Sunday, January 31, 2016

Phisix 6,700: Ferocious Bear Market Rally Pump; 4Q and 2015 GDP’s Cosmetic Numbers

The problem is that fear is a negative, dangerous, and potentially explosive emotion. It can easily morph into anger and violence. Exactly where it will lead is unpredictable, but it’s not a good place.—Doug Casey

In this issue
Phisix 6,700: Ferocious Bear Market Rally Pump; 4Q and 2015 GDP’s Cosmetic Numbers
-Global Acute Stress Response: From Flight to Fight or From Fear to Greed
-Fight or Flight: The Fading Effect of Central Bank Magic on Global Equities
-From Flight to Fight: Phisix Race to 6,700 was a Product of a Coordinated 6 Issue Pump!
-Bear Market Rally: Big Weekly Gains Signal More Volatility Ahead!
-January Bear Market Losses Presages NEGATIVE Annual Returns!
-The Direction of GDP is NOT EQUAL to the Direction of PSEi!
-4Q and 2015 GDP Improvements were Principally Based on Price Deflators!
-2015 GDP: Soaring Credit Intensity Underscores Heightening Credit Fragility

Phisix 6,700: Ferocious Bear Market Rally Pump; 4Q and 2015 GDP’s Cosmetic Numbers
Global Acute Stress Response: From Flight to Fight or From Fear to Greed
Don’t you know that fear can actually be source of violent reactions via the survival instinct called “flight or fight” response or the “acute stress response1”?
If you haven’t noticed, the magnified upside and downside volatilities encompassing today’s marketplace looks very much like ‘flight or fight’ or acute stress responses. And why shouldn’t there be vehemence, when financial markets have essentially been utterly deformed in order to serve the interests of political agents and their cronies?
Moreover, ‘acute stress response’ also underscores the path of contemporary monetary policymaking.

When markets exhibits signs of ‘flight’, as evidenced by the recent stock market crashes in the Middle East and in China, the entry to the bear markets by key equity benchmarks of Europe and Japan, the worst 10 day start of the year performance in history for US stocks as with bear markets of several key US benchmarks as the Russell 2000, the Dow Transportation Index and the former darling the Biotechnology Index, the reflexive government response to market ‘flight’ has been to impose policies designed to ‘fight’ the ‘flight’.

Essentially, former Fed chief Ben Bernanke’s prescription that “History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse2” has emerged to become a de facto central bank standard to avert ‘deflation’ or an economic meltdown.
And panicking central bankers have been all over during the past two weeks in the frantic attempt to quash the ‘flight’ from acute stresses in risk assets.
ECB’s Mr Draghi dangled more subsidies to the stock market in citing that they will “review - and possibly reconsider - monetary policy at the next meeting in early March”, the previous week.
This week the US Fed backpedaled on their hawkishness to cite “global and financial developments” as the reason to stay on their policy stance.
Meanwhile, the Chinese government announced that they had injected a record liquidity in three days of market operation last week to the tune 690 billion yuan (USD$ 105 billion). Media imputes such infusion to the coming New Year week long holidays. But the holidays are slated for February 8 to 13, which means next will see normal operations. And the likelihood is that the PBOC will inject more.

And the biggest show of them all, for this week, has been for the Bank of Japan where Governor Kuroda announced on Friday a complex, three tiered, Negative Real Interest Rate Policy (NIRP) which emerged out of a split decision within its board.
Thus I predicted last week3,

So with central banks behind their backs, and provided that the central bank magic can be sustained, then this should be a big week for the bulls.
For the BOJ, the experimentation with negative real rates means that all the previous QEs have virtually failed!
In the marketplace, the failure to satisfy consumers would lead to financial losses. Sustained losses would induce insolvencies and or to the cessation of operations or the closure of the enterprise.

