Sunday, February 28, 2016

Phisix 6,800: 6.3% 4Q GDP; Why Has December Imports Collapsed by 26%??? Philippine Bank Stocks Plunge!

…the expansive fiscal and monetary policies implemented by governments to spur growth might have laid the foundation of the next economic crisis…Those debt-financed fiscal policies and accommodative monetary policies had been only moderately successful in promoting growth, with public and private debt levels in the world now too high…Fiscal as well as monetary policies have reached their limits. If you want the real economy to grow there are no shortcuts which avoid reforms…Talking about further stimulus just distracts from the real tasks at hand. We, therefore, do not agree on a G20 fiscal stimulus package as some argue in case outlook risks materialise…The debt-financed growth model has reached its limits. It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy".—Wolfgang Schaeuble Germany's Minister of Finance at the G-20

In this issue:
Phisix 6,800: 6.3% 4Q GDP; Why Has December Imports Collapsed by 26%??? Philippine Bank Stocks Plunge!
-4Q GDP at 6.3%? Really? Then Why Has December Imports Collapsed by 26%???
-Has the December Import Crash Been Symptoms of a Formative Global Recession?
-December Import Crash: Where was Strong Domestic Demand?
-December Import Crash: Statistical Ruse to Buoy 4Q GDP?
-Phisix 6,800: Mixed Performance, Divergence and Overbought Conditions
-Has the Pummeling of Banking Stocks Signified the Effects of Yield Curve Inversions?
-Global Stock Markets: Oil Prices as Du Jour Stimulus and the Cockroach Theory
Phisix 6,800: 6.3% 4Q GDP; Why Has December Imports Collapsed by 26%??? Philippine Bank Stocks Plunge!
4Q GDP at 6.3%? Really? Then Why Has December Imports Collapsed by 26%???
The headline of the week should highlight of the incredible collapse by December imports!
Yet haven’t we been told that 4Q GDP rose by 6.3% (NGDP 5.2%) which became the fodder for panic buying in domestic stocks???
So what just did happen to December imports?
Here is the government’s PSA on the December meltdown1: (bold emphasis added)
The   total   imported   goods by the country for the month of December 2015 amounted to $4.056 billion, a decrease of 25.8 percent from $5.470 billion recorded during the same period a year ago. The decrease was due to the negative performance of nine out of the top ten major imported commodities for the month led by other food & live animals (-47.9%).  The other eight negative performers were: feeding stuff for cereals not including unmilled cereals (-33.1%); electronic products (-30.3%); miscellaneous manufactured articles (-18.1%); mineral fuels, lubricants and related materials (-14.1%); telecommunication equipment and electrical machinery (-9.0%);   iron and steel (-5.4%);    transport equipment (-3.3%); and industrial machinery and equipment (-3.2%).  Moreover, total imports for the year 2015 registered a 2.0 percent increase, that is from $65.398 billion in 2014 to $66.686 billion in 2015).
The balance of trade in goods (BOT-G) for the Philippines in December 2015, registered a surplus of $603.03 million.   This is in contrast with the $667.47 million trade deficit in the same month last year. 

While, basically the domestic financial markets ignored the data, the government panicked. The government via the National Economic and Development Authority even issued a statement intended to mollify the public2: (emphasis mine)
The Philippine Statistics Authority reported today that the total payments for imported goods in the country declined by 25.8 percent in December 2015, the steepest monthly year-on-year decline recorded since April 2009 when it fell by 37.1 percent. This halted the six consecutive months of positive growth in imported merchandise.

“Despite this decline in December, strong domestic demand will prop up imports growth in the near term, as we expect continued expansion in inward shipments of power-generating machines, office and electronic data processing machines, and telecommunications equipment. Investor confidence in the country is still growing and is seen to increase investments. This will in turn boost demand for imports of capital goods as well as raw materials and intermediate goods,” said NEDA Deputy Director-General and Officer-In-Charge (OIC) Margarita R. Songco.

In December 2015, the value of imported capital goods, a leading indicator of strong economic activity, remained resilient as it increased 20.9 percent to US$1.5 billion in December 2015. This accounted for 37.8 percent of total merchandise imports for the period.

