Monday, October 06, 2014

Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is

All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis. Jesse Livermore, How To Trade In Stocks

In this issue

Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is
-The Strong US Dollar and the Return of the Risk OFF Climate
-ASEAN Equities in the Shadows of the Strong US Dollar
-The Currency Periphery to the Core Dynamics
-7,400 is not the Technical Hurdle, the BSP Chief Is
-BSP Governor Tetangco, Jr Hits on Stock Market and Real Estate Irrational Exuberance

Personal Notes;

-Pls help share a prayer for the speedy recovery of my principal, MDR’s Securities’s owner, Mr. Manuel D. Recto, who presently endures a health ordeal.

-I have cobbled enough strength to write about the latest very interesting developments even when I am presently indisposed. With more indications of a possible major inflection point, recess can wait another day

Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is

The Strong US Dollar and the Return of the Risk OFF Climate

In mid-September, I noted of the sharp spike in the US dollar which had been broadbased which I said then could serve as harbinger to a possible return of the risk OFF moment[1];
Their individual charts reveal that the US dollar has been rising broadly and sharply against every single currency in the basket during the past 3 months.

This may have been due to a combination of myriad complex factors: ECB’s QE, expectations for the Bank of Japan to further ease, Scotland’s coming independence referendum, or expectations for the US Federal Reserve to raise rates in 1H 2015 (this has led to a sudden surge in yields of US treasuries last week), escalating Russian-US proxy war in Ukraine and now in Syria (as US Obama has authorized airstrikes against anti-Assad rebels associated with ISIS, but who knows if US will bomb both the Syrian government and the rebels?) more signs of a China slowdown and more.

Yet a rising US dollar has usually been associated with de-risking or a risk OFF environment. Last June 2013’s taper tantrum incident should serve an example.

For most of Asian bourses, the return of the Risk OFF moment in the face of a soaring USD has become pretty much evident. 

In the past, each time the US dollar surged (see top pane with Asian ex-Japan iShares AAXJ overlapped with the US dollar index), this placed a cap in the gains of BOTH Asian and Emerging Market (iShares EEM) equities as measured by their respective ETFs.

The peak and troughs of the US dollar has been highlighted by the green trend lines, while the highs and lows of Asia (ex Japan) have been exhibited by the blue lines.

The graphs shown in the lower panes represent the RATIOs of Asia (ex-Japan) and the Emerging Markets (EEM) relative to the US Dollar. Those orange rectangular indicators reveal of the crucial inflection points: 1) peak US dollar vis-a-vis cyclical lows of AAXJ-EM in July 2013. 2) Culmination of AAXJ-EM relative to US dollar lows in November 2013 and 3) a repeat of 2) during April-May 2014.

From July until August, such inverse relationship seems to have been “broken” as both the US dollar index and Asian (ex-Japan) and Emerging Markets (EEM) have converged to spike correspondingly!

It’s only this September when the old relationship seems to have returned with a vengeance!

To understand more of the significance of these indices, the basket of iShares All Country Asia ex-Japan (AAXJ)[2] and their weightings consists of China 23.83%, South Korea 18.69%, Taiwan 15.45%, Hong Kong 12.67%, India 9.14%, Singapore 6%, Malaysia 5.09%, Indonesia 3.4% Thailand 2.93% Philippines 1.63% and others .89%. The top 5 weighting on a sectoral basis has been financials 31.54%, info tech 21.17%, consumer discretionary 9.17% Industrials 8.57% and telecoms 6.72%.

Meanwhile the iShares MSCI Emerging Markets (EEM)[3] consist of a broader basket of 17+ emerging markets and their respective weightings: China 18.39%, South Korea 14.64% Taiwan 12.09%, Brazil 10.14%, South Africa 7.35%, India 7.15%, Mexico 5.09%, Russia 4.55% Malaysia 3.98% Indonesia 2.6% Thailand 2.31% Poland 1.77% Turkey 1.55% Chile 1.43%, Philippines 1.22% Hong Kong 1.03% and others 4.51%. The top 5 sectoral components consist of Financials 27.3%, Info tech 16.82%, energy 9.83% consumer discretionary 8.8% and materials 8.28%

The only exception to the general trend of faltering equity assets has been the equity benchmarks of China, India and the Philippines.

