I can prove anything by statistics except the truth – George Canning (1770-1827), British Prime Minister
In this issue
Phisix 6,900: 3Q GDP Shocking Divergence: The Official and Untold Story! GDP of PSE’s Listed Firms Turn NEGATIVE in 1H!
-GDP is About Politics Not Economics
-Sadako Exposed: GDP Deflator Inflated 3Q 6.0% GDP! Deflator Masked the Current Priced GDP Slump!
-3Q GDP: OFW are Heroes No More, Contradictions on Consumer Spending GDP!
-3Q Industry GDP: Retail Trade’s Conflicting Indicators!
-GDP of PSE’s Listed Firms: 1H and 2Q Shrank as Income Growth Crashes!
-The Cat Is Out Of The Bag! Experts Admit Real Estate Slowdown, Security Bank Exits Property Business!
-BSP’s Property Index: No Cure to Internal Bubbles
-Interesting Tidbits: Phisix 3Q GDP Pump, China’s Bailout of Malaysia via 1MDB Sale, China’s War on the Finance Industry
Phisix 6,900: 3Q GDP Shocking Divergence: The Official and Untold Story! GDP of PSE’s Listed Firms Turn NEGATIVE in 1H!
GDP is About Politics Not Economics
For the average economic agent, GDP numbers should not be an obsession. That’s because while GDP attempts to measure overall health conditions of financial-commercial activities within a given state defined boundaries, aggregates can hardly capture accurately the ever changing motions of the millions of moving parts of a society.
In short, differing circumstances of every economic agent makes GDP largely irrelevant. Anecdotally, what would be the value of GDP to my neighborhood fish ball vendor or sari sari store owners? Essentially nothing.
It only becomes of value if political hands distort on the nature of existing commercial activities. Say implement political transfers, subsidies, regulations, mandates, prohibitions and or increase taxation on selected groups predicated on ‘economic data’.
For banks, GDP becomes of value when government institutes ‘credit easing’ financial repression policies. Why? Because such policy effectively represents a subsidy to them.
Besides, GDP represents past performance, and people purposely act to attain present or future goals. Plainly looking at GDP for guidance would assume trajectories based from the past, which makes any forecast susceptible to fat tailed distribution or events.
But because GDP is more than a measure of economic conditions, what transfixes the public’s attention, as indicated by media’s headline treatment to the said number, is that GDP is essentially POLITICAL.
After all, GDP was conceived for the purpose of raising funds to finance wars. Financing wars may not be the end goal today (depending on the government), but raising funds remains as the key incentive embedded for the GDP.
And as a supposed measure of economic conditions, GDP thus have been construed or sold to the populace and to international audiences as a gauge of success/failure of the policies implemented by the incumbent political regime.
So GDP will most likely be used as advertisement-publicity tools for politicians.
As example, when politicians want to look good through the perception of having ably and competently ‘managed’ the economy over the short term for popularity ratings or for elections purposes, all that would be needed would be to implement credit inflation (borrowing from the future) policies to spike a sensory perceptible boom that will be recorded and manifested through GDP.
For starters, politics is always about symbolism. And in the realm of politics, symbolism means to tinker with people’s impression or perceptions through superficial images.
And credit booms readily serve as tools for such political conveniences and or exigencies.
Depending on conditions of balance sheets, credit booms initially generate positive effects through economic numbers that will be backed by an asset boom. Positive economic statistics will feed on soaring asset markets and vice versa. Hence, such feedback mechanism will punctuate on the perception of ‘economic progress’ that provides foundations for positive political impression/aura/sentiment in favor of incumbent politicians.
Since the feedback loop between the direction of economic statistics and asset markets should hold sway on popular perception, these needs to be financed. And the best way to do this is to influence credit conditions through the implementation of subsidies to creditors.
At zero price, there is greater demand than supply.
Hence at zero price, a credit boom temporarily inflates economic statistical numbers (revenues, incomes, wages, earnings, rent and taxes) or the GDP. At zero price, a credit boom also provisionally inflates demand for assets. Higher asset prices are incorporated to economic statistics that indirectly contributes to GDP.
My point here is that GDP and credit conditions from easy money/ monetary accommodation policies are fundamentally entwined. And more than that, GDP and monetary policies are tools for politicians.
From the asset market perspective, GDP whets on the gambling and speculative impulses or the desire to seek fortune from free lunch policies. Abetted by financial intermediaries, GDP morphs into a fetish for gamblers to justify actions to overpay for assets.
For financial intermediaries, GDP enhances the capability of these institutions to wangle remuneration (fees, commissions, and etc…) from the public for their provision of intermediation services from the pursuit of such speculative activities.