But the downturn in imports of raw materials & intermediate goods (-53.2%) and consumer goods (-20.3%) pulled down total imports. Import payments for raw materials and intermediate goods declined in December 2015 with lower imports of materials & accessories for the manufacture of electrical equipment (-74.1%) sourced mainly from Taiwan, Japan and Singapore. This partly mirrors the decline in global electronic and semiconductors sales in December 2015 due to softening global demand. 

Nonetheless, NEDA sees household consumption remaining strong with upbeat consumer confidence, low inflation, low interest rates, better employment opportunities, and still positive outlook on remittances inflow, which bodes well for imports of consumer goods.
If one reverts to the PSA data, of the 10 sectors measured, only imports of metal products registered an advance (by 19.8%), so it’s not clear where the alleged advance in capital goods imports emanated from.

In contrast, the PSA seem to have indicated significant declines of capital goods imports, in particular, “Transport Equipment, contributing 8.4 percent to the total import bill was the country’s    third    top import for the month amounting to $340.16 million.   It declined by 3.3 percent compared to last year’s value of $351.75 million. Imports of Industrial Machinery and Equipment ranked fourth with 6.5 percent share and reported value of $262.21 million in December 2015.  It dropped by 3.2 percent from $270.80 million in December 2014”. (bold original, italics mine)
So what the PSA data seem to have manifested was that December’s import plunge has not only been broad based, which affected major industries from capital goods, intermediate goods or inputs for reexports, and to consumer goods, but even worst, the scale of December’s crash—based on nominal USD value—has almost resonated with that of 2008-9!!! (see nominal USD value chart from tradingeconomics.com in the lower window)
Let me repeat, the crash wasn’t just in growth numbers but in nominal USD levels (or import’s NGDP).
As usual, the December import breakdown had to be sanitized by the recitation or incantation of “strong domestic demand”
Additionally, for some in the mainstream, the December data had to be rationalized and sterilized as a product of uncertainties from the coming elections: “Every time there is a presidential election, investment tends to slow significantly… I think a lot of private sector investment is holding back waiting for the (election) results - to have more certainty”

I posted the data of Philippine imports during the 4 pre-Presidential election periods to denote of three things:

One. If imports were a product of political “uncertainty” then the adverb “Every time” represents an unalloyed bilge. Why? Only ONE presidential election reveals of a declining import trend. Guess when was that? Answer: 1998, or the Asian Crisis!

Elections of 1992, 2004 and 2010 showed of INCREASING nominal value import trends.
Second. Perhaps the observation from a % standpoint could somehow be right (but this seems dubious, I have no data on this though). But NADA ZAP ZILCH ZERO of the four election period revealed of a dramatic one month crash.

While 1998 showed of a steep decline, it was a consequence of a series of monthly deficits. Moreover, it was a manifestation of a regional and not a global dynamic similar to the GFC 2008-9. Elections had little to do with it.
Third and lastly, both the above tell us that the spin “political election uncertainty equals crashing imports” represents a fallacy of composition.
Political election uncertainty equals crashing imports is simply FALSE!
Has the December Import Crash Been Symptoms of a Formative Global Recession?
Yet NO one seems to even give an effort to figure out why those imports crashed at all.

The mainstream’s kneejerk or mechanical reaction has been to strenuously DENY warts and all such number—as an anomaly or fundamentally unreal.
Yet has those earlier big import gains (June to November) led to a vast stockpile of excess inventories? Or has demand suddenly vaporized? Or could it have been both?

How much of those big imports gains were due to the frontloading of inventories in expectation of further weakening of the peso?
How much of those significant jump in imports have been a consequence from false expectations brought about by media and the establishment G-R-O-W-T-H spin?
Has the collapse in electronic products imports been additional symptoms to the deepening of the export recession?
The decline in global trade has been accelerating and spreading.

