As in all periods of speculation, men sought not to be persuaded by the reality of things but to find excuses for escaping into the new world of fantasy—John Kenneth Galbraith, The Great Crash 1929, published 1954
In this issue
Inflating the PSE’s Bubble: The Bid-en Global Financial Assets Boom Compounds on the BSP’s Php 1.9 Trillion Liquidity Infusions
I. No Free Lunch: The BSP’s Php 1.9 Trillion Liquidity Infusions
II. Philippine CPI: The Cantillon Effect on Street Inflation, The Peak of the Great Philippine Treasury Boom?
III. BSP’s The Inflation Tax: Negative Real Rates To Inflate Debt Away
IV. BSP’s Liquidity Injections Magnify the Stock Market Bubble!
V. The Bid-en Global Financial Assets Boom!
Inflating the PSE’s Bubble: The Bid-en Global Financial Assets Boom Compounds on the BSP’s Php 1.9 Trillion Liquidity Infusions
I. No Free Lunch: The BSP’s Php 1.9 Trillion Liquidity Infusions
The effects of the massive Php 1.9 trillion of liquidity infusions (and counting) will eventually manifest itself in the economy and the financial markets through prices (goods, services, and or assets), allocation of resources, and credit conditions.
Unless the credit impairments in the banking system have been as large to negate these, once the Bangko Sentral ng Pilipinas’ injections percolate into the economy, relative price surges are the likely ramifications. Yet, both the National Government (NG) and the BSP intends to offset or mop the money tsunami with more debt issuance.
Examine their financing mechanism. First, the NG issues debt to finance public works/spending. Then, to finance NG debt, the BSP prints peso, channeled directly and indirectly (mostly) through banks and financial institutions via deposits. Later, to counteract its currency or peso issuances, the BSP generates debt in competition with the NG. So, the money printing and debt response of the BSP actually resemble a switch-and-bait scheme.
Again, such a radical policy has been assumed by the establishment as a necessity.
Interestingly, barely anyone bothers to ask WHY such extreme measures are required when the macroeconomic fundamentals are supposedly sound as popularly sold to the public. Importantly, why has the mainstream been reticent of the underlying costs of such measures?
If benefits can only accrue from the use of the money printing press, why not use them always?
Like the lockdown, the citizenry is once again a guinea pig of the BSP’s gambit.
II. Philippine CPI: The Cantillon Effect on Street Inflation, The Peak of the Great Philippine Treasury Boom?
For now, weak demand has been able to counterbalance the deluge of the BSP’s liquidity infusions.
According to the BSP: Year-on-year headline inflation rose to 2.5 percent in October from 2.3 percent in the previous month and was within the BSP’s expected range of 1.9-2.7 percent for the month. The resulting year-to-date average inflation rate of 2.5 percent was within the Government’s target range of 3.0 percent ± 1.0 percentage point for the year. By contrast, core inflation—which excludes selected volatile food and energy items to measure underlying price pressures—eased to 3.0 percent year-on-year in October from 3.2 percent in September. Meanwhile, month-on-month seasonally-adjusted inflation increased to 0.4 percent in October from nil in the previous month.
Figure 1
Rising food prices from the typhoon and disease-related disruptions on supply have boosted the headline CPI, so deduced the mainstream experts. On the other hand, the non-food component, the CORE CPI, which still registered feebleness, continues to manifest enervated discretionary spending of consumers.
In short, the gargantuan liquidity injections, manifested by surging money supply growth, have done little to boost demand.
But aside from the superficial portray of reality, here is what’s really happening.
The impact of liquidity injections signify a process.
The Cantillon Effect tells of the divergent impact of money supply’s entry to the economy.
As Austrian economist Mark Thornton explained, (bold added)
It begins with an increase in the money supply and who first receives the money. That means the increase of money changes income distribution in favor of who first receives the new money. Then, depending on the preferences of those who first receive the money, some goods will experience an increase in demand, while other goods will experience a relative decrease. This in turn changes outputs of various goods and ultimately investments. Cantillon famously noted that if the new money comes into the hands of savers, that the interest rate would decrease, but if it comes into the hands of consumers, the interest rate would increase, as entrepreneurs would need to borrow more to meet the increased demand for goods.
Mark Thornton, Money, Inflation, and Business Cycles: The Cantillon Effect and the Economy
As the primary recipients of such BSP policies, whatever the banks and financial institutions use or spend on, relative prices from these are bound to increase. The bureaucracy represents the secondary point-of-entry for the newly minted money.
That is, from such entry points, the allocation and spending process should lift a larger spectrum of relative prices over time.
When the BSP instituted its QE in the 4Q of 2015, this eventually diffused into the economy to send price level higher, as measured by the CPI, which climaxed with a rice crisis in 4Q 2018.
A 14-month gap emerged from the peak of M3 (August 2017) and the zenith of the CPI (October 2018) to showcase the transmission mechanism of the Cantillon effect from the first wave of QE.
In any case, such gigantic liquidity injections (about 10% of the NGDP) will most likely fuel runaway street prices in the coming months/years. That is in the condition that the scale of credit problems of the financial institutions have not been as large as the amount of liquidity used to bail-out the system.
Importantly, another important consequence would be to amplify the misallocation of finances and resources. The current developments in the stock market are manifestations of these.
The spread of Philippine Treasuries has been steepening to indicate higher inflation ahead. While wider spreads tend to benefit the banking system through bigger interest margins, ascendant rates for a highly levered system will tend to offset such benefits.
