Epic Climax. We are witnessing the unfolding of a classic massive top.
As said I noted last week, history is in the making, not because of the headline index, but because of extent of grotesque valuations reached, the intensive mispricing, the sheer degree of recklessness as expressed by vertical prices, the total evisceration of risks, the extreme or lopsided scale of misperceptions which are basically manifestations of hardened convictions of a one way street or the delusional attainment of paradise, and importantly, the massive and brazen manipulations of stock prices and stock price index.
The late legendary investor John Templeton once provided a template on the stock market cycle:Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria
Euphoric Politics: Big Expectations Will Lead To Big Frustrations
Yet more examples of “hardened convictions of a one way street or the delusional attainment of paradise”.
Mainstream headlines has recently put into limelight euphoria in the political spectrum.
In their latest survey, Asia Pulse noted that the new administration garnered an “overwhelming majority” of 91% trust rating which media effused with “record breaking”.
Stupendous! That’s more than 9 of every 10 people!
When people think the same, then no one is thinking at all!
Last week, another major pollster Social Weather Station in conjunction with MVP and Philstar owned Businessworld “bared a new record-high net personal optimism” where optimists soared to a record 49% as against pessimists who slumped to 3%.”
Pardon the ad hominem but the latter pollster is the same outfit that produced a survey, last year, under a contract with a life insurance agency, which said that a third of the residents believed that Philippines have attained a developed world status!
Yet paradoxically, the electorate supposedly junked the past “daang matuwid” administration in the rationalization of a “protest vote” against the latter’s socio-political-economic conditions
Instead, such political euphoria appears to be manifestations of a vastly narrowing of time orientation by the public. People are becoming impatient, restive and short term oriented. Thus, the intensifying short termism translates to the increasing reliance on populist policy palliatives or short term solutions via the “superhero effect”.
Compounded by media’s indoctrination, the BSP’s asset bubbles have subliminally structurally altered people’s mindset to look for short term fixes.
That’s if the polls are accurate and not politically colored.
Yet the supreme irony is that the when it comes to the administration’s policy bedrock (war on drugs) from which extrajudicial measures (summary executions) have become a frequent policy tool, public opinion has supposedly been split on the issue. So if the pillar of the regime’s policies has been driving a wedge on public’s opinion, then just how can polls come up with a lopsided tilt?
And as proof of public pressure on the administration, the mercurial president once again flip-flopped over “summary executions”. From GMA Online (italics mine): "I said we cannot build a nation by killing people over the bodies of your fellow citizens. But I’ll have to control. So iyong sira na, you have to check with them if they are talagang ma-resuscitate pa, 'ika nga. Lagay na lang natin sa diyan," he said in a speech before officers and members of the League of Cities of the Philippines (LCP) and League of Provinces of the Philippines (LPP), who took their oath in Malacañan Palace late Wednesday night.
Awesome, fickle mindedness
In reality, all actions have consequences.
Summary executions, which supposedly claimed an “innocent” 22 year old honor college student in Dagupan City, perhaps out of mistaken identity or mere grudge, will come with a cost. Curiously, only two media outfits carried this report.
And summary executions will NOT be matter of public opinion but of the ramifications from arbitrary repressive social actions. If sustained, current environment which already have been sowing the seeds of a violent environment will see even more violence (on both directions or government and non government). That’s because violence begets violence, especially under perceptions of injustice perpetrated by the government.
Yet how will prosperity be attained if society substitutes drugs with murder? Or how will increasing use of repression encourage economic activities? (more below)
Interestingly, the regime’s political direction has been founded on poor numerology: “war on drugs” have been intended to address 3.7 million afflicted (users and pushers) of the over 100 million in population! (GMA7 on the president’s SONA)
Repression as a means to control drugs? Or has drugs been used as a scapegoat or pretext to promote serfdom?
Moreover, just how can business flourish when the government cannot even respect life of its constituents?
A market economy ultimately stands on property rights. And the essence of property rights is LIFE through self-ownership. One cannot own property/properties without life or self-ownership. And it is from property rights where trade occurs (voluntary exchanges) and where the contractual regime (sanctity of contracts) emerges. If life is treated with little respect, then how much more of the individual’s property?
Proof?
Just look at how confused the president is with economics. This quote from the State of the Nation Address (bold added): “Reforms to ensure competitiveness and promote ease of doing business will be mandatory. [applause] Reacting to these needs, the restrictions on the economy will be needed to make more investments to come and to develop labor-intensive industries such as manufacturing, agriculture and tourism shall be pursued. (GMA Online)
Apparently, competition has been seen as similar to TV contests like Britain’s Got Talent where competing interests are screened and judged through a panel, rather than by the consumers. Or politics has been seen as the commanding priority over the consumers or the population. But this is opposite to the way world works.