The general trend, as of Friday, seems to reveal of a spreading decay of the performances among Asian-Emerging markets. On a sectoral basis, the ongoing deterioration of emerging market-Asian stocks has likewise been led by dominantly weighted Financial sector[4].

Last week I showed of the two sharply contrasting faces of the milestone 7,400 highs of May 2013 and September 2013 in the Phisix[5]. Apparently like her other Asian and EM peers, domestic financials has severely lagged the recent blitz, or has become a baggage to the “massaged” ramp to reach 7,400. 


And speaking of massaging ramp, almost everyday has become a marking the close day at the PSE, as bulls desperately set the index to close higher by pushing it up by about .2 to .3%. Amazing pumps. (chart from technistock.net)


Back to EM. Add to the EM miseries has been a dramatic fall in commodity prices (represented by CRB Raw materials) which has had a strong correlation with MSCI EM share prices (chart from Yardeni.com)

This marked equity EM underperformance in the face of the rising US dollar appears consistent with the patent economic slowdown in EM economies.

The IMF recently warned that a sustained EM downdraft would impact advanced economies. Yet I have been pounding on the table that an EM growth cascade will mostly likely influence to weigh on Advance or developed economies (DM). That’s unless DM internal growth neutralizes EM weakness. Yet sagging DM growth will also serve as feedback mechanism back to EM and vice versa, or my periphery to core dynamics[6]:
Unfortunately the IMF team stops there. They did not expand their horizons to include of the subsequent feedback mechanism from DM to EM! If EM growth affects DM, so will there be a causal chain loop, or DM growth will also have an impact to EM growth!

Doing so would extrapolate to a contagion process, as the slowdown feedback mechanism in both EM and DM will self-reinforce the path towards a global recession!
In other words, if the current deterioration in Asia-EM equity sphere worsens, and if equities will manifest on real economic aspects which will have significant impact on DM, then a global recession looks likely in the near horizon. 

Perhaps, 2015 at earliest or 2016 the latest?

ASEAN Equities in the Shadows of the Strong US Dollar

Let us narrow down the perspective to US dollar-ASEAN equity.



In contrast to AAXJ or EEM, the FTSE ASEAN 40 appears to have some signs of positive ‘convergence’ with the US dollar. The FTSE ASEAN (blue line) climbed along with the US dollar (green line) into May 2013. That’s until the then Fed Chief Ben Bernanke floated with the “taper”. The Fed’s taper brought ASEAN stocks swiftly into bear markets, even as the US Dollar index tumbled.

ASEAN stocks found a second wind in February 2014 as the US dollar stabilized and began its upward trek. Along with the ascending US dollar, ASEA went on path to beat the May 2013 highs.

However by September, the US dollar has gone parabolic, and the ASEA-US dollar convergence trend appears to have been ‘broken’ as the FT ASEA index plunged.

First of all a clarification.

The FTSE ASEA ETF basket comprises mostly large caps with an 83.49% share and with midcaps at 16.32% of ASEAN majors whose weightings are distributed as follows: Singapore 33.72%, Malaysia 29.65%, Thailand 15.22%, Indonesia 13.06%, Hong Kong 4.1%, Philippines 3.2%, United Kingdom .84%, and the US .22%[7]. Again on a sectoral basis, the top 5 are Financials which carries the dominant weight with 46.45% share, Telecoms 19.38%, Industrials 9.57%, Consumer discretionary 7.37% and Consumer Staples 5.43%.

In short, mostly financial stocks of Singapore, Malaysia, Thailand and Indonesia have borne the yoke of the ASEA 40. Thus the underlying present weakness of ASEA, again in the face of a surging US dollar translates to ongoing infirmities with mostly financials in the ASEAN ETF.