While such dynamic can be partly blamed on falling prices (see left), even trading volume has shown signs of inflection (right window).
And those aggregate numbers can be seen in the region’s merchandise trade. China’s exports and imports crashed 11.2% and 18.2% in January. Japan’s exports and imports also collapsed 12.9% and 18% during the first month of the year. Global trade barometer South Korea has both its external trade data in a freefall as February exports crumbled 17.4% while imports tanked 17.3%. Such was a follow through from January’s numbers at NEGATIVE 18.5% and NEGATIVE 20.1%. South Korea’s January’s dismal trade data according to Channel News Asia was the “worst downturn since the depths of the global financial crisis in 2009”.

Among the ASEAN majors, Thailand’s exports tumbled by 9% in January as imports cratered by 12.37%. Indonesia’s trade numbers had even been worse, exports plunged 20.2% while imports slumped 17.5% over the same period. The recent crash in the rupiah hardly boosted exports.
There were exceptions though. Vietnam reported that while exports grew 2.9%, imports skidded 6.6% in February. It’s only Malaysia which posted gains for both exports and imports last December at a skimpy 1.4% and 3.2% respectively.

In other words, marginal gains yet susceptible to declines…all depending on global economic conditions
And sad to say that if the current momentum of global trade intensifies, then a global recession could be within the cards in 2016 or in 2017.
The point is here that it would be arrantly myopic to believe that the Philippines would be immune to global developments.

All these major economic factors—OFW remittances, BPOs, tourism, external merchandise trade, FDIs or even portfolio flows—have been closely linked or tied to the conditions of the global economy.

Most importantly, the above factors have been driven by the direction of the USD.
December Import Crash: Where was Strong Domestic Demand?

And it would be equally naïve, if not disingenuous, to believe in the Keynesian catechism of strong domestic demand!
Yet whatever happened to strong ‘domestic demand’ last December?

Why has strong ‘domestic demand’ been unable to forestall, or at least mitigate, December’s massive import breakdown? Using NEDA’s own explanation “consumer goods (-20.3%) pulled down total imports”, yet the same agency bifurcate with the claim “NEDA sees household consumption remaining strong”.

Huh? By overlooking the cause of falling consumer goods exports, just how can one make a conclusion that household consumption will remain strong? Abracadabra???!!!

Again just where will domestic demand come from?

Agriculture and manufacturing has been stagnating, exports have been in a recession as OFWs remittances have been trending towards zero (or even negative) growth.

Yet media, authorities and their experts make it appear as if these sectors don’t have the demand to affect the real economy. As if the weakening of these sectors won’t infect or spread to the other sectors. The public has been made to believe that the economic activities have little relevance from one sector to another.
Yet what happens to the frantic race to build supply capacity in order to cater to them? Will incomes and earnings from these bubble industries be enough to sustain them? Will overcapacity not lead to a decline in investments that would affect current investments and jobs?
Let me use the Robinsons Land (RLC) case which I discussed last week as example. RLC officials admitted that occupancy rates in 2015 were at 95% or vacancy rates were at 5%. Seen from an industry basis, given the spreading weakness of the general economy (which should now include imports and probably wholesalers), the rush to build supply would risk the ballooning of the vacancy rates or the lowering of occupancy rates.

Yet the swelling of vacancy rates would not only put pressure on the profits of property developers and mall operators, they are going to heighten strains from credit conditions—which have financed the supply side growth as well as the demand side growth via receivables—both of which will impact capex growth.
Media quoted that RLC announced that capex for 2016 would be at Php 16-17 billion from Php 15 billion, which should represent only 6.7% or 13.3% growth. Given the headline bullishness of the industry, those numbers can be seen as surprisingly conservative!

But I discovered RLC has been saying the same capex Php 16-17 billion benchmark numbers since 2014. In late 2014, RLC declared capex at Php 15-17 for the year 2015. Same goes for 2014 where Php 16 billion was the broadcasted capex spending.

In other words, RLC’s capex spending for the past 2 years hardly went beyond Php 15 billion yet every announcement would seem like growth because of the increase in the so-called top line numbers as announced by the company.

And since the public don’t seem to look back, but to trust every word of what the establishment says, they continue to harbor the impression of G-R-O-W-T-H!
In reality, RLC’s capex has hardly grown, may not likely grow and could even contract this year in spite of the firm’s present announcements.

