Sunday, October 18, 2015

Phisix 7,550: Sorry Folks, But Declining Growth Rates of OFW Remittances Represents An Established TREND!

“We have Dodd-Frank and we’re in a bubble right now anyway,” Trump said, alluding to social media companies that he says have initial public offerings worth “billions” but “haven’t even made 10 cents.” Trump also accused Federal Reserve Chairwoman Janet Yellen of keeping interest rates low in order to shield Obama from having to leave office during a recession. “She’s keeping the economy going, barely,” Trump said. “The reason they’re keeping the interest rate down is Obama doesn’t want to have a recession-slash-depression during his administration.”… “You know who gets hurt the most? People who practice the American dream and did what should have been the right way — the people that went through 40 years of their life and saved a hundred dollars every week [in the bank],” Trump said. He paused, shaking his head before adding: “They worked all their lives to save and now what happens is they’re being forced into an inflated stock market and at some point they’ll get wiped out.”—Donald Trump on the US Stock Market-Economic Bubble from an interview with the Hill

In this issue

Phisix 7,550: Sorry Folks, But Declining Growth Rates of OFW Remittances Represents An Established TREND!
-Comment on Headline Quote and This Week’s Marking the Close
-OFWs Are Symptoms of Government Failure!
-Sorry Folks, But Declining OFW Remittances Represents An Established TREND!
-Why OFW Remittances Are Down: External Forces: The Saudi Arabian Case
-Implications of the Flailing OFW Remittance Growth Trend
-Harvard’s Carmen Reinhart, Goldman Sachs and HSBC Warns on Emerging Market Crisis!

Phisix 7,550: Sorry Folks, But Declining Growth Rates of OFW Remittances Represents An Established TREND!

Comment on Headline Quote and This Week’s Marking the Close

Disclosure: I am not a supporter of any US presidential candidates. The reason for the quote above is to exhibit on how financial bubbles have entered mainstream outlook to the point that populist politicians bring this up even during their campaign trail or even use it to generate political mileage.

Back to the Phisix.


As I have repeatedly been saying, trading at the PSE has undergone a massive transformation. From what used to be a rudiment function of ‘price discovery’ of capital markets, present day PSE has transmogrified into a political instrument. Such impudent mutation can be seen through the rampant use of “marking the close” or the price fixing of the PSEi index at the close. Intriguingly, the brazen use of “marking the close” comes in the face where such actions have been deemed as illegitimate, according to Philippine statutes. Apparently, political convenience has supplanted any form of self-imposed mandates to have accommodated or tolerated such unbridled unscrupulous activities.

Yet some of this week’s flagrant accounts:

Monday October 12’s 11.38 points gain was a product of a 24.23 point last minute pre-close pump which reversed ALL losses (see upper window). Said differently, a shocking 100% of the day’s index advance was a PRODUCT of price fixing of the index!

Meanwhile, 65% of Wednesday October 14th’s 88.67 losses (lower window) was due again to price fixing.

While upside headline price fixing stratagem has characterized most of the “marking the close” incidences, which essentially engendered the record Phisix 8,127, there have been minority incidences of downward actions.

Sustained use of price fixing means the impairment of the fundamental function of capital markets. It entails of a grave distortion of prices and of valuations and all of other subsequent actions from these which leads to the progressive decay of the essence of stock markets.

As I have been saying here, I will document on the brazen manipulations of the PSEi for historical purposes.

The wanton and shameless use of ‘marking the close’ somewhat resonates with the warnings of historian economist Charles P Kindleberger[1],
The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft embezzlement or fraud
I say ‘somewhat’ because Mr. Kindleberger looks at such misdemeanor as purely an outcome of market failure. Applied to the Philippines, I suspect instead complicity between political agents and their private sector factotums. The undeclared goal objective has not only been to inflame speculation during a boom but more importantly to attain political capital (in order to advance political careers), as well as, to justify politically induced wealth redistribution in favor of the government and their cronies brought about by financial repression policies under the masquerade of an illusionary stock market boom.

At the close of this cycle, perhaps some may come to realize on how manipulations, deceptions or even fraud have substantially contributed to the domestic stock market’s unhappy ending or tragic outcome. And most likely Mr. Kindleberger’s warnings will be confirmed when the emergence of panics will be highlighted by revelation of some swindle, theft embezzlement or fraud. A great example would be Brazil’s current bubble bursting episode which has set in motion a string of corruption scandals.