I recently asked if the surging US dollar will have a contagion effect on Asian’s high flyers[8]: “Yet will the region’s high flyers, India’s Sensex, Indonesia’s JCI, the Philippine Phisix, Thailand’s SET and the New Zealand 50 be immune to a seeming transition towards a risk OFF environment?”

This week’s outcome shows that the contagion dynamic has alive and kicking but operates at a different degree compared to 2007.

In June 2013, the response to the “taper” was a violent tantrum—risk assets had been sold swiftly and almost simultaneously across the globe.

In the current rising US dollar milieu, selling pressure has been gradual and selective but has commenced to spread, like Ebola, and seems to be intensifying.

The first June 2013 dynamic was a shock and adjust. The current September 2014 dynamic has been a slomo corrosion of the foundations for risk assets.

Among the three major ASEAN aspirants hoping to beat the May 2013 highs, Indonesia’s JCI has been the first to match and in fact crossover the previous record highs of May 2013.

Unfortunately the bulls failed to hold the sanctified ground which they fought intensely for the last two weeks. This week the bulls got decisively crushed when the JCI collapsed by 3.57%, thus a major setback for a new high.

Thailand’s SET has been another aspirant to reach May 2013 highs. Unlike her peers the JCI and the Philippine Phisix, the SET has yet to touch the May 2013 highs. But this week, the Thai bulls had also been clobbered, as the SET tanked by 1.87%. So this week’s losses adds to the distance which bulls would need to cover for that much desired pivotal game changer. So near yet so far.

The battering from the re-emergent RISK OFF environment became evident also with the Korean Kospi which was also thumped by 2.73%, the Singapore’s SET which was also whacked by 1.18% and Japan’s previously turbocharged Nikkei was smashed by 3.21%.

Meanwhile Australia’s S&P/ASX, and the Hong Kong Hang Seng rallied back to close with marginal gains. Taiwan Taiex managed to rebound up by 1.3% for week.

Hong Kong’s Friday rally came amidst reports that the political impasse would be resolved through negotiations. As of this writing, opposing protagonists have reached a deadlock.

Whether such protest has been externally orchestrated or not[9], the consensus hardly realizes of the gravity of risks of the extended political stalemate; first the ratio of banking loans to the real economy has reached a record 203% at the end of the June 2014, compared with 138% in 2007, and importantly, Hong Kong’s banking exposure to China is just under $ 500 billion or 55% of all loans in the system, the Wall Street Journal quotes the HKMA[10].

A disruption of flow of financing in either direction (China to Hong Kong or vice versa) may trigger financial dislocations and defaults in both the mainland and Hong Kong.

Also a sustained interruption in the flow of domestic businesses—say for instance last week, Hong Kong real estate companies and retailers have been alarmed by the sharp drop in customer traffic and sales on areas affected by protests[11]—may expose many highly vulnerable and sensitive overleveraged companies to sharp business oscillations, thereby raising risks of financial instability.

And as the peso skidded to the 45 level, the Phisix chimed with the region to a one day modest selling pressure. But domestic bulls made sure that the overvalued and severely mispriced Philippine Phisix was to be immune from foreign events, so they went into another Pavlovian frenzied charge last Friday to ensure that the benchmark would close with virtually little losses for the week.

Bottom line: China has been economically and financially fragile due to excessive leverage and now compounded by a struggling economy under the weight of the former. Add Hong Kong and Singapore to this equation. In terms of debt, the Japanese political economy has been no better. Yet the Japanese economy has been grappling to emerge out of the web of interventionists chains even as the productive sectors repeatedly sputter. Meanwhile many emerging market economies (like the ASEAN majors) have been reeling from the repercussions of domestically germinated bubbles. Thus geopolitics can be the spark that may unglue everything. Here the rising US dollar is like a lit fuse which has been fast approaching the trigger that would unleash the main event.