In politics, policy fiascos lead to a doubling down of related policies. Or, doing the same thing over and over again expecting different results. Someone famous called the latter ‘insanity’.
And peculiarly, on January 21st, Mr. Kuroda went on air to deny the BoJ’s adaption of the NIRP, only to reverse this stance after a week or on Friday the 29th. Yet on the day that Mr Kuroda denied the NIRP, the Nikkei plummeted to its lowest since one year ago or in January 2015.

After the ECB enticed the stock market with possible easing this coming March, rumors were rife that the BoJ would follow, hence the stunning one day 5.9% rebound on the 22nd!

Of course, such policies were imposed in the name of the economy, but in reality such has been nothing less than another designed subsidy for the financial sector, the foreign exchange earners, and the government.
Media have jumped the gun on the BoJ to ease. One such outrageously laughable example of desperation: “They could buy ketchup, throw money out of helicopters,” said Eiji Kinouchi, chief technical analyst at Japan’s second-largest brokerage. “The possibilities are limitless. People are always saying the BOJ has run out of options, but they’re wrong.”
Yet if inflationism would have no adverse impact on the economy, then central banks would no qualms to do this, and more importantly, they would have already done this. Moreover, central banks would cease to exist as governments will appropriate on its role, since this means free lunch for political spending! Government’s buying of ‘ketchup’ represents a fiscal activity.
As the late great Austrian economist Ludwig von Mises presciently warned4,
Public opinion is utterly wrong in its appraisal of the phases of the trade cycle. The artificial boom is not prosperity, but the deceptive appearance of good business. Its illusions lead people astray and cause malinvestment and the consumption of unreal apparent gains which amount to virtual consumption of capital
Fight or Flight: The Fading Effect of Central Bank Magic on Global Equities
The Nikkei 225 added 3.3% over the week, 85% of which came from Friday’s NIRP sponsored 2.8% jump!
While I expected this to be a big week for the bulls, much had been realized, but it hasn’t been true for some.

Despite sporadic interventions by the national team, Chinese stock markets crashed again last week.

At the close of Thursday, the Shanghai index was down by a staggering 9.23% over the week! Nevertheless, severely oversold conditions abetted by the BoJ’s NIRP prompted the Shanghai Index to recover by 3.09% on Friday. The recovery trimmed the week’s heavy losses to 6.14%. Year to date, or for the month of January, the Shanghai index lost an incredible 22.65%!
At Friday’s 2,737 level, the Shanghai Composite Index has plunged to November 2014 levels!

Remember that the Chinese stock market bubble has its roots on the 2H of 2014. Prior to the bubble, the Shanghai index was adrift at a listless 2,000-2,500 range since 2012. This means that the current bear market has eviscerated nearly all of its bubble gains from when it hit a high of 5,166 in June 12 2015. Easy come, easy go.
It’s a wonderful example of what I said as the bust will be roughly proportional to the imbalances acquired during the inflationary boom
And as a showcase of how bear market rallies can be significant and equally ferocious, overtly buttressed by the National Team, the key Chinese equity benchmark surged by 24% from the ‘lows’ of August 24 to the ‘highs’ of third week of December 2015! Yes 24%! But when bears’ reasserted dominion late December, gains from fierce bear market rally was more than entirely lost in a matter of a little over a month! (attention PSE bulls)
Europe’s equities diverged. Most of Europe’s stocks rose but gains were unimpressive. And there were even some exceptions. (I wanted to post charts but given the space constraints I am unable to do so)
Despite the BoJ’s NIRP inspired Friday’s 1.64% rally, the German Dax was up by just a puny .34% over the week! And as of Friday, and even in the wake of the ECB’s promise, the DAX has just been off by a measly 4.3% from the January bear market lows.

Remember that the ECB imposed NIRP on June 2015. Yet the gains or honeymoon period from the ECB’s NIRP had been a fleeting one. The DAX rebounded by about 9.9% from the ECB’s NIRP, which peaked in about a month or in July 2015. From then, the Dax stumbled gradually, then suddenly (Hemingway effect) to current levels.
My point is that these central bank policies to subsidize the stock markets via monetary policies, as shown by the experiences of Japan, China and Germany, have conspicuously been increasingly afflicted by the laws of diminishing returns.