Economic life is about the millions of moving parts spontaneously operating real time even under the shadows of the political interventions. And such is the reason black markets exist even under the most oppressive and tyrannical regimes (like North Korea or in Cuba).
And it is the consumers that basically determine which entrepreneur is to be rewarded and which is to be punished via profit and loss mechanism. Yet through restrictions in economic freedom, or the economic or commercial use of property rights, competition will not be increased but REDUCED. And diminished economic opportunities would only redirect activities to the unofficial economy.
Competition, in the present political context, will thus be subjected to political whims thereby advancing the interest of the politically connected and the well to do or to those who has resources to comply with regulations (compliance costs) rather than providing equal commercial opportunities to the rest. Hence restrictions work as a protectionism in favor of the political class.
And state induced crony capitalism effectively brood systemic corruption.
In a paper on corruption, economist John Joseph Wallis wrote*
Crony capitalism is not a manifestation of venal corruption—it is a symptom of systematic corruption. Developing countries do not have markets that work well, because the open access and competition necessary to make impersonal markets work cannot flourish when entry is limited to create the privileges that hold the political system together
The fundamental lesson from which to avoid corruption according to Mr Wallis “is how to construct a government that does not depend on manipulation of the economy for its continued existence.”
*John Joseph Wallis “The Concept of Systematic Corruption in American Economic and Political History.” Edward L. Glaeser and Claudia Goldin Corruption and Reform: Lessons from America's Economic History p.58-59 March 2006 NBER.org
So the regime’s economic agenda would only perpetuate on the status quo (systemic corruption), even if it has been sold to the public as an agent for C-H-A-N-G-E!
And because political euphoria has been founded on essentially structurally faulty or flawd premises but has been seen a foolproof way to success by both political agents and by its constituents, big expectations will lead to big frustrations.
Euphoric Sales Promotions!
It’s not just in politics.
I received a sales pitch from one of the leading bank that lambasted the analysts and market specialists who called Philippine stocks as “expensive”. The stunning sales pitch comes with: “But who could really tell if the market will go down? What if we took profit and never had the chance to re-enter at lower levels? Taking this risk could translate to a lot of missed opportunities. Why not just stick with it as the market continues to gain momentum? Or even a better practice would be is to do COST AVERAGING if it happens that the market dips.”
Truly astounding.
Again even more signs of “sheer degree of recklessness as expressed by vertical prices, the total evisceration of risks, the extreme or lopsided scale of misperceptions which are basically manifestations of hardened convictions of a one way street or the delusional attainment of paradise”
The bank representative did not address why some analysts and or market specialists say that Philippine stocks are or have been “expensive”. “Expensive” seems to have risen out of a vacuum. Yet “expensive”, and its potential repercussion or risks from overvaluation, have been summarily dismissed as insignificant factors.
For the bank analyst, what mattered most was the momentum and price chasing dynamic. Or said differently, prices have become totally unanchored or irrelevant to fundamentals. Because Philippine stocks have moved vertically up, such phenomenon has been perceived as a motion that has been destined for perpetuity, hence the proposition predicated on a false choice: to be engaged now or to average down dips.
Furthermore, it is interesting to see how sales pitches have focused on the psychological hokum predicated on the “fear of missing out”. Such fear of missing out has been expressed by “missed opportunities”. By not buying today, you’d have lost an opportunity of a lifetime! Astonishing!
Said differently, you do not want to be attending parties or social gatherings telling everyone that you don’t own stocks. Because “missed opportunities” would mean that either you are a caste or you are not fashionably IN or just plain dumb!
Yet the bank analyst seems to have a very short memory. Or could it rather have been selective perception? Or survivorship bias (seeing winners/survivors in the exclusion of losers)?
Has the present vertical rally not just been only 6 month old? What preceded the present rally? Was it not a NINE month crash (April 2015-January 2016)?
Also has the runup going to the record April 2015 8,127.48, been only a three month old dynamic?
Moreover, the Phisix touched TWO major bear market levels in the past three years. The unanswered question is WHY? If the Philippines has been fundamentally immaculate and robust as so claimed by the mainstream then why the bear markets at all?
Importantly, why have current valuations reached 1997 levels, if indeed G-R-O-W-T-H had been driving stock prices?
And what has history to say when outlandish price levels have been attained? More price surges or a collapse?
In September of 2014, I asked that should Phisix break out of the 7,400, which cycle would such a breakout align itself with: 1979, 1997 or 2007?
The two generational or secular highs (1969-79 and 1994-97) during the topping process showed how previous highs had been exceeded. The cyclical top of 2007 likewise reveals of the same dynamic but at a more muted dimension.
As I have been saying the issue is about financial instability rather than of reaching specific price levels. The two generational/secular stock market bubble cycles did not only result to a stock market crash but metastasized into financial crises.
