Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.—Milton Friedman
Happy Fathers Day!!!
In this issue
In this issue
Daddy’s Day [Abridged] Edition: Phisix: The Climaxing Philippine Property Bubble!
Bonus: Chart of the Day: Russell 2000
Daddy’s Day [Abridged] Edition: Phisix: The Climaxing Philippine Property Bubble!
I am not supposed to be writing again this week, but recent developments have been so compelling for this unpopular causal-realist analyst to resist from doing his work of calling a spade a spade.
The Global Property Guide noted that the high end vertical residential markets in the Philippines have recently been skyrocketing. (bold mine)
In the Philippines, the average price of 3-bedroom condominium units in Makati CBD rose by 8.95% in Q1 2014 from a year earlier, a sharp improvement from the annual growth of 2.32% during the same period last year.
Look at the numbers again: 8.95% 1Q 2014 against 2.32% 1Q 2013; this indicates a breathtaking almost THREE times leap in the rate of growth! If such explosive pace of growth will be carried through the year, annualized, this means high end property inflation of 35% percent!!! To repeat, THIRTY FIVE percent property inflation, Yikes!!! In 2013, the same company reported a 10.56% jump in growth rates for the same sector, which has been slightly above the 1Q 2013 annualized growth rate.
And this spectacular surge in the high end property inflation rate almost mirrors the equally fantastic money supply growth rate!
I believe that much of the other property segments will reveal an almost similar frenetic pace of price escalation. To consider, as I previously tallied, the top publicly traded property developers alone have allotted at the very least $250 billion in capex for 2014 which will be funded mostly by debt.
So with all these new money coming into the economic stream, mostly raised from banking system, these implies a massive chasing of limited supply of land-property which ensures a chimerical spike in land and property prices, now obviously seen via the stupendous 8.95% growth rate in Makati CBD condos.
Oh by the way, the average banking loans during the first quarter to the real estate sector, construction industry, trade, financial intermediation and hotel has been at 19.09%, 46.64%, 19.05%, 11.96% and 41.94% respectively, numbers which are far far far off the statistical growth data! These figures are very supportive of, or consonant to the latest surge in the property prices.
And like outrageously overvalued and mispriced stocks (PERs of 30,40,50,60 and PBVs of 4,5,6,7,8 which are ABOVE pre-Asian crisis levels, which I pointed out here, as well as standard deviations of 5 sigma for some stocks based on 4 year eps), property prices have been manifesting signs of a manic blowoff top.
Such has been symptoms of mindless chasing or pushing up of financial assets financed by credit encouraged, prodded and abetted by monetary policies.
Because these assets are titles to capital goods, both are highly sensitive to changes in interest rates. So by forcing the public into frenzied speculative activities, the financial repression policy of negative real rates has massively been distorting the valuations of these assets, income and earnings. Unfortunately, the consensus construes these as ‘sustainable’, yet they never come to question why the BSP has been so averse to raise rates? Will rising rates foil the “transformation” dream?
Also, the rate of property inflation reinforces my discernment that the BSP’s measure of CPI inflation rate has hardly been reflective of real conditions.
This also means that current financial market prices (peso, bonds and stocks) have hardly been accurately discounting or have priced in such a spike in implied inflation.
Despite these, blinded by illusions of the boom phase of every bubble, the mainstream still has NOT come to reckon that these are signs of financial instability or a bubble!!! It is understandable that industries benefiting from these invisible transfers, operating on a principal-agent dynamic, will staunchly deny such risks by selling to the public HOPE instead of the real balance of risks from current the political economic environment.
And yes, such deeply held optimism has all been grounded on political hopes. But again no one dares question why the BSP has exhibited steadfast reluctance to apply real “macro prudential” policies of tightening.
BSP officials have chosen instead to ignore self imposed rules (e.g. BSP’s circular 600), would rather massage the financial markets, and resort to policy gimmickry (e.g. raise reserve requirements) and on publicity hype via statistical smokescreens such as calling the 1q 2014 GDP slump as a one-off effects from Typhoon Yolanda (even when the coconut industry have been the only direct link) or could even be likely understating that Banking system’s loan portfolio exposure on the real estate industry which they say grew by only 4.5% in 2013 even when their other figures covering the supply and demand side (for banking loans on the property sector) have posted an astounding annualized 23.64% and 21.34% growth rates!
Just give it a thought: In the 1Q 2014, Makati high end condos rose by a whopping 8.95% even as the statistical GDP slipped to 5.7%. The latter has largely been due to a decline in (-.9%) private construction.
What does this entail? Instead of going into construction activities, a lot of freshly issued bank credit money found their way into boosting Makati’s high end properties and properties where the credit issuance dynamic operates on.