All these signify as consequences from credit easing policies intended to provide justifications for personal and political objectives of the incumbent politicians.
All these serves to rationalize the existence of redistributionist-invisible wealth transfer policies in favor of the government and her cronies.
All these have been intended not only to buoy the political capital of politicians but most importantly, as originally formulated, GDP was engineered for politicians to gain access to public’s resources. Applied particularly in modern or contemporary times, GDP have been designed to help ensure easy ACCESS to cheap credit.
Easy access to credit is required to finance political spending.
Easy money policies not only translate to easy access to cheap credit, it entails lower costs for maintaining debt. To expand this thought; easy money policies provides INDIRECT subsidies to the government through inflated taxes as the private sector assumes the debt accumulation from a credit fueled boom. Thus, a credit boom inflates GDP numbers and government’s tax revenues.
Easy money policies provide DIRECT subsidies to government through lower debt servicing, and again, facilitates the government’s finances through availability of inexpensive debt channels. GDP, thus serve as a standard from which to establish the credit worthiness of a nation state.
And by the same token, credit ratings agencies assess on a nation’s credit profile through GDP! And this is why credit rating agencies, like every mainstream financial institution, provide forecasts on a nation’s GDP!
Ironically, since GDP has inherent and embedded political incentives behind them, GDP represents a self-measurement action by the government. This would be like asking a student to grade him/herself.
YET GDP is nothing but statistics based on aggregated surveys of various industries.
And like all surveys they can be prone to significant errors or they can be manipulated.
Such extreme sentiments suggests of radically or extremely dispersed views from a sample of the population derived from current policies, or of massive errors from such series of surveys or a combination of both.
And because the GDP contraption is a monopoly, the government can evince whatever it wants to project.
There hardly are any means for the public to scrutinize on the data quality or its data acquistion methodology, except to vet on the consistencies of its numbers or to question its assumptions and or to analyze the consistency of economic logic from its results.
Sadako Exposed: GDP Deflator Inflated 3Q 6.0% GDP! Deflator Masked the Current Priced GDP Slump!
For the lackey’s in both international and local media, confetti balloons and champagnes were popped and fireworks were lit to celebrate the alleged recovery by 3Q GDP.
For them, these numbers have represented hook, line and sinker THE reality.
Conversation by talking heads then focused on what those numbers allegedly reveal about ‘the economy’.
Again, there hardly have been efforts to investigate on the consistencies of its numbers or its assumptions, or the congruence of the logic behind such numbers.
Yet ironically what has been declared by the government doesn’t square even with their own indicators.
You see, the recent big negative headline numbers in exports and manufacturing barely even posed as stumbling blocks or barriers to the GDP. Instead, ironically these sectors actually CONTRIBUTED to G-R-O-W-T-H!
Yes, the government’s own numbers reveal of stupefying paradoxes. Just how can something negative become positive??? That would only be George Orwell’s 1984 world!
Apparently, it turns out that statistics can transform stones into bread!
The charts from the government’s PSA numbers reveal that, based on CURRENT prices, manufacturing growth (upper window) had been slightly NEGATIVE in 3Q.
Likewise, good exports had consistently been NEGATIVE for the past three quarters or from the start of the year, again based on CURRENT prices (lower window).
Just wave the magic wand and….boom, stones becomes bread!
How?
When adjusted for 2000 CONSTANT prices, the negatives suddenly morphed into positives! Thus, numbers that had been a drag mysteriously transformed into a booster!
In short, the shift from negative to positive was PRINCIPALLY due to the GDP deflator! Thereby, GDP deflator INFLATED the Headline GDP!
Behold the magic of statistical inflation!
Note that from the government’s numbers, manufacturing (both in current and constant terms) has collapsed from its peak 2Q 2014! (see green arrow). The remarkable difference between the two data has been the divergent trends. The growth number at current prices posted a negative, and a sustained downtrend, but GDP deflated constant numbers showed not only of a positive growth output but of a reversal in the downtrend!
To repeat, trend of GDP based on current prices have gone against or contrary to the trend of GDP based on constant prices!
The GDP deflator is actually represented by ALL goods domestically produced and weighted by market value of the total consumption of each good[1].
Although from the Philippine government’s definition, CPIs serve as anchor to the computation for GDP deflators: “The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures (PCE) in the calculation of the gross national product (GNP)”.[2]
And this is how the PSA-NSCB computes for GDP.
This leads us back to the 3Q GDP.
As one would note based on the government’s own data, since 2009 there had been NO instance where GDP based on constant prices grew faster than GDP based on current prices. Or to put in different context, traditionally GDP in constant prices TRAILED GDP current prices. Such relationship ended in 2Q 2015.