OFWs Are Symptoms of Government Failure!

Conditions of OFWs reflect on real state of the Philippine political economy. I am talking of an unorthodox or unconventional perspective here.

Let us put it this way, a real boom in the economy, which should be accompanied by REAL jobs and wage GROWTH should extrapolate to LOWER OFW activities (both in the context of flow and stock). Why go abroad when there is copious economic opportunities here?

Alternatively, sustained growth in OFW activities simply means real jobs and wage growth has HARDLY been sufficiently generated.

So despite the much trumpeted economic boom, OFW dynamics continues to grow. This only means that the ballyhooed boom has been limited to certain segments of the economy and NOT to the general economy.

So in contrast to the constant weaseling, fudging and equivocation by media, by political entities and by their private sector non-media allies, OFWs are symptoms of government failure, and importantly, of financially oppressed people voting with their feet.

As I wrote in 2012[2] (bold added)
The mainstream savors the romanticized notion that OFWs are the “modern day heroes”. In a way they are. Yet hardly any of these experts deal with why OFWs thrives and why they are heroes, outside of the context of $ remittances.

People seem to have mental blackout if we point out that today’s modern day heroes, the OFWs, like their shadow economy counterparts, have been products of unfree economies.

The remittance phenomenon serves as an incredible paradox: The lack of economic opportunities as manifested by high unemployment which has been the outcome of the towering walls of arbitrary regulations and the politicization of markets, has been offset through migration and overseas employment. Yet politicians and media glorify what in reality has been exposing on their flagrant mistakes of collectivization.

Yet the heroic part of the OFW is this; oppressive laws have not prevented them from finding ways and means to survive. So they go abroad and elude domestic government. This has been the part not seen by the mainstream. What has been mostly seen has been the dollars sent and social costs of parting ways with the family, a theme that has been assimilated in media (tv series or movies).
The OFW saga represents the unintended ramification of the peso’s travails from accrued government ineptitude and abuses. 


All the cumulative bromides spouted by mainstream schnooks on how a weak peso would enhance exports, tourism or consumption and have basically ignored facts. Yet as Aldous Huxley has warned, facts DO NOT cease to exist because they are ignored.

The slomo boiling frog crash of the peso from Php 2 to a US dollar in 1960s to 2004’s Php 55, has led to neither goods or service exports nor consumption boom. What it produced instead has been a diaspora of workers. And as with any action, the consequences from worker exodus come with unexpected social costs such as family separation, longing for parental care, abuses and so on…

Nevertheless, because such social costs are either intangibles (mostly indirect consequences) or substantially diffused as to account for statistical significance, such costs has mostly been subordinated to economic considerations (which again have been embraced as political accomplishments).

Yet in spite of the numerous social costs, survivorship has been THE priority for the household choice for overseas employment.

This dynamic has hardly changed today.

The 2009 pivot by the BSP to implement financial repression—negative real rates—policies in order to boost aggregate demand (a.k.a. boost domestic demand/consumption) and to lessen dependence on exports or external links, which represented ‘trickle down’ subsidies to the elites, have failed to reduce the incentives for struggling households to send family member/s for employment overseas.

There has been no better proof than Libyan based OFWs whom resisted government efforts to be repatriated in 2014, during the festering of the Libyan civil war. OFWs reportedly said they were better “dying as heroes” in war torn Libya than starvation.

I noted[3] of a quote by media that Libyan OFWs as having “better chances of surviving” there than in the Philippines. Such sentiment, in the stirring words of a government spokesman, OFWs “would rather take the chance. They think they have greater chances of surviving the war [there] than of surviving uncertainty [without jobs] here”

Striking irony isn’t it? A boom with little jobs, yet OFWs would rather risk dying from violence overseas than from hunger at home.

I further admonished of the domestic economic façade[4],
in a nutshell, the Libyan OFW episode brings to light the quality of the so-called economic boom. This accentuates signs of the deepening misperception by the cheery consensus that has backed the prevailing conviction supporting today’s one way trade in the financial markets.

