In investing, tribalism is outright dangerous to your wealth. When you allow tribalism to impact your thinking, you lose the ability to think independently—Vitaliy Katsenelson
In this issue:
The K-Economy: Stocks Rage in the Face of Record Hunger! The BSP’s 1.9 Trillion Gambit! Ghost Remittances or Unemployment 2.0?
I. The K-Economy: Record Poor and Hunger Amidst a Raging Stock Market
II. The BSP’s Php 1.9 Trillion Liquidity Powers Stocks, But Weakens the Role of the USD Based Monetary Regime
III. QE as Source of Bank Bailout Financing, The Thinning BSP’s Capital Base
IV. Record GIR’s ‘Borrowed’ Reserves; Emerging Divergent Signs on the Peso’s Strength
V. Ghost Unemployment or Ghost Remittance Data, 2.0?
The K-Economy: Stocks Rage in the Face of Record Hunger! The BSP’s 1.9 Trillion Gambit! Ghost Remittances or Unemployment 2.0?
I. The K-Economy: Record Poor and Hunger Amidst a Raging Stock Market
From the Philstar (December 14): At least 84% of Filipino families are poor or borderline poor, while only 16% feel they are not, new survey results published Monday indicate. According to a Social Weather Stations survey, 48% of families included in the survey identified themselves as "poor," while 36% felt they were "borderline poor," and only 16% claimed they were "not poor." Survey results also showed that at least 78% of Filipinos were food poor or borderline food poor, with the results suggesting that 31% identified as food poor, while the borderline food-poor were 47%, and the non-food-poor were 22%. Of these numbers, 8.2% of families were described as "newly poor," having described themselves as non-poor or borderline poor anywhere between 1-4 years ago.
From the SWS (December 16) The national Social Weather Survey of November 21-25, 2020, the first to be done by face-to-face interviews since the start of the Covid-19 pandemic, found that 16.0% or an estimated 4.0 million families experienced involuntary hunger – hunger due to lack of food to eat – at least once in the past three months. The November 2020 Hunger rate is 15 points below the record-high 30.7% (est. 7.6 million families) in September 2020. Nevertheless, it is double the pre-pandemic 8.8% (est. 2.1 million families) of families in December 2019 [Chart 1, Table 1]. Average hunger for the full year is new record 21.1% With hunger at 16.7% in May, 20.9% in July, and 30.7% in September, the average hunger rate for the full-year 2020 is a new record 21.1% of families. It surpasses the previous record of 19.9% in 2011 and 2012, and is double the average 9.3% for 2019. (bold original)
So the K-shaped economic path is being reinforced by the implicit and the massive bailout of the elites from BSP policies, channeled mainly through the capital markets, amidst unprecedented sentiment of privation and hunger. Incredible.
And as part of the campaign to combat deflation by boosting the animal spirits, business optimism, wrote the BSP, has been on a significant rise in the 4Q, which oddly contrasted from its consumer sentiment survey, which has considerably lagged.
Another sign of a K-shaped path?
To what extent have the rocketing stock market combined with the barrage of recovery predictions by mainstream institutions contributed to the improvements in business perceptions? Yet will such optimism be parlayed into investments? Importantly, will there be sufficient savings to fund these?
Figure 1
Surging stocks have been rationalized on the projected economic recovery through wider liberalization of the economy as vaccines become available to the public. And thus, the mainstream has been abuzz with rumors of the reanimation of corporate backroom activities to justify further the vertical pumps at the Philippine Stock Exchange.
To what degree has the public understood the corrosive effects of BSP policies and the relentless maneuvering of the equity benchmark in the fundamental function of price discovery and discounting mechanism of domestic capital markets?
With the intent to maintain the benchmark index levels at a 10-month high, manipulators have embarked on painstaking efforts to embellish the index through serial marking-the-closes during 3 of the last 5 sessions last week. The aggregate end-session pump for the week amounted to 90.49 points or more than double the week’s gains of 26.67 points or .37%. Marking-the-close has become a regular feature of the Philippine stock market.
As evidence of the loss of functionality as a barometer of economic health, the PSYEi rammed through the previous critical resistance levels in 2017 to set a milestone of 9,058.62 on January 29, 2018.
Did the economy, a proxy of earnings, deliver a similar outlook as projected by stocks?
Here are the GDP numbers: (2016) 7.1%, (2017) 6.9%, (2018) 6.3% and (2019) 6%. As the PSYEi climaxed, the GDP went south!