US market rallied strongly last Friday based on payroll data. But so did the US dollar which as shown above went parabolic! Well see how things go next week

The Currency Periphery to the Core Dynamics

Another very important clarification. The appearance of “convergence” between the ASEA and the US dollar index is not what it seems.

Previous accounts of the rising US dollar index has been primarily because of the weak euro and yen more than it has been about the region’s currency standings vis-à-vis the US dollar. 



The ICE’s US dollar index equivalent, the DXY, and JP Morgan Bloomberg’s Asian currency index ADXY[12], tells the story.

The Bloomberg’s ICE Dollar Index (DXY) basket consist of the euro 57.6%, the yen 13.6%, British pound 11.9%, Canadian loonie 9.1%, Swiss franc 3.6%, Swedish Krone 4.2%

Since the DXY spike during the taper tantrum last June 2013 (upper window), the DXY has corrected and been range bound for most of the year UNTIL August 2014. The latest DXY pole-vault has been at a THREE year high!

Meanwhile the JP Morgan Bloomberg Asian basket (ADXY) comprises of the Chinese yuan 38.16%, Korean won 12.98%, Singapore dollar 11.07% Hong Kong dollar 9.22% Indian rupee 8.75% Taiwan dollar 6.1% Thai baht 4.92% Malaysian ringgit 4.3% Indonesia rupiah 2.85% and Philippine peso 1.65%.

The JP Morgan Asian currency index ADXY reveals the last ADXY meltdown was during the June July 2013 “taper tantrum”. Today’s re-emergent volatility seems yet halfway the predecessor.

Importantly, Asian currencies have been rising along with the US dollar index from April until August 2014 (blue line lower pane).

This means gains of the US dollar then has been against the other components of the US dollar index rather than from Asian currencies.

This also implies that the gains of ASEAN equities as measured by the ASEA ETF came in the backdrop of rising ASEAN currencies, even as the DXY rose. That’s why it would seem schizophrenic to see rising stocks along with falling domestic currencies. That’s unless the current environment has been about massive debt monetization by governments ala Venezuela and Argentina.

The whole equation only radically changed in September when what has been mostly a strong US Dollar index because of erstwhile weak US dollar components has now PERMEATED into the BROADER currency sphere.

And because of the broad based strength of the US dollar, the pillars of many EM Asian-equity benchmarks came under pressure or have been frazzled. Thus the innate signs of diffusions from currency to risk assets in the EM-Asian spectrum. ASEAN bonds have yet to exhibit the same symptoms. Again a sustained ascent of the US dollar could most likely bring about the culmination of the topping process of ASEAN stocks.

So even from the currency perspective alone, the periphery to the core dynamics has clearly been in motion and has similarly been signaling contagion.

7,400 is not the Technical Hurdle, the BSP Chief Is

Philippine bulls have a herculean problem.

I’m not referring to the resistance level of 7,400, overvaluations, mispricing, speculative binges, malinvestments or overleverage, rather I am alluding to BSP chief who once again raised not only sanitized alarm bells, but what’s different this time around is that he announced that the BSP will supposedly manage everyone’s risk appetite!!!

First I’ve been saying that the BSP chief’s warning has been getting very much frequent but couched as diplomatically stentorian.

Despite the supposed floridness of Philippine growth conditions, the good governor Amando M Tetangco, Jr vents another sterilized statement of caution in his September 30 speech[13] (bold mine): “Even as our fundamentals show strength and we have built buffers against external shocks, we remain cognizant that there are risks that could challenge this positive narrative. For instance, there is the uncertainty over the timing and magnitude of the US Fed policy shift into more normal mode. This headwind could take many forms, among others: financial stability pressures from repricing of credit; sharp downward adjustments in prices of real and financial assets; and, capital flow volatility that could re-emerge as global investors react to news. If these risks are not managed well and result in unwarranted tight financial conditions, fragilities in EME financial markets could be exposed. In turn, these could negatively feedback to the real economies of EMEs. On the part of the BSP, although our series of monetary tightening actions in the past few months have been principally aimed at managing inflation expectations, these have also been put in place to help guide the domestic financial market to a smooth transition as monetary policy begins to normalize in the US. In the case of the domestic economy, the key challenges over the medium term are likely to relate mainly to addressing potential supply-side bottlenecks, bridging identified gaps in existing infrastructure, minimizing the impact of natural calamities, and promoting greater economic inclusion by, among other things, generating more employment.”