This time is DIFFERENT! Today’s divergence—where GDP at constant prices exceeded GDP at current prices—represents a MILESTONE! This represents A FIRST since 2009, or probably for an even longer period, (data I don’t have), or even perhaps, the first ever (since CPI is at record lows)!
Moreover, contra the headline bullishness, at 4.5% GDP current prices has been on a marked downshift from its peak in Q2 2014! (see again the blue trend)
Additionally, at 4.5% GDP current prices have plumbed to 2009 LOWS! (see green arrows)
Let me magnify the above perspective to cover 3 years instead of six.
As noted above, GDP at current prices has gone in the opposite direction to the GDP at 2000 constant prices!
To include the government’s measure of CPI (2006 constant), we find its relevance to the establishment of GDP.
We can see how the collapse in CPI (since Q3 2014) has resonated or coincided with the crash in GDP at current prices (since Q2 2014)!
Ironically, contrary to the developments of CPI and GDP current prices, crashing CPI has only magnified GDP or headline G-R-O-W-T-H via the deflator!
Thus, 3Q GDP has represented a statistical charade through the PURELY BASE EFFECTS from the near zero deflator which amplified GDP!
Remember, these are not my numbers. These are numbers from the government’s PSA. Anyone can go to the links I provided above to construct their own charts.
3Q GDP has hardly been about the economy but of the tweaking of price deflators to generate or inflate statistical G-R-O-W-T-H!
Absolutely stupendous!
Said differently, the government appears to have increasingly relied on forcing the CPI to dive in order to bolster GDP!
Once again, behold the magic of statistical inflation to deliver G-R-O-W-T-H!
Here’s a naughty question: has the government deliberately been crashing the CPI with the intention to inflate statistical headline growth?? Is this how GDP is grown?
And how accurate has the CPI been?
Sorry folks, statistical illusions does not constitute as anywhere close to reality.
3Q GDP: OFW are Heroes No More, Contradictions on Consumer Spending GDP!
Statisticians do not just come up with numbers; they have to present a visualized flow of these numbers in order sell a story from it.
What better tale than to imbed on the assumption that floundering prices, by virtue of GDP deflator, would result to new expenditure patterns, particularly a spending boom!
Given that HFCE, Household Final Consumption Expenditure, accounts for over 60% of expenditure GDP (66% in 2Q 2015), the biggest factor in determining changes in statistical GDP will be consumer spending.
So OFWs flows SHOULD play a vital role in ascertaining the government’s estimates of HFCE…
And for government to live up with its hype, the statistical Sadako will come in very handy.
In the 3Q expenditure GDP, HFCE contributed to 68.5% share of GDP (based on constant prices) from 66.6% in the 2Q 2015! As anticipated, for 3Q 2015, consumers were portrayed as delivering the gist of GDP G-R-O-W-T-H!
So by building on HFCE or consumer spending as the predominant GDP driver, government statisticians intuitively highlighted consumer related industries as the major beneficiaries from consumer activities.
Strong consumer spending equals service sector growth, Bingo!
The critical problem lies on the assumption built from these numbers.
The former pillar or key source of HFCE or consumer spending, OFW remittances, as I suspected, have virtually been relegated by government statisticians to the sidelines!
HFCE at current prices traditionally and consistently tracked remittance growth trend since 2009 (upper window). But this 3Q 2015, the collapse in OFW remittance growth rates SUDDENLY became a non-issue or even a nonevent! This can be seen from the explosion in the gap between HFCE and OFW remittances growth rates!
Just stunning! Sorry OFWs, but government statisticians took away your significance; they made you heroes no more!
This unusual or anomalous relationship can be further seen from the ratio of cash remittance growth to HFCE growth rates (lower window; based on current prices): where the former’s contribution to the latter’s growth rate have sunk to a record low—a mere .24%!
So based on 3Q government data, OFW remittances have become irrelevant or obsolete! Yet GDP became more dependent on consumer spending!
Income growth must have been growing substantially to supplant the developing slack from OFW remittances. Splendid right?
Question is, just which industries have functioned as the key source for such income growth (outside remittances)? Has BPO grown enough to fill in the void from the OFW remittance stagnation? From service sector perhaps, which depends on consumer spending? The effect has now become the cause?
Or just where has the public been acquiring funds for the alleged spending binge??? The BSP’s data on personal savings say that the few segment of the population with bank accounts have been saving and NOT spending in 3Q! Just when has saving money translated to spending money? Which of the two opposing actions represent the truth?
Apparently too, based on 3Q data, the implied assumption has been that manna just falls from high heavens to finance HFCE spending growth! Sadako economics rules!
