Negative rates are the destruction of money, an economic aberration based on the mistakes of many central banks and some of their economists who start from a wrong diagnosis: the idea that economic agents do not take more credit or invest more because they choose to save too much and therefore saving must be penalized to stimulate the economy. Excuse the bluntness, but it is a ludicrous idea—Daniel Lacalle
In this outlook:
An Update of the Six Factors of the Stagflation Risk; February CPI Climbs, Despite Price Controls as Negative Real Rates Hit Record Levels!
1 An Update of Six Factors Why Stagflation Risks will Dominate the Economic Landscape in 2021
2. Stagflation Ahoy! Despite Price Controls, February CPI Uptrend Accelerates
3. Stagflation Ahoy! Inflationary Forces Building-Up Even in Non-Food Sectors
4. Stagflation Ahoy! The BSP’s Massive Inflation Tax: Negative Real Rates Hit Record Levels!
5. PSE’s Speculative Mania to Culminate as Liquidity Diminishes, Bank Deposit and Cash Growth Fades?
6. Stagflation Ahoy! Demonstrated Preferences: Contra BSP and Consensus Analysts: Treasury Traders Bet on Inflation!
An Update of the Six Factors of the Stagflation Risk; February CPI Climbs, Despite Price Controls as Negative Real Rates Hit Record Levels!
1. An Update of Six Factors Why Stagflation Risks will Dominate the Economic Landscape in 2021
From the Inquirer (March 7): Malacañang on Saturday gave assurance to the public that it was making “immediate interventions” to address the quickening of the inflation rate, which indicates the pace of the rise in prices over a certain period. “We are intensifying efforts to ease inflation through immediate interventions, such as augmenting the supply of meat,” presidential spokesperson Harry Roque Jr. said in a statement, adding that the 4.7-percent inflation rate for February was only a temporary tick. Bangko Sentral ng Pilipinas Gov. Benjamin Diokno in an online briefing on March 4 said inflation was expected to stay above the target band in the first half of the year but “we are confident that it will taper off in the second half of the year.” The elevated inflation rate remains driven by supply-side factors “and so we thought [that] it does not require monetary response at the moment,” said Diokno, who heads the Monetary Board.
Upon the disclosure of the January CPI numbers, I wrote:
Next, the 60-day price ceiling on pork and chicken products, which takes effect on February 8th, is designed to embellish statistical inflation than to augment supply.
That said, in the following months, the CPI may retain its current levels or could most likely decline. But that would be conditional to the surfacing of its aftereffects. If its ramification overwhelms the intended effects price ceiling, then the CPI may continue to advance.
Stagflation, Ahoy: January CPI Accelerates, Price Controls and QE to Fuel Higher Inflation, Treasury Markets Agree February 7, 2021
So February’s CPI still increased to 4.7% despite the price controls!
From the BSP’s March 5 disclosure “February Year-on-Year Inflation Higher at 4.7 Percent; Month-on-Month Inflation Decelerates”:
Headline inflation rose further to 4.7 percent year-on-year in February from 4.2 percent in January and was within the BSP’s monthly forecast of 4.3-5.1 percent for the month. The resulting year-to-date average inflation rate of 4.5 percent is above the Government’s target range of 3.0 percent ± 1.0 percentage point for the year. Core inflation, which excludes selected volatile food and energy items to depict underlying demand-side price pressures, increased slightly to 3.5 percent in February from 3.4 percent in the previous month. On a month-on-month seasonally-adjusted basis, inflation slowed down to 0.1 percent in February from 1.1 percent in January.
Inflation in February was driven mainly by faster price increases of key food items and higher domestic petroleum prices. Year-on-year fish inflation rose as prevailing cold weather conditions limited availability of certain fish variants though supply is expected to improve with the lifting of the closed fishing season. Meanwhile, the uptick in rice inflation can be attributed to the end of the main harvest season. Meat inflation remained elevated on a year-on-year basis while month-on-month inflation eased in February compared to the previous month following the temporary price ceiling imposed on pork and chicken products in the National Capital Region (NCR). At the same time, rising international oil prices, which led to upward price adjustments of domestic petroleum products combined with double-digit inflation rate for transport services, contributed to higher non-food inflation.
Back in December, I wrote of the five forces that have amplified the risks of stagflation:
These are:
1. Momentum and Trend
2. The massive disruption of the division of labor and Say’s Law.
3. The BSP has been implementing an inflation tax.
4. The BSP’s policy of inflating asset bubbles only underscores the aggravation of the misdirection of scarce resources.
5. Philippine Treasury markets have been saying inflation ahead!
I added a sixth factor: higher CPI exposes fragility in the banking system.
