Sunday, September 20, 2015

Phisix 7,100: Downgrades Transforms into Capex Cuts! More Signs of Cracks in the Philippine Property Bubble!

The actual aim of the flood of laws restricting or even prohibiting the use of cash is to force the public to make payments through the financial system. This enables governments to expand their ability to spy on and keep track of their citizens’ most private financial dealings, in order to milk their citizens of every last dollar of tax payments that they claim are due. Joseph T. Salerno Why Government Hates Cash

In this issue

Phisix 7,100: Downgrades Transforms into Capex Cuts!  More Signs of Cracks in the Philippine Property Bubble!
-Snowballing Downgrades: Ayala Land Suddenly Slashes 2015 Capex by 20%!
-Media Ignores the Risk from an Increase in Rural-Coop Banks NPLs, Why This Matters
-More Cracks in the Property Bubble: Philippine Housing Credit Growth Tops the World in 1Q 2015!
-July OFW Remittances Slump, But BPO to the Rescue! Says Media
-The Other Face Of Financial Inclusion Is Financial Repression, BSP to Launch War On Cash!
-Asian Currencies Rally On Expectations of a FED Stay; Thailand and Malaysia Launches Stimulus
-PSEi 7,100: 3.2% Rally on a Low Peso Volume; Major Shifts in Index Heavyweights

Phisix 7,100: Downgrades Transforms into Capex Cuts! More Signs of Cracks in the Philippine Property Bubble!

Snowballing Downgrades: Ayala Land Suddenly Slashes 2015 Capex by 20%!

Last week I wrote, “With the huge variance between government G-R-O-W-T-H numbers and establishment expectations, then more downgrades should be expected.[1]”

Well, it appears that G-R-O-W-T-H downgrades have not been limited to the forecasting aspect on media headlines. Real consequences have emerged even at the corporate world.

The Philippines largest real estate company, Ayala Land (ALI) has reportedly slashed its capital expenditure budget by about 20% from the initial Php 100 billion earmarked for the year.

The fascinating thing is that company officials seem to fudge on the reason for such abrupt decision by citing technicalities.

Here is a statement by an ALI official on the capex cut as quoted by Businessworld: “We just want to prioritize. We just want to make sure that we tighten the actual spend to keep our debt at a certain level, but not at the expense of affecting our projects…It’s more of rationalization of spending, especially on land acquisitions.” Hence, the recent move was more about implementing “tighter cash management.”[2]

Prioritize spending? Tighten cash management? Hasn’t there been a real estate boom juggernaut that should entail of an avalanche of cash from property sales and rents that should be more than enough to cover debt servicing and to finance expansions?

Besides, why worry about cash flows or to keep the firm’s “debt at a certain level” when G-R-O-W-T-H, as have been popularly assumed, would ALWAYS be there? 

Yes, why the sudden parsimony??? (!)

Could it have been perhaps that the series of recent downshifts in the headline G-R-O-W-T-H projections has influenced on their outlook and thus the subsequent action to pare capex? Could it also have been that despite the published numbers, the firm’s actual performance maybe lower than expected? Or could it have been both?

Or the kernel of it, has ‘tighter cash management’ really been a euphemism for LESSER G-R-O-W-T-H expectations???

In today’s world, truth must be shunted aside for what is politically correct. And of course the politically correct du jour theme is state of nirvana that has allegedly been attained. And any imperfection or blemish would be denied! So the technical gibberish.

Yet what seems forgotten is that lesser investments should translate to diminished earnings G-R-O-W-T-H (all things equal)!

So given the firm’s present price levels, which had been frantically pumped and pushed by manipulators this week, lower earnings growth should compound on its ridiculously exorbitant valuations! As of September 17, based on PSE data, Price Earning Ratios (PER) was at an incredible 33.38! And as of Friday, PBV was at a fantastic 4.16 (based on PSE July 2015 report where book value was at 8.42)! A mature real estate company priced for perfection!

Yet has this overvaluation not signified a serious “misalignment in asset prices”?

Alternatively, could it have been that all the recent spate of money raising activities at the capital markets had been intended, not for capex, but for boosting the interests of insiders?

But again, without selling G-R-O-W-T-H then there would be less appetite by the public to finance future fund raising. So G-R-O-W-T-H will be THE main issue.

Yet the capex cuts won’t likely stop here.

More questions to expand such thought. Will ALI be the only real estate company to trim on its capex? Or has ALI lit the proverbial fire of a seminal bandwagon? Or asked differently, will there be other firms in the industry that will be following suit?