So savings and spending can happen at time? Try it. Perhaps the money one spends on will just reappear on one’s bank accounts or pockets.
The grotesque contradictions don’t stop there.
Comparing HFCE at current and deflator adjusted or constant prices denotes of even more ridiculous inconsistencies (see lower left window)
There has been a developing absurd divergence between HFCE (based on current prices), which has been on a DOWNTREND, and HFCE (based on constant prices), where the latter spiked upwards to break Q1 2014 highs!
The widening of the divergent gap has nothing been short of astonishing!
So again, the government’s 3Q data suggests that the main source of consumer spending growth…was from the GDP deflator!
You see statistics can magically transform stones into bread!
3Q Industry GDP: Retail Trade’s Conflicting Indicators!
Next we move to the biggest industry contributor.
3Q GDP as noted above was illustrated as a populist story of “strong consumer spending equals service sector growth”
Seen from the sphere of statistics, IF HFCE was responsible for the expenditure GDP, then the service sector constituted the opposite side of the accounting ledger—the industry GDP.
Said differently, from the context of industry GDP, the significant G-R-O-W-T-H from GDP deflator adjusted numbers was most pronounced on the service sector.
Let me use retail GDP as example (see right window)
Among the major sectors, the trade sector provided the largest G-R-O-W-T-H with 7.7% current and 7.9% constant in 3Q GDP.
The sector’s share in the GDP basket (by industry) surged by .31% to 18.51%. The trade sector has narrowed its gap with the biggest contributor to the GDP (by industry) basket, the manufacturing sector, which lost .1% share to a mere 21.98% of GDP.
Yet the share of retail trade to the trade industry in 3Q was 80.48% current and 81.4% constant.
In short, retail trade carried the weight of the 3Q consumer spending boom from the industry GDP basis.
That’s the story the government wanted the public to see and believe.
But things are not what it seems, even from the government’s own numbers.
While both on the upside, retail GDP (based on current prices) have yet to beat Q1 2014 (orange horizontal line) highs even as retail GDP (based on constant prices) has significantly surged past Q3 2014 highs (green horizontal line)! Again, the point is that retail GDP growth numbers was inflated by the GDP deflator!
Yet seen in the context of HFCE compared with retail GDP (based on current prices), both have parted ways or have gone in different directions! While HFCE growth rates have been on downtrend since Q3 2014, retail GDP growth has been ascendant from Q4 2014, but still below record highs.
It’s only when seen from constant prices where both HFCE and Retail GDP beat 2014 highs. Again because of zero bound price deflators.
You see, it’s not just about defiant trends, but of the rampant inconsistencies and conflicting assumptions and conclusions derived from the government’s own numbers that backs the 3Q GDP.
As author of How to Lie with Statistics, Darrell Huff once remarked[4],
Many a statistic is false on its face. It gets by only because the magic of numbers brings about a suspension of common sense.
GDP of PSE’s Listed Firms: 1H and 2Q Shrank as Income Growth Crashes!
Just recently, I had been mystified by what seems as uncanny silence by the PSE to publicly announce the 2Q and 1H revenue-income performance of all firms listed at the exchange. So I asked[5]…
To reminisce, PSE officials rhapsodized and bloviated about the resplendent headline earnings during the 1Q even when the numbers generated were due to only just a handful of companies.
Gross consolidated revenues then, or the public’s spending on goods and services of ALL listed firms registered a paltry 1.6% growth. In short, the PSE’s 1Q GDP was only 1.6%, which patently contradicts the 5.3% 1Q GDP performance (based on current prices)!
Yet the revenues of listed firms accounted for 52% of GDP, back then. Considering that PSE’s numbers reflected on reported real economic activities, then these should represent the reality more than the estimates derived from aggregated surveys that constitutes the GDP.
As previously explained, the ocean of disparity reveals why government’s GDP was nothing more than a pump!
Well then, my suspicions seem to have been confirmed!
Not only has FIRST semester revenues of listed firms skidded to a shocking contractionary mode, net income of the PSE universe horrifyingly COLLAPSED!!!
Remember, 1Q income was up 14% while 1H income was just 2%! This means 2Q net income crashed by -10% to produce 1H’s positive but meager 2%!!!
Just awesome!
Here’s more. Again as noted in the above table, revenues for ALL listed firms fell .8% with PSEi member firms down 1.9%.
The PSE explained (bold mine)[6]: The total income of listed companies slightly expanded by 2.0% year-on-year in the first half of 2015. Data from the latest financial statements submitted by 244 out of 260 listed companies showed that their aggregate income totalled P321.18 billion, P6.18 billion higher than the P314.99 billion income recorded in the same period last year. Out of the 244 reporting listed companies, 177 posted net gains while 67 posted net losses. The increase in overall earnings performance of listed companies was primarily brought about by higher profit contributions of key business segments and subsidiaries.