The reason for this as previously explained, has been the insufficient cash flows for any meaningful capex growth, and that the firm have become increasingly depended on credit to finance operations, residual expansions and sales.
Yes such is another wonderful example of the money illusion: The illusion of growth as a function of credit expansion.
Moreover, just where are the jobs?
While government narrative has been that jobs continue to grow, this hasn’t been supported by the real world. In case of online jobs, job placements continue to crash. 2015 was a crash for the entire year relative to 2014.

Despite the company’s repeated spin that job placements will improve, Monster.com’s employment index continues to founder.

The firm notes that for December, “Philippines registered a -36% year-on-year decline in online recruitment activities in December 2015. Although still negative, this is an increase from the -46% reported in November 2015. - The BFSI industry had the steepest year-over-year growth at 6%, while the Production/Manufacturing, Automotive and Ancillary sector saw the most decline at -63% Customer Service jobs experienced the highest growth at 6% year-over-year, while Hospitality & Travel fared the worst at -63%” 3
While it may be true that -36% may look like an improvement from -46%, -36% remains a huge negative number.

Gosh, has political correctness pushed us to become so dense or obtuse such that we cannot or have been prohibited to even distinguish a collapse from growth?
While having picked up job placements in the same way as Monster.com last December to early January, online firm A’s numbers continues to deteriorate.
I will have to exclude Online Job B from future reports because job postings have been in a monumental meltdown: from 36k last April to just 1.5k last week!
Heck, how are companies today recruiting people? Via the more costly traditional media where readership are being eroded by the web? Or through viral or word of the mouth?
Nonetheless, those job placements seem to reflect on the real conditions of the economy rather than those sanguine headlines.
As a side note, here is the government’s employment index as of 3Q 2014.

From the PSA4: (bold mine) Total Employment Index increased at 2.8 percent growth slower from its 4.0 percent growth in the same quarter last year. Trade pulled down the index with a 1.4 percent drop from the previous year. The rest of the industries slowed down: Real Estate at 5.7 percent (from 11.2 percent); Private Services at 4.4 percent (from 6.3 percent); Manufacturing at 3.6 percent (from 4.0 percent); Mining and Quarrying with 2.7 percent (from 3.2 percent); Finance with 2.1 percent (from 10.0 percent); and Transportation and Communications with 0.1 percent (from 3.9 percent). Only Electricity and Water rebounded from a drop of 2.2 percent to positive 0.4 percent this year.

So I get it. Employment is down. But based from the government’s survey, consumer based spending is up therefore headline 3Q GDP has been computed as UP 6.1% (NGDP 4.4%)!

Low is HIGH, down is UP, few is Many!
December Import Crash: Statistical Ruse to Buoy 4Q GDP?

Yet let me offer a REASON to doubt on the PSA’s IMPORT numbers.

Perhaps this may have been designed to bloat 4Q GDP

Remember GDP= C+I+G (X-M)
where GDP represents the summation of Consumer, Investment and Government spending PLUS net exports (or exports MINUS imports).

Considering that imports have surged in October (16.9%) and November (10.1%), as exports have declined by 10.8% and 1.1% over the same period, the government would have a difficult time reconciling the ocean of difference as a consequence of big NEGATIVE net exports to produce its 4Q GDP numbers 6.3% (current 2000) and 5.2% NGDP.

So what they may have done was to crash the December imports! And perhaps pass on the deducted numbers into the future. So the audacity by the officialdom to claim “anomaly” or convey of confidence predicated on “strong consumer demand”.
The circumstantial evidence? Bureau of Customs collection was only down 2.7% in December year on year! [Note: The Bureau of Treasury has not officially disclosed on December numbers so I have to rely on media’s account on this.]
Or has the Bureau of Customs padded on the December numbers?
It is likely that December’s crash has represented both real and statistical frills.
Yet another possible statistical ruse to embellish the GDP. Of course, I have noted here that revving up the GDP has been primarily designed to gain access to credit5.
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.
As proof, the Philippine government was able to raise $2 billion bonds which had record low coupon rates the other week. Any nice topline will serve as enough inducements to a world desperately scrambling for yields
Nonetheless experts say that now is the best time to buy stocks because of election spending!