Will capex cut backs be limited to the real estate sector or will this spread into the other industries too? 

What happens if cut backs on capex evolves or progresses into a national phenomenon? Will this not reinforce the ongoing slowdown in the statistical G-R-O-W-T-H or the GDP momentum?

And what would be the conditions of the built-in or accumulated leverage in the system when the G-R-O-W-T-H materially recedes? Will Non Performing Loans soar further?

Where will the much ballyhooed consumer spending growth model get its financing once the tapering of capex will result to lesser investments and therefore reduced jobs? And how will the few resident consumers continue with their spending binge once banking system tightens as consequence to a G-R-O-W-T-H downturn? 

Finally, given the current string of current and prospective downgrades, what then justifies valuations at current levels? 

Will HOPE serve as worthwhile strategy in managing one’s portfolio?

These are interesting developments that have been fundamentally ignored by the establishment consensus.

Yet the feedback loop between debt overload and slowing G-R-O-W-T-H has now reared on its ugly head!

Media Ignores the Risk from an Increase in Rural-Coop Banks NPLs, Why This Matters

Has ALI’s decision to prune capex also been influenced by this?



The above represents the media release section from the Bangko Sentral ng Pilipinas website.

Two things of note from the above: one, NPLs from Rural and Coop Banks and two, remittances both of which I highlighted in red and green rectangular boxes respectively 

First, signs of the spreading Non Performing Loans (NPLs)

From Google search, I found only three media outfits that seem to have covered the NPLs of Rural and Coop banks, particularly Philstar, Interaksyon and Manila Times.

Interestingly, either rural-coop banks have been considered as an insignificant sector unworthy of mention or that most of media have decided to drop or censor the BSP disclosure because it would NOT fit the “This Time is Different” boom story.

Yet little is understood that developments at the rural-coop banks are RELATED to the general banking system.

And here is the official disclosure from the BSP[3] (bold mine): The gross non-performing loans (NPLs) of rural (RBs) and cooperative banks (CBs) represented 12.04 percent of the banks’ total loan portfolio (TLP) at end-March 2015. The latest NPL ratio increased marginally from the 11.85 percent posted at end-2014, the lowest quarterly NPL ratio recorded by RBs and CBs since end-September 2012. The rise in the NPL ratio was because gross NPLs grew by 2.17 percent while TLP increased by only 0.51 percent. Among economic sectors, the largest recipients of loans from RBs and CBs at end-March 2015 were agriculture, forestry and fishing; wholesale and retail trade; loans to individuals for consumption purposes; and real estate activities. To mitigate credit risks, the banks also set aside loan loss reserves amounting to 57.56 percent of their gross NPLs at end-March. The figure is marginally lower than the 58.30 percent posted a quarter earlier.

Lower credit growth vis-à-vis ageing soured loans (NPLs) growth has exactly been the same dynamic that has underpinned the bulging of auto and real estate loans in 1Q 2015 in the universal commercial and thrift banks, as I wrote last week.

During the past 2 quarters, auto and real estate NPLs have been growing faster than total loan growth. In 1Q 2015, auto and real estate loan NPLs have virtually grown at par and or has overtaken total credit growth.

While the BSP reported subdued NPL numbers for universal-commercial-thrift banks, this was largely due to credit card, salary loans and other loans which offset the ongoing degeneration of auto and real estate loans.

But the camouflage will not last.

Statistics should be understood, and not swallowed hook line and sinker.

As refresher, the NPL ratio comes with a time asymmetric significance[4]:
Total portfolio loan growth has been derived from newly acquired loans during the stated period. However, NPLs have emanated from loans acquired from the past that have gone sour during the abovestated reporting period…

The point is that for as long as new loans outpace growth in NPLs then the statistical metric of loan coverage on NPLs will remain depressed even if NPLs have been growing.

And because NPLs have represented ageing loan portfolio performance, any slowdown in new loan growth will magnify NPLs. In addition, because of the furious pace of new loans growth rate, today’s big growth in loans will become tomorrow’s NPLs.
Such time asymmetric significance tells us why NPLs will become a banking system problem: “today’s big growth in loans will become tomorrow’s NPLs”


Based on the BSP’s consumer finance survey report of 2012[5] which covered 2009 housing loans, rural-coop banks played the second largest private sector providers of finance for homeownership, after money lenders. 

However given the current credit boom, the distribution mix of housing loans must have changed to favor the core banking institutions.