More: Listed companies garnered a combined P3.26 trillion in revenues during the first half of 2015, a 0.8% decline from their total revenues of P3.29 trillion in the same period last year. The negative turnaround in revenues of listed companies was primarily due to lower sales of commodities as a result of lower prices and production
On the PSEi issues: The combined net income of companies comprising the PSEi amounted to P227.42 billion during the first half of 2015, 1.6% higher than their aggregate net income of P223.78 billion in the same period last year. The combined net income of PSEi companies represented 70.8% of the total net income of 244 reporting listed companies, lower than its 71.0% share to total income in the same period last year.
The PSE didn’t announce this on their website. Instead the above came from their monthly issue which are gated or for subscription only. In short, the PSE appears to have limited the spread of this downbeat or depressing information to subscribers only. [That’s if subscribers read them at all!]
PSE officials should be objective and neutral (value free) to the developments at the PSE. They should not be cheerleaders for any sides. Nor should they sport biases that would affect the way information is presented to the public. PSE information bears externalities. The information they generate affects people’s perception, thoughts and eventual actions.
Nonetheless, the suppression of bad news will hardly bury the truth or reality.
Yet the above numbers tell us that 27% of all listed companies essentially weighed on both revenues and profits of the 244 reporting companies. Though still a minority, internal decay has started to affect the headline numbers!
The diffusion of eroding fundamentals has likewise resonated with activities at the benchmark PSEi.
Since 70% of share weight of the PSE universe comes from the PSEi, then some of the biggest companies members of the headline bellwether have already been discharging symptoms of strains.
So while the PSE reported that 29 companies as having registered profits during the 1H, only 20 companies (two-third) reported improvements as against ten companies (one-third) which reported decreases.
Apparently, again, the underperformance of the minority has grown substantially enough to impact and encumber the overall conditions as manifested through headline numbers. This is also means improvements have been less than deterioration to account for the headline corrosion or the net decline.
Understand that PSE numbers are reported accounting activities of listed companies. And accounting numbers may show what they may not.
As previously noted, many major companies, particularly in the property sector, have issued considerable nominal profit growth figures in 3Q (but at materially declining rates). Unfortunately, despite the marvelous headline numbers, excess ‘profits’ extrapolated into insufficient cash flows. That’s because booked sales have accounted for uncollected revenues. Hence, property firms employed massive increase in the leveraging of their balance sheets.
In short, a lot of those accounting profits have signified as mirages from the money illusion brought about by financial repression policies. Once collection becomes a problem, this will expose on the fragility of the balance sheets of many of such highly levered property firms.
The table above exhibits on the sectoral performance of the PSE listed firms.
It shows that the downturn in net income has been largely due to sluggish activities of the to the biggest share weight contributors to the PSE: the holding (income growth +.4%, share weight to PSE 29.4%), property (1.9% and 15.3%) and the industrial sector (2.1% and 21.1%). The mining sector was the most downcast (-21.4%), but this industry carries a negligent share (2.1%) to PSE’s overall performance
Note: if the numbers are correct, then the ballyhooed boom in the property sector has signified as mere publicity hype! The sector only posted a 1.4% change/growth during the 1H! This also means that most of the gains registered by this sector has been funneled or has been concentrated to a few big firms, which have hardly been shared by the rest of the firms in the industry! It’s a marked sign of divergence—slomo deterioration (periphery to core dynamics) of the overall conditions.
A further note: Do remember that this represents the 1H activities. 2Q performance was absent in the PSE’s September report. And again, a radical downswing from 1Q’s 14% to 1H’s 2% income growth translates to substantial degradation of 2Q performance which I suspect involved many major PSEi firms. Again, in terms of fundamentals, PSEi firms accounts for 70% of the PSE universe share.
Again censorship will not conceal reality.
Moreover, the decline in 1H revenues and earnings was attributed to “primarily due to lower sales of commodities as a result of lower prices and production”. This means that the lackluster PSE activities had been CONSISTENT with government surveys on the national general decline of prices (CPI, general retail, general wholesale, construction material retail and wholesale and producers price index).
Importantly, this is a manifestation of how the demand curve slopes downward: demand has been nowhere to be found to offset supply pressures! (Again contrary to GDP numbers!)
And here’s why.
Given the 10 consecutive months of 30%++ money supply growth, which has been a product of years of sustained intense banking credit inflation, the attendant big jump in price inflation essentially increased the cost of goods and services for sale. And to compound on the miseries, higher costs had been met by tepid growth in demand (slowdown in income growth).