Yet if jobs and investments have been in a decline, just where will such spending come from? Pork barrel based spending, which are merely transfers from taxpayer to politicians are sustainable sources of spending?

Has it not been truly bizarre where election uncertainties would be attributed by certain experts as causing the import collapse which the other seems as a reason to buy stocks? Experts seem as grasping at the straw to keep the illusions alive.
Phisix 6,800: Mixed Performance, Divergence and Overbought Conditions
And speaking of stocks, the Philippine equity benchmark, the Phisix, closed down with a marginal .31% deficit this holiday abbreviated trading week.
The slight decline had been a manifestation of a mixed market. It has likewise represented the aggressive use of last minute pumps or marking the closes in two days by Team Viagra to stave off substantial losses.
From a technical perspective, after reaching its first resistance level, the Phisix (PSEi) appears to be in a consolidation phase, with incipient signs of overbought conditions

The mixed market can best be seen from the sectoral performance, where outcomes had been divergent for the week. Two industries posted gains while the rest or the majority registered losses.
The banking-financial sector led the losers, down by a surprising 3.54% followed by the other three, the mining (-1.34%), service (-.69%) and the property sectors (-.22%).
Gains from the industrial (+1.23%) and the index heavy holding sector (+.48%) provided the offsetting force to cushion the index’s retreat.
Yet among the PSEi components, 9 issues advanced while 19 issues declined. Meanwhile, two issues were unchanged.

The broader market was evenly split between the dominance of advancers and decliners on a daily basis during the 4 day session.

Nevertheless in aggregate, for the week, advancing issues eked out a slight margin of 13 over declining issues over the week.
Average weekly peso volume was at still light at Php 7.142 billion. But volume had been buttressed by special block sales, mainly from Semirara and Star Malls. Special block sales at Php 9.1 billion, accounted for about 31.85% for the week’s total volume.
As I have noted last week, the peso rally may happen when the sale of USD bonds will be formalized or concluded. Apparently, the $2 billion record low coupon rates fund raising by the government through USD bonds the other week escaped my radar screen. So this has likely spurred the peso to rally or the USD Php to fall by .315%.
And it is important to note that the recent steep rally in Asian stocks has mostly been supported by the temporary weakening USD.

Has the Pummeling of Banking Stocks Signified the Effects of Yield Curve Inversions?
It’s interesting to observe of the quasi crash by the banking index last week.

As noted above, the banks represented the biggest drag on the index where the banking and financial sector slumped 3.54%!
In the recent past, the bank and financials index (green) have been tightly correlated with the price movements of the PSEi (red). However this week, the banking index dived even as the PSEi had mostly held ground.

The headline index consists of THREE banking issues which are considered heavyweights. Said differently, the three firms—namely BDO Unibank, Bank of the Philippine Islands and Metrobank with respective PSEi share weightings of 5.2%, 5.2% and 3.84% as of Friday’s close—have been part of the top 15 biggest market cap.

In the same pecking order, curiously the same issues suffered -1.98%, -6.86% and -4.74% for the week.
Mainstream media reports seem eerily silent on this. Why?

I have long propounded that the yield curve will ultimately matter. Actions at the bond market and the yield curve determine the direction of the interest rates as well as the interest rate arbitrages by financial institutions.

The core financing of the Philippine bubble principally depends on them.
Despite this week’s big rally on Philippine treasuries, brought about by the $ 2 billion bond raising, with the bulk of the recovery occurring at the front end, the recent declines in banking stocks could have reflected on the recent inversion of the many parts of the domestic yield curve.

As examples, spreads of the 10 year 1 month bill bounced off last week’s inversion (upper left). The 10-2yr spread remains very flat or at 41 bps (upper right). The 10-3yr spread moved away from negative to ZERO (lower left). The curve’s belly, the 10yr-5yr variance remains NEGATIVE for the third week -19.8 bps (left).

