Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

 

Keynesianism is the destruction of the middle class. By printing money and bloating deficits and spending, the size of government in the economy rises faster than the private and productive sectors. The size of the government increases during recessions by increasing expenditure to combat them, and it also increases during economic downturns by hiking taxes and creating inflation, which is a hidden tax—Daniel Lacalle 

In this issue

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting in August? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?  

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position? 

IV. Public Spending Surges to Fourth-Highest Level on Record in May! 

V. Will the Government Introduce a Fiscal Stimulus Package Soon? 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

VIII. Five-Month Debt Servicing Costs Hits Record High! 

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation 

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks 

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

With the BSP priming the public for a policy easing this August, and May public spending reaching a non-December all-time high, could this signify the implementation of a 'Marcosnomics' signature stimulus?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting August?

Businessworld, June 28,2024: THE BANGKO SENTRAL ng Pilipinas (BSP) kept interest rates steady for a sixth straight meeting on Thursday but signaled that a rate cut at its next meeting in August is “somewhat more likely than before,” with up to 50 basis points (bps) in easing likely this year…Mr. Remolona said he expects inflation to further ease in the second semester with the implementation of lower tariffs on rice. 

If an increase in rice tariffs will lower the CPI, why would this require the BSP to cut rates?

Policy rates represent a tool for managing aggregate demand, largely ignoring the impact on balance sheets.

By signaling a cut, is the BSP admitting to a worsening slowdown in demand?

Don’t you see the contradiction? Why would the BSP use a demand management policy to address a supply-side concern? 

For the avoidance of doubt, the results of the BSP’s latest consumer survey corroborate their implicit worries (bold added): The consumer sentiment in the Philippines was more pessimistic for Q2 2024 as the overall confidence index (CI) became more negative at -20.5 percent from -10.9 percent in Q1 2024. The decline in the index is reflective of the increase in the percentage of pessimists, which outweighed the increase in the percentage of optimists. The weaker confidence among consumers was mainly due to their concerns over the: (a) faster increase in the prices of goods and higher household expenses, (b) lower income, (c) fewer available jobs, and (d) the effectiveness of government policies and programs on inflation management, traffic and public transportation, provision of financial assistance, and labor and employment.  For the next quarter (Q3 2024), the CI turned negative at -0.4 percent from 2.7 percent in Q1 2024. However, the consumer sentiment for the next 12 months (May 2024-April 2025) remained optimistic as the CI was little changed at 13.5 percent from 13.4 percent in Q1 2024. (BSP, June 2024) 

So, could this be the genuine reason for the entrenchment of the BSP’s 'dovish' stance? 

It does not stop there. 

It’s not just consumers; businesses have also shared this dour sentiment for 2024. 

This is according to another BSP survey. (bold mine): The business sentiment in the Philippines turned less upbeat in Q2 2024 as the overall confidence index (CI) declined to 32.1 percent from 33.1 percent in Q1 2024. This is reflective of the combined decrease in the percentage of optimists and the increase in the percentage of pessimists. The Q2 2024 business confidence turned less buoyant due mainly to the firms’ concerns over: (a) softer demand for goods and services such as personal care, health and other consumer products, construction supplies, city hotels and restaurants, and manpower services, (b) ongoing international conflicts that may push oil prices higher, (c) slowdown in business activity due to El Niño-induced extreme weather conditions, and (d) persistent inflationary pressures that may weigh down consumer spending. For Q3 2024, the country’s business confidence weakened as the overall CI also fell to 43.7 percent from 48.1 percent in the Q1 2024 survey result. For the next 12 months, business outlook was similarly less upbeat as the overall CI decreased to 56.5 percent from 60.8 percent in the Q1 2024 survey result (BSP, June 2024) 

Even before this survey, has the BSP been aware that the revenue growth of listed retail chains had been struggling for some time? 

Besides, why did the BSP not address the escalating tensions between the Philippine government and China over the disputed South China Sea claims? 

An outbreak of violence in the region would not only disrupt global supply chains but also raise the specter of a wider conflict—a "casus belli"—that could have severe socioeconomic and financial consequences for the Philippines. 

Does this represent another case of an analytical "blackout?" 

In a nutshell, is the BSP concerned about how the gloomy views of consumers and businesses may translate into weaker GDP growth? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?

On the other hand, how would interest rate cuts boost demand, incomes and jobs if household and business balance sheets are already heavily leveraged?

Figure 1

Has the BSP not learned from the Bank of Japan's experience with negative nominal interest rates, where instead of stoking inflation, it exacerbated the curtailment of demand that led to its "lost decades?" (Figure 1, topmost graph)

Further, would the BSP's rate cuts not only magnify economic imbalances and stoke inflationary pressures but also widen inequality between those with access to formal credit and those reliant on shadow banking, such as small and medium enterprises (SMEs)?