Nota bene: This author does not believe in the accuracy of the CPI simply because averaging different goods as potatoes, cars, laptops, and Netflix subscription fees represent a ridiculous and impractical exercise, and thus, do not reflect a realistic demonstration of price changes experienced by individuals writ large (community). Furthermore, since the CPI is a political-economic sensitive number, as per the PSA, "it is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy", hence to advance the political-economic agenda of the incumbent such statistics are vulnerable to interventions. But anyway, using the lens of the mainstream, we extrapolate this data alongside the others to arrive at some clues of the political economy heading forward.
Let us revisit these.
2. Stagflation Ahoy! Despite Price Controls, February CPI Uptrend Accelerates
1. Momentum and Trend.
Figure 1
Both the headline and CORE CPI has been in a long-term uptrend.
Yes, following a multi-year high, the CPI (headline and CORE) did plunge from September and October 2018 but found a bottom in October and November 2019. This bottom was signified by a higher low relative to September and October 2015.
Connecting the lows of 2015 and 2019 gives us a SIX-year uptrend.
Even if we reduce this perspective to the lows of 2019, February 2021’s CPI represents an acceleration of the current 16-month CPI cycle.
And considering the distortive effects on statistics by price controls, the February CPI data fundamentally understates the actual numbers!
The reference to the month-on-month data is a demonstration of how authorities perceive the economy. That is, current events prove that the price controls were indeed “designed to embellish statistical inflation than to augment supply”.
While supply-side factors have rightly been a pivotal factor in the recent spike, for now, the BSP admitted in their report that the rise in CORE inflation depicted “underlying demand-side pressures”.
But in media presentations, top officials of the BSP continue to deny this.
Importantly, their CORE inflation chart exhibits a reversal of the 20-year downtrend, which upside acceleration has been reinforced by the recent breakout!
These numbers come from the National Government from the surveys conducted by their army of statisticians. They can churn out numbers as they wish to, with nobody questioning its relevance.
Yet, the chart shows not only the critical turnabout of the CORE inflation data but more importantly, its acceleration.
It may be vogue to put most of the blame on the supply-side, but the intensifying uptrend in CORE inflation is like a ticking inflation time-bomb.
And how on earth can this represent "transitory" or "temporary"?
And even if imports are to be considered a fix, world food prices continue to trek higher too. UN’s Food and Agricultural Organization (FAO) reported a ninth straight month of price increases of its Food Price Index (FFPI).
And the striking part of FAO’s Food Index is the real chart trend. Following a double bottom marked by lows of 1985 and 2000, the food benchmark has been on a bull market. The sharp rally of the last nine months only validates the 21-year uptrend!
3. Stagflation Ahoy! Inflationary Forces Building-Up Even in Non-Food Sectors
2. The massive disruption of the division of labor and Say’s Law
We will repeat. While it is true that exogenous forces (like the African Swine Flu, typhoons and more) have played substantial roles in the current food shortages, inflation pressures have signified a product mainly from the present (e.g. mobility restrictions, price controls, health protocols, and more) and past policies (BSP-induced business cycle imbalances such as overinvestments in leveraged industries as shopping malls and real estate at the expense of the agricultural sector, agricultural protectionism, and more).
An anti-market regime represents the common denominator.
Forecast accuracy is not even necessary, all it takes is to observe the pile-up of policy errors upon errors, demonstrating the failure of central planning at its finest.
Recall of the publicity stunt by authorities of shifting pork inventories from the provinces to the metropolis?
For instance, according to the Businessworld (March 2): “Some 101,333 live hogs have been transported to Metro Manila since Feb. 8, when the Department of Agriculture (DA) capped pork retail prices in a bid to keep inflation under control.”
We noted earlier that…
To solve the supply problem in the NCR, national authorities have been promising to send surplus stock from provinces in the South. But of course, doing so means that the same provinces will be at risk of incurring shortages. That’s because those surpluses are intended only for local demand.
A validation of our analysis…
From Philstar (March 5): When Metro Manila’s pork shortage was driving up prices, the government’s immediate fix was to ask provinces to send some of their pigs to the capital for replenishment. Now, these areas are seeing their own inflation spike. On average, meat prices outside the National Capital Region (NCR) accelerated by 20.8% year-on-year in February, up from 15.9% a month ago, data from the Philippine Statistics Authority showed.
Worse, meat costs are now rising faster in the provinces than in Metro Manila. Last month, prices of the same products went up 20.4% annually in NCR, down from 21.6% in January.
It doesn’t stop here.
Again from our February 15 outlook,
And unless there are sufficient surpluses, price pressures are likely to diffuse into other agricultural products as excess demand corrode on its marginal surpluses.