The narrowing windows of gains only punctuate on the risk of severe or dramatic downside ‘flight’ actions overtime. Yet central banks refuse to heed reality. But they continue to focus instead on the short term. The result should be the worsening of the unintended consequences from present day ‘rescue’ actions.
Meanwhile, not even the BoJ’s NIRP seems enough.

Italy’s benchmark, the FTSE MIB Index, even sank by a hefty 1.95% over the week, mostly on banking stocks. Reason? The Italian government’s organized bailout of four small banks last December has reportedly hit a snag as many have been pulling out from Italy’s banking system: “The value of Italy’s third-largest bank has plummeted by 60 percent since the start of this year. There are signs many are pulling money out of Banca Monte dei Paschi, out of Italian banks, and out of Italy in general. Even if the nation is not hit by a banking crisis imminently, the dire situation in Italy’s banks and its whole economy could still cause a financial disaster in Europe that would reverberate around the world.5”
Yes Italy is very much larger Greece in terms of the economy but accounts for the second largest debt exposure in the Eurozone, only next to Greece in the context of debt/GDP. And any escalation of the Italian banking problems would indeed reverberate around the world.
Moreover, Italy’s banking crisis reveals to us of the world’s manifold economic financial tinderboxes which only exhibits on the exceptional fragile conditions of global finance today.
Yet in the face of the ECB’s ‘review and reconsider’ of the easing policies in March, the backpedaling of the FED, the PBoC’s record injections and the BoJ’s surprise NIRP, central bank magic has not been weaving as much of its desired effect on global stocks as it had been before.

While there may be residual vestiges of the BoJ NIRP’s honeymoon effect, given this week’s asymmetric responses, signs are that last two week’s central bank panacea may not last. Perhaps not even a month.

If so, in the next transition from fight to flight, then this would mean that the ensuing cascade should be sharp and fast as central banks have effectively lost control!
From Flight to Fight: Phisix Race to 6,700 was a Product of a Coordinated 6 Issue Pump!
The ‘acute stress response’ syndrome has been evident on the PSEi. What do you call an 11.08% collapse in 3 weeks that was followed by a stunning 7.72% spike in one week?
Has this not been a transition from flight to fight?
Given the massively oversold conditions, combined with central bank actions, a rebound was to be expected
As I wrote last week: The 3 consecutive weeks of severe broad market losses may be a record of sorts. And they likewise could be indicative of the substantially oversold conditions. Realize that no trend goes in a straight line. The question is whether the coming bounce would be tradeable or not. Or will attempts to trade them become equivalent to catching falling knives.

One may add to ingredients of the rally the GDP pretext and of the month end window dressing, nonetheless the behemoth rally.
Additionally, it shows how the cornered, beleaguered and ego-bruised bulls can mount an equally seismic and passionate desperation rebound.

The miffed bulls seem to say: Greed can more than match fear, pound for pound, volatility for volatility, mano a mano!

And with remarkable ferocity, the bulls rammed through the various resistance levels to more than reclaim the 6,500 bear market threshold level. And the Phisix has suddenly returned to the trading range carved out of the August 24 meltdown.
For now, the Phisix looks likely to test a key resistance level at 6,800 set by the upper trend channel.
As noted earlier, stretched oversold conditions, backed by rallies abroad from promises to ease by the ECB and the BoJ, add to this the domestic pre GDP (announcement) plus window dressing, bulls came wildly swinging at the week’s opening.
I have long pointed out here of the GDP week stock market pump or dump. The premise of this “pre GDP week” play has been that 2-3 day actions at the PSEi, prior to the announcement, should serve as the noteworthy barometer for the direction of GDP. A modest pump means that GDP will be within the expectations. A mega pump means that GDP will exceed expectations. A dump means that the GDP will underperform expectations.