Mr Tetangco has been saying this quite too often, is he seeing something coming soon which he can’t directly say???

Yet what is the relationship between the “uncertainty over the timing and magnitude of the US Fed policy shift into more normal mode” with risks of “financial stability pressures from repricing of credit; sharp downward adjustments in prices of real and financial assets; and, capital flow volatility”? The good governor, as always, doesn’t explain or has hardly ever presented an attempt to elaborate on the connection between US interest rates and financial stability risks.

He either assumes the crowd understands this or he assumes that they don’t know or don’t care at all. And I believe no one in the circles dares to ask him on these.

That’s because since most in the audience have been either uniformed or are sheer courtiers of the administration, what they see in such statements are halo effects—the content of the speech doesn’t matter at all, what matters is the impression of the messenger.

What the BSP governor has supposedly been averse of can be summed up in a word: CREDIT.

The domestic banking and financial system has over indulged by issuing credit, while the non banking system has absorbed too much credit, both in foreign and local currency denominated liabilities, based on very low interest rates (financial repression) to borrowers regardless of their credit worthiness.

Such democratization of credit expansion has made the system vulnerable to rising interest rates. Even at zero bound, debt levels in and of itself can impair balance sheets of both lenders and borrowers. Rising rates will help, if not accelerate, in exposing of the many unviable projects that have all been dependent on zero bound rates.

The BSP just gave us a recent example.

In their recent survey of lending standards[14] they reported steady and unchanged conditions for overall credit standards for business lending.

But not for the households which according to them have shown signs of tightening (bold mine):  “In particular, banks’ responses indicated stricter collateral requirements and increased use of interest rate floors for all types of household loans. Banks’ responses also showed net tightening of standards on loan covenants (except for housing loans), wider loan margins for credit card and auto loans, and reduced credit line sizes for credit card loans. By type of household loans, a continued net tightening of credit standards for housing loans was noted while credit standards for credit card and auto loans showed some tightening from being unchanged in Q2 2104.Most of the respondent banks foresee maintaining their credit standards over the next quarter. However, some banks expect overall credit standards to tighten slightly due to an anticipated deterioration in borrowers’ profiles and reduced tolerance for risk, among others.

What motivates households and enterprises to borrow? From the same BSP survey (bold mine): “For loans to businesses, the net increase in loan demand was attributed by banks to increased needs for working capital and fixed-capital investments of borrower firms as well as lower interest rates and clients’ improved economic outlook. Meanwhile, the net increase in demand for household loans reflected the low interest rate environment and more attractive financing terms offered by banks.

So household demand for credit continues to rise due to low interest rates but credit quality has been declining. Has the BSP’s response been due also to the rise in 1Q NPLs[15]?

There was also reportedly a net tightening of credit conditions in commercial real estates, again from the BSP: “The net tightening of overall credit standards for commercial real estate loans was attributed by respondent banks to perceived stricter oversight of banks’ real estate exposure along with banks’ reduced tolerance for risk, among others. In particular, respondent banks reported wider loan margins, reduced credit line sizes, and stricter loan covenants for commercial real estate loans. Demand for commercial real estate loans was also unchanged in Q3 2014 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of improved clients’ economic outlook, lower interest rates, and increased working capital financing needs of clients.

The BSP first says that there have been steady and unchanged conditions for overall credit standards, but they point to exemptions in consumer lending and commercial real estate as areas experiencing tightening condition due to perceived deterioration in credit quality for households loans and supposed stricter oversight of banks real estate exposure.