And just as the PSYEi went through the roof, the conservative, the late BSP Governor Nestor Espenilla Jr., through the 2017 Financial Stability Report, warned: “Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds but there seems no evidence that investors believe the stock market to be overvalued. Whether this is a Minsky moment waiting to happen is certainly an important thought but the absence of clear-cut valuation measures for the market as a whole leaves the issue without an empirical resolution.”
The earlier report from the incumbent BSP Governor also cited concerns…
From the 2018 1H Financial Stability Report: Based on the audited financial statements of the 148 Philippine Stock Exchange (PSE)-listed non-financial corporations (NFCs)… The same companies have also reported lower profitability with respect to return on assets
From the perspective of the headline index today, the economic collapse did NOT even occur! Thus, with the boom from the BSP liquidity injections, PERs are now at the highest level in history!
Some numbers.
The PSYEi 30 trades at a nosebleed 18.86 PER based on 2019 earnings. With the collapse in aggregate income by 52.45% in 9-months YoY, assuming a partial 4Q recovery that lifts income decrease to only 30% from 2019, Friday’s 7,272.8 entails a whopping 26.94 per!
On a per issue basis, the biggest market caps sports PER ratio (with 20% premium) of 30 or more! Stunning!
Going back to the index boom in 2017-2018, primed only by a few issues, if the GDP didn’t rise, something else did advance. Guess what it is?
Again from the 2017 FSR: As a matter of fact, firms listed in the PSE exhibited a rising debt-to-equity ratio, from about 45 percent in 2008 to more than 86 percent as of end-March 2018
And again from the 1H 2018 FSR: Based on the audited financial statements of the 148 Philippine Stock Exchange (PSE)-listed non-financial corporations (NFCs), the growth of interest expense (IE) has outpaced the rise of earnings before interest and taxes (EBIT) (Figure 2.3). In addition to the rate of growth, the ratio of IE to EBIT shows a rise from 14.5 percent at the start of the first quarter of 2016 to 22.6 percent as of March 2019, with a high of 27.8 percent in December 2017
Have the risks of a Minsky Moment, which had earlier been warned about, from the massive artificial inflation of the stock market totally vanished from the perspective of an apostate BSP? Has supporting credit flows and collateral values supplanted financial stability as the principal priorities of the BSP?
As an aside, the number of issues (averaged weekly) traded hit a record high on the week ending December 11 and was down by a smidgen last week. Again, the previous high was when the PSYEi 30 peaked in January 2018. It represents a symptom of speculative excesses, most possibly financed by increased leveraging of the financial system. Market euphoria are signs of stability?
The BSP seems to forget that capital markets represent an important channel for deploying capital and savings to the economy. Thus, the significant mispricing of capital would lead to serious maladjustments, and consequently, capital consumption.
Because industries engaged in a massive race-to-build supply, particularly shopping malls and real estate, have been the main beneficiaries, how would surging stocks not incentivize more capital allocation towards these, thereby aggravating issues of malinvestments?
Once again, the BSP’s New Economy from the latest Financial Stability Report: “Wholesale and trade. The viability of big and bigger malls may have to be reconsidered. This is not just because of physical distancing norms, which will affect baseline assumptions about foot traffic. The bigger concern may be in the emergence of ecommerce, which has given retailers its internet-based platform to sell and market products. This provides consumers greater reach and enables households to purchase at the comfort of their homes, without being constrained with store hours or dreaded parking at the malls. With some products visible on the online market even before the pandemic, the quarantine was the trigger for the underlying, likely permanent change. Online transactions also adjust the employment frontier from the stores/retailers to the backroom services handling electronic orders. Physical stores may not be completely eliminated but a reconfiguration is likely.”
By inflating the stock markets, the BSP is basically going against their recommendations for entrepreneurs to shift to the digital sphere or eCommerce.
Signs of confusion from clashing policies are symptoms of desperation or indications of a policy failure in the making.
At the day’s end, the BSP’s liquidity policies, echoing global central bank trends, are driving a substantial wedge between the economy and financial markets. The K-path.
II. The BSP’s Php 1.9 Trillion Liquidity Powers Stocks, But Weakens the Role of the USD Based Monetary Regime
From a recent speech by BSP Governor Benjamin Diokno: In sum, we have injected approximately P1.9 TRILLION PESOS (approximately $US 39.2 billion) in liquidity into the financial system, equivalent to 9.6 percent of GDP.
Figure 2
There it is!
The BSP’s assets jumped 46.27% YoY to Php 7.31 trillion while liabilities likewise soared by 47.2% to Php 7.146 trillion last October. [Figure 2, upmost window]
The Php 1.9 (1.829) trillion liquidity injections distill into the PSYEi 30 (as of October).
