help mitigate potential risks to financial stability”. How does one square raising the issue of “potential price pressures” from the supply side with demand side policies supposedly “to help mitigate potential risks to financial stability? Puff. They never explain.

Yet the financial markets bought into the gimmickry that consumer price inflation will be subdued by mere raising of the reserve requirements and from the vote of approval by the S&P who again blindly ignores of the shocking 9 months of 30+% money supply growth rates, thus sending the peso to the sky as if all the above risks have suddenly vanished.

And again as I previously wrote incremental increases in bank reserves requirements have mostly been symbolic[13].

Add to this the possibility that modern central banking has been said to be unconstrained by fractional banking. In other words, banks can lend for as long as there is demand and that mandated bank reserves will merely be supplied by the central bank. So from fractional banking modern central banks phase in infinity banking.

Ironically, I will be quoting S&P’s chief economist Paul Sheard[14] (bold mine).
Central banks don't constrain the amount of bank reserves they supply. Rather they supply whatever amount of reserves that the banking system demands given the reserve requirements and the amount of deposits that have been created.

Why is this?

Because modern central banks, in normal times (such as before the crisis and the forays into QE) target a short-term (usually overnight) interest rate in the interbank money market (the market in which banks lend and borrow central bank reserves). They do this by adjusting the amount of reserves on their balance sheet (in the banking system) to ensure that the interest rate is in line with their announced policy rate (the federal funds rate in the case of the Federal Reserve).

The adjustment takes the form of ensuring that there are neither too few reserves (which would put upward pressure on the interest rate) nor too many (which would put downward pressure on it, assuming that the central bank does notnegate that by paying interest on excess reserves). If the central bank wants to hit its interest-rate target, it has to supply the amount of reserves consistent with that, and that amount (normally) corresponds to the amount of reserves given by minimum reserve requirements.

If bank lending increases and the associated increase in bank deposits leads, as it will, to a higher level of minimum required reserves, the central bank will naturally supply those reserves. Otherwise there will be a central bank-induced shortage of reserves, and the overnight interest rate will go up, meaning that the central bank will not be hitting its interest-rate target. Central banks, in normal times, cannot target an interest rate and independently restrict the amount of reserves they supply"
If Mr. Sheard’s view is correct where central banks supply the reserves to conform with the mandated reserves rather than banks restraining their loans predicated on required reserves, then the BSP seems to have pulled one heck of bluff via the reserve requirement policy tool.

Nonetheless, since all these loan creation extrapolates to additional nominal spending power which will stream into the real economy that will affect money prices, economic coordination, production process and trading patterns, this means that in spite of the artifices employed, economic reality will ultimately prevail. As the great Mises pointed out above, “Only apparent and temporary relief can be won by tricks of banking and currency.”

On Philippine Trade Balance and Gross International Reserves

And speaking of more tricks. One of the factors that has helped boosted the peso lately has been an abrupt narrowing of the Philippine trade balance as growth of imports suddenly collapsed from 26% y-o-y in January to a mere .3% last February. Based on the National Statistics Office this has mostly been due to a decline in Mineral fuels, Lubricant and Related materials.

There are possible explanations to this, seasonality-February tends to be a weak month for imports or the huge January imports constituted advanced orders which took the share of February’s activities or smuggling has taken the upper hand and or smuggling crackdown has led to diminished imports. There could be more but such factors have been off the top of my head for now.

The February trade balance statistics does not diminish the case for a weak peso over the long term. The fact that 30+% of money supply growth rate represent a huge additional nominal demand for resources means that the specific supply side requirements has to grow as much as with demand, for price inflation to be tempered. If domestic supply doesn’t match demand for specific items then prices will rise and supplies would need to be imported. The sheer requirements of the bubble industry ensure that supply from imports will be substantial and would sway the trade balance towards sizeable deficits—thereby affecting the peso. What can happen is that most of these imports may be channeled through smuggling. Yet smuggling still would require more dollars. Statistics will not alter such fundamental economic flows.

And if the import route will be obstructed say by a smuggling crackdown then we will see shortages. Such shortages will put a “shock” to the bubble industries that will ripple through the formal economy.

Aside from trade deficits, domestic inflation brought about by the credit fueled massive demand—expressed through the sustained 30+% money supply growth rate—serves as the primary force of inflation. Both would signify a one-two punch against the peso.