But the point is: Rural and coop banks should still play a very important role in housing loans particularly in Areas Outside the National Capital Region (AONCR)

Nonetheless even the latest numbers underscore its significance. From the BSP Chief’s pitch for financial inclusion in a speech last July[6]: (bold mine) 47% of Filipinos borrow money, of whom 72% borrow from family, friends and informal lenders. Banks as source of borrowing stood at only 4.4%, lower than lending/financing companies (12%), cooperatives (10.5%), microfinance NGOs (9.9%) and government entities (6.1%).

Said differently, ongoing developments at rural and coop banks looks likely a manifestation of the radically changing conditions in the domestic banking system.

Yes, this looks likely as the Philippine or localized version of the periphery (rural-coop) to the core (universal-commercial-thrift) transmission phenomenon.

And because rural and coop banks seem as more vulnerable, hence the incipient signs of NPLs rising “slightly” or the initial headline appearance.

Simply stated, rural and coop banks are likely the initial symptoms of banking system’s progressing entropy.

And as seen in rural-coop banks, rising NPLs has commenced to nibble away at the loan loss reserves. As NPLs swell, the foundations of loan loss reserves erode.

Yet what happens if the NPLs spread or diffuse to overcome total credit growth at the core? And importantly what happens to the so-called solid ‘capital buffers’ once asset values fall along with a sustained rise in NPLs?

More Cracks in the Property Bubble: Philippine Housing Credit Growth Tops the World in 1Q 2015!



And why shouldn’t NPLs balloon at the core of the Philippine banking system?

This shocking data from IMF’s Global Housing Watch reveals that in 1Q 2015, the Philippines grabbed the lead or held the tiara for the fastest housing real credit growth year on year in the world!!!!!!!

This practically squares with the BSP’s study on land prices in Makati CBD and Quezon City which reportedly zoomed by 25% and 10% respectively.

This comes at a time when stocks had been repeatedly pushed to record upon record highs.

Ironically this represents the same period when statistical GDP have been revised down to 5% which is far from mainstream’s expectations of 7%!


This period also marked the collapse of general liquidity as measured by M3 and a stunning dive by CPI!

It also highlights on the moderation of general banking system credit growth that had been concomitant with soaring auto and real estate NPLs!

Yet understand the statistics. Realize that the numbers backing credit growth of different nations are NOT THE SAME.

There have been only a few sections in the population with access to the formal system’s banking housing mortgage facilities.

Unless those IMF numbers represents growth in the context of mostly the percolation of credit growth in the population, the implication is that only those few with access to the banking system have been gorging on expanded credit volume to have prompted the explosive growth rates in 1Q 2015 that topped the world!

The BSP’s own numbers on the formal banking system hardly supports credit growth based on penetration level. The BSP defines a formal account “to an account held in financial institutions such as banks, cooperatives or microfinance institutions and can be a mobile money account as well”[7]. Based on the BSP and World Bank’s Findex estimates “3 million new accounts were opened between 2011 and 2014”. This implies of a penetration level of 31.3% of Filipino adults with formal financial accounts in 2014 which grew by 17.7% from the penetration level of 26.6% in 2011.

Since it took FOUR years to enroll 3 million people or increase the formal banking system’s penetration level by 4.7%, hence it is unlikely for 1Q 2015 housing credit growth rate at about 15% to account for mostly an increase in the population’s penetration level.

Note on statistics: I’m referring to the bank formal accounts and not access to housing or mortgage credit which should even signify a much smaller number.

Alternatively this means that, again, housing credit expansion have been based on mostly on existing accounts in financial institutions. The same accounts have been frantically anteing up on their speculative bets on real estate, financed by imbibing more and more credit volume.

Said differently, those awesome rates of housing credit growth represent a deepening of concentration of credit risks to the few with access to the formal banking system!


Given the recent slump, the appeal on domestic stock markets for punters appears to have waned. So the speculative focus seems to have shifted instead to real estate. 

The Global Property Guide reported that for the 2Q, inflation in Philippine housing prices (based on Makati 3 bdr condos) have again snared the fourth spot in the world! Housing prices ballooned by 7.91% (nominal) or 6.61% (inflation adjusted)! That’s a lot more than the 2Q statistical GDP penciled at 5.6%!

Nominal housing prices have been about 50% more than pre-Asian crisis levels. Those zero bound rates have gravely inflated property prices in the name of G-R-O-W-T-H.

Of course, demand alone does not entirely account the ballooning credit. Price levels also influence credit volume. This means that the higher the property prices, the more money will be required to acquire them, thus greater demand for credit.

Yet the slump in systemic liquidity and CPI in the face of soaring property prices and housing credit only suggests of two developments: Lots of the fresh credit have been used to pay for exiting debt, and lots of new credit to finance property speculation!