Moreover, has the BSP also expressed concerns over the deteriorating conditions in the banking system, where higher interest rates have led to the erosion of accounting profits, potentially worsening financial liquidity conditions and exposing the solvency issues of bank borrowers and the industry? (Figure 1, middle and lower windows)

Will the BSP’s rate cuts not amplify the balance sheet imbalances?

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position?

Along with the above, as previously noted, May's CPI could represent an interim peak. We arrived at this conclusion based on several factors:

Figure 2

1. Slowing month-over-month momentum in the CPI

2. A bullish flattening of the Philippine treasury yield curve, which narrowed further in June (Figure 2, topmost graph)

3. Instead of boosting demand, the elevated leverage in household balance sheets—as revealed by record consumer spending—has fueled an increase in consumer non-performing loans (NPL)

4. Deteriorating job market conditions

5. The recent bounce in imports may be driven by substitution effects due to production slack

6. The rising US dollar-Philippine peso exchange rate, which not only contributes to higher import and financing costs but also puts pressure on local industries to generate more foreign exchange revenues to fill the widening trade gap. (Prudent Investor, June 2024)

The BSP has published its projected CPI for June (3.4%-4.2%)—which seems tilted lower than May (3.7%-4.5%). The next step will be for the consensus "to pin the tail on the donkey" by selecting numbers within the BSP’s range.

If the CPI slows, would it validate our view that the economy has been slowing faster than expected? And would this justify the BSP’s proposed easing this August?

IV. Public Spending Surges to Fourth-Highest Level on Record in May!

We also noted peculiar signs of restraint in government spending in the first four months of 2024.

However, this trend may have reversed in May, as the enlarged deficit emanated from outsized government spending!

Inquirer.net, June 28, 2024: The government reverted to a fiscal deficit in May, after posting a P42.7-billion surplus in April, amid higher public spending fueled by accelerating inflation and a high-interest environment…Government spending in May amounted to P557 billion, accelerating by 22.24 percent mainly driven by allotments to government agencies’ projects and budgetary support to local government units and state-run corporations. For the first five months, disbursement reached P2.3 trillion, up by 17.65 percent…For this year, the government has set a budget deficit ceiling of P1.48 trillion, or equivalent to 5.6 percent of gross domestic product (GDP). It also aims to reduce the deficit-to-GDP ratio to 3.7 percent by 2028.

May's government spending represented the fourth largest on record, according to data from the Bureau of Treasury! (Figure 2, middle chart)

Ironically, this May spending surge was in line with the biggest spending streams that occurred in December over the last three years—when the government typically used the final month to meet or exceed (political) expenditure targets. Yet, it is not even the end of the second semester. (Figure 2, lowest image)

Or, public spending in May was the highest on record (excluding the December expenditures)!

Has the government's frontloading of expenditures last May broken the seasonal December spending cycle? 

That’s right.  The surge in May’s deficit spending may set the template for the coming months through the year-end—we can only expect December spending to surge even more (or hit a fresh milestone)! 

Because of the revenue or collection slowdown, the spending ballooned the fiscal deficit way above 2023’s level. 

V. Will the Government Introduce a Fiscal Stimulus Package Soon?

Figure 3

Remember that government revenues are dependent on economic, financial, and administrative performance, while spending is programmed as part of the Congress—approved budget. 

For instance, not only does public spending play a crucial role in shaping economic imbalances that can lead to inflation, but inflation also has a material influence on revenue collection. Revenues depend on the declared transacted price levels.  That is to say, a slowdown in private GDP growth would materially widen the fiscal deficit. (Figure 3, top and middle visuals) 

The government has already proposed a 10% increase in the 2025 budget to Php 6.35 trillion. 

A surge in public spending increases a segment of the private sector’s revenues from Public-Private Partnerships (PPP) and other direct and indirect linkages via the political bureaucracy—which will be used for "consumption." 

Therefore, as we observed in our early June post, 

Are they saying that the current weakness in consumer spending growth will reverse with more deficit spending or more implicit transfers favoring the government and its cronies? Or how will increasing this reverse the current trend?  (Prudent Investor, May 2024) 

Are authorities expecting an economic downturn? Are they preparing the public for the launch of a grand stimulus through measures via easing rates, liquidity injections, and deficit spending? 