When reality begins to shatter such forceful expectations, then trouble lies ahead especially for those blinded by overconfidence.
Here comes trouble!

Sorry Folks, But Declining Growth Rates of OFW Remittances Represents An Established TREND!

Unlike mainstream insight, OFW trends are subject to the fundamental law of economics.

This means OFW dynamics are also determined by the law of diminishing returns!


Given that OFW flows have grown faster than the population for decades, its long term growth rate has been diminishing. 

Yet only clowns in C-suites and their junior C-suite aspiring appendages, as well as their media puppets, will say that OFW growth rates can perpetually grow faster than the population! They must be thinking of a population of gremlins.

The reality is that OFW growth is bounded by domestic demographics. Simply put, population dynamics serve as natural limits to OFW deployments.

It’s partly true, that the current credit inflation aggregate demand stimulus bubble has somewhat reduced the share of OFWs to statistical GDP. But that’s because the credit inflation dynamics still has been in operation. Yet take away the credit inflation, the economic role played by OFWs should be larger.

Finally, OFW trends, as I have been repeatedly pointing out, must not be seen as operating in a linear route[5] as popularly held. That’s because OFWs, like other external based revenue earners such as BPOs, export and tourism, are levered to overseas dynamics or conditions.
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.
In other words, to see the Philippines as immune to external risks because of the assumption of the permanence of OFW remittance growth would serve as a fatal misread.

Paradoxically, OFWs have served as inspirational theme to the current credit inflation (borrowing from the future to spend to day) bubble.

Yet growth in OFWs remittances has hit a roadblock last August. For the first time since April 2003, OFW remittance growth has turned NEGATIVE!

From the Bangko Sentral ng Pilipinas[6]: (bold mine) Personal remittances from overseas Filipinos (OFs) totaled US$2.3 billion in August 2015. This brought personal remittances for the period January–August 2015 to US$17.9 billion, higher by 3.9 percent relative to the level posted in the same period last year…The US$2.3 billion remittances in August 2015, however, were lower by 0.8 percent compared to the year-ago level. This was partly due to the depreciation of some currencies against the US dollar, particularly the euro, Canadian dollar, and Japanese yen, which reduced the dollar equivalent of remittances sent from host countries.

As usual, the BSP applied headline prophylaxes to an adverse headline to say that August OFW “reached” X amounts. In addition, the disclosure focused on cumulative growth by clouding on monthly year on year contraction.



Meanwhile mainstream media immediately went on air to put a lipstick on the pig stating that negative growth in August was “small”, was a “single data”, or was an anomaly.

The above personal and cash remittance charts are from the BSP data.

Some statistical facts. 

In 2015, BSP’s Personal Monthly year on year data shows of THREE accounts of below .5% growth rates; specifically, January +.2%, July +.5% and August -.8%.

The same applies to growth rates on cash remittances during the same months, January +.5%, July +.5% and August -.6%.

So in 3 of the last 8 months (or 37.5%) OFW remittances growth has fallen below .5%!

On January’s lackadaisical growth I wrote last March[7]
It would appear that the law of compounding and diminishing returns likewise affects remittance trends. Nominal remittance levels have reached size and scale where growth rates have become incremental.

Yet January’s nominal remittance trend may have even broken its long term trend
Rewind one year back. November 2014’s personal and cash remittance monthly growth rates were at 1.5% and 1.8% respectively. 

Then I wrote[8], Both personal and cash remittances reveal of a sharp drop in remittance growth rate as of November on a monthly basis. It’s the lowest since 2009!

So for the past 12 months, there have been 4 accounts (or 33%) where personal and cash growth rates were below 2!

Do you see any small, single data or deviation here?

Both the BSP chart above reveals that growth rates have been on an inflection point or that growth rates have been descending since 2014 from the 2013 peak.




I expanded the charts of personal remittance data to cover the monthly growth rates averaged annually, as well as, the quarterly growth rates from 2014-2Q 2015.

The above charts punctuate on the August 2015’s predicaments:
-2014 remittance growth rates have plunged to 2009 levels (left)!
-4Q 2014 to 2Q 2015 monthly have plummeted from the 1-3Q of 2014 (right)!

The average annual remittance growth rates from 2009 to 2014 tallies at 6.86%.