Apparently, the market has answered. In both 2015 and today, the pattern has been 1979. Will the same pattern selection hold if 8,127.48 is broken? We will see.
Yet current spiel to attract depositors money defies quintessential axioms for investing. For instance to quote the erstwhile value investor Warren Buffet's basic rules:
-“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1”
-“Price is what you pay. Value is what you get.”
-“Risk comes from not knowing what you are doing.”
Moreover, establishment promotions don’t tell their clients HOW they benefit from it. Simple logic tells us that if everyone buys their endorsements, then there would be no sellers at all. Yet it is transactions that set on the price levels. And with a dearth of the likely sellers then who would assume such position? Here is a guess, the establishment’s trading/portfolio management/ treasury/finance department will. Or the establishment will function as sellers on what the public buys at elevated prices.
As iconoclast Nassim Nicolas Taleb wrote in his December 2015 paper Skin in the Game: Why Each One Should Eat His Own Turtles: Equality in Uncertainty (bold mine)
As a trader you learn to identify and deal with upright people, those who inform you that they have something to sell, by explaining that the transaction arises for their own benefit,with such question as “do you have an axe?” (meaning an inquiry if you have a certain interest). Avoid at all costs those who call you to tout a certain product disguised with advice –trying to dump inventory on you. In fact the story of the turtle is one of the most common occurrence in history.
Mr Taleb’s paper is based on the axiom Ipsi testudines edite, qui cepistis or “You who caught the turtles better eat them”. It is predicated on the conflict of interests between principal and agent or the lack of skin in the game.
And this will not just be about inventory of securities, but more about wealth transfer. By inducing the public to buy or imbibe on unnecessary risks, regardless of the risk reward tradeoff, the establishment earns from profits (from trade), commissions, fees and deals. Such would be aside from inflated asset prices of their stocks, which would likely be used as collateral or currency for more loans or for more merger and acquisition and other corporate deals.
The public takes on needless risks while the establishment parties from the central bank invisible wealth redistributions.
And at the end of the day, as always, it is the gullible public who will be left with holding an empty bag.
In short, when the establishment becomes desperate in the promotion of their interests…at all costs, then it should serve as writing on the proverbial wall.
Euphoric Bank Credit Expansion Spree!
Another fascinating highlight on today’s epic top has been how one online stock broker described Philippine stocks as being driven by “liquidity”.
It appears that perhaps some of the establishment analysts have been baffled by the recent vertical price action—which of course, has had little relevance with popular expectations anchored on G-R-O-W-T-H—so the frantic search for explanations. In such a quest, they probably stumbled into the correlation between “liquidity” and stocks, hence the generalization.
The Bangko Sentral ng Pilipinas would define “liquidity” as changes in money supply conditions. The BSP reported elevated liquidity and banking loans conditions for June.
Because the banking sector has been responsible for more than 70% (75% last June 2016) of money supply growth, then a “liquidity” powered PSEi represents a euphemism for a bank credit fueled vertical ramp of the PSEi.
To put bluntly, a stock market bubble enabled and nurtured by a credit bubble.
Of course, the establishment will say other things about how stocks are not a bubble.
But changes in the conditions of general bank loans have practically guided the path of the PSEi.
Each time bank credit growth surges, the PSEi belatedly follows suit. And each time the credit growth slows, the PSEi eventually falters.
In essence, Phisix 8,127 and beyond would imply for sustained furious growth rates in bank credit as today. Since bubbles basically feed on credit, then for bubbles to continue to inflate or swell requires acceleration in the speed and the intensification of in the scale of credit growth rates.
But since all actions have consequences, inflating asset prices would translate to price distortions in the economy. And one of the main distortions will likely be reflected on CPI outgrowth. Rising CPI will add an inflation premium to interest rates. And rising interest rates would put a brake on credit growth. CPI has basically resonated on the activities of bank loans and M3 growth.
Moreover, credit expansions extrapolate to increased burdens on balance sheets. Increased leverage will lead to a compression of profit margins and thereby put an obstacle to capex expansions. That’s if increased leveraged would not be offset by faster productivity as manifested by earnings growth.
So a break of April 2015’s 8,127 principally depends on the banking system's credit growth conditions. If the banking system’s credit growth rate accelerates further, then 8,127.48 would be taken out. Otherwise the reverse happens
Observe that since the BSP has launched a silent stimulus last 4Q 2015 and 1Q 2016, credit growth and the PSEi surged vertically in tandem.
Such stimulus as I previously noted was perhaps engineered to fund election spending, lift inflation so as to provide “foundations” on the statistical GDP or to bailout the stock market or a combo of the three.
And like 2009, the BSP essentially pried open or reversed the flattening of Philippine yield curve to achieve a revival in credit growth conditions.