Yet how will an annualized 35% increase in high end property prices, which is about 5x GDP, be sustained if the statistical formal economy slows or remains at current level or even marginally improves? Or how will such rate of growth continue if banking and other credit activities fall?
So while publicly declaring war against financial instability, the monetary politburo has been taking actions that has been buttressing on such risks. In short, via financial repression policies of negative real rates, the Philippine economy may have become guinea pigs for the top BSP Nomenklatura to dabble with.
Property bubbles will hurt both productive sectors and the consumers. Property bubbles increases input costs which reduces profits thereby rendering losses to marginal players but simultaneously rewarding the big players, thus property bubbles discourage small and medium scale entrepreneurship. Property bubbles can be seen as an insidious form of protectionism in favor of the politically privileged elites.Property bubbles also reduces the disposable income of marginal fixed income earners who will have to pay more for rent and likewise reduces the affordability of housing for the general populace.
To consider, it’s only a matter of time when such rate of price increases will spillover to Makati’s rental markets covering other residential and commercial sectors. This will affect household affordability and business viability of commercial tenants. The diffusion will also spread first within the metropolis then outside to mostly urban areas, again where the credit money will flow.
People hardly realize that property bubbles will drive a deep political wedge between property owners and the non-property owners or even between big property owners relative to the small property owners. Add to this the widening chasm between the elite relative to the middle and lower class, where the former has unbounded access to central bank subsidy, in terms of easy money or bank and capital market credit, where easy money speculations not only drive up the elite’s financial assets but will likely facilitate the acquisition of properties from those with less access to the formal credit sector. This means not only of invisible redistributions but a concentration of risks and benefits to those few entities with access to the formal credit system. No bubble eh?
As a side note, the subsidy hasn’t been restricted to financial flows. There has also been transfer of risks to hapless retail depositors. Much of the conventional finance managers recklessly deploy depositor’s savings to the aggressive expansions by politically connected elite companies in the hope of generating returns from such overvalued levels. In reality, such exposures will hardly even generate “low” returns at current price levels, but instead assumes on a high degree of risks through excessively valued collaterals or indentures that are convertible to overpriced securities.
In short, due to the seeming foolhardy management of fiduciary pool of funds from retail depositors by conventional or mainstream financial institutions, savers are at a severe risk of losses stemming from not only nominal based capital but likewise real (inflation adjusted) capital, as well as, opportunity costs.
Yet all these accruing inflation in asset markets will eventually fuel outcries over “inequality”. Such has already been the political landscape in Singapore.
Property bubbles are simply NOT sustainable.
Rising general inflation rates have already been indicating of a coming reversal. Couple this with the sharp slowdown in money supply growth rate which began this January that will be manifested this July; a possible sign that the biggest borrowers may have hit their natural saturation point of imbuing debt.
The consensus will be faced with a harsh awakening pretty much soon.
Voltaire [François Marie Arouet] (1694-1778) was imputed to have said "Prejudices are what fools use for reason."
Beware the prejudice based merely on faith; especially faith predicated on political promises that has been PROVEN economically unfeasible and unsustainable as shown throughout history.
Bonus: Chart of the Day: Russell 2000
Though I started as a chart technician I am not really a fan of pattern seeking analysis.
Technical analysis for me is the layperson’s equivalent of econometrics—the attempt to see or understand prices in the frame of mathematical models, via a multitude of variegated mathematically constructed indicators such as moving averages, trading bands, oscillators, momentum, patterns, waves and etc., presented in the context of price based patterns.
They somehow represent what psychologists call as the heuristics of the “law of least effort” as they don’t require exhaustive examination of the real determinants of prices—subjective values of people expressed through actions.
In my view, the usefulness of technical analysis is in the understanding of how the public uses them rather than of the tools itself.
Here is the chart of the small cap US benchmark the Russell 2000. As of June 13, 2014, the Russell 2000 has been priced at 82.71 PER based on Wall Street Journal’s trailing 12 months.
Will the bearish Head and Shoulders formation materialize or be falsified?
Questions: What if the NEGATIVE (-.1%) 1Q US GDP turns out NOT an anomaly but carried through the 2nd Q? This would mean an official recession for the US economy even when stocks (US and elsewhere are at record highs).
Three follow up questions: How will the record mispriced US stock markets react to an official recession? How will the US officialdom react to such an outcome? Will the US Federal Reserve cease or reverse from current “tapering”? Given that today’s financial markets have been deeply reliant on central bank actions, to which course of actions will global financial markets give weight to?
We are looking forward to a very interesting second half of the year.
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