At the end of the day whether it is households, non-real estate business or real estate and related businesses the common denominator for all these borrowing and lending activities has been LOW INTEREST RATES.

Why should the BSP worry about US interest rates if the banking system have been sound? The answer simple. The banks have been portrayed to look strong even if they haven’t.

Why? Because the BSP doesn’t really know of the viability or credit worthiness of each of the loans that have been extended throughout the system. And this lack of knowledge is what they admit as “uncertainty” and thus the warning “risks that could challenge… financial stability pressures from repricing of credit; sharp downward adjustments in prices of real and financial assets; and, capital flow volatility”.

They have practically NO idea what happens when there will be a “repricing of credit” and or how intense and scalable will “sharp downward adjustments in prices” and or how volatile capital flow will be. Had they known this won’t even been mentioned.

And as one would note, changes happens at the margins.

The BSP’s recent panic rate hikes have only marginally filtered into the banking system’s credit activities.


Watch how the economic agents act rather than what they say.

Despite the BSP’s actions, the banking system credit activities as of August 2014[16] continue to swell.

While year on year % change of general loans have decelerated last month to 19.12%, it still is the second highest growth rate since January 2013. The highest was in July 2014 at 20.92%. General loans have been growing about three times the economy! How the heck won’t inflation appear at such rate of growth?!

Year on year changes on real estate loans in July was at 17.67% as against 16.76% or a marginal decrease. On the other hand, consumer loans sustained a sharp uptick particularly from June to August or 16.01%, 16.17% and 16.59% respectively. These numbers hardly squares with the BSP survey on bank lending standards.

And the recent jump in loans appears to have reversed the recent declining money supply growth trend. Year on year money supply growth for August bounced backed to 18.5% from last month’s adjusted 17.9%[17].

As a side note, I’d like to say kudos to the BSP’s Economic and Financial Learning Center (EFLC) team for being responsive, accommodative and forthright to my queries. I hope their bosses are like them.

Going back to the BSP Chief’s September 30 speech on growth inclusiveness: “It is also imperative that we focus our efforts on Inclusiveness, the second I. We must create an environment that not only enables more of our countrymen to enjoy prosperity as the economy grows… but also one where they can actively participate in making the economy grow. Indeed, durable economic growth is one that is inclusive. It must cast a wider employment net in a broader set of industries, while remaining entrepreneur-friendly. On the BSP’s part, we continue to strengthen our initiatives to promote greater financial inclusion through regulations that broaden access to financial services and programs that deepen financial learning.

John Maynard Keynes quote on inflation should serve as a wonderful rebuttal to such propaganda[18]
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Just how on earth will “a continuing process of inflation”, in this case by credit expansion in the Philippine banking system via financial repression (negative real rates) policies, where “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens” that “impoverishes many, it actually enriches some” [yes cronies] become part of the inclusive growth agenda?

Beats me, but BSP communications keeps getting more contradictory, obscure and non transparent

BSP Governor Tetangco, Jr Hits on Stock Market and Real Estate Irrational Exuberance

I missed an earlier highly crucial speech last week that underscored the BSP’s Governor Tetangco, Jr’s role as nemesis for the bulls, where he cites his recent and prospective actions[19] (bold mine)

The BSP has done a number of things over the past few months. We have raised reserve requirements, hiked the SDA rate, the RRP rate and then, recently, both the SDA and the RRP rates together.