Given the previous balance sheet expansions, such as 2015-2016 and 2019, which likewise spurred increases in the PSYEi 30, recently risk assets, including the stock market, have been targeted by the BSP’s liquidity “shock and awe” operations. [Figure 2, middle window] Ergo, the enormous spike in the BSP’s balance sheet as a result of the QE has coincided with the sharp rise of the PSYEi 30.
However, even in the BSP’s balance sheet, there are no free lunches. The shifting composition represents a monumental transformation of the BSP’s monetary regime.
On the asset side, the growth spike of domestic securities and loans and advances by 481.8% and 692.24% to Php 1.318 trillion and Php 481.76 billion, respectively, overshadowed the 15.12% growth of international assets. [Figure 2, upmost pane]
The consequence of which has been to shrink dramatically the role of international reserves. The share of international reserves to total assets steadily held the range of 83% to 87% since 2012. But it plunged to 68.24% share in October, following the breakdown of the 83% threshold last March. [Figure 2, lowest pane]
The BSP's monetary regime operates under a de facto USD standard, where international reserves provide an anchor to the issuance of domestic or peso liabilities. The point being, in the past, the money printing operations by the BSP had been kept in check by its stash of USD reserves.
And despite the massive borrowings and FX derivative operations by the National Government, the growth of the international reserves likewise has been reflected by the record GIRs, has barely kept the pace with the BSP's peso liability issuance.
The recent expansion of external borrowings, rationalized by the mainstream as either in response to Covid-19 or a host of other spending programs such as infrastructure, has been designed to boost the BSP’s operations.
Hence, the fragility of the peso has been amplified by the slowing growth of international reserves relative to its domestic monetary operations symptomatic of the BSP's ambitious money-printing operations.
III. QE as Source of Bank Bailout Financing, The Thinning BSP’s Capital Base
Figure 3
On the liability side, total deposits boomed by 58.53% to Php 4.138 trillion on the back of a 160.62% growth surge of the Treasurer of the Philippines, and a 321% jump in liquidity absorbing Term Deposit Facility (TDF).
In the meantime, the growth of currency issuance jumped 25.24% to Php 1.781 trillion. With the outperformance of deposit growth, its share of liabilities continues to climb as currency issuance dropped. [Figure 3, middle pane]
Bank reserves or Reserve Deposits of other Deposit Corporation fell 19.38% last October. Year-to-date, bank reserves fell by Php 196.3 billion, reflecting the initial batch of Reserve Requirement Cuts (RRR) for 2020 in March. Since the BSP initiated RRR cuts in 2018, bank reserves have trekked south. [Figure 3, lowest pane]
And for the second month, the BSP borrowed from the capital markets too. Net bills payables ballooned to Php 309.8 billion in October from Php 49.94 billion a month ago.
The BSP has used its liquidity tools such as the TDF and the bills payable to sop up some of the excess liquidity from its QE. Aside from the National Government borrowings, all these have accounted for an ever-expanding amount of debt.
Figure 4
Also, the growth of the balance sheet of the BSP has been closely tied with the cash reserve conditions of the banking system. [Figure 4, upmost window] By extension, the recent QE underscores the role of the BSP as the main source of cash reserves of the banking system.
Finally, the BSP’s equity or capital (.68%) and net worth (2.18%) to total assets continue to fall as of October. Marginal losses on its assets will expose the vulnerability of the BSP's thin and falling capital base, as well as its net worth. This means that should such losses emerge, any counterparty holding the BSP’s liabilities (the peso) would suffer. [Figure 4, lower window]
IV. Record GIR’s ‘Borrowed’ Reserves; Emerging Divergent Signs on the Peso’s Strength
And speaking of the BSP’s Record Gross International Reserves, from the Inquirer (December 16): The country’s dollar reserve level rose to a historic high in November on the back of the central bank’s earnings from its foreign exchange operations and foreign investments, the Bangko Sentral ng Pilipinas (BSP) said on Tuesday. In a statement, the monetary regulator said the Philippines’ gross international reserves, based on preliminary data, rose by $710 million to $104.51 billion as of end-November 2020 from the end-October 2020 level of $103.80 billion
Figure 5
The charts are mostly updates from our previous discussion.
That said, the BSP’s record GIR has recently been constructed based on leverage through loans, derivatives, and repos. As such, the BSP’s mounting use FX gearing doesn’t constitute a safety net from either exogenous or endogenous shocks. Rather, systemic risks are magnified by it.
Having a large short position is like building a rocket lift-off pad for the USD.