Personal remittance for 1Q 2015 5.07% and for 2Q 5.4%. July and August’s growth rates were at .5% and -.8% respectively. So to achieve 5% September remittances should spike by an astronomical 15.45%!

Anything below that number would entail for a remittance growth rate of below 5%. Yet even at 5%, 2015 will be way (27%) below the 6.86% annual average!

But what happens if September and 4Q data will be as uninspiring July or August or even the 1Q and 2Q?


More luscious data. 

I expanded to cover ALL August Cash remittances monthly (left) and cumulative (right) growth rates from 2000 to 2015.

Whether from cumulative or from monthly both charts tell of the same story… Drumroll pls…the law of diminishing returns in motion!

Small? Single data? Anomaly?

Media and the establishment consensus have been in a massive state of denial of reality!

There are those who say that weak remittances signify an offshoot to weak peso.

Yet it’s totally misplaced to say that the weak peso contributed to the lethargic remittance growth, because the reality has been that a firming US dollar relative to non-US dollar pegged currencies has exacerbated an existing trend.

All the charts above indicate that August was barely an anomaly but a data point WITHIN an existing cyclical trend. Said differently, August data simply reinforced an ongoing dynamic or a trend!

August data didn’t emerge out of a strong USD/weak peso too!

I wouldn’t also dare suggest that a fall from 6% to 1% or even to 5% would be reckoned as “small” considering the billions worth of amount involved. That would be taking proportionality out of context! 

Well, but you know nothing can ever go wrong in the Philippines! And this is why shocks would seem inevitable.

Let us see things from the perspective of OFW stock.

Data from the Commission on Filipinos Overseas (CFO) say that as of 2013, the estimated stock of OFWs (inclusive of permanent, temporary or irregular) totaled 10.239 million.

The OFW’s three major global distribution as follows (in millions): US 3.536 (34.5%), Saudi Arabia 1.029 (10.04%) and United Arab Emirates .822 (8.02%). These three accounted for 52.56% of OFW employment in 2013.

Note that Saudi’s riyal and UAE’s dirham are PEGGED to the US dollar. Hong Kong, whose dollar is also pegged to the US dollar, has an estimated .201 million of OFWs or a 1.9% share. The euro has risen vis-a-vis the US dollar (USD-euro fell by 2.4%) in August. The Eurozone has .866 million OFWs deployed in the region for an 8.46% share.

This means that OFW share of employer countries that have been unaffected by the USD strength totals 62.92%.

Four insights from the above

One, ceteris paribus (or given all things equal), the downside factor from foreign currency effect of a strong US dollar on non-pegged, and non-euro currencies have been sizeable enough to offset whatever gains from OFW employment from the US dollar, US dollar pegged currencies and from Eurozone nations

Two, growth from the US dollar, US dollar pegged currencies and from Eurozone have been negligible or stagnant to have amplified the growing slack in domestic OFW remittance growth

Three, Philippines economy must be booming for job creation and job growth to have suddenly exploded. And this may have reduced demand for overseas employment, therefore the decline in remittance growth trend.

Fourth, since nothing exists in a vacuum, planet Mars must have opened doors for OFWs where the deluge of remittances will take years to reach the Philippines.

Seriously now. While I believe that first factor could have played a big role, I suspect that the second factor, the global economy could likely be the major unappreciated force operating behind the scenes.

Why OFW Remittances Are Down: External Forces: The Saudi Arabian Case

Last December I wrote[9],
Yet if oil prices remain at below the cost to maintain the GCC’s and oil producing welfare states which may end up with the cutting of social services, how far before Arab Springs or popular revolts emerge?

And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.
I will use Saudi Arabia as example. I have no direct updated data on OFW conditions in Saudi. But nonetheless I will use circumstantial evidence to support my theory.

Saudi Arabia is state of economic funk. As evidence, she has declared a cut on political spending in response to ‘record’ budget deficit, have been drawing from her foreign currency reserves to bridge this record deficit (forex reserves has plunged 11% from August 2014 highs), Saudi’s sovereign wealth fund has been selling equities (mostly European equities) also designed to shore up her government’s finances, and lastly, statistical GDP has been falling and has been expected to fall further.