These we did in response to various factors to achieve the following results:

1. To rein in domestic liquidity growth. M3 growth is now down from above 30 percent to just above 18 percent in July this year. We expect M3 growth to continue on its deceleration path and reach more normal levels later this year.;

2. To help manage the financial stability risks of the over-all low interest rate environment. While we have not seen broad-based asset mis-valuations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield. So far, coupled with changes in reportorial requirements and macroprudential measures, the monetary policy actions appear to have achieved some success in moderating the buildup of “irrational exuberance” in certain market segments.;

3. To help steer inflation expectations Our most recent Business Expectations Survey showed that the number of those who expected inflation to go up in the current and next quarters has increased. In addition, our survey of private sector economists shows inflation forecasts that are precariously close to the upper end of our target range. This is particularly true of forecasts for 2015, for which the NG target is lower at 2–4 percent.Further, our own forecasts are also now higher. We now see 2014 inflation to average 4.48 pct, up from previous 4.33 pct, and 2015 inflation to average 3.79 pct, up from previous 3.72 pct. While most of the reasons cited for the heightened inflation expectations are due to supply side pressures, elevated expectations need to be addressed sooner rather than later. These could fuel second-round effects, which may be more difficult to arrest once they have set in; and

4. To reduce the possible financial stability impact of extended periods of negative real interest rates. Right now because of excess liquidity in the system, the industry doesn’t seem to mind much that real interest rates are negative. But ladies and gentlemen, when the tide turns, those projects that you may have “approved” based on a specific expected value may not provide you the “return” you anticipated. With this in mind, our policy actions have been aimed at helping you manage your own risk appetites.
Let me first start with a quote from the great Austrian economist Ludwig von Mises[20]
Where does inflation start? It starts as soon as you increase the quantity of money. And where does the danger point begin? That is another problem. The question cannot be answered precisely. People must realize that you cannot give a statesman advice: “This is the point up to which you may go and beyond this point you may not go, and so on, you know.” Life is not as simple as that. But what we have to realize, what we have to know when we are dealing with money and monetary problems, is always the same. We have to realize that the increase in the quantity of money, the increase of those things which have the power to be used for monetary purposes, must be restricted at every point. 


Look at the scatterplot chart above of money supply growth rates vis-à-vis CPI rates. The densities between developed and emerging markets (relatively low CPI and low money supply growth) and (high cpi and high money supply growth) emerging markets reveals of the generally positive correlation in the relationship between these two variables or higher money supply growth leads to high CPI.

The Philippines has been noted as extending out of the graph, hence operates as an “outlier”, i.e. having to have too much money supply growth but with suppressed inflation rates.

There are two reasons for this unrealistic inflation data; one is structural. This has been acknowledged by the BSP themselves, where regulatory obstacles have hindered market forces from being reflected on statistics[21].

The second is theoretical; by deliberately keeping inflation numbers suppressed this allows government to cap bond rates and consequently interest rates, therefore sequester invisibly a larger segment of society’s resources.

It’s for both reasons we can’t really depend on government statistics

Yet I have dealt with the supply side decoy or smoke screen for so long which I won’t elaborate here.

Anyway do note of the BSP’s evocative statement “the industry doesn’t seem to mind much that real interest rates are negative”. Yet the monetary authority doesn’t specify which industry/ies has been permissive of negative real rates.

Of course, why would industrial or household borrowers, who are beneficiaries of the negative real rates, complain of the transfer mechanism which they benefit from? The BSP should have asked the savers, the pensioners and the salaried class whose money have been losing purchasing power as asset and consumer prices skyrocket.

They should have asked me how my children’s tuition fees have soared along with food prices!

And take further note, “We expect M3 growth to continue on its deceleration path”.

Well, this isn’t likely to happen if the BSP doesn’t do its job of “real” tightening. By real tightening I mean squeezing out of excess liquidity in the system by bring real rates into positive territory. But can this spendthrift government afford to lose its foster a boom to finance public spending paradigm?

Leaving real rates negative via baby steps tightening will only whet the orgasmic borrow and speculate activities. The perception of scarcity (rates will rise tomorrow so borrow and spend now!) enhances this process. This will compound on the present financial instability risks!

And I just love this…”While we have not seen broad-based asset mis-valuations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield.”

Now read this: “Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities. Nevertheless, valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.