To recall, government’s CPI peaked at 4.9% in July and August 2014. (I believed that this number has been vastly understated). Likewise as proof of reduced purchasing power and of income slack, I have also shown the Bangko Sentral ng Pilipinas job-labor data for 2014 where job growth was a miniscule 2.5% and where real wages in NCR, home to one third of the labor force, has been NEGATIVE. (If CPI has been understated, then real wages has been overstated)
Thus, higher business costs in the face of relatively weaker demand engendered the negative 2Q and the languid 1H 2015 PSE performance.
Not to mention the ballooning EXCESS CAPACITY WHICH TOLL WILL BECOME APPARENT QUITE SOON. (see property sector commentary below)
Moreover, the previous spike in general economy inflation hurt consumer’s purchasing power, hence depressing demand which has now become evident through falling real economy prices. (This apparently is being addressed by the government through statistical massaging of numbers—see above)
In addition, the sustained spiraling of property prices has only increased business costs which have only added to the profit and to demand squeeze.
Now the mechanics of borrowing from the future to spike present GDP through massive misallocation of resources, incited by the BSP’s manipulation of the yield curve, has become remarkably visible as evidenced by spreading boomerang on corporate fundamentals!
Markets are a process. Hence, we are now witnessing the drawback from 10 consecutive months of 30%++ money supply growth with a time lag.
The artificial boom has clearly been fading. Guess what’s next? Well, my bet is that it is time to pay the piper!
Even more, PSE’s topline performance should at least compliment or coincide on government’s GDP declaration. The changes in topline accounts should show little variance and similar directional flows with government data. Apparently they don’t!
Understand too that PSE’s 1H gross consolidated revenues accounted for 51% of 1H GDP at current prices!
Again, the PSE’s 1H report represents street level activities. They are NOT numbers consequent from aggregated surveys conjured by statisticians.
And most significantly this means that the contraction of PSE’s GDP in 2Q and the anemic 1H growth, which significantly diverges from 1H GDP at 5.3% (current prices), reinforces my view that government GDP has hardly reflected on the actual conditions of the Philippine economy.
The government has only been inflating GDP through statistical skullduggery to project a showbiz economy for political goals.
Fascinatingly, the massive deterioration in corporate fundamentals came as the Phisix streaked through record upon record highs (8,127.28 last April 10) or early 2Q. Of course, such record landmark was partly attained on the back of unbridled market manipulations.
Amazingly too, such numbers evolved when media backed by their favorite experts fantasized that 2015 earnings would soar by 16%! Read again SIXTEEN PERCENT (16)!!! At 1H growth rate of 2%, this means 2H G-R-O-W-T-H should skyrocket by 30% to reach such chimera!!!
And during this period, I recall of ‘experts’ and their zealot adherents rambunctiously shrieking and superciliously yelling at the top of their lungs at internet circles about how this ‘time has been different’, and where such inflationary boom was seen as bound for supposed perpetuity.
Now reality has begun to reassert her presence. Unless there will be a deus ex machina, the worship of bubbles through misperception, misinformation, disinformation, mendacity, deceit, overconfidence, blindness to risk, economic sophistry and propaganda are being exposed as they are.
There will be a nasty and painful price for actions that had been based on erroneous catechisms.
And once again the wisdom of Sir John Templeton has been validated:
Bull markets are born on PESSIMISM, grow on SKEPTICISM, mature on OPTIMISM and die on EUPHORIA
The Cat Is Out Of The Bag! Experts Admit Real Estate Slowdown, Security Bank Exits Property Business!
The cat is out of the bag!
When the media launched an avalanche of ‘news reports’ on the real estate sector over a two week window last October, I smelled something fishy[7]
Intriguingly, why the sudden media blitz? Have there been strains in the industry to have prompted for this? Has there been an upsurge in skepticism for media to defend the industry by citing ‘experts’, or in reality, insider opinions? Or has sales been stalling?
In a news article on the Bangko Sentral’s new requirement for banks to report on quarterly housing loans and the proposed rolling out of residential housing index, one key industry participant admitted of falling sales during the said period: “property consultancy KMC Mag Group, Inc. in September said a recent drop in sales was not due to lower demand but to fewer projects launched.”
Validated at last!
So what had been presented as news then had actually been a barrage of press releases to promote real estate sector due to faltering business conditions.
And over the past weeks I have shown why the account of falling sales in the property sector has been true. Many property sectors have shown slower rate increases in sales growth. This includes Ayala Land and SM Prime as previously discussed here and here.
The claim that lower sales has been due to supply issues or “fewer project launched” seem specious, given that not only has inventory been soaring on the balance sheets of major developers, Global Property Guide in their 1H report bragged about the upsurge in new licenses: 5% open housing, 43.5% mid income housing, and the more than doubling of low cost condominiums. Only licenses of mid and high end condos fell by a slight 2.5%.