Except for the August 2015 meltdown, which interrupted the 2Q GDP announcement, previous three GDPs in 2H 2014 to 2015 plus last week’s pre-disclosure activities exhibited the same dynamics.

Well considering how rampant price fixing activities in the domestic stock markets, despite so-called pat on the back “reforms”, it’s easy to construe that such actions may have likely emerged from insider tips.
And speaking of price fixing pumps, what would be of the PSE without the unbridled “marking the close” pumps? Another stunning 31% of Monday’s 3.64% gains came from an awesome last minute pump!
It’s only in the Philippines where closing prices function like a Viagra with regularity!
While it has been true that severely oversold conditions provided the fulcrum for the massive reflexive recoil, the shift from excessive fear to extreme greed via the 7.72% rip more than meets the eye.
From the surface, the previous biggest industry losers were this week’s biggest winners (upper window). So the battered holding and property sector plus services produced the largest gains.
On first thought, this should be the natural or intuitive reaction.

But wait, that’s not entirely the picture from last week’s trading activities.
Broken down into the weekly performance of the PSEi component issues, the general rule last week seemed: the bigger the market cap share, the bigger the pump, therefore the best returns (see above left red rectangle)!

Understand that the top 5 issues control 38.46% of the PSEi basket. Expand this to include the top 10, then the effective market weight share balloons to an incredible 65% of the benchmark index pie. So movements of the top 5 will be enough to materially sway the index in either direction. Yet how much more the top 10?
Yet the table above shows that only 6 issues belonging to the top 7 biggest market cap share delivered about 10% or more for the week! These 6 issues accounted for 43.63% of the PSEi weighting as of Friday. All the rest with the exception of the ‘laggards’ underperformed.
And except for one issue SCC, which was the week’s sole loser, 29 issues rose.

So the dispersion of the gains had been heavily tilted towards the top 6 of the 7 biggest market caps.
Said differently, this week’s mammoth 7.72% push or the race to 6,700 was largely a product of a coordinated and synchronized pump focused on 6 of the7 biggest market cap issues.
Yet what’s so special with these 6 mature and ridiculously overpriced firms?

The exceptions from the general rule were the striking upside price spirals of some of the previously battered issues like SMC (21.5%), Bloom (19.88%) and PCOR (16.91%).
So oversold markets created conditions for the bounce, but the concentrated bidding on the biggest market caps not only provided the magnificent headline 7.72% week on week gains, but likewise amplified the bandwagon effect at the general markets.
And as noted last week: since the elites have greatly benefited from the BSP inflationary boom, then I expect some of them to try to put up a passionate last stand to prop up the sham boom. I would add government agencies as likely candidates for this week’s massive and orchestrated 6 issue index pump!
And record of sorts seen in the market breadth during oversold conditions of last week has transposed into record of sorts in a brewing overbought condition. The margin of advancing issues relative to declining issues swelled to possibly record levels at 239.
Frantic bids spiked prices many non PSEi issues to the sky like Melco Crown (MCP) to generate a stunning 69.92% payoff in a week! Who needs casino when stocks now deliver casino like returns!
This week’s furious comeback by the bulls has emerged with a modest improvement in peso volume. And this was mostly due to Friday’s Php 9.8 billion. Weekly volume was at the highest this year where peso volume rose by 30% week on week.
But given the ferocity of the pump, peso volume still lags or overstates the price action.
Bear Market Rally: Big Weekly Gains Signal More Volatility Ahead!
The extreme pendulum swing from flight to fight again highlights on the violence in reaction to the emergence of acute stresses.
This week’s massive rebound may have led many to come to believe that the good ole days have returned and that the bear market is over.
Well not so fast!
This week’s 7.72% gains accounts the FOURTH largest weekly gain since the 2007-8 bear market. In the above chart I recorded all 4.5% and above weekly gains from 2007-2016.
In three occasions, particularly from 2007 to early 2009 the Phisix posted a whopping more than 11% weekly return! That’s ELEVEN plus percent.