On the July OFW Remittance Bounce, What the BSP’s Record Gross International Reserves Means, More on Unemployment Statistics September 21, 2020
According to the IMF’s International Reserves and Foreign Liquidity data, the share of the BSP’s Other Reserves, comprising mostly derivatives, has risen from less than 2.6% in 2018 to 10.16% last October. [Figure 5, upmost pane]
The growth of the BSP's Other Reserve assets have been partially accounted for by its increased short-term lending and repo transactions with the US banking system (Treasury International Capital or TIC). [Figure 5, middle pane]
Lastly, the record GIR has risen along with the net foreign asset (NFA) from both the banks (Other Depository Corp) and the BSP signifying FX “borrowed reserve” accumulations using the bank’s resources in support of the BSP. [Figure 5, lowest pane]
Structural forces signified by substantial accumulations of foreign reserves representing US dollar shorts in the face of a corroding balance sheet of the BSP barely supports a strong peso.
Figure 6
And yes, the USD peso has been dropping on decaying volume, even as the economy, particularly banks which have been normalizing operations. The sharply slowing volume can hardly be explained by seasonal forces but seems more like controls on trade.
Further, the massive influx of borrowed FX money may have lowered PHIREF rates in late October to early November to reflect the liquid conditions in the interbank foreign exchange swap market. But the same rates have started to climb even as the USD peso continues to skid. Has the USD liquidity in the local financial system been tapering?
Have divergent signs emerged?
V. Ghost Unemployment or Ghost Remittance Data, 2.0?
Here’s more to the informational dissonance or perhaps the inflating of statistics.
From the BSP (December 15): Personal remittances from Overseas Filipinos (OFs) grew by 2.5 percent year-on-year to US$3.044 billion in October 2020 from US$2.969 billion in October 2019… Likewise, OFWs’ cash remittances that were coursed through the banks rose by 2.9 percent to US$2.747 billion in October 2020 from US$2.671 billion in October 2019.
Recall that while the BSP continues to shout out the gains from OFW remittances, widespread unemployment statistics have been reported by different agencies not only on OFWs but also on immigrant workers?
OFW Unemployment versus Remittances Data: Which of the Two is Accurate or Valid? November 24, 2020
Repatriation has not only been a symptom of depressed demand for domestic workers but the deployment of OFWs has likewise plunged to a multi-decade low!
From the Philstar (December 8): Even with no jobs at home, hiring of Filipino migrant workers is on track to its lowest level in nearly 3 decades due to sprawling lockdowns that stopped deployment, putting the Philippines’ main dollar source at risk of future decline. From January to October, 693,237 overseas Filipino workers had been deployed, plummeting 60.8% from same period a year ago, preliminary data from the Philippine Overseas Employment Administration showed. The latest tally is running at its lowest since 1996, a year before the Asian financial crisis, when yearend deployment registered 660,122. With only 2 months left to record, OFW placement is on track for its third slump in 4 years.
And more OFWs will be sent home next year…
From the Inquirer (December 18) More than 126,000 overseas Filipino workers (OFWs) are still waiting to be repatriated nearly a year into the COVID-19 pandemic, according to a Department of Labor and Employment (DOLE) official. The OFWs have asked to be returned home after their jobs were affected by the global economic slump due to the health crisis, said Alice Visperas, director of the DOLE’s International Labor Affairs Bureau. But 82,000 other displaced Filipinos have decided to remain in their host countries to look for other jobs, Visperas said. The government has flown or shipped home more than 550,000 pandemic-displaced OFWs, including seafarers since the start of the year, she said. More than 370,000 of them have been transported to their home provinces, she added. 80,000 more coming The government task force in charge of the repatriations is expecting 80,000 more OFWs to come home in the first half of next year, the chief of the Overseas Workers Welfare Administration (OWWA) said on Thursday.
Last September, we noted:
1. 500k displaced OFWs represents fake news. It never happened.
2. 500k workers, initially retrenched, were rehired immediately and simultaneously.
3. Employers of the remaining 1.7 million OFWs increased their wages substantially, which offset income losses of those unemployed. Or incomes of these OFWs flourished from having moonlighting jobs.
4. The remaining OFWs dug deep into their savings and sent these home.
5. The remaining OFWs borrowed money extensively to send these home.
6. The BSP has inflated the remittance numbers to paint a sound macroeconomic picture of the Philippine economy. They probably did these by declaring part of the USD borrowings of banks and or the National Government as remittances.
On the July OFW Remittance Bounce, What the BSP’s Record Gross International Reserves Means, More on Unemployment Statistics, September 21
It appears that option number 2 (rehiring) can be extracted out of the list.
For the authorities, desperate times call for desperate measures. Do whatever it takes to revitalize the animal spirits (including ghosts)!
Whatever. It. Takes. ¯\_(ツ)_/¯
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