In other words, those huge increases in new licenses during the 1H should be enough to carry sales through the year.
The following day another article shows of how incongruent the claim of supply side obstacles has affected sales conditions.
Applied to rents[8]: (bold mine) AFTER a five-year upswing, office rental rates in Manila entered a period of slowing growth in the second half of the year in anticipation of major new supply in 2016, property consultancy Jones Lang LaSalle (JLL) said.
Though the major cheerleader of the property sector, JLL, rabidly denied that this represented a “coming downturn”, it’s clear that this hasn’t been one of supply shortages.
Curiously JLL has long rebuffed the issue of oversupply. Apparently reality has gradually been gnawing on their misbeliefs
And here’s more[9]: Moody’s mixed review on Philippine banks which it has tempered to “stable” comes with an interesting commentary: (bold mine) “While systemic issues appear unlikely in the foreseeable future, Philippine banks’ asset quality also remains vulnerable to exposure to highly leveraged developers and property projects that suffer from poor sales, Moody’s said, as many large conglomerates are also leading players in the real estate market. This raises concerns about the vulnerability of the banks to risks in interconnected sectors brought about by high credit concentration of large borrowers, which is a structural weakness,” the report read.
Well again I have been validated.
But unlike Moody’s, for me vulnerability out of “high credit concentration of large borrowers” translates to “systemic issues”. The difference is that such risks have not become apparent yet. Such risks are considered tail risks. They are largely ignored or downplayed but once it materializes, it would have devastating consequences—because the risk was unheeded or unanticipated.
And reading today’s conditions as signs of strength would signify as a patent misreading of risks.
As an aside, it’s interesting to note of the ostensible shift in media’s winds, from a blitzkrieg of press releases disguised as news, suddenly the spate of bad news on the property sector!
Nonetheless signs of growing fractures in the system are signs of a deflating bubble.
And I expect more stress to haunt the property sector.
Why?
Because as I have been pointing out, easy money policies have been creating artificial demand for properties through leverage. Easy money policies create the impression that people can spend more than they earn. So many people have been taking up more debt to buy assets that they eventually will find out they cannot afford to pay.
And because the supply side bore the impression that demand for properties will rise on a linear dynamic, based on the perpetuity of easy money landscape/policies, and from the misread that demand came out of income, they went on a frantic race to build inventories also financed by debt.
Moreover, given that much of the Philippine economy have been unbanked or has less access to formal credit system, this means the demand for the property sector may have hit a saturation point.
And because the government too via the BSP has announced to apply “macroprudential” policies of tightening its supervision or controls on real estate loans, sales will either be affected or supply side will have to resort to unconventional means, e.g. shadow banking, to provide the leveraging required for the unloading of the massive property inventories.
Moreover, given the conspicuous slowdown in the productive sectors of the economy, the stagnating OFW remittances, slowing credit growth which has been manifested in the cooling domestic liquidity, it’s apparent that all these will eventually affect demand for properties.
And more bad news for domestic liquidity.
Though a flattening of the slope of yield curve of Philippine bonds can be seen as a general trend, hardly any of them has reached an inversion. That’s basically due to serial furtive interventions by unseen forces to manage the spread with the implied purpose to widen these or to maintain easy money policies. Well this has somewhat worked until last week.
This week, the spread of the 10 year 3 year spreads have phenomenally inverted! Such inversions are signs of intensifying tightening in the financial system. And such tightening has most likely been brought by balance sheet constraints.
Financial tightness alone will be portentous for interest rate sensitive property sector.
Additionally, the real estate industry has most likely overestimated the price sensitivity of Philippine property sector consumers or speculators.
Industry people probably think that domestic consumers are too monied to be dense or insensitive (inelastic) to price changes. Yet such egregious misperception or cockeyed view of the markets will face a comeuppance soon.
After all, unless economics 101 have been rendered obsolete, the law of demand says that ceteris paribus (all things the same) when the price of a product increases, quantity demanded falls.
Given the recent significant surges in land and residential unit prices as recorded by the Bank for International Settlements during the 2014-15, such price spikes will likely affect demand.
And more inauspicious signs for property sector.
When Ayala Land abruptly announced a capex cut I asked[10],
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?
After ALI, a bank not only cut capex but announced a total EXIT from the property business!
From the Businessworld[11]: SECURITY Bank Corp. is divesting its majority stake in real estate company Security Land Corp. by yearend in line with a strategy to concentrate on its main business.
