But the evils of paper money have no end. Its uncertain and fluctuating value is continually awakening or creating new schemes of deceit. Every principle of justice is put to the rack, and the bond of society dissolved: the suppression, therefore, of paper money might very properly have been put into the act for preventing vice and immorality.—Thomas Paine, one of the Founding Fathers of the US
In this issue
Mania at Phisix 8,050! Beware of the January Effect, Will 4Q GDP Be Lower Than the 3Q?
-Going Gaga over 8,050! Beware the January Effect
-Two Major Secular Tops Occurred In January: 1979 and 1997; Inflation Targeting
-Will 4Q GDP Be Lower Than the 3Q? Vehicle Sales Plunge in 2018
-What Justifies Forecasts of a Strong Return for the PSEi in 2019?
-Global Central PUT Launched in the face of Sharply Slowing Global Economy and Displacements in the Financial Plumbing
Mania at Phisix 8,050! Beware of the January Effect, Will 4Q GDP Be Lower Than the 3Q?
Going Gaga over 8,050! Beware the January Effect
Wow! The PSEi 30 closed at 8,049 last Friday, and the establishment has been slavering over, and piling into each other, in extolling how great 2019 will be for the equity markets, and thus, the economy.
Such dopamine triggered mania typically occurs when breakthroughs occur. Not so this time. The latest rally must have functioned as a relief valve to the recent angst experienced by them from the latest bear market. Thus, the “I told you so’s”, “markets will always come back”, “markets have nowhere else to go but up” and the other 'pat in the back', jubilant rationalizations!
With a stunning 7.78% return in just 13-days, of course, this is strong!
But what exactly are the factors to justify sustained strength from such explosive rates of increases?
Figure 1
More than anything else, January has functioned as the bulwark month of the bulls. Since 2012, only January 2016 has registered a decline. The over 7% gains of 2012 and 2013 have resulted in diametric annual outcomes, i.e. 32.95% and 1.33%. (see figure 1, upper window)
Yes, of course, January gains may accelerate further considering the imminence of the ‘golden cross’ which may send chart based buyers chasing prices. The golden cross represents a bullish momentum indicator which shows of the crossover of the 50-day with the 200-day moving averages.
However, in 40 years, big returns (5% up) from January have been trending down. (see figure 1, lower window)
Because of the base effect that would be natural. For instance, it would be a cinch to have returns double when the originating base is at 100 than it is at 1,000.
Furthermore, despite the base effect, it hasn’t been true that the strong January effect leads to even stronger yearend returns as popularly held.
The biggest January return 23.56% occurred in 1987 where the month’s seasonal strength served as a springboard to its marvelous 91.42%. The PSEi index closed at 813.17 in 1987.
The most phenomenal annual return of 154.42% occurred in 1993 where January returns registered 7.15%. The Phisix ended 1993 at 3,196.08.
There were 16 Januarys that had over 5% returns in 40 years. Of that 16 years, 7 or 43% of Januarys registered negative returns. Half or eight of annual returns were lower than January returns.
Of course, every January is fundamentally different.
Two Major Secular Tops Occurred In January: 1979 and 1997; Inflation Targeting
And sure enough, TWO of the MAJOR SECULAR stock market cycle TOPS occurred in January.
January returns of 1979 and 1997 were 9.77% and 7.93% to deliver annual returns of -10.52% and -41.04%, respectively.
Figure 2
The culmination of the stock market cycle in the early 1980s resulted to an 81% collapse while the turning point brought about by the Asian crisis in 1997 registered a 68.6% crash in one and a half years for the headline index. The Phisix bottomed at 1,000 levels in 2003 (figure 2, upper window)
Recall, last year, the Sy-led Phisix climaxed to a milestone 9,058.62 also in January (29). January 2018 returns of 2.4% pale in contrast to the current setting, although the Phisix ended with a -12.76% return last year.
Please note that the composition of the Phisix has been changing. So while we may be referring to a single index, the composite members have changed overtime.
And as an aside, in the 1965-1985 cycle, the Phisix and the CPI moved almost in tandem. That is, the Phisix rose and fell concomitantly with the CPI. (figure 2, lower pane) And that has also been the case of Phisix during the 2014-2015 mini-cycle.
So when the mainstream says that the slowing CPI leads to significant returns - history shows that such hasn’t been the case.
Under the current operating environment of the fiat money-fractional banking standard, growth in money supply, mainly from bank credit expansion function as the principal pillars to the GDP, revenues, and earnings growth, as well as, stock market returns.
So when the CPI skids as a result of the slowdown in bank credit expansion, the same factors will abate to signify tightening money conditions.