These 11 percenters functioned like mileposts during the bear market cycle of 2007-2009.
Like today, those three 11 percenters emerged in response to previous violent selloffs.

The first 11% in August of 2007 highlighted on the inaugural of the 2007-2009 bear market.
The 11% weekly rebound led to an interim high in October of the same year. However bulls were unable to maintain the momentum as they were confronted by heavy selling resistance from the August highs, so they eventually succumbed to the bears. The bears then took command. From here the PSEi headed downhill.
The next 11% highlighted on the selling climax.

The traumatic series of market carnage from September to November 2008 or during the post Lehman event prompted anew a huge response to the severely oversold condition.

In the week of October 18, the PSEi collapsed by a harrowing 18.25! And this was followed by another weekly crash by 10.73% a week before the 11% run, or in November 21! That’s aside from the smaller losses in between the two weeks of the major crashes. So from the severe clobbering emerged November 2008’s 11+%!
Yet after hitting a landmark low in October, the PSEi remained intensely volatile with sharp upside and downsides going on until the culmination of the bear market.

So following a terrifying 54% 1 year and 7 month crash, the end of the bear market or the return of the bullmarket was foreshowed by the 11%+ surge by the Phisix.

Remember, 54% cleansing prior to the baptism of the 2009 bullmarket!
I know, mathematically speaking 7.7% is not the same as the 11% or anywhere near it. But again this week’s 7.7% accounts for the FOURTH largest, and has reflected on similar conditions that brought about this week’s massive reactions.
So this week’s activities seem to reverberate with the 11% bear market rally of August 2007.

Yet even the taper tantrum or the first bear market which appeared in 2013 has not attained similar degree of volatility. The biggest response was at 4.75%. And that came four months after (or in September) the bear market’s appearance!
Nonetheless, the takeaway is that this week’s 7.7% looks likely a signpost of more incoming intense volatility ahead.

And most importantly, they are unlikely to signal the end of the bear market. To the contrary big moves are the common characters of an inflection points or bear markets
Additionally, the still excessive valuations and attempts to prop up the index underscore how current conditions are not sustainable.

January Bear Market Losses Presages NEGATIVE Annual Returns!
And here’s more.
While the 7.72% surge this week essentially slashed a vital chunk of losses, i.e. 72.15% of the -10.7% during the previous week, the month of January closed with a negative 3.8%.

Seasonally speaking, January has been predisposed towards the bulls. Excluding this month’s loss, during the past 30 years (1986-2015) only a third of Januarys registered losses. And most of them occurred during bear markets.

I have plotted all the largest 3%+ losses of January from 1986-2015 along with their annual returns.

History has not been kind to the PSEi when January fell into the clutches of the bears.

A short narrative:
The December 1989 failed putsch against the Cory administration prompted for the January 1990 (-5.04%) loss which paved way for a full blown bear market. The said bear market translated to an annual 40.99% rout.
The 1993 154% skyrocketing by the Phisix led to three cyclical bear market strikes within 1994 to 1995. Bear market strikes account for the period where Phisix endured 3 bouts of 20%+ losses but recovered from them. However, the bear market strikes during the two successive years failed to evolve into a full blown bear market. Yet the January negatives of 1994 (-10.06%) and 1995 (-13.13%) delivered -12.84% and -6.88% annual deficits respectively. The full bear market came a year and a month after 1995.
The 1999-2000 episode represented the failure of the massive dead cat’s bounce in the wake of the stock market crash from the Asian crisis. Following 19 months of agonizing 68.6% collapse, the Phisix staged a huge 145% rebound in 1998-1999. The botched (dead cat’s) bounce of 1999 was carried over to January 2000 with an enormous -7.16% loss. This led to the 30.26% annual deficit.