Yet hardly has new money found its way onto productive investments (which represents the key driver for economic growth)! Hence the widespread price slump in the real economy.

When the BSP report on 1Q land prices came out, I wrote[8],
But in the 1Q, concomitantly with 1q real estate, the PSEi was pushed to a string of record highs.

In other words, while the statistical economy, and most likely, the real economy have materially been slowing, the toys for the big boys have become the object of intense speculative actions.

It is perhaps a reason why prices on the general economy have been on a downfall as rampant speculations on asset markets have substituted real economy investments and consumption activities in 1Q 1015.
Current dynamics suggests of a continuing trend: rampant speculations on asset markets that has substituted real economy investments and consumption activities! No bubble eh?

Sad to say, rip roaring price inflation in properties have NOT been signs of a sound economic model. Instead, such are symptoms of an artificial unsustainable boom, where past and present demand has been borrowed from the future.

And since all actions have consequences, such borrowed demand will have to be paid for, again, in the future. But the future has arrived! This means that the fantastic run on property prices represents the ‘terminal phase’ that portends of a coming reversal…sooner than later. 

To apply economics 101, the law of demand tell us that as the price of a product increases, quantity demanded falls. Applied to property (ceteris paribus-all things being equal), a sustained rise in the trajectory of property prices decreases affordability or reduces the pool of potential buyers or shrinks the market size.

(Have ALI officials come to realize this?)

And because property speculation entails expanded use credit, increased volume and deepened banking system’s exposure to the sector extrapolates to heightened credit risks from which banks themselves—in response to growing NPLs and or in view of an economic slowdown—and or the government, will eventually have no choice but to put a rein on them. And when they do so, speculation and economic activities which supported all these should grind to a screeching halt. Consequently, this means a KIBOSH on statistical GDP and SURGING NPLs.

Additionally, skyrocketing property prices have been occurring in the face of a current economic downturn. This should mean LESS and LESS headline support for demand. And it’s more than just the headlines. There should be real economic repercussions. Diminished liquidity from a downturn means the monetary spigot for speculative activities will tighten. And a tightening means reduced funds available for speculation.

Moreover, reduced income from an economic growth downshift extrapolates to less money for speculation or reduced demand for big ticket items.

To sum it up, 1Q 2015 provides a rich insight of the diverging conditions of Philippine economy which exposes on the heightened fragility or what seem as the terminal stage of the domestic real estate bubble.

The four divergent signs: The “slight” rise in NPLs in rural-coop banks in conjunction with rapid deterioration of auto and real estate banking portfolio. Meanwhile, housing credit growth boomed along with a breathtaking surge in housing prices, both of which hugged international headlines.

Such divergences wonderfully serve as progressing symptoms of what the IMF calls as the “buildup of unsustainable economic imbalances and misalignments in asset prices”

As always divergences, which represents unseen or tacit conflicts of internal economic forces, will eventually find resolution via convergence.

July OFW Remittances Slump, But BPO to the Rescue! Says Media

The second BSP headline issue that I would like to deal with relates to the July remittances.

The BSP headline says “Personal Remittances Reach US $15.7 billion in January-July 2015”. The BSP once again conceals or sanitizes what has been a negative development. When G-R-O-W-T-H underperforms, they substitute the headline with “reach x amount”.

A headline from a business news outfit was more candid. The Businessworld Online bannered, “Weak peso causes remittances to barely grow in July”. The secondary lines noted that remittances “grew at the slowest pace since at least 2010”


Of course, it is hardly accurate to say that the weak peso “caused” remittances to barely grow. Correlation isn’t causation. 

Nonetheless, I commend the Businessworld for their attempt to report facts.

Both monthly growth rates in Cash and Personal remittances dived to just .5% in July.

This marks the second time this year where remittance growth was subdued at a rate less than .5%. The first was in January.

Besides, declining OFW remittances looks like an ongoing trend.

It’s simply a revelation that at current levels, the law of diminishing returns has been affecting OFW dynamics.

There are limits to everything…BPOs included!

What’s more. July’s OFW remittance data essentially debunks the poppycock peddled by the establishment that the lower peso will not only increase spending power of remittance recipients but also encourage OFWs to send more remittances!

The BSP’s disclosure exposes on the why: “This is partly due to the depreciation of currencies in their host countries against the US dollar, which reduced the dollar equivalent of their remittances.[9]

Get that? Since OFWs have been dispersed throughout the world, they are mostly paid by their employers in local currencies of their host nations. And since US dollar have been surging against most currencies of the world, the conversion of OFW revenues in local currencies to US dollar meant LESS US dollars.

