One of the evils of paper money is that it turns the whole country into stock jobbers. The precariousness of its value and the uncertainty of its fate continually operate, night and day, to produce this destructive effect. Having no real value in itself it depends for support upon accident, caprice, and party; and as it is the interest of some to depreciate and of others to raise its value, there is a continual invention going on that destroys the morals of the country—Thomas Paine
In this issue
Next Week’s Blockbuster 2Q GDP: Statistical Charade; Self-Rated Poverty Zooms, and SMPH and ALI as 2Q GDP Proxy
I. Next Week’s Blockbuster 2Q GDP: Statistical Charade
II. Consumer Boom? Self-Rated Poverty Zooms, Bank Savings Rate Tumbles as Credit Card Debt Hits Record!
III. GDP Boom? Debt and Inflation Financed Free Lunch Public Spending and Deficits
IV. From the Frying Pan into the Fire: From Inflation to Tightening
V. SMPH and ALI as 2Q GDP Proxy
VI. Boosting "Confidence" through Statistical Inflation and the Gaming of the Stock Market Index
Next Week’s Blockbuster 2Q GDP: Statistical Charade; Self-Rated Poverty Zooms, and SMPH and ALI as 2Q GDP Proxy
I. Next Week’s Blockbuster 2Q GDP: Statistical Charade
2Q GDP is going to be a blockbuster, so claims the consensus. (Prudent Investor, July 2022)
But as noted two weeks back, because the GDP represents nothing but a numerical estimate of the economy, calculated and published by authorities, whatever gains it acquires during the period are about statistical charade.
The drivers of the expected gains are likely, first, the low-base effect. The second is the muted CPI. And lastly, the government spending.
Let us deal first with the CPI.
Up by 6.4%, the July CPI, which almost reached a four-year high, beat the consensus forecast.
Had the 2012 base rates been used, the July CPI would have handily transformed into a multi-year high!
See how a change in base rates works wonders?
Further, because of the regulatory regime of SRPs and price controls and various responses by the marketplace against these, such as shrinkflation, value deflation, and "sneakflation," the CPI understates the extent of price pressures in the economy.
The PSA will check on reports of shrinking sizes of products.
Third, there is the political component. The CPI is a politically sensitive number.
A surge in the CPI increases the costs of public financing, which effectively constrains the free lunch activities of public spending. It devalues the peso and also restricts the GDP.
And there’s more.
According to the PSA, it serves as a basis for economic analysis, collective bargaining agreements, wage adjustments, and for monitoring the effects of government economic policy on households.
To what extent will the CPI reflect on objective reality at the expense of promoting the interests of authorities?
II. Consumer Boom? Self-Rated Poverty Zooms, Bank Savings Rate Tumbles as Credit Card Debt Hits Record!
But there seems to be a pushback from the private sector.
Before the GDP announcement, independent pollster the SWS effectively puts an alternative scenario to the GDP.
SWS, August 2:The national Social Weather Survey of June 26-29, 2022, the last under the administration of President Rodrigo Duterte, found 48% of Filipino families rating themselves as Mahirap or Poor, 31% rating themselves as Borderline Poor (by placing themselves on a horizontal line dividing Poor and Not Poor), and 21% rating themselves as Hindi Mahirap or Not Poor. Compared to April 2022, the percentage of Poor families rose from 43%, while Borderline families fell from 34%, and Not Poor families declined from 23% The estimated numbers of Self-Rated Poor families are 12.2 million in June 2022 and 10.9 million in April 2022.
Consumers are supposed to anchor the 2Q GDP. But then, the SWS survey shows that households are reeling from price pressures, leading to the increased perception of self-rated poverty.
Or, the SWS data shoot down the idea of the resiliency of the consumers.
Instead, their poll pointed to an 11.93% surge in families rating themselves poor! Overall, self-rated poverty and borderline poverty totaled 79% of the families!
If households are not generating enough income to spend on necessities? Why should this not cause self-poverty ratings to rise?
Figure 1
Is the public drawing from bank savings to meet higher expenditure requirements? (Figure 1, topmost pane)
And for those with access to bank credit, are households increasing their balance sheet leverage to augment their spending in the face of inadequate income growth?
In peso, household credit cards zoomed to a new record last June, according to the BSP. (Figure 2, middle window)
The surge in credit card usage has also magnified the so-called demand side contributor to price pressures.
And with bank lending also picking up the tempo, the BSP can barely deny the contributions of credit-financed demand on the uptrend in prices. And that's aside from the public spending aspect of the demand-pull contribution to price pressures. (Figure 1, lowest pane)
III. GDP Boom? Debt and Inflation Financed Free Lunch Public Spending and Deficits
But monetary authorities seem to be showing reluctance in combating mounting price pressures.
Figure 2
Businessworld, August 3: “Our policy rates are still accommodative. The policy rate as it goes up is not even keeping up with the inflation rate. As the inflation rate goes down, the real policy rate becomes less negative,” BSP Governor Felipe M. Medalla said during a Financial Executives Institute of the Philippines membership meeting on Tuesday. “The policy rate is still negative in real terms. So, we can afford to step on the brakes without killing our nascent economic growth,” he added.
Authorities tell us they are still banking on the INFLATION TAX to keep the GDP afloat. The spread between BSP rates and the CPI remains deeply negative (Figure 2, topmost pane)
What they have not told the public is that the redistribution effects of the current environment remain favorable to them, which comes at the expense of the consumers (which is the reason for the surge in self-rated poverty)
That said, authorities seem to think that access to credit (by the public sector and the elites) will remain unscathed by rising rates, which means they have little consideration for the law of demand. They appear to think that politics is superior to the laws of economics.