2000 also marked the bursting of the dotcom bubble in the US which aggravated local conditions.
The fantastic 11% weekly rebound by the PSEi in August 2007 highlighted on the advent of the US financial crisis influenced domestic bear market. The dawning of the full-blown bear market had been reflected on January 2008 (-9.82%). By the end of the year, or for the year 2008, the PSEi accrued a whopping -48.29% devastation.
2009 marked the end of the Global Financial Crisis (GFC) bear market. However the vestiges from the volatility of the selling climax post Lehman was still manifested in January 2009 (-3.26%). Coupled with the BSP’s adaption of zero bound, January losses turned into a colossal 37.62% recovery for the year.
Meanwhile, the January 2011’s staggering -7.61% loss signified a legacy from the European crisis, where the Phisix ‘corrected’ by 15% from November 2010 to February 2011. The significant January loss reversed to generate a miniscule positive 4.07% return for the year.
Here’s the thing. The difference of the last two cases with the rest was that—the first, marked the end of the bear market (2009; but that’s after a 54% loss)—and the second, January loss happened when there clearly was no bear market. 2011 represented a cyclical correction in a secular recovery trend.

And like today, all the previous accounts, where substantial losses plagued Januarys in 5 out of the 30 years, involved the bear markets in motion. What distinguished these bear markets had been the various stages of the cycle, namely, the advent (1990, 1994 and 2007) and the post climax (1995 and 2000) phase.
Yet ALL delivered NEGATIVE returns. But the variability of the degree of losses depended on the evolution of the bear market within the given year.
So unless ‘this time is different’, which should be the expected rationalization from the consensus, history has two unpleasant messages for the PSEi:

First, the humungous 7.72% one week comeback represents a flight or fight response, which most likely indicates more volatility ahead.

Second, January losses, which transpired in the shadow of the bear market, could most likely presage negative returns for the year.
While the past is definitely not the future or will not exactly replicate the future, cycles, which are derived from the repetition of mistakes as revealed by the specifics of previous experiences, gives us a clue of what lies ahead.
The Direction of GDP is NOT EQUAL to the Direction of PSEi!
Pre GDP pumps (and dumps) have usually been followed the ‘buy the rumor, sell the news (and vice versa)’ dynamics. But last week’s publication of the GDP results, which turned out to be ‘better than expected’, only served to combust the buying pandemonium at the PSE.
Yet the direction of the GDP EQUALS the direction of the stock market has been a catechism for the mainstream.

Like Pavlov’s dogs that have been conditioned to ringing bells as signaling food, the public have been brainwashed or conditioned to believe, and importantly, to react to announcements of GDP.

For the consensus, GDP justifies a bid on Philippine assets, most particularly the PSEi.
So when the government and media screams G-R-O-W-T-H (!), the reaction should be a buying binge or frantic pumping! Well that’s the story of last week!
And it has really been a fascination to see how popular entrenched beliefs have really signified a MYTH! Or a popular delusion!

The above graphs exhibits the BSP’s monthly data of the PSEi (red) and the headline (constant) GDP number from the Philippine Statistics Authority (blue bar chart)
Given that the data spans three years then it may be safe to say that the trends generated from the above can be construed as statistically significant.
Here’s a short walk through of the graph.

The successful breakout of PSEi from the May 2013 7,400 high occurred in January 9 2015. The new record high of 8,127.48 was established in April 10, 2015. So the bulk of the 27 record finishes happened in the 1Q of 2015. What was the GDP of 1Q 2015? Answer: 5% the lowest since Q4 2011!

What happened to the PSEi after the milestone April high? Answer: the Phisix weakened through the rest of the year. In fact, the Phisix ended 2015 down -3.85%!

Was the GDP rising or falling through the 2Q-4Q? Answer: Rising.

So the Phisix fell as the GDP rose (green oval and green trend line)!

Now let us rewind back to the taper tantrum days of 2013 (see orange trendline and ovals).

Then the headline GDP set its biggest performance in Q2 2013 at 7.9%. Incidentally that was the time when the taper tantrum quasi bear market occurred.
What was the GDP trend from Q2 2013 to Q1 2015, rising or falling? Answer: Falling. What was the trend of the PSEi of the same period? Answer: Rising.