So instead of G-R-O-W-T-H, the strengthening US dollar means lower remittances sent!

The establishment fundamentally frames their rose colored arguments on US dollar aspect of remittances. But they have been blind or purposely omit to see the effects of the strong US dollar on the SOURCE of remittances.

As I recently wrote: Revenues of both OFWs and BPOs are SOURCED externally. This means OFW remittances depend on the INCOME of foreign employers. BPOs revenues depend on the INCOME of foreign based principals. This likewise means that the economic, social and political CONDITIONS of the nations serving as HOST to foreign employers and foreign principals essentially determine indirectly the REVENUES of OFWs and BPOs.

However, like the BSP, some in mainstream media have been afflicted by a deep state of denial such that instead of directly reporting the slump in July OFW remittances, they write about how BPOs will substitute for the deficiencies of OFW remittances.

This Inquirer article writes with a halo effect on government projection on BPOs growth trends: Finance Secretary Cesar V. Purisima earlier said that BPO revenues were on track to eclipsing remittances as the economy’s main source of strength. By 2017, the BPO industry is expected to rake in $28.9 billion from a projected $21.2 billion this year.[10]

Well haven’t the Philippine government been missing a lot of their recent targets? Haven’t their GDP G-R-O-W-T-H, CPI and even tax collection objectives been askew? So what’s the probability that current trend will continue? Because the government say so? Proof by assertion?

Additionally, to write about BPO eclipsing remittances in 2017 signifies a non sequitur. Reason? July remittances (recent past) is different from BPO in 2017 (future). One is a fact, the other is an estimate. Apples to oranges.

Also, July remittances signify as the strawman which the BPO has been erected to crush! Awesome reporting!

And here is a stunningly absurd statement: (bold mine) Due to the stable supply of dollars from recurring sources such as remittances and outsourcing, the economy never runs out of dollars needed to pay for imported goods such as fuel and food, and for foreign debt payments

Huh? For someone to claim with the adverb “never” means two things. The person has attained God like omniscience or has been infected by overweening confidence on things which the writer has really been clueless of.

Like all human activities, BPOs are subject to changes in demand and supply. The supply side of BPOs are dependent on many fluidly variable factors such as political, legal, labor/manpower, wages, input prices, infrastructure, competition and many others. A significant change in one or two of them may alter whatsoever comparative and competitive advantage the Philippines holds today. For instance, soaring taxes, or skyrocketing wages or a war with a neighbor will likely reduce the appeal for BPO investments or operations.

India used to be the lone powerhouse of BPOs, that’s until the Philippines got into the fray. Yet India holds six of the top ten in BPO destinations with 2 from the Philippines, one from Poland and from China based on the 2015 rankings by Tholons

The same applies to the demand side or the clients or principals of local BPOs, where any major changes in the conditions of their host nations or on global conditions may affect BPO investment or operations. For example, a global recession or depression may likely upend or delay the BPO boom.

Nothing is set on the stone.

Even more laughable is the credulous attempt to bloviate at the endless boom without explaining the complex entwined relationships of the BPO industry, demand and supply of dollars and coordinating function of the USD-Php exchange rate on demand and supply, except to assume on it. Economic reporting with the absence of the role of prices! Yet a silly conclusion! How marvelous!

Yet whatever happened to the other US dollar revenue earners tourism or exports, have they ceased to exist? 


If the economy has sufficient dollars then US-Php wouldn’t have risen. Despite this week’s rally, the USD Php is still up 3.8%. 

Additionally, GIRs (supply of dollars) would not be in a decline. Yet never ending supply?

This should serve as a sterling example of propaganda material that has been passed off or masqueraded as a news report.

Now back to July remittances. With another sharp fall in remittance growth rates, how will this boost consumption? Pray for December? What if USD continues to strengthen? Wait for Godot? And what if Godot remains absent, what happens to the perpetual fountain of consumer spending?

And how will this affect the delirious race to build supply side? Vacant stores at shopping malls will be called “renovation”?

Or will consumption growth, like Sadako, just jump out of the computer terminal?

The Other Face Of Financial Inclusion Is Financial Repression, BSP to Launch War On Cash!

Last July, the BSP launched the Financial inclusion program which they call as National Strategy for Financial Inclusion (NSFI). In coordination with 12 other agencies, the said program’s ultimate goal is to achieve “inclusive growth”. This mainly through the provision of “effective access to a wide range of financial products and services”[11]. Lately they added “financial education and consumer protection”[12] to the ambit of the means to attain such ends.