The second quote is from the Fed Chairwoman Janet Yellen[22]

So essentially the BSP chief parrots the Fed Chairwoman Janet Yellen who recently observed, valuation metrics in some sectors do appear substantially stretched, or in Mr Tetangco’s version, we have not seen broad-based asset mis-valuations.

Don’t you love the lack of originality???

Yet the BSP chief acknowledges what the Austrian economists have been warning about: “keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield.”

First of all bubbles have never been in the central bank’s dictionary. And because they are not in the dictionary, they have hardly any models built around them. So if there are hardly any models, they nary have a clue on what bubbles are.

Yet they can see or have been told of its symptoms. Either their acknowledgement of symptoms comes from pressure groups (say the BIS) or from their own is something no one can say.

But for the BSP chief to say low rates can result to misappreciation of risks represents music to my ears!!!!

Governor Tetangco has jumped to my ship and is now the nemesis of the bulls (for now)! If Mr. Tetangco means what he says then expect more interest rate increases.

He further notes “when the tide turns, those projects that you may have “approved” based on a specific expected value may not provide you the “return” you anticipated. With this in mind, our policy actions have been aimed at helping you manage your own risk appetites.”

This is what I have been saying for so long. All projects dependent on zero bound will be exposed for what they truly are—unprofitable ventures!

Here is the dilemma, Governor Tetangco mistakenly thinks that managing risk appetites will be an orderly process. That’s where he will be surprised. It’s not going to be orderly but a disorderly process.

The obverse side of every Mania is a Crash!

Stocks and real estate for example feed on each other. The fantastic growth in real estate sector for instance which has been funded by credit has led stock market investors to bid up their shares possibly on credit too. So credit has funded both overvaluations in stocks and in properties. If the BSP tightens significantly then all segments that has substantial gearing exposure, not just stocks and real estate will be jeopardized.

And then he will realize of what we have been saying, Potemkin Villages propped up by credit expansion will remain Potemkin Villages.

So eventually the disorderly adjustment will hit the real economy hard

Here is a prediction, the BSP governor will rescind and recant his hawkishness and turn dove again. But by that time, it will be too late.

The BSP’s chief volte face validates my earlier prediction[23]:
The BSP has been BOXED into a corner.

Option 1. If the BSP tightens then the whole phony credit fueled statistical economic boom collapses. So will be the destiny of free lunch for the Philippine government.

Option 2. If the BSP maintains current negative real rates or invisible subsidies via financial repression to the government through a banking financed boom, then stagflation will deepen and spur higher interest rates despite the BSP’s King Canute rhetoric.

So we are most likely to end up with Option 1 where economic reality via the markets will force the BSP to eventually tighten, or else God forbid, the Philippines suffer even a far worst fat tailed disaster: hyperinflation.
We are now firmly in OPTION 1











[10] Wall Street Journal Hong Kong Lenders Feeling Pinch of Bad China Loans September 29, 2014



[13] Amando M Tetangco, Jr: Infrastructure, inclusiveness, institutions –raising the Philippines to the next level speech at the Philippine Economic Briefing, Manila, 30 September 2014. Bank of International Settlements

[14] Bangko Sentral ng Pilipinas Bank Lending Standards Remain Broadly Steady in Q3 2014 October 3, 2014


[16] Bangko Sentral ng Pilipinas, Bank Lending Grew at a Decelerated Pace in August September 30, 2014

[17] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Rises in August September 30, 2014


[19] Amando M Tetangco, Jr: Convergence in a divergent world speech at the ACI Phils-FMAP-IHAP-MART-TOAP Joint General Assembly, Makati, 23 September 2014. Bank of International Settlements

[20] Ludwig von Mises Chapter 6 Inflation LUDWIG von MISES on MONEY AND INFLATION A Synthesis of Several Lectures p.24

[21] Loc cit September 15, 2014


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1 comment:

Anonymous said...

Hi Benson, any suggestions on how to prepare yourself financially before these happen?

4:15 AM

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