And the likelihood is that gargantuan infusions by the BSP won’t be ending anytime soon.
From the Businessworld (October 21): “With the huge amount of liquidity injected into the system, we are fully aware of the need to carefully assess the appropriate timing of the unwinding of all these measures,” Mr. Diokno said in a credit rating call with Moody’s Investors Service held on Oct. 14. “Doing it too late or too early may have serious repercussions on the economy,” he added.
On the other hand, the Philippine great bond boom, which has supported the banking system’s topline, appears to have climaxed.
Unless banks resume lending to the economy, artificial support from the Treasury boom is about to fade.
III. BSP’s The Inflation Tax: Negative Real Rates To Inflate Debt Away
Figure 2
Because pushing interest rates down represents the main direct effect of such colossal liquidity injections from the BSP, it has caused a stark divergence between bond yields and the CPI.
As such, the yields of 10-year Philippine Treasuries, which have recently dropped to historic lows, have dramatically deviated from climbing CPI rates. The spread or the difference of the 10-year yield and the CPI have plummeted to a 6-year low. Such subsidy, through lower repayments of government’s debt, comes at the expense of savers. This is the inflation tax or financial repression.
Such deviations are also signs of distortions embedded in the pricing system.
Back in 2014, when the CPI surged as the growth of money supply exploded by over 30% in 10-straight months, Philippine Treasury yields failed to keep pace with the CPI, hence the disparity.
In the present circumstance, falling yields have been a function of QE policy use at an unprecedented scale.
The negative spread between the CPI and 1-year T-bills also demonstrates the Financial Repression in action.
However, the steepening spread of the yield of the 10-year bond and 1-year bill may be pointing to the reversal of such implicit subsidies enjoyed by the NG.
Through negative real rates, the government intends to inflate away its mounting liabilities. Sadly, this means a lower standard of living for the average citizenry. Even retirees of the government bureaucracy will lose from such inflation tax. Stagflation will likely encompass the Philippine economy.
IV. BSP’s Liquidity Injections Magnify the Stock Market Bubble!
While the spectacular vertical moves of the share prices of many issues may have perked up the adrenaline of the speculative crowd, principally the members of domestic financial institutions, it is a concerning sign of massive marketplace contortions brought about by the throwing-the-money rescue policy of the BSP.
Naturally, as the primary recipient of liquidity injections, banks and the financial system have used such spare money to trade and buoy financial markets, instead of lending to the economy, which represents a high-risk engagement.
The BSP is due to publish the updated liquidity and bank lending metrics for September next week.
By the way, the so-called profits declared by banks have emanated by the near halving of deposit expenditures in the 3Q, which are likely from the implementation of Bayanihan 2.0! We shall talk about this once the full details become available.
So, while such the massive pumps in the broader market have created a façade of a bull market, last seen in 2009-2012, the fragile support from the BSP measures, to shore up the asset prices to stave off deflationary consequences on collateral, has only magnified the discrepancies between asset valuations and its underlying fundamentals!
For the 10-component issues of the headline index, which published their 3Q Financial Statement last week, the so-called reopening has brought about only a startling 2.6% increase in revenues, Quarter-on-Quarter! Or, using the 1Q as a base point, revenues dropped 9.7% in the 2Q, while the 3Q had a 7.3% decrease. Some improvement, eh?
And once again, the only meaningful gain on their balance sheets has been on debt accumulation!
Think of how this applies to the GDP? By the way, next week, authorities will announce the survey-based 3Q GDP. Insignificant improvements in social mobility, poor fiscal conditions, and weak 3Q financial statements published by a third of the members of the elite index prognosticate paltry improvements relative to the 2Q. But then again, GDP is a political statistic.
That said, the BSP’s liquidity infusion policies have only been inflating a massive bubble!
V. The Bid-en Global Financial Assets Boom!
But here is the thing. Exogenous events have further compounded the panic buying spree of local assets.
US media repeatedly said that the triumphant sweep of the "blue wave" meant a buy on US stocks.
But when election results showed a nail-biting cliff hanger and that there was no landslide, with surveys falling flat on their faces once again, similar to Brexit, and the 2016 US Presidential elections, the narrative changed.
It was to be a Bid-en up for the global asset markets!
Figure 3
The plunge in the US dollar prompted a buying spree that covered almost every financial asset: aside from stocks, bitcoin (traded above USD 15,000, a 2018 high), commodities, treasuries, and bonds.
The unwinding of hedges, mostly through the derivative markets, must have spurred a global risk ON.
Asian assets rallied ferociously this week. Except for India’s rupee, Asian currencies soared. Indonesia’s rupiah and the Thai baht surged 2.84% and 1.78%. The Philippine peso added .37% this week.
Asian bourses averaged a phenomenal 3.98% return this week. National benchmarks consisting of Hong Kong’s Hang Seng, Korea’s KOSPI, Singapore’s STI, Japan’s Nikkei, India’s Sensex, and the Philippine Phisix stormed higher by 6.66%, 6.59%, 6.39%, 5.87%, 5.75%, and 5.72% respectively.
Japan’s Nikkei hit a 29-year high.
Figure 4
The US S&P 500 had the best showing during the election week since 1932!
The global supply of negative-yielding bonds hit a historic USD 17.1 trillion! The yields of US junk bonds and 30-year mortgages tumbled to fresh lows!
Again, how sustainable are ebullient asset prices fueled by the printing press of central banks in the face of continued dismal economic performance?
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