In sum, in 2013 to 2015, as GDP fell, PSEi soared. On the other hand, from Q2 2015 to Q4 2015 as GDP rose, PSEi fell!
So in 3 years, has rising GDP translated to higher stocks? Answer: A very CLEAR NO!
One can even assert of the INVERSE correlation: higher GDP equates to lower stocks (and vice versa)!

But I would NOT propound on this. Why? Simple: Because correlation is NOT causation!
The PSEi represents an outcome of mostly profit and loss oriented voluntary exchanges or market activities. On the other hand, GDP represents a monopolized aggregation of surveys bundled up as statistical numbers to supposedly represent economic conditions conducted by the government.

Incentives matter. Profits and loss versus political objectives.
In essence, comparing market outcomes with that of politically directed or politically derived numbers would deduce to comparing apples and oranges.
Besides what people say may not reflect on what they really would do. And these are what makes surveys vulnerable to errors, and more importantly, to manipulation.
At the end of the day, there has been little relevance between the actions of the PSEi and the GDP.
So the incongruence between the performance between GDP and the PSEi, as demonstrated above, should put into limelight the sustainability of last week’s engineered pump, which again has been sizably predicated on GDP equals stocks!
4Q and 2015 GDP Improvements were Principally Based on Price Deflators!
The Philippine government reported ‘better than expected’ 4Q GDP at 6.3% and a 2015 5.8% GDP.

Based on the government’s own data, in 2015 for the first time in statistical history, NGDP (current GDP) has been subordinated by constant (real) GDP.

In the past, constant GDP trailed NGDP. But due to the record low of BSP’s statistical CPI, the base effects from price deflators essentially determined or boosted the GDP!

This has little to do with the living and breathing economy. This has everything to do with massaging of numbers. As the late economist Ronald Coase popularly remarked, if you torture the data long enough, it will confess to anything.
It’s a fascination because NGDP collapsed with CPI from Q4 2014 to Q3 2015, nonetheless constant GDP rose. However, in Q4 2015 as CPI bounced back along with NGDP, the upside trajectory of constant GDP remained intact.

So the upside trajectory of the constant GDP represents the smoothing out of volatility from real world economy prices. This virtually assumes that nominal prices changes have no impact on the economy! Wow!

Perhaps it would best to tell our grocer or supermarket to adjust their selling prices to constant (2000) prices! Let see how this works.
But the government doesn’t seem to even apply price deflators equally.

Seen from the expenditure account of Household Final Consumption Expenditures (HFCE), and on the industry side of retail trade (upper charts), NGDP for both factors remains above constant GDP.

As a side note, it is a curiosity to note of some stark contradictions where consumers spending continue to grow robustly while retail GDP has materially slowed, and where personal savings continue to soar! Based on the Philippine GDP statistics, consumer spending is like transferring money from the left pocket to the right pocket!
The BSP have yet to relese the December OFW remittances.


But for weak economic accounts like manufacturing or exports, constant GDP prevails over NGDP. So there appears to be a bias in using deflators on ‘lagging’ factors as against the ‘performing’ variables.
Like in the GDP of the 3Q, the beauty of statistics is the ability to magically convert negative/s into positive/s.

For instance, goods exports have been in a technical recession based on NGDP. That’s because the sector has been contracting for 4 consecutive quarters!

Nonetheless, by virtue of statistical alchemy, technical recession vanished! Exports had even been recorded as positive.

So if one is an exporter, as the top line continues to deteriorate then this should translate to financial pressures or even losses. But in the eyes of statisticians, exporters have no financial problems, because exports have still been growing albeit at moderate rates!
So if both will engage in a conversation, the exporter will likely say, “Business is bad, I’m losing money”. On the other hand, the statistician will say, “That’s not true! Based on constant numbers you are still making money!”
And it’s not just exports.