Saudi’s plight has not entirely been about oil, but also about her huge welfare state. She has been an active geopolitical player in the Middle East where Saudi forces have been militarily involved in the Yemen civil war against Iran supported Shia Houthi insurgents.

And it has been more than Yemen. The Saudi Arabia government has long helped in the plotting of the overthrow of the Syria’s Assad regime which she has been forthright. 

Syria’s civil war, which is an extension of the proxy war between the US and Russia (aside from Ukraine), has become an enormous humanitarian disaster.

And Saudi’s anti Assad stance brings her directly against the alliance of supporters of the Syrian regime: Russia, Iran, Iraq and China which raises the risks of escalation of war in the region.

As side note, Russia’s Putin seems to have deftly used one of Chinese 36 military strategies (explained as proverbs) called ‘beat the grass to startle the snake’. Long suspicious that the ISIS may have been partly sponsored by the US*, Russia’s direct intervention has only exposed the US air war against ISIS as a farce.

*From Putin’s UN speech last September 28[10]: (bold mine) It seems, however, that instead of learning from other people’s mistakes, some prefer to repeat them and continue to export revolutions, only now these are “democratic” revolutions. Just look at the situation in the Middle East and Northern Africa already mentioned by the previous speaker. Of course, political and social problems have been piling up for a long time in this region, and people there wanted change. But what was the actual outcome? Instead of bringing about reforms, aggressive intervention rashly destroyed government institutions and the local way of life. Instead of democracy and progress, there is now violence, poverty, social disasters and total disregard for human rights, including even the right to life. I’m urged to ask those who created this situation: do you at least realize now what you’ve done? But I’m afraid that this question will remain unanswered, because they have never abandoned their policy, which is based on arrogance, exceptionalism and impunity.


Yet the Syrian war has brought US and Russian warplanes on very close encounters (from CBS News) early October, where a miscalculation can bring about direct confrontation between the world’s superpowers. God forfend what happens next!

Back to Saudi. Saudi Arabia has not just been in economic doldrums or embroiled in geopolitical controversies, domestic politics have likewise become unstable.

As predicted in 2011[11]: Lastly like a house of cards, once oil prices collapse, Saudi’s political leadership will most likely suffer from a political backlash which may end their grip on power.

Well, a senior Saudi prince, according to Guardian has “launched an unprecedented call for change in the country’s leadership” by publishing to letters “calling for the king to be removed.”[12]

In short, if my suspicions are correct, given the economic and political deterioration in the region, hiring trends in the Middle East may have been on a downswing.

Based on 2013, the Middle East accounts for 24.31% share of global deployment.

So aside from the population barrier, the size and scale reached by cumulative years of labor migration, the recent firming of the US dollar, geopolitical and related economic variables are likely forces behind the obstacles to OFW’s remittance growth.

While the artificial domestic economic boom may have may have contributed to the OFW declining trend, but it’s likely an inconsequential one.

My guess is that once the economic boom reversal happens, there will be another labor emigration stampede. That’s if there are jobs for them!

Implications of the Flailing OFW Remittance Growth Trend

The next question is what are the implications of stagnating OFW remittances?

I alluded to the sudden appearance of many vacant retail spaces at major shopping malls to November 2014 and January 2015’s dissipation of OFW remittance growth.

As I have noted above, OFWs have become the titular inspirational icon behind the race to build supply side: namely, shopping malls, casino-hotels, vertical condos, finance and housing.

Given what seems as deepening trend of OFW growth reduction, what will happen to the cumulative supply side inventories (mall spaces, hotel rooms, condo units, housing and loans extended) built on expectations that OFWs trends are unbreakable and has been set on a stone? What happens to all the massive amount of debt that has financed the one way positioning on the real economy?

Will BPO’s be able to sufficiently replace the growth slack generated by stagnating remittances? Yet are BPOs immune to the world economic conditions, domestic politics and geopolitical forces????

Exports, manufacturing and prices of everything else in the real economy according to government measures as CPI, general wholesale and retail, construction materials wholesale and retail, producers price index have been on a streaking slump! FDI’s have stagnated too. Only imports have recently rebounded. But that’s after a string of declines. The latest import rebound as stated last week has most likely been about restocking*, positioning for Christmas, foreign exchange effect, and likely frontrunning in anticipation of an even lower peso.