The fact that the Philippine money supply growth has vastly outpaced developed economies undertaking QE, as I previously wrote, “Even with the Fed’s aggressive QE and Bank of Japan’s even bolder Abenomics year on year change of M2 has been at 5% for the Fed and 4.5% for the BoJ. China’s M2 comes at 13.2% in 2013 according to the People’s Bank of China[15]”…means that based on supply, the peso should weaken against these currencies.

So far because of publicity stratagem mounted by the government, demand for the peso has temporarily overwhelmed supply. Such demand is not fundamentally grounded and thus won’t last.

Finally, the BSP posted the Gross International Reserves (GIR) for April[16], here is what they reported, “Preliminary data showed that the country’s gross international reserves (GIR) reached US$79.61 billion as of end-April 2014, Bangko Sentral ng Pilipinas (BSP) Officer-in-Charge Nestor A. Espenilla, Jr. announced today. This level was slightly lower by US$0.04 billion than the end-March 2014 GIR of US$79.65 billion.”

The reason the data has been considered “slightly lower” is because March data have been revised[17] from $79.8 to $79.65 billion. I know this would seem as pettifogging but that’s how governments operate, they shift and manage data for them make them look favorable than they are supposed to be.

But here is one more thing. GIRs consist of money or asset “stocks”, particularly Reserve Position in the Fund, Gold, SDRs, Foreign Investments and Foreign Exchange. The fact that foreign money “flows” continue to post positive balances, particularly OFW remittances, BPO foreign revenues, FDIs and portfolio flows means these should have flowed into the GIR as money or asset “stocks”. But they haven’t. So a fall in GIR reserves implies that GIR money and asset “stocks” PLUS foreign money flows from the current-capital account balances have been used to manage the Peso. Thus the BSP interventions in support of the peso have been far larger than what is seen by looking solely from the GIR data.

Behind the Philippine Education Inflation

I usually put my personal experience with consumer price inflation as my prologue to highlight the effects of 30+% money supply growth rate.

But for today I moved this down because I wanted to emphasize on the snowballing hysteria on the supposed Philippine economic boom.

My daughter just gave me her tuition bill. And this is 10+% more than from last year.

I came across this article noting that 353 universities have sought for government approval for tuition hike. So I guess my daughter’s school hasn’t been isolated.

So while the article didn’t mention of the current rate of adjustment desired by the universities, it noted that “the average tuition increase per unit for school year 2013-2014 was P37.45 or 8.5 percent nationwide[18]”

This means regional areas have most likely asked for less than 8.5% while increases in the National Capital Region must be vastly higher than 8.5%. So 8.5% could serve as a minimum threshold for the recent increases which I expect to be a lot higher.

Artificial demand from supply side leverage has contributed to recent increases. But school tuition inflation has long been in place even ahead of the BSP’s bubble blowing policies.

A simple reason: government imposed subcontracting of public school students (grade 7 and high school students) to private schools in exchange for paltry subsidies. This government program is called Educational Service Contracting (ESC) which falls under the Republic Act 8545 (amending R.A. 6728), or the “Expanded Government Assistance to Students and Teachers in Private Education, or GASTPE[19]

Here is the Department of Education’s definition[20]: ESC is a scheme under the Government Assistance to Students and Teachers in Private Education (GASTPE) wherein the government subsidizes the tuition fee of students who enroll in private schools because public secondary schools cannot accommodate them anymore. It is jointly implemented by DepEd and the Fund for Assistance to Private Education (FAPE). The subsidy is P6,500 per student in participating schools outside the National Capital Region and P10,000 per student in private schools in the NCR. [As a side note I discussed this in 2010[21]]

Think of it. A private school in NCR has an annual tuition fee of Php 50,000 for students where 20% are earnings or profits. This entails that the cost to maintain a student for the year will be Php 40,000. But the government gives a subsidy of only Php 10,000 to the school. This means there would be a Php 30,000 deficit. If the private school shoulders this, then the school will likely lose money and close shop or vastly reduce earnings which imply lesser expansion or improvement of facilities. Such isn’t a viable option. So what would a school owner do? They will spread the cost by charging these deficits to their private sector enrollees. And the tuition hikes would spread to cover not only in high school but to the private owner’s affiliated college or grade school. So tuition fee hikes embody both price inflation from bubble blowing policies AND government subcontracting. (As a side note, such lethal combination has hammered the education pre-need industry which media blames on many other effects rather than causes)

For school year 2013, the DepEd added 24% slots or a total of 310,709 slots for public students nationwide. The DepEd chief said that this would “democratize access to quality education”. I say that the DepEd will not only see the opposite—a deterioration in quality education—but this would add to the list of uneducated.