Will 4Q GDP Be Lower Than the 3Q? Vehicle Sales Plunge in 2018
And to carryover this premise, the National Government will be announcing the 4Q and 2018 GDP next week.
Figure 3
There have been little signs of improvements thus far in the 4Q.
November’s plummeting rate of growth in tax revenues, the sharp slowdown in merchandise trade backed by industrial production, as with slumping consumer credit hardly suggest of a GDP stronger than the 3Q. [Why Deficit-to-GDP May Reach 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion! January 13, 2019]
And bank credit and its ramification, M3, have, thus far, dovetailed with the direction of the GDP.
Trends of critical monetary indicators have been heading south to signify financial tightening. Going by its correlation, 4Q GDP should be lower than the 3Q. 3Q GDP may be revised ahead of the actual 4Q and 2018 GDP announcement
But, of course, since the GDP is a government constructed statistics, and since the government is driven by political incentives, GDP may exhibit what the NG desires to project for political or even economic reasons. For instance, boost GDP to lower credit risk to allow the NG to fund its record deficit cheaply.
Yet more signs of a 4Q slowdown.
Figure 4
The plunge in car sales in December has also exhibited the slowdown in both (total) bank credit expansion and money supply.
December car sales plunged 29.8% year-on-year but had been higher 2.2% month-on-month. Fourth quarter sales crashed 21.54%. Total car sales for the year of 2018 dived 16.02%.
The downturn in BSP’s consumer car loan growth validated the steep fall in November’s car sales growth. The BSP has yet to publish the banking system’s December car loan data.
Yes, excise taxes, the frontloading of pre-TRAIN sales and higher CPI have contributed too. But do note that since peaking in August 2016, the rate of vehicle sales growth has been in descending. TRAIN 1.0 only accelerated its downturn. (figure 4)
So from the Transport GDP perspective instead of increase, it could be a (substantial) decrease.
What Justifies Forecasts of a Strong Return for the PSEi in 2019?
So if 4Q GDP underperforms, what factors should juice up 1Q 2019 GDP for the stock market to justify its 7.78% 13-day return? Where will the GDP get its momentum?
Only 2/3 of January has passed as of this writing. Except for the stock market, what spectacular economic development has occurred in 3 weeks of 2019?
Is the stock market pricing in a miracle from an even larger deficit spending by the NG? Does the stock market believe that instead of competition for funds and resources, expansive and aggressive government spending will lead to MORE resources at cheaper costs?
Does the stock market also believe that the crowding out syndrome, as a consequence of the law of scarcity, will be abolishedand replaced by abundance?
Have they been pricing in free money from the coming elections? But if banks have been slowing down on credit issuance, then electoral free money can only emanate from increased BSP financed deficit spending. Wouldn't the accelerated BSP monetization of deficits lead to more and not less inflation? Wouldn’t this spur further declines in the peso that would enlarge the US dollar shortage in the economy and magnify leverage denominated in USD? Wouldn’t such monetization also indicate that the BSP’s year-end target of 3.2% would fall short?
Is the stock market pricing in an economic bounty from the BSP by first reducing reserve requirement ratios and next, interest rate cuts?
Have the stock market come to believe in the promise of the BSP to expand liquidity to double digits without understanding how this can be achieved? The BSP’s RRR cuts have not been about easing, but about plugging the banking system’s liquidity shortfall along with the thrust to align peso liquidity conditions with its falling international reserve assets in USD.
Is the BSP expecting that policy rate cuts would reignite the banking system’s already blazing credit growth rate that may hit uncharted levels? Does the BSP believe that the Hanjin debacle would be isolated even when they have warned against such risks (3Rs) in their 2017 Financial Stability Report?
Does the stock market believe that record bank credit debt of Php 7.86 trillion PLUS record public debt of Php 7.195 trillion whichtotaled Php 15.055 trillion last November 2018 or about 90.5% of estimated real GDP in 2018 would have little impact on the economy, earnings and liquidity conditions operating under relatively higher rates with a very flat to partially inverted yield curve?
Or has the stock market been bewitched by the BSP?
Or could it be that some liquidity constrained financial institutions may have been in collusion to force up stock prices to generate trading revenues with the aim to attain interim or short-term profits? Or could this be part of the attempt to hide or conceal escalating balance sheet impairments and or puff up collateral values through artificially elevated assets?
Or could it be that as a result of constant manipulations of the index, the stock market’s pricing system has become so deformedthat prices reflect, not of actual economic, financial and or capital conditions, but about excessively destabilizing speculative impulses?
Global Central PUT Launched in the face of Sharply Slowing Global Economy and Displacements in the Financial Plumbing
Of course, the domestic facet represents just part of the larger prism.