Manufacturing’s NGDP collapsed from Q4 2014 to Q3 2015, but then rebounded on Q4 2015. Yet there has been little change in the sector’s GDP rate of growth (constant based). Again, manufacturing GDP appears immune to price changes in the real economy.
Yet paradoxically, despite the so called G-R-O-W-T-H in manufacturing GDP, input prices for October and November remains in deep contraction. Shrinking input prices hardly suggest of a strong demand by manufacturers.
Following a dramatic 9% decline in the Philippine government’s survey of the (nominal) value of industrial production last October, November posted an improvement by only 1%. So December manufacturing must have skyrocketed by high double digits to generate NGDP growth of 4.4% (or RGDP of 6.6%) in Q4!

Unfortunately, bank lending to the sector remains depressed. For Q4 the average lending growth has been only 2.81%! The stagnating rate of lending growth means the sector may be borrowing to cover only working capital!

The above hardly points to a meaningful rebound in manufacturing sector that should have confirmed GDP activities.
This shows of a serious conflict in what headline GDP has been standing on and what other data have been indicating.

There are so many issues to raise.

But the above data on real estate and construction (broken down into public and private construction constant GDP) seems as one of the most striking. 
 
Media raves about how government spending powered the 4Q. This has largely been due to the 41.5% in 3Q and 51% in 4Q surge in public construction. As an aside, public construction accounts for only 24% of construction GVA (nominal).
But the outstanding number has not been in the public spending but in the alleged collapse in private construction numbers!

Private construction posted ZERO growth in 3Q and NEGATIVE .4% in 4Q! Yet as private construction stagnated, real estate continues to post a hefty 7.8% 3Q and 7.9% 4Q G-R-O-W-T-H!
The collapse in private construction suggests that real estate projects by developers have virtually stood still! Expansion in the inventory has stalled! But looking at the quarterly reports of listed companies, this has not been the case. To the contrary developers have been aggressively adding to inventories. An eyewitness account will tell you that private construction activities in the Metropolis have been buzzing!
Yet how has the real estate industry been generating economic activities if there have barely been construction activities to provide for inventories? Has G-R-O-W-T-H emanated from mere turnover or speculative churning? Has G-R-O-W-T-H originated from the money illusion or inflation of property prices brought about by rampant speculations?
The government’s numbers seems to be detached with reality.
I’m still awaiting the PSE’s 3Q report on the aggregate performance of the listed firms to see if there have been any signs of congruence with government data.
2015 GDP: Soaring Credit Intensity Underscores Heightening Credit Fragility

A final piece on GDP.

The lower window shows of the correlation between GDP and banking loan growth. The slowdown in bank credit growth in 2015 has resonated with the deceleration in GDP in 2015.

Since companies finance their operations with mostly bank credit then naturally bank credit conditions should reflect on GDP.

Yet GDP has been inflated by bank credit growth. The top pane shows why. Credit intensity or the ratio of bank credit growth over NGDP reveals how much bank credit growth had been generated to produce 1% GDP.

Since 2013, this ratio has been accelerating to the upside. It demonstrates that despite the moderation in both factors, bank credit growth has been growing FASTER than the GDP. This alludes to the deepening dependency on credit to generate growth. This means that more reduction or decline in the rate of credit growth would not only lead to lower GDP but likewise amplify credit risk. By credit risk, a growth slowdown would mean lesser ability to pay outstanding obligations or liabilities thereby raising the risk of default.

From my perspective, since GDP has been vastly inflated, then this means that the credit intensity should be higher than indicated on the headline numbers.
Those inflated GDP numbers were most likely designed to mask the growing untoward ramifications brought about by zero bound redistributive policies.

It won’t take long when government statisticians won’t be able to conceal on the developing decay.

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1 Psychologistworld.com Stress: Fight or Flight Response Psychologistworld.com
4 Ludwig von Mises The Economic Consequences of Cheap Money Mises.org September 10, 2012

5 Richard Palmer Are Italy’s Banks About to Explode? theTrumpet.com January 28, 2016


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