Let me guess, because the Phisix broke into new territory, August-September M3 may have likely surged past the highs of May 2016 and July 2017 at 13.5%
[Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling September 24, 2017]
Well, that conjecture turned out to be pretty much accurate.
The BSP’s data demonstrates that August M3’s 15.4% broke past highs of May 2016, which has exactly been less than a month before the Phisix breakout in mid-September. When M3 soared to its peak in May 2016, the Phisix hit a high of 8,100 two months after or in July.
What is the relationship between the Phisix and the peso? Well, the answer to that is “what medium is used to transact stocks?” Wouldn’t that be the peso? This means stocks are likewise subject to the conditions of the supply and demand of the peso.
For instance, under current conditions, when an excessive amount of money has been infused into the financial system, demand for money decreases as demand for other economic goods or financial assets increases.
To quote again BSP’s Dr. Dante Canlas**:
[**Dr. Dante Canlas, BSP Sterling Professor of Monetary and Banking Economics, Business Fluctuations and Monetary Policy Rules in the Philippines: Lessons from the 19841985 Contraction April 30, 2012 p 14-17 BSP.org.]
"A prior issue is this: is inflation a monetary phenomenon Friedman had said “inflation is always and everywhere a monetary phenomenon.” With a quantity theory of money in mind, if the central bank increases the money supply from a position of balance, then the real money stock exceeds the demand for it. To restore balance, the general price level must rise, which means inflation rate, defined as the percentage change in the general price level must rise.
And the BSP’s negative real rates policies have signified its source.
Thus, monetary inflation feeds into asset prices, expressed as record Phisix (as well as property prices), and likewise into the general price level, as measured by the CPI.
In response to the BSP’s twin action, real economy inflation, not just the CPI, should be expected to substantially rise. And increased price pressures would translate to compounded difficulties for the marginal earners. To put bluntly, disposable income will shrink! [As an aside, my neighborhood sari-sari store informed that prices of San Miguel beer products is expected to increase in the coming days]
And even when taxes of the marginal earners will be removed, their purchasing power will remain suppressed due to the government’s inflation tax.
The BSP’s emergency measures, viz. lowest interest rates in history (ZIRP) and record NG debt monetization (QE), has fathered the resurgent M3.
Both the private sector and the government have used money creation to propel GDP.
As I wrote back in August,
Today, both the BSP and the banking system have been working overtime to expand the money supply. Monetary inflation has been aimed at generating revenues for the NG through direct taxes and through the inflation tax.
[BSP Has Been Right: No Foreign Exchange Crisis…For Now; But Devaluation Policies Amplify Risks! August 27, 2017]
On a month to month basis, the BSP’s net claim on the National Government (NG) was reduced by Php 12.6 billion in August. However, the year-on-year rate of change jumped 16.74%.
On the other hand, the growth of the banking system’s total production and consumer loan portfolio has rocketed past 2014 highs!
In the recent past, the fiery bank loan growth, which peaked in 2011, spurred a 10 month 30+++% in 2H 2013 to 1H 2014. That was all about the banking system’s credit inflation.
Today, with the twin-engine of credit inflation in full throttle, a repeat performance of the previous 30++%%% money supply growth looks likely a viable immediate target!
Such explosion in bank loans or the sustained massive expansion of systemic leverage operates even as net income has been stagnant in the 1H 2017***, the perpetual race to build supply and intensifying economy-ide price pressures.
[***Phisix Surged to 8,000 even as Net Income Posted a CONTRACTION in the 2Q and Stagnated in the 1H!August 20, 2017]
The S&P Global Ratings appears to have captured in their radar system the massive increases in systemic leveraging. Hence they issue a subtle warning, perhaps tacitly addressed to the very accommodative BSP
The median leverage of the largest domestic companies appears to be stabilizing in most countries, with the exception of the Philippines and Thailand.
Philippine and Singaporean companies had about 2x more leverage on aggregate than those in Indonesia. They also had nearly 50% more leverage than those in Malaysia and Thailand. These numbers remain consistent year-on-year. Singapore stands as the “champion” of indebtedness, due to still-modest operating conditions for real estate and oil- and gas-related sectors, combined with persisting spending and sticky dividends (about 35% of EBITDA for the largest 100 listed companies in the country, compared to 25% on average across Southeast Asia). In the Philippines, the dominant diversified groups continue to spend aggressively on expansion and acquisitions, so leverage has continued its upward trend.
We believe ease of access to funding remains a key factor in leverage. Singapore, Philippines, Malaysia, and Thailand all have active and liquid local banking and capital markets. We also see that leverage tends to be above average among the most active issuers in these markets…
Based on their sectoral exposure, we believe that countries likeliest to see credit quality deteriorating in the next 12 months are the Philippines and Thailand, with Malaysia, Indonesia, and Singapore being potentially more stable.
The S&P essentially validates my observation that PSEi 30 firms have been gorging in debt with reckless abandon. [Biggest Wow, as 1H Net Income Stagnated, Ex-Bank PSEi 30 Debt Swelled by a Staggering 19% (Php 433 Billion)! September 3, 2017] Debt has become the foundation of G-R-O-W-T-H!
And the massive pump-fest at the Phisix comes in the light of the “credit quality deteriorating in the next 12 months”! Interesting, no?
Of course, BSP policies account for as a major factor.
There is another related dynamic: Market manipulation. During the first three days of the week, the PSEi’s correction had been severely mitigated by coordinated and synchronized end-session pumps. [Signs of Market Top: Financial Felony, Swindles and Fraud: Filinvest-Megawide Collection Troubles? Three Unprecedented Days of PSEi Magic! September 28, 2017]
In the next days, it had been dumping! But Thursday’s dump came after another attempt at an afternoon delight pump! (upper right window)
In all five days of the week, end-of-session pumps and dumps became the determinant of the Phisix. The halcyon days of pricing dictated by the markets are over. Price discovery and the economic coordination process from pricing signals have given way to the brazen gaming of the system.
With SM consistently being inflated along with its other subsidiaries (SM Prime and BDO) to keep the Phisix at records, the Sy group now commands an astounding 26.81% share of the index’s market weight! The Phisix is now about SM! Remember, in the 1H SMPH declared that it bought Php 4.9 billion of shares of related party firms. [SM Prime’s Growth Model: In 1H 2017, Every Peso of Growth Was Funded By SIX Pesos of DEBT! SMPH Bought Php 4.9 Billion of Related Party Shares! August 13, 2017] Pump one’s own stocks by borrowing heavily! Truly signs of times!
Aside from the government, some vested interest groups have come to believe that markets can be tampered or controlled with impunity or with no attendant harmful consequences.
We shall soon see.
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