So the BSP lists or enumerates a litany of why financial inclusion is needed. It includes the numbers of people with no bank accounts, untapped savings at households, credit access outside the banking system and etc...

In short, NSFI signifies nothing less than a political rhetoric with a simple objective: Transform the informal economy into the formal economy regulated by government.

As a side note, theoretically I am in favor of such financial integration. However, theory is different from practice. Yet like any tools, social policies can be used for or against the interests of its constituents.

So despite all the supposed idealistic supporting goals of “shared economic development”, “uphold social cohesion” and “reduce income inequality”, none of this will be the outcome.

Why? Simple because of demonstrated/revealed preference. Or action speaks louder than words.

No less than current or incumbent policies tell us why such idealistic financial integration goals will not be used for the benefit of the public.

First, there will be no “shared economic development”, “uphold social cohesion” and “reduce income inequality” with policies that promotes the interests of political agents and their cronies, through trickle down policies. From the BSP Chief last May, “While the trickle-down approach to spread the benefits of development is good, it is not enough; we want to be more proactive”[13]

The trickle down approach or the picking of winners through political means entails imposing coercion against the very people it purports to protect. This drives a wedge on beneficiaries relative to the non-beneficiaries. For now, the pseudo economic boom has kept social order seemingly tranquil. But this will change once the bust cycle gets reinforced.

Furthermore, the competition to wield the government’s machinery itself will be extrapolate to social division (everyone wants to rule), fragmentation (us against them) and corruption (use any means to win). It’s not just about money, it’s about power. And the struggle for power represents a boilerplate for the ventilation of schism through violence.

Second, there will neither be “inclusive growth” nor even “consumer protection” from financial repression, particularly negative real rates policies. Again from the BSP chief in a September 2014 speech: “Right now because of excess liquidity in the system, the industry doesn’t seem to mind much that real interest rates are negative”[14]

In a speech at Deputy General Manager, Bank for International Settlements, or the central bank of central bankers, Hervé Hannoun explains negative interest rates[15]: In essence, the monetary stimulus aims to lift short-term growth via five main channels: by boosting credit to the real economy (the credit channel), by lifting asset prices (the asset valuation channel), by forcing investors away from safe assets towards riskier ones (the portfolio balance and risktaking channels), by lowering the exchange rate (the exchange rate channel) and by attempting to nudge inflation up towards objectives with a view to warding off a so-called deflationary spiral (the reflation channel).

In other words, negative rates represent an invisible redistribution program that benefits borrowers as against savers, and pension holders (“boosting credit”), a subsidy on asset owners (“lifting asset prices”) as against non-asset owners, as well as support for foreign currency holders (“lowering the exchange rate” and “nudge inflation”) as against domestic currency holders.

None of these comes for the benefit of the average citizens. Instead all of these work against the average residents.

Such kind of redistribution program has vile consequences. Even the patron of inflationism recognized of its evils. From John Maynard Keynes[16] (bold mine)
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.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
The reality is that instead of “inclusive growth”, the unstated goal of financial inclusion is to wage “war on the informal economy”, where the ultimate goal of the government is to capture efficiently resources from the public through its financial tentacles, the banking system.

I predicted that the financial inclusion will lead to a “war on cash”[17].
Bankrupt governments will do all it can to seize resources from its constituents. Given that the banking system functions as the main depot of the economy's monetary resources, then the banking system will serve as the main channel for this.  As a quote widely attributed to American felon Willie Sutton, he robbed banks "because that's where the money is"

On the initial phase, government interventions will be benign. This will be through the imposition of taxes, fees, other surcharges and "persuading" clients to invest in securities of government and of their cronies.

Then, the next phase will be through INDIRECT confiscations. Such will be channeled through monetary policies inflationism (Zero bound, or negative interest rates and QE) and war on cash (limits to cash transactions).

And when the conditions becomes dire, appropriations will shift to DIRECT means: capital controls, deposit haircuts, and as the above, the expropriation of money stashed at the banking system's safety deposit boxes.
The war on cash has apparently arrived on the Philippines.

As a side note, the move to ban hoarding coins represents an earlier war on cash.

From the government mouthpiece, the Inquirer: THE DAYS of using physical cash to pay for nearly anything and everything that consumers buy may soon come at an end. Regulators are set to release by yearend a “constitution” for cashless payments in the country, covering rules that private sector stakeholders such as telecommunication firms and “plastic” money providers should have to adhere to. Bangko Sentral ng Pilipinas (BSP) Deputy Governor Nestor A. Espenilla Jr. said the goal would be to turn cell phones, and debit and credit cards as the main modes of payment for most Filipinos, even for those buying small items at community sari-sari stores (convenience stores)[18].