And in spite of this week’s big rally in Philippine treasuries which led to the slight widening of spreads, the overall trend remains headed toward INVERSIONS (green sloping downtrend line).
Severe flattening of yield spreads to negative spreads or the yield curve inversions point to the dramatically tightening liquidity environment. Such translates to diminishing arbitrage from maturity transformation (borrow short-lend long) or the shrinkage of net interest margins for banks. Of course, the secondary effect would entail of lesser credit activities from the banks.
And considering that credit has functioned as the lifeblood of the contemporary zero bound formal economy, then this will likely have a spillover effect on the real, mostly, formal economy, as well as to asset prices.
As I have noted in the past6:
Said differently, a reduction of credit activities will lead to a substantial repricing of the considerably overpriced and mispriced assets.
Hence, overpriced and mispriced assets maybe vulnerable to violent adjustments (a.k.a crashes)…
Now if half of the banking balance sheets have constituted loans and other the half have been divided into financial (and property) assets, and fees, then both will similarly be vulnerable to a downturn in economic activities and from a hefty repricing of assets.
To make a long story short, this means there will be a transmission and feedback mechanism through the sequence of slowing credit growth to NGDP to earnings to asset pricing to credit risk and vice versa.
So if my suspicions are correct, then this week’s divergence between bank stocks with the general markets will hardly last.

Instead, price action of banks could be ominous of a convergence, a forthcoming selling episode. Add to the likelihood of the mean reversion are likely signs of overbought conditions.
And perhaps by next week, we may know from the BSP’s disclosure whether January 2015’s credit and liquidity data will corroborate on this week’s bank selloffs.

As of December, the rate of expansion of both bank credit and domestic liquidity appears to have resumed its descent, down to 13.1% (see below) and 8.3%.  
With the exception of the last two quarters of 2015, bank credit growth has mostly mirrored GDP activities whether seen from annualized (top) or quarterly (bottom) or when compared to NGDP or current based (real) GDP.

In short, GDP has mainly been a function of mostly credit conditions.

Moreover, credit intensity or credit required to produce GDP has been accelerating to the upside even as NGDP and banking system loan growth have both in decline. This implies that the former have been declining more than the latter. This also suggests of the diminishing returns from credit growth on the statistical GDP. And more importantly, the rise of credit risks.
For all the bullishness being foisted on the public by media—which have mainly been premised on statistical charades, financial market pumps, roseate projections by mainstream outfits, and economic sophisms masquerading as ‘expert’ opinions to defend the status quo by denying all possible risks—has been the utter blindness to very foundations to the ungluing of the façade.

Global Stock Markets: Oil Prices as Du Jour Stimulus and the Cockroach Theory
Global stock markets had been sharply volatile last week.

Stock markets of many developed nations have swung from big gains to big losses and back to big gains.

Meanwhile Chinese stocks rallied strongly at the start of the week, to only succumb to a 6.41% crash last Thursday. Thursday’s crash echoed on the January’s end of the month version. Nonetheless, following the announcement that China’s central bank had “some monetary policy space” and “multiple policy instruments to address possible downside risks” on Friday, aside from signs of nudging by the government on the stock market, the Shanghai index closed up by .95% to trim the week’s loss to 3.25%
However the character of global markets seems to have changed. China’s influence over global markets appears to have dissipated or has shifted mostly to the price of oil. In short, for now, developments in the Chinese stock markets have been sidelined for other concerns particularly on oil. Add to the subsidiary concerns have been the Brexit or British Exit from the EU.

While the G-20 meeting was also factor that helped revived the ‘animal spirits’, it was oil that took the limelight.

US crude’s WTIC’s 10.5% spike coupled with Brent oil’s 7.1% surge fed into many developed economy’s stock market gains.

And instead of the former populist theme where “low oil prices equals bigger consumer spending” that should translate to “higher” stock markets, today’s low oil prices have now extrapolated to lower stocks and vice versa. Or, the correlation of stock market movements and oil prices has increased.
Reason? Bloomberg offers four theories: Low oil prices equals global recession, low oil prices will ignite credit defaults, low oil prices equals low investments and finally low oil prices equals rebalancing of portfolios that means liquidations of non-oil assets.
Global stock markets have become so fickle to look for anything to whet on their speculative juices.