Have we not been told that food prices will slow in response to the lifting of the 'galunggong' fishing ban? So what happened?
From the Manila Bulletin (March 5): A fisherfolk group urged the government Friday, March 5, to provide support to small fishers, as it lamented the skyrocketing market prices of mackerel scad, or more popularly known as galunggong. Fishers’ group Pambansang Lakas ng Kilusang Mamamalakaya ng Pilipinas (Pamalakaya) said the recent price hike of one of the country’s staple fish products was an added burden to consumers who are already reeling from rising food prices and other commodities…Pamalakaya has also called on the government to “seriously consider” placing a price cap on fish products as prices of galunggong reached an average of P280 per kilogram (kg).
And while the public fixates on the political vaudeville of food inflation, price pressures are being diffused into the broader economy.
Remember the supposed green shoot in the manufacturing sector, represented by the Markit’s PMI in January 2021? Well, that momentum stalled last February. Why? Well, because, hmm…of intensifying inflation.
From Markit PMI (March 1): Average cost burdens rose at the quickest rate in over two years. According to panel members the COVID-19 pandemic had adverse effects on transportation and material prices. Firms reportedly passed on part of the burden to clients by increasing selling charges…A number of respondents attributed the uplift to greater demand. In an effort to build inventory holdings, firms raised their stocks of purchases, with the rate of growth the sharpest in over four years. Stocks of finished goods rose only marginally, however. Whilst the latest data indicated sustained growth in production, employment declined for the twelfth month running. Respondents linked staff cuts to sufficient capacity and voluntary resignations. That said, the rate of job shedding eased to the softest in the aforementioned period of decline…On the price front, input price inflation rose at the sharpest rate since October 2018 with raw material shortages underpinning the increase. Firms looked to pass on higher costs by Firms looked to pass on higher costs by raising their selling charges
If the survey is accurate, then again, what is the reason for the increase in production? To protect profit margins from surging input prices, increased production has been anchored in the hope to pass such price burdens to the consumers.
Yet, the industry still suffers from job cuts. Green shoots, eh?
In a way, this represents the escalation of the CORE CPI. But if this observation "input price inflation rose at the sharpest rate since October 2018" is accurate, then the CORE CPI has been significantly understated.
But the PSA reported a sharp (-5.3%) decline in manufacturing input prices or the Producer Price Index (PPI) last January. The PSA rebased their methodology from 2012 to 2018. The PSA’s data is in sharp contrast to the Markit PMI.
We agree with the consensus that supply shocks tend to be transitory but in the strict condition that markets are allowed to function and if money supply growth has been static.
That’s not the case today.
4. Stagflation Ahoy! The BSP’s Massive Inflation Tax: Negative Real Rates Hit Record Levels!
3. The BSP has been implementing an inflation tax.
The news…
From the Inquirer quote at the top: The elevated inflation rate remains driven by supply-side factors “and so we thought [that] it does not require monetary response at the moment,” said Diokno, who heads the Monetary Board
From the GMA News (March 5): "We recognize that the factors explaining the elevated inflation is not due to demand side but on the supply side, meaning the rise in oil prices and the rise in some food prices because of some factors and so we thought it does not require a monetary response at the moment," said Diokno… Diokno warned, however, that should demand-side issues, it would be a concern for the central bank but assured that there is still no data pointing to such a scenario. "Right now there is no such thing. As I said, BSP policy-making is data dependent and so we continue to monitor the developments," he said.
From the Philstar (January 21): “I would not say that inflation would be an overriding concern at this point. The uptick that we are seeing is emanating from temporary supply side considerations,” central bank Deputy Governor Francisco Dakila Jr. said in an online briefing on Thursday. “That really is the basis for saying that we have ample room to keep the overall stance of monetary policy accommodative,” he said…….“Money supply is at record high and ironically, as we return to normal activities and the velocity of money normalizes, the more inflationary our high money supply would be,” Habito said in a separate briefing
But again from the BSP’s report: “Core inflation, which excludes selected volatile food and energy items to depict underlying demand-side price pressures, increased slightly to 3.5 percent in February from 3.4 percent in the previous month.”
Figure 2
Nipping the inflation in the bud is not going to happen for TWO reasons.
First. The BSP has been attempting to use Financial Repression or the INFLATION TAX to SUBSIDIZE public debt, which hit an all-time high of Php 10.327 trillion, last January. Transferring resources from savers and currency holders through inflation signifies a more politically palatable means of taxation, especially with national elections on the horizon.
Second. At the same time, aside from public debt, artificially low rates have been and will be used to bailout and disguise insolvencies embedded in the banking-financial system and the economy.