So from zero bound, the BSP now shifts to “cashless payments” via mobile banking as a medium or platform to force an integration of the informal economy with the government. Remember, like hard selling salespeople, the presentation or the focus has always been on the benefits. The cost is presented as zero. The sad part is that people will belatedly discover that the costs will be greater than the benefit.

To apply the analogy of Dr. Jekyll and Mr. Hyde, the other face of financial inclusion is financial repression!

Asian Currencies Rally On Expectations of a FED Stay; Thailand and Malaysia Launches Stimulus

As I have been saying here, NO trend goes in a straight line.


So Asian currencies found an excuse, through the US Federal Reserve’s action to stay the course, to bounce back. This is with the exception of Indonesia’s rupiah.

Based on the official quotes from Friday’s close the USD-PHP fell by 1.01% to 46.415 as against last week’s 46.89.

Based on Bloomberg’s weekend quote the peso was even lower at 46.27. Hence the bigger USDPHP loss above. But based on four other fx quotes I follow, the peso was weaker at 46.5. So we will just see what happens on Monday.

Anyway, the crashing ringgit finally found a breather. Based on Bloomberg’s quote Malaysia’s ringgit rallied 2.79%. I guess this should be official that’s because this number had been confirmed by the news.

Well this week’s rally can be considered a relief rally that has been most likely based on short covering. However, I expect the US dollar to continue to eventually firm up again.

There are lots of denials on the likelihood of an Asian crisis 2.0. But again instead of looking at merely statistical numbers, actions of politicians illustrates a lot of undeclared conditions of respective economies.

The Thai government, according to Nikkei Asia[19], announced an emergency 136.3 billion baht ($3.86 billion) stimulus package aimed at improving the long-ailing economy by spurring domestic demand. The package consists mainly of public investments in rural areas and what is in effect a subsidy to those in low-income brackets

Heck, what’s the “emergency” all about?

Meanwhile, the beleaguered Malaysian Prime Minister Najib Razak’s administration likewise declared several measures last week. These included a US$4.6 billion stock market rescue fund, mulls of a mandate to repatriation of earnings worth 500 billion ringgit ($115 billion) of state owned investment funds as well as blue chip companies, ponders to abolish import duties on 90 items and domestic spending worth 6.77 billion ringgit (US$1.6 billion) by Malaysian government's investment holding arm, Khazanah Nasional on various industries, specifically tourism, hospitals, BPOs and creative industries.

Curiously why all these rush to support the stock market and to engage in political spending?

Finally, the US Federal Reserve’s decision to keep rates as it is, which was based on “recent global economic and financial developments” means that the September Fed liftoff issue is history. Yet if Asian currencies weaken again anytime soon then please don’t blame the Fed’s potential December rate hike.

The Indonesian rupiah failed to respond positively to the Fed’s stay. The currency’s loss has extended for the tenth week, “its longest losing streak since 2000” according to Bloomberg. Well, the sustained run on the rupiah simply exhibits a domestic disorder that has little connection with the FED’s liftoff.

Back to the Fed. The Fed has clearly been cornered. They are unlikely to raise rates in 2015. Yet by citing global uncertainty, US stock markets reacted unfavorably post Fed decision. So by keeping on its interest rate stance, the FED indirectly wanted to support the stock market, however, bringing up concerns over global certainty seem to have backfired. Such unintended consequences puts into spotlight the Fed’s diminishing credibility.

As a side note, Ms Yellen turned down negative interest rates as path for present consideration, but she opened the Fed’s doors on this for the future: "if the outlook were to change in a way that most of my colleagues and I do not expect, and we found ourselves with a weak economy that needed additional stimulus, we would look at all of our available tools." Using negative rates is "something that we would evaluate in that kind of context," Ms. Yellen said.[20]
The immediate risk is one of the return of investor risk aversion on a global scale. And a medium term risk is one of a global recession at zerobound.

And a recession at zerobound will be one for the books.

Should this happen then this means central bankers have lost their magic.

This time is different! (In the context of central banking)

PSEi 7,100: 3.2% Rally on a Low Peso Volume; Major Shifts in Index Heavyweights

Apparently, the index managers found a second wind to finally break the string of 7 weekly losses.

The PSEi soared by 3.19% over the week again on another low volume pump.

Officially peso volume traded swelled to a huge Php 94 billion or an average daily volume of Php 18.8 billion, but that’s because of special block sale worth Php 59.23 billion of cement company Lafarge Republic Inc.