The DepED program impinges on the constituents that they intend to protect in two ways. The increased subsidy means higher taxes for consumer that will translate to a reduction of people’s disposable income that could have been spent for education. Moreover, higher tuition fees reduce affordability, thereby putting more prospective students out of school or force off students from private schools and into public schools. So added pressures for public schools would mean even more interventions or more subsidies. So we go back to into a loop; keep people poor so they will continue to depend on the government. At the end of the day, this program is like a dog chasing its own tail.

And contra government data which shows the education share of a typical Filipino household at only 4%, to my experience education expenditures eat up about 20-30% of my budget if your children are in the private school. So education inflation will hurt the middle class.

Again the education sector has been a beneficiary from bubble blowing policies. This means that for now, artificial demand brought about by mostly supply side leveraging has been supportive of this arrangement, but this isn’t going to last. Yet it’s sad to see more people suffer from a backlash of self-destructive policies from political social engineers.

Nonetheless I am optimistic that the web will introduce more online competition against the traditional system which should lower the cost of education and truly democratize learning[22].

Phisix: Déjà vu 2013? Déjà vu 1994-1997?

Global Investment management firm GMO’s Edward Chancellor[23] identifies the 8 characteristics of a stock market mania: 1) This-time-is-different mentality. 2) Moral hazard—strong belief in government support 3) Easy money. 4) Overblown growth stories—the industry chant. 5) No valuation anchor—valuation who cares? 6) Conspicuous consumption (e.g. fastest growth in car sales) 7) Ponzi finance and 8) Irrational exuberance

I think all of these can be bundled to characterize the Philippine Phisix where participants see a singular direction or a one way trade, deeply entrenched groupthink (thinking with the eyes), and exceptionally irrational exuberance.

Proof? The Phisix has risen for SEVEN consecutive weeks…even profit taking seems now a taboo.

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Two patterns seem to be playing out.

First is the Déjà vu 2013, where we see same parabolic moves, same marking the close in February 28th, and a similar short and shallow correction cycle in early March[24]. Eerily the March correction began only 1 day apart.

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A second pattern could be the Déjà vu 1994-1997. In 1994-1997 there had been three bear market strikes (20+%) and a huge final leg rally that ended with the Phisix reaching the early 1994 high. The breakout failed, the rest is history.

Today there are some similarities but with variations. Instead of bear market strikes, there have been 3 visits to the bear market territory. Currently the Phisix as noted above is on a one way lift off mode.

While I am not a fan of patterns, these patterns recur due to the patent desire by many participants to bring back the old boom days even if such conditions have not been the same.

In finale, grotesquely priced bonds and outrageously mispriced stocks, rising inflation pressures, massive debt accumulation, and 30+% money supply growth rates serve as ingredients to a Wile E. Coyote or a Black Swan moment

As Aldous Huxley said, Most ignorance is vincible ignorance. We don’t know because we don’t want to know.


[1] Gustave Le Bon The Crowd A Study of the Popular Mind Batoche Books p.40 (link)



[4] Bangko Sentral ng Pilipinas Foreign Direct Investments Inflows Reach US$1 Billion in January 2014 April 10, 2014




[8] Inquirer.net PH credit rating upgraded, May 9, 2014


[10] Ludwig von Mises 8 Inflation PART V  DESTRUCTIONISM Chapter 34 The Methods of Destructionism Socialism An economic and sociological analysis Mises.org






[16] Bangko Sentral ng Pilipinas End-March 2014 GIR Stands at US$79.8 Billion April 7, 2014

[17] Bangko Sentral ng Pilipinas End-March 2014 GIR Stands at US$79.8 Billion April 7, 2014

[18] Philstar.com 353 universities seek tuition hike May 10, 2014

[19] Funds for Assistance to Private Education DepEd’s GASTPE Program FAPE.org

[20] Philippine Department of Education, DepEd increases tuition fee subsidy for Grade 7 students May 6, 2013



[23] Edward Chancellor Looking for Bubbles Part Two: A Sentimental Approach GMO Quarterly Report 1st Quarter 2014

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