Negative rates represented by the 1-year T-bill minus the CPI, as well, the BSP’s overnight policy spread with the CPI are at historic levels. Historic. Levels.
Demand-side influences, as shown above, have repeatedly been denied by BSP officials in public.
A third reason, the publicly enunciated one, is that low rates from liquidity injections should aid the core lending operations of the banking system.
But again, the mainstream sees only statistics but neglects the interrelationship of money, demand and supply.
Undergirded by massive dislocations from the supply shock, even a slight pick-up in demand, most likely from fiscal policies is likely to combust street inflation at runway rates, thereby causing unintended consequences or defeating the BSP’s goals.
Be careful what you wish for.
Figure 3
And plagued by credit deflation, banks have barely contributed to financial liquidity. Instead, the primary source of money supply growth has been the unprecedented injections by the BSP, which has financed, in part, the landmark fiscal operations of the National Government.
With the BSP slowing its QE operations, money supply growth has followed its path.
So while slowing growth of money supply should lead to decreasing contribution of relative demand to the CPI, the BSP is unlikely to tolerate deflationary forces from taking over.
That said, the underlying bias for policymakers, bent on demand-side management, is to sustain a loose monetary policy, magnifying inflation risks under the current supply shock setting.
Thus, a sustained spike in Philippine 10-year treasuries is likely to get reflected on bank lending rates, thereby raising the cost of credit with all its attendant ramifications on risks.
5. PSE’s Speculative Mania to Culminate as Liquidity Diminishes, Bank Deposit and Cash Growth Fades?
4 and 5 The BSP’s Policy Of Inflating Asset Bubbles and Higher CPI Exposes Fragility of Banks
Liquidity injections don’t come for free.
All policies come with direct, indirect, and opportunity costs spread in different timeframes. While falling CPI has anchored the great Treasury boom, a property speculation mania, as well as the strong peso, the re-energized street inflation may strip away these erstwhile privileges.
Figure 4
Aside from treasuries and the peso, the downturn in the peso main board volume at the PSE appears responsive to the slowing money supply growth. And slowing liquidity manifested through rising rates will likely reduce volume further, undermining the speculative mania infesting the PSE.
A possible example.
Premiere Horizon Alliance [PSE: PHA] has captured the retail’s speculative appetite as one of the most traded small-cap issues since 2021. PHA has returned a stunning 162% year-to-date (as of March 5).
PHA’s chart appears to be signaling a major top, though. It is consolidating at its high, forging a massive rising wedge, on fading RSI and declining volume (shares).
In short, beating the January acme has become an escalating burden to retail punters, weighed by overbought conditions and diminishing liquidity/volume support.
I guess once the support breaks down, PHA is about to cascade fast. And this might send other crowd favorites also spiraling lower.
As an aside, certain media outlets have been long on the prowl against one of their retail favorite, ABRA Mining [PSE: AR], for unspecified reasons. Well, because of some technical reasons, the PSE suspended trading of AR shares, which possibly signals the culmination of the BSP-induced speculative excesses.
Unknown to most, collateral values, which affect credit operations and the balance sheets of the banking system will likely be affected by deflation in the asset markets.
Figure 5
For instance, liquidity conditions of banks today depend on the BSP’s injections, which are likewise reflected on the money supply growth, exhibited by deposit liabilities and cash reserves.
Under this premise, the BSP will fight to maintain liquidity to keep present asset price levels afloat at the expense of street prices. But in doing so, economic and financial imbalances mount.
Pricing strains in the real economy represent the critical outlet.
6. Stagflation Ahoy! Demonstrated Preferences: Contra BSP and Consensus Analysts: Treasury Traders Bet on Inflation!
6. Philippine Treasury markets have been saying inflation ahead!
Figure 6
Signals from Philippine Treasury Markets represent the last factor.
Nope, public and private institutional traders (yes, banks and government financial institutions) making up the commanding bulk of the treasury markets know the real score: they don’t seem to believe in the viewpoint of their respective analysts and the BSP and Administration officials.
Why? That’s because their portfolios have likely been constructed to anticipate MORE inflation ahead!
Demonstrated. Preference.
There has been a sharp steepening of the yield curve (BVAL). The yield surges at the long-end have significantly widened its spread with the belly (middle-end, benchmarked by the 5-year bonds).
BSP officials can say what they want in media to appease the public. But their traders continue to act in the opposite direction, projecting magnified inflation risks forward.
In the end, action speaks louder than words.
Taking effect today are the consequences of last year’s policies in combination with pre-existing imbalances.
Stagflation Ahoy!
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