Publicly listed Aboitiz Equity Venture along with Irish partner CRH Plc, under investment vehicles, AEV CRH Holdings, Inc. and CRH Aboitiz Holdings, Inc bought about 88.85% of the company’s shares held by Calumboyan Holdings, Inc., Lafarge Holdings (Philippines), Inc., Round Royal, Inc. and South Western Cement Ventures, Inc. The AEV-CRH partnership also bought other minority shareholders via a tender offer.

The special block sale constituted 91% of the week’s volume. Excluding this, the average daily volume was at measly Php 6.956 billion.


The oversold rebound was broad based. All major indices posted gains. But the bulk of the advances came from the property sector which was led by SMPH. SMPH skyrocketed by 14.03% over the week to set a new record!

These are spectacular signs of desperation to attain record highs in the face of current economic conditions! 

This week’s major pumps had been concentrated to a few major index sensitive issues. Aside from SMPH, BDO posted +7.18% while AC +7.42%.

The other major gainers looked like cameo performers: EDC +17.12%, FGEN +9.59% and DMC +6.0%, actions of which seem to characterize a bear market’s sucker’s rally.

Among the 30 PSEi issues, 19 issues gained while 9 issues posted losses. Two were unchanged.

At the broader markets advancers took the week with a clean slate. Advancers routed decliners by a margin of 164. However, this comes after 6 of 8 weeks of intense selling.

Yet this week’s activities caused SMPH to leapfrog in terms of market cap weighting (see right).

As of Friday, SMPH holds the fourth spot from about 6 or 7 last week. Curiously four of the top 5 issues belong to the SM and Ayala group. The four issues carry a weighting of an astounding 30.69%!

This comes as PLDT’s share continues to swoon.

Moreover, two of the top 5 are property companies from the SM and Ayala Group. Yet more signs of a manipulated pump? And, ominous signs of times?


The index managers backed by the bulls have been attempting to fill the gap created by the August 24 crash.

While technically speaking the breakout of 7,100 has been successful, it has failed to convincingly establish new grounds.

Yet those early intraday pumps during the last three sessions have all failed to maintain their gains for the day. (charts from Bloomberg)

And what used to be an afternoon delight pumps initiated by manipulators had now reversed into dumps, including the spectacular ‘marking the close’ dump last Friday.

In other words, there seems to be quite a substantial number of sellers at 7,100 and above. And the inability by manipulators and their bullish cohorts to generate significant volume makes 7,100 a sturdy resistance level.

Besides, manipulators may have exhausted themselves from last Monday’s incredible low volume (Php 4.56 billion, Php 5.18 billion including block sales) panic buying pump that climaxed with a marking the close which accounted for 38% of the day’s gains!

Yet the imposing gains some of the majors, SMPH, BDO and AC makes them equally vulnerable to a steep downside move.

Finally the PSE tells us that there are only about 640,665 direct stock markets accounts in 2014 where 95.3% are retail accounts. This leaves 29.892 accounts or 4.7% representing institutions.

These numbers tell us that market prices on the margin are determined mostly by the 4.7% or the 29,892 institutional accounts who deliver the bulk of the market’s volume.

The thin number of population of participants reveals why the PSEi can easily be manipulated.



[2] Businessworld Online Ayala Land reins in land bank spending, cuts capex September 18, 2015

[3] Bangko Sentral ng Pilipinas NPL Ratio of Rural and Coop Banks Rises Slightly September 15, 2015


[5] Bangko Sentral ng Pilipinas 2012 Consumer Finance Survey based on 2009 BSP.gov.ph

[6] Amando M. Tetangco, Jr. Opportunities in Financial Inclusion and Financial Integration Bangko ng Sentral ng Pilipinas July 21, 2015



[9] Bangko Sentral ng Pilipinas Personal Remittances Reach US$15.7 Billion in January-July 2015, September 15, 2015

[10] Inquirer.net BPOs seen to surpass OFW remittances September 17, 2015



[13] Amando M. Tetangco, Jr. Acting Together for Financial Inclusion May 20, 2015

[14] Amando M. Tetangco, Jr Convergence in a Divergent World September 23, 2014

[15] Hervé Hannoun, Deputy General Manager, Bank for International Settlements Ultra-low or negative interest rates: what they mean for financial stability and growth Speech at the Eurofi High-Level Seminar, Riga, 22 April 2015

[16] John Maynard Keynes, The Economic Consequences of the Peace by John Maynard Keynes, 1919. pp. 235-248. PBS.org




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