*Given that both sources of supply, manufacturing and imports have stalled, inventories must have been depleted to require replenishment.

And if government’s data have been anywhere accurate, all these seem to indicate that the real economy have been plodding too. Will income growth from these industries fill-in the gap from OFW remittances????

Yet the only thing booming have been high end properties and stocks!

How about the stagnating remittance effects on US dollar supply, GDP and earnings? 

Again, will tourism and BPOs amply cover for the deficiencies in US dollar supply generated by trade deficits and from the sagging OFW remittances?

Propagandist media boldly asserts that the Philippines will NEVER run out of US dollar supply. But what happens if the world economy turns for the worst where remittances and exports will be joined by tourism and BPOs? Will US dollars just fall from heaven? Or will BSP stop printing peso and print US dollars instead? 


How about GDP? The mercantilist bias built into the computation for GDP means trade deficits extrapolate to GDP reductions. So that’s one negative. 

True, government spending on infrastructure supposedly zoomed in August. But government spending accounts only for only about 15% of expenditure GDP. And that’s statistical growth not real growth. It’s really growth for the pockets of cronies, politicians and bureaucrats and not for the public.

Yet given that the kernel of 5.6% 2Q GDP has been mainly erected from consumers which accounted for 66%, which ironically came even when remittances have been struggling, the question now is where will the Philippine Statistics Authority (PSA), and its underling, the National Statistical Coordination Board (NSCB) get HFCE G-R-O-W-T-H if September remittances fails to deliver 15.45% for a quarter growth of 5%? 



As BSP data as seen above suggests, growth in personal savings appears to be accelerating! August data appears to have jumped by 10% year on year. Although only a small segment of the Philippines are banked where only 15% of the population has savings in banks, according to Findex, surging savings means less consumer spending!

So who will be spending? The underprivileged whose incomes most likely depend on OFW remittances??? The informal sector, whom has recently been financially strained from 10 successive months of 30+%%% money supply growth???? The still booming property prices which are likely to add to the rental/overhead costs of businesses in the face of weakening demand?

And has resident consumers, with access to the formal banking system, been saving due to rising perceived economic and financial uncertainties?

Curiously where will GDP G-R-O-W-T-H, an aggregated survey constructed statistical number, come from?

Of course, aside from horror movies, Sadako have become very useful especially for statisticians, especially for the domestic variety.

How about corporate earnings of PSEi?

Most of the business models of the PSEi’s 15 biggest market cap issues have catered to the mythical impervious domestic consumers.

With relevance to my first or original question, with lethargic OFW remittance growth, with a seeming downdraft in the real productive economy, and with soaring savings rate, where will the financing of consumer spending come from to buy all big ticket inventories coming from the race to build supply?

How will these affect top line, and subsequently, the bottom line of most of the 15 biggest market cap firms?

Will most of the 15 biggest market cap firms be in a capex cutting spree?

Yet why the panic buying spree of outrageously overpriced equities where valuations have been premised on the easy money growth days of 2012-13? Because people love to fight the last war (rear view mirror effect)?

Of course, today’s panic buying spree has occurred with vastly diminishing volume. This implies lesser or weakening belief on the G-R-O-W-T-H mantra. 

And I would suspect a lot of the volume comes from manipulators and their handy recruits of ‘greater fools’.

Harvard’s Carmen Reinhart, Goldman Sachs and HSBC Warns on Emerging Market Crisis!

It has been a fascination to see global stocks race back to old highs in the face of a stream of bad news. It seems that all it takes for this to happen is for a connected media personality to whisper that the FED won’t be raising rates. Such whisper would then spike the proverbial stock market punch bowl.

It’s as if all bad news will have little bearing not only on valuations but on debt, liquidity and access to credit.

Monetary cocaine has not only been very addictive it works well to lobotomize reason.

But even with the FED on stay, Asia’s currency markets haven’t been entirely convinced that the strains have been over. The ringgit, rupiah and interestingly, the peso underperformed and defied the general currency trends in Asia. 

The USD-Php rose by .39% this week to 46.05.

As the late great baseball legend Yogi Berra once said, It’s ain’t over ‘til its over!