Let us put it this way, if the property business would remain as profitable as popularly seen then why the shift “to concentrate its main business”? Besides, at 19.06% share of total bank loans to the general economy (as of September), the property sector represents the largest client of the banking system.
So given the tight relationship of banks and the property sector, why has Security Bank decomposed on its horizontal integration on the property sector via its real estate arm Security Land Corp?
This should be an example of “demonstrated preference” or as per the great Austrian Ludwig von Mises definition of the concept, “that actual choice reveals, or demonstrates, a man's preferences; that is, that his preferences are deducible from what he has chosen in action”[12].
In layman’s term, actions speak louder than words.
Security Bank’s choice to exit the property business simply means a redirection of priorities. SB officials can say anything on their action, but the fact is that they have changed their priorities to exclude the property sector! This is hardly a bullish sign!
Will Security Bank reduce its exposure to real estate loans too?
Of course given the capex cut by ALI, and Security Bank’s exit, supply side growth will most likely slow too. But this would not be the reason for falling sales.
Aside from the factors I mentioned above, instead some of industry participants are starting to question the premises of the boom. And this is being shown or ventilated through actions.
BSP’s Property Index: No Cure to Internal Bubbles
It’s a curiosity to know that the BSP will launch a housing price index. It is as if this represents a novel idea. Many institutions as Global Property Guide, IMF and the Bank for International Settlements already provide such services.
Besides, property indices constructed by the government will be useless to spot bubbles or convince bubble worshippers and or regulators.
The reason is simple, most of them simply don’t understand, and more importantly, refuse to comprehend on the essence of bubbles.
Bubbles are not just about high prices, excessive valuations or high debt levels; these are symptoms and not the cause. Bubbles are about malinvestments spawned from the political tampering of money.
Like stocks, NO amount of expansion in prices or debt, will convince them that such assets have been in a bubble. Because there will always be some excuse/s or some statistical variable/s to rationalize price/valuation/debt surges.
And bubbles create multitudinous religion-like devout followers, who will staunchly defend the faith…no matter what. After all, pleasures brought upon by free lunches can be and have been very addictive. And addiction means resistance to change. And to wean away from such attachment would take introspection and will to change, which should be an arduous task
On the other hand, most regulators will deny bubbles with passion for the same political reasons behind the obsession to GDP…that’s until, of course, bubbles blows up.
In short, for an economy maladjusted by easy money policies, government price indices will not serve as a shield or will not provide immunity to the coming bust.
Interesting Tidbits: Phisix 3Q GDP Pump, China’s Bailout of Malaysia via 1MDB Sale, China’s War on the Finance Industry
Phisix 6,900: 3Q GDP Pump
Well the 3Q GDP pump went into motion.
The recoil from the 6,772 lows during the APEC shortened trading week plus this week’s preannouncement run totaled 4.22% of GDP pump!
Unfortunately this week’s early low volume three day pump was totally obliterated by Friday November 27’s Php 16 billion 1.93% dump! So the Phisix roundtripped to close the week almost unchanged.
Yes there won’t be a week without price fixing the Phisix, but I won’t be posting the charts anymore because they consume a lot of memory space.
Yet two interesting developments in the region
China’s Bailout of Malaysian Government via $ 2.3 billion Purchase of 1MDB’s Power Assets
The Chinese government bailed out Malaysia’s debt beleaguered and corruption plagued 1MDB (1 Malaysian Development Berhad) through a sale of its power assets to China’s state owned China General Nuclear Power for $ 2.3 billion. The ringgit surged by .75% this week.
Malaysia and the Chinese government sealed other deals last week even when other ASEAN neighbors, like the Philippines was openly criticizing China’s actions on the contested islands, according to Nikkei Asia.
China Government’s War on Brokerages, Missing Bigwigs and Ownership of 6% of the Equity Markets
In China, it’s hard to be part of the financial community especially if one takes action like short selling which eventually the Chinese government sees as politically incorrect. Why? Because of all of a sudden, bigwigs have gone missing! A list of missing persons from Bloomberg: Chief Executive Officer Yim Fung of Guotai Junan Securities Co., Lei Jie, the former chairman of Founder Securities Co., Chief Executive Officer Poon Ho Man of Hong Kong-listed China Aircraft Leasing Group Holdings Ltd and Chairman Xu Jun of Ningbo Zhongbai Co. a department-store operator
The Chinese government’s crackdown has not stopped with the chieftains of the industry. They have expanded to include the entire brokerages. On Friday, the assault on brokerage firms triggered a panic selling where Shanghai index cratered 5.5%. And interestingly, Chinese government’s rescue of the stock market makes them owners of 6% of the entire capital market!
[6] Philippine Stock Exchange Monthly September PSE.com.ph
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