So instead of previously fixating on central bank activities, ‘stimulus’ seems to have shifted on how major oil producers agree or disagree to manage oil prices via prospective changes in production output.

Additionally, because of the tightening correlation between oil and stocks, establishment entities like the Wall Street Journal have even suggested that central bank buying activities should include oil in their large scale asset purchasing programs or QE (with reference to the Bank of Japan or BoJ)
This looks increasingly as more signs of desperation to anchor onto something as central banks magic appear to be fading.
Yet what seems to have been overlooked has been the US dollar. The presently weak US dollar (as shown by the Bloomberg dollar index at the right window) has provided much space for oil’s rally.
And while it may be true that low oil prices will likely increase pressures on highly leveraged energy firms that may lead to defaults, the problems have not been confined to the oil sphere.

There hardly is a single cockroach. The appearance of a cockroach extrapolates to more hidden ones. That’s based on the cockroach theory of finance. And the energy sector could be just one of the many debt impaired ‘cockroaches’ that has emerged.

According to the Bloomberg, 5,000 publicly listed energy firms have a combined $3.6 trillion in debt. Such scale of debt has been distributed as $2.1 trillion in bonds, and the rest, could be in bank loans. While not all will be affected, many will.

And cockroaches have definitely been surfacing.

Aside from stock market and currency crashes, presently, the Standard & Poor’s US Distress Ratio for junk bonds has already reached 2009 crisis levels. And the sustained rise of the distress ratio points to even more defaults ahead.
And the contagion or ‘spillover’ dynamic has only been escalating, as analyst Wolf Richter explained7: And it’s not just the oil-and-gas and the minerals-and-mining sectors that are getting crushed. Of the 607 distressed bond issues in the ratio, 172, or 28%, are oil-and-gas related and 80 bond issues, or 13%, are minerals-and-mining related. The remaining 59% are spread across other the spectrum…In terms of total debt, the third largest sector on the distressed list is Telecom with 31 S&P rated issuers and $33.5 billion in distressed debt, followed by Utilities, where distressed debt has soared 58% in just one month (!) to $32.5 billion, spread over 37 distressed issues. 
And yet even more cockroaches. The gold-oil ratio seems to be a harbinger of even more volatility, which combined with tightening of global liquidity and financial conditions could even lead to a major adverse event ahead.

The BCA Research recently warned8: The gold/oil ratio has made all-time highs recently. Not only is this ratio a liquidity vs. growth indicator, but it also takes a real time pulse of investor angst, rendering it a reliable fear gauge (see chart). Worrisomely, crude oil volatility has spiked to levels last seen during the Great Recession, and is also signaling that the VIX will follow suit in the coming months.
While oil prices may be today’s darling, it is just one of the many symptoms of imbalances that have been unraveling or undergoing violent adjustments. Eventually, I expect such fixation to lose footing.
Finally, it has been a curiosity for Citigroup, one of the largest banks in the world (13th based on relbanks.com in 2015) to declare that “chances of a global recession are already high and only going up”.

Mainstream banks usually don’t go against the interests of political institutions. That’s unless recession has already been extant or when such institutions are trying to sell something. The latter seems to be the case for Citigroup.

So while the firm says global recession is “increasingly probable”, “it's not necessarily unavoidable”. That’s because such would be conditional to Citigroup’s prescriptions. According to Bloomberg, “To avoid a recession and to avoid a greater slowdown in potential output growth than is warranted because of worsening demographics, the world needs a global version of what we would call 'Abenomics plus,'" which in Citi's terms would be easy monetary policy coupled with fiscal stimulus and structural reform that would include "material deleveraging."

In short, make sure that government subsidies flows to us and recession will go away.

___
1 Philippine Statistics Authority External Trade Performance: December 2015 February 24, 2016
2 Businessworld.com NEDA statement on Dec. imports February 24, 2016
4 Philippine Statistics Authority Total Gross Revenue Index of Industries grew by 4.3% in Q3 2015 February 24, 2016
8 Anastasios Avgeriou Is Volatility Set To Spike? February 24, 2016

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