Now comes one of the key author of “This Time is Different”, Harvard’s Carmen Reinhart to warn of the growing risks of an emerging market crisis.

At the Project Syndicate Ms. Reinhart writes[13], (bold mine)
While no two financial crises are identical, all tend to share some telltale symptoms: a significant slowdown in economic growth and exports, the unwinding of asset-price booms, growing current-account and fiscal deficits, rising leverage, and a reduction or outright reversal in capital inflows. To varying degrees, emerging economies are now exhibiting all of them.
She worries more about Emerging Markets’ hidden debts…
In short, though emerging economies’ debts seem largely moderate by historic standards, it seems likely that they are being underestimated, perhaps by a large margin. If so, the magnitude of the ongoing reversal in capital flows that emerging economies are experiencing may be larger than is generally believed – potentially large enough to trigger a crisis. In this context, keeping track of opaque and evolving financial linkages is more important than ever.
Well she surely sounds like me!

And it’s not just Ms. Reinhart. THE politically influential Goldman Sachs thinks that emerging markets are the third wave of the current financial crisis[14].
 

The financial crisis can be viewed as a number of separate but related waves. Wave 1; the US Wave started with the housing market collapse, spread into a broader credit crunch and ended with the Lehman collapse and the start of TARP and QE. Wave 2; the European Wave began with the exposure of banks to leveraged losses in the US and spread into a sovereign crisis, given the lack of a debt sharing mechanism across the Euro area. It ended with the OMT, promises to ‘do whatever it takes’, and finally the introduction of QE. Wave 3; the EM Wave coincided with the collapse in commodity prices.

The buck doesn’t stop with Goldman, HSBC jumps into the bandwagon!

HSBC throws in the bullish towel to announce that due to EM risks they too have become risk averse![15]
Monetary policy in the post crisis period has been like one giant blanket that has kept investors sheltered from the stiff breeze of structural stagnation. This blanket has also encouraged investors to move further and further into riskier assets. In effect, risk premia has slowly been pushed down. The eurozone crisis and now the EM crisis highlight that depressed risk premia are unlikely to unravel in a slow and gradual manner. Rather, once risk premia reach unsustainable levels, then only one proverbial straw will break the camel’s back. At the moment, EM assets are in the maelstrom of this unravelling…Going into year-end and looking at the financial landscape for 2016, we cannot help but remain highly risk averse.
It’s interesting to see how mainstream institutions seem as falling over each other to announce the likelihood of a global recession. 

More…

Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management sees recessions as cyclical and likely to reach within arm’s length, “Recessions follow expansions like nights follow day…We've experienced a global recession once every seven to eight years over the last 50 years. The last time we had that was '07-'08, but that was an extreme outcome. This [current] global expansion is in its seventh year, so we have to be careful[16]

And so with David Rubenstein, cofounder and co-CEO at The Carlyle Group who declared on Bloomberg that a US recession is “inevitable”, "We have not really had a recession in six years…We came out of the last recession in June of 2009. We tend to have recessions every seven years, more or less in the United States, since World War II. So at some point in the next year or two or three, you can expect a recession."[17]


Even Moody’s in last week’s outlook thinks that the risks of a US recession has risen, “Given the maturity of the current business cycle upturn, the latest deceleration by core business sales hints of rising recession risk”[18]

It is NOT my intent to use the above quotes as an appeal to authority.

Instead, for me the above represents a vital turnaround in the opinion of some of the major international establishment institutions on the global economy and of global markets.

Ideas also run from the fringes to the mainstream or periphery to the core phenomenon too.

As final note, in the past I have written that there are social implications to a market meltdown[19]
So a sustained market downturn will not only translate to losses, social frictions will likely follow.

Actions have consequences.


[1] Charles P Kindleberger, Manias, Panics and Crashes, A History of Financial Crisis, Third Edition, p.66











[12] The Guardian Saudi royal calls for regime change in Riyadh September 28, 2015

[13] Carmen Reinhart The Hidden Debt Burden of Emerging Markets Project Syndicate October 9, 2015

[14] FT Alphaville Goldman does New Wave October 12, 2015



[17] Ibid

[18] Moody’s analytics Stagnant Sales Reduce Rate Hike Odds October 15, 2015

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