It has not just been the Philippines, but global stocks have been on fire.
Risk ON has almost been ubiquitous.
US equity markets charged feverishly to post astounding weekly and phenomenal 13-days returns. The Dow Jones Industrials soared 2.96% for a 13-day return of 5.91%, the S&P 500 2.87% and 6.54%, the technology-heavy Nasdaq 2.66% and 7.87%, and the small-cap Russell 2000 2.43% and 9.93%.
Asian equity markets revved up this week to post a significant average weekly return of .94%. An overwhelming 89% or 17 of the 19 national benchmarks registered gains.
Leading the week’s winners were South Korean KOSPI (+2.35%), the Philippine PSEi 30 (+1.81%), Australia’s All Ordinaries (+1.82%), China’s SSEC (+1.65%) and Hong Kong’s Hang Seng (+1.59%).
For the year, 89% or 17 of the region’s benchmarks also posted advances. The 3-week return has averaged 2.97%. And the Philippines maintained its second spot in returns with 7.78% next to Bangladesh Dhaka’s 8.17%. Pakistan’s K100 (+6.04%), Singapore STI (+5.07%) and Hong Kong’s Hang Seng (+4.82%) were the next in the line of winners.
Weekly and 2019 returns were similarly robust for other American national benchmarks of Canada (weekly) 2.44% and (3-weeks) 6.85%, Brazil 2.6% and 9.34%, Chile 2.36% and 7.32%, and Mexico 1.57% and 6.25%.
European bellwethers also surged. National equity benchmarks of Germany (weekly) 2.92% and (3-weeks) 6.12%, France 1.98% and 3.02%, Switzerland 2.22% and 7.05%, Netherlands 2.22% and 4.47%, Austria 2.88% and 8.8% and Sweden 2.34% and 6.46% were among the biggest weekly gainers.
Why the sudden spurt?
The simple answer: The central bank put has gone live! Global central banks came to the rescue!
Figure 5
Because of the ‘surprisingly’ weak December trade and factor data, the Chinese government has signaled more stimulus possibly via tax cuts and fees and allow local governments to raise bonds.
Moreover, monetary tightening hasn’t just been a Philippine phenomenon, similar symptoms have appeared globally. Global M1 has plunged to recessionary levels. (figure 5, third from the top window)
A week ago, the primary dealer holding data of US Treasuries rocketed to record levels (Bloomberg’s Tracey Alloway).
Primary dealers are financial institutions (banks or security broker-dealer) which act as market makers of government securities. Primary dealers also engage in “trades in order to implement monetary policy” the US Department of Treasury notes.
In the US, repurchase agreements (repo) are exclusively transacted by the primary dealers with Treasury, agency debt or agency mortgage-backed debt as collateral, according to the NY Fed.
Collateral issues have most likely been the cause for the primary dealer’s panic stashing of USTs. While there have not been any indications in the treasury trade fails data as to signal mounting stress within the US financial institutions, the likely counterparties could be foreign official institutions such as central banks.
Also, enlarged dealer holdings mean less UST available in the system for repo and shadow repo trades to conduct offshore US dollar transactions.
Primary dealers went into panic hoarding of USTs during the Great Recession in 2007-2008 and during the European debt crisis of 2011. It has happened again in late 2018! (figure 5 lowest window)
Note that primary dealer holdings of UST have been on an uptrend which suggests a continuing buildup in financial stress. The spikes highlight the period of accelerated or intensified stress.
So mounting collateral issues from intensifying liquidity drain in the global financial system may have prompted global central banks to respond by expanding their balance sheets in 2019 that has spawned a monster risk ON and a dramatic short squeeze.
That said, a record 560 billion yuan ($83 billion) had been reportedly injected by China’s central bank, the People’s Bank of China (PBOC).
The PBOC’s actions could be part of the overall activities of major central banks, led by the European Central Bank (ECB), the US Fed and the Bank of Japan (BoJ), which appears to have coordinated the expansion of their balance sheets to put a floor on the world’s stock markets. (figure 5, upper two charts)
Though the popular pretext for the recent stock market surge has been the improving odds of a prospect of a US trade deal with China, dislocations in the world’s financial plumbing could be one of the principal factors behind January 2019’s central bank put.
Until how long will such band-aid fixes work? Will the FED reverse course soon? Will every major central bank follow?
Last week, ironically, a Reuters article entitled "ANALYSIS: Global economy is headed for recession" was republished by local media ABS-CBN. Leading indicator from the OECD suggests of the heightening risks of global recession, though the article tilts towards a soft landing.
Does recent market moves indicate a soft landing? Or will the consensus be body slammed with a shock as a result of trend-following activities?
Expect the unexpected in 2019.
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