They remain addicted to free lunches.
For instance, authorities directly benefit from increases in CPI via sales and excise taxes collections. Or, the rising trend of the CPI reflects higher sales (VAT) and excise taxes because of the point of sales where the charges are applied. (Figure 2, middle panes)
And it is precisely from higher nominal sales value brought about by price increases that anchor the GDP. The extraction of the CPI or via the PCE deflator/implicit price index nets the real GDP.
More importantly, because of this penchant for free lunches, the unstoppable fiscal deficit of the 2Q should lead to the outperformance of the GDP (Php 357.32 billion). (Figure 2, lowest window)
Figure 3
Contra the BSP, deficits play a substantial role in affecting the demand side of the CPI.
Strikingly, to finance it, public debt reached a new record of Php 12.792 trillion last June. (Figure 3, topmost pane)
Fundamentally, the public is being told economic prosperity can be attained through unfettered and reckless spending.
In the same context, the BSP seems to be hoping to maintain such an environment. If so, how will this not lead to more inflation ahead?
IV. From the Frying Pan into the Fire: From Inflation to Tightening
But there seems to be a silver lining to the series of rate hikes implemented by the BSP.
Some of the recent "froth" from the belated actions of the BSP has diminished. The differentials between the 10-year PDS and the BSP official rates have slid down. (Figure 3, middle pane)
However, the treasury markets have indicated that while the CPI is due for a significant decline, the emergence of liquidity strains affecting demand will likely be its cause.
The spread between the 10-year BVAL rates and the various short-term rates has also significantly flattened. (Figure 3, lowest window)
The treasury markets tell us that there are significant unforeseen consequences from the current policy backdrop.
Or, policy errors have prompted the economy to jump from one unintended consequence to another.
V. SMPH and ALI as 2Q GDP Proxy
Figure 4
A third compelling factor: the low base effects should also come to play.
The 2Q performance of SMPH and ALI might serve as a conducive proxy for the 2Q GDP.
Despite the substantial headline numbers, the topline growth of SMPH and ALI manifested the low-base effect compared to the same period a year ago.
In Q2 2022, SMPH revenues grew 10.7%, while net income jumped 32.71%. In the meantime, Ayala Land posted 18.11% revenue growth while net income spiked 64.86%.
Outside the base effects, that is, the general revenue trend in 2Q 2022 remained sideways. On the other hand, while higher than last year, the net income trend remains substantially below the 2019 levels.
And much of the rebound in commercial real estate/shopping malls comes from the bet on a consumer revival. Retail entrepreneurs have seemingly ignored the adverse impact of price pressures on savings, income, and profits/earnings.
Worst, the outstanding debt of these firms continues to scale to records, increasing their fragility to a stagflationary episode.
And are these firms resilient enough to withstand the tight money and the change in consumer attitudes?
VI. Boosting "Confidence" through Statistical Inflation and the Gaming of the Stock Market Index
The mainstream appears to work double-time to re-establish the "confidence" or the "animal spirits" by focusing on statistical improvements.
For instance, they tell us the banking system is profitable and sound but fail to inform the public that the BSP's massive relief measures remain in place.
But then comes the issue of the near debt default by the flagship firm of a political favorite two weeks ago. The firm supposedly paid up its dues to its creditors.
But it is unclear whether the firm used its political clout to transfer risks temporarily to another set of lenders to resolve the near credit event.
And it hasn't just been about bank debts directly. Heavily indebted listed firms have gone into liquidation mode to raise liquidity.
PLDT sold nearly half of its cell tower assets to raise Php 77 billion. JGS Summit recently unloaded a substantial segment of its Meralco holdings to raise Php 12.4 billion in cash, rationalized on "financial conservatism and balance sheet management."
With cracks surfacing hither and yon, what should be clear is that things are not as smooth sailing as the consensus desires them to be.
Unfortunately, yelling GDP would not take these risks away!
In contrast, a malinvested GDP financed by debt and inflation is unsustainable.
The consensus isn't just working on spiffing up statistics to shore up confidence.
Figure 5
It would seem that financial markets are forcibly being directed to toe the line of politics.
Organized afternoon bids, which culminated with pre-closing mark-the-close pumps, have been responsible for most of the gains of the PSEi 30. The PSEi 30 was up 1.42% this week. The aggregate mark-the-close pumps totaled 1.9%! (Figure 5, topmost pane; charts from technistock)
And the slight advances in volume this week came as the PSE tweaked the index membership.
It removed Security Bank while bringing back Semirara, which got the boot in August 2020. Emperador replaced Semirara, then.
Instead of a healthy representation, the PSE looks only at boosting its index. And so the constant changing of the index.
And the more obsessed they are with status symbols, the lesser the odds of a renascent bull market.
Bull markets come naturally. That they are being forced or managed into existence exhibits its artificiality and unsustainability.
Interestingly, the strong PSEi 30 rebound came in the face of declining breadth, cementing support to this stagflation bear market rally.
___
Prudent Investor The Consensus Race to Upgrade 2022 GDP, Domestic Demand in the Lens of the TWIN Deficits, Misdirected Capital: Ilocos Norte’s Renewable Energy Sector, July 25, 2022
Social Weather Stations (August 2) Second Quarter 2022 Social Weather Survey: 48% of Filipino families feel Poor; 31% feel Borderline Poor, 21% feel Not Poor SWS.org.ph
Yours in liberty,
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