So let us examine conditions of the yield curve.
The Asian Development Bank noted in their Bond Monitor that between March 1 to May 15 Asian bond yields softened, “the exceptions were the People’s Republic of China (PRC) and the Philippines, where yields generally picked up.”
Apparently, the massive yield chasing dynamic that led to a gigantic $13 trillion of negative yielding bonds has percolated on global bond markets or to emerging markets as well.
According to the Marketwatch.com, emerging markets bonds reported an eye popping record breaking four week buying boom or portfolio inflows (left)! Apparently such fierce bond chasing phenomenon spilled over to the Philippines. Prices of Philippine bonds have surged (yields have dived)!
So this should temporarily boost domestic bank profits.
But all actions have consequence.
The bond buying binge has once again flattened the Philippine yield spreads as shown in the 10 year minus 2,3, and the belly, the 5 year curves above. Such sudden narrowing of spreads has effectively neutralized a considerable segment of the BSP’s silent stimulus!
Yet if this two week dynamic continues, then the present sustained high levels of loan growth may likely find a substantial headwind. Narrowing yield spreads translate to the thinning of net interest rate margins where the incentives to issue loans may be reduced
But so far, domestic banks have met narrowed margins with massive issuance of loans. Or domestic banks have offset diminished margins with an expansion in volume. Or volume has substituted for reduced margins.
Such intense competition for market share in the bank’s loan department expressed through volume should only translate to a significant lowering of credit standards.
While credit strains hardly appear during the good times, it is during the slowing down of the economy where such imbalance surface.
Yet the present frenzied rate of bank expansion seems unsustainable. And if bank expansion moderates or turns lower and so will Philippine stocks.
Euphoric PSEi via Price Engineering
PSEi 8,100 was virtually reached in 5 trading sessions since July 21. Two sessions July 21 and July 27 closed at the said near record highs. So the during the past 7 trading days covering two weeks, the latent mission was to breach 8,100…at virtually all costs!
This reveals how the thrust to breach 8,100 comes with intense emotional attachment, a deepening sense of entitlement and latent fear of a reversal brought about by the previous crashes (PSTD). These have all been expressed on prices through vertical runups which has now gone past 6 months old.
Thereby each case of price weakening/ profit taking has been followed by a massive engineered price spikes—mostly channeled through post lunch afternoon delight and or marking the close sessions.
8,100 has not only been the magical number, PSEi 8,000 has also served as the bull’s “Maginot Line”—a line that must be held again at all costs.
Applying the above daily price cycles to the compressed trading spectrum, each time profit taking would occur to bring the PSEi close to 8,000, there would be unremitting pump to elevate the Phisix back to 8,100. And such intense seesaw battle have been about market prices, but more importantly the goal of holding on to the 8,000 level as well as the push to 8,100 have all been magnified by manipulations.
Thursday (July 28) and Friday’s (July 29) activities exemplified on the chronic obsessive compulsive disorder that has prevailed at Phisix or gripped market participants.
Following July 27s 8,100 close, a profit taking mode engulfed the Phisix. Though manipulators started to reduce the losses immediately past lunch break, selling pressure overwhelmed them. So it took about past 3 pm for the cabal to concertedly push the PSEi higher. The session ended with a marking the close which chopped losses by .22%. The PSEi closed down .93%.
On Friday, despite the massive pump on SM following the incorporation of a 50% stock dividend, momentum to push the PSEi back to 8,100 failed, selling ensued. Though there was another exertion to pump the Phisix post lunch, selling accelerated. By the closing bell, marking the close turned upside down: instead of a pump it was a dump for Friday.
Price fixers have basically been challenging charts. They realize that any sign of weakness would have created a bearish formation (first head and shoulders). So the vertical pump succeeded to expunge the formation. Nonetheless, the next objective, 8,127.48. Failure to beat this would imply of a massive double top. Additionally, short term accounts of bearish rising wedges had all been eviscerated by sustained vertical pumps. Apparently, there is no such thing as resistance levels or bearish chart formations for a determined few with access to a lot of money and who would take needless risks to prove a point. It’s why I am no fan of charts.
Instead, the industry’s feverish sales pitches for a sustained stock market boom (or solicitation for more money to be used for redistribution), the PSE’s glorification of the stock bubble, febrile rate of bank credit expansions and engineered price actions or price fixing activities highlight on escalating imbalances being acquired on the financial system, even as stock market prices surge. Add to lethal cocktail mix, the huge political bubble.
Essentially, market crashes, financial panics or even crisis are products of antecedent artificial booms.
The psychological denial framework can be identified as the “This Time is Different” syndrome.
As Harvard’s Carmen Reinhart and Kenneth Rogoff wrote (bold mine)
The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter, we have learned from past mistakes. The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country), is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.