As we concluded from the same note last May, 

Once again, when the economy slows substantially or recession risks mount, monetary authorities will likely resort to the 2020 pandemic playbook: substantially easing interest rates, infusing record amounts of liquidity, and deepening the imposition of relief measures. Alongside this, political authorities are likely to drive deficits to reach record levels. 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

The increase in the fiscal budget gap for May translates to an impending reversal in the four-month deceleration of public debt issuance. (Figure 3, lowest chart) 

Intriguingly, some quarters have praised this deceleration without fully comprehending the policy "path dependency" of the authorities. 

Subsequent to the April announcement of a Php 2.57 trillion target for 2024, which represents an 8.9% increase from last year's Php 2.07 trillion, the government has already declared that it proposes to raise Php 600 billion in Q3, following the projected Php 585 billion increase in Q2.

As of May, the Bureau of the Treasury (BoTr) has raised Php 1.038 trillion, which amounts to 40% of the projected Php 2.57 trillion financing.

The increase in the May’s fiscal budget gap translates to a coming reversal in the four-month deceleration in public debt issuance.  Intriguingly, some quarters have exalted this deceleration with hardly a comprehension of the policy path dependency of authorities. 

And subsequent to the April announcement of a Php 2.57 trillion target in 2024 or an 8.9% increase from last year’s Php 2.07 trillion, the government has already declared that it proposed to raise Php 630 billion in Q3 following the projected Php 585 billion domestic borrowings in Q2. 

Through May, the BoTr has raised Php 1.038 trillion or 40% of the projected Php 2.57 trillion financing. 

This path dependency on deficit spending would entail increases in systemic leveraging. 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

How is the government deploying our anticipated 'stimulus'?

Figure 4

We anticipated a reversal from the recent slack in LGU allocations, primarily due to the upcoming 2025 Senate and local elections.

The 'proxy war' between the US-NATO alliance and the Russia-China-BRICs alliance is playing out in the domestic political sphere through an intensifying contest between the incumbent and former administrations, where LGUs will play a pivotal role in determining the winners.

The pro-China former President and his two children plan to run for Senate in 2025 against the pro-US incumbent.

Facilitated by the BSP's easing and the banking system's liquidity infusions, the incumbent administration is expected to disproportionately increase budgets for select and favored LGUs that will promote their domestic and geopolitical agendas.

Although LGU allocations increased by 8.54% in May, the 5-month growth surged by 10.6%, reaching a nominal spending of Php 420.3 billion, the second-highest on record. (Figure 4, upper graph)

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! (Figure 4, lower image)

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus."

VIII. Five-Month Debt Servicing Costs Hits Record High!

But there is more.

Figure 5

Notably, interest payments skyrocketed by 47.8% in May alone! (Figure 5, topmost graph)

Over the 5-month period, interest payments soared by 40% to a record high of Php 321.6 billion. As it is, the pie of interest payments rose to 14.24%—its highest level since 2009!

Consequently, 5-month debt servicing (including interest and amortization) surged by 48.5% to an unprecedented Php 1.217 trillion, accounting for 91.78% of the full-year debt servicing in 2023! (Figure 5, middle and lowest windows)

Specifically, amortizations are just 8.22% below the 2023 levels, while interest payments remain 48.8% short of last year’s level.

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation

Adding these together, the BSP’s incentive to ease or cut rates is largely political in nature.

Primarily, it aims to lower financing costs to support the administration’s pre-election geopolitical and GDP "stimulus," while mitigating the rising costs of public debt servicing. 

Additionally, it seeks to alleviate liquidity and solvency challenges affecting the banking industry and its clients. 

The banking system operates similarly to a cartel under the BSP's oversight.

Figure 6 

Faced with stepped-up deficit spending, the BSP could likely bankroll this by increasing its direct liquidity operations (net claims on the central government—NCoCG); a strategy previously employed in 2020. (Figure 6, topmost chart) 

In coordination with the BSP, banks are also expected to increase financing of public debt through purchases of government debt (NCoCG). (Figure 6, middle graph) 

The acceleration of the banking system’s historic NCoCG has mirrored the surge in the record-high in public debt. May’s data will be reported by BuTr in the first week of July.

Figure 7

Let's not forget that banks have also been significant borrowers of local savings to bridge gaps from deposit shortfalls, hidden non-performing loans (NPLs), substantial mark-to-market losses, and record Held-to-Maturity (HTM) assets reflected on their balance sheets.

The banking system's bonds and bills payable have been approaching the Q4 2019 zenith. (Figure 7, topmost image)

Essentially, the banking system is in tight competition with the government and non-financials for access to the public's savings. 

Not only does this put a floor on rates, but it also provides an incentive for the BSP to expand liquidity operations to keep the system afloat. Yet, this entrenches inflation, the interconnectedness of leverage, and the potential transmission of risks.

As such, while we expect the rebound in the CPI to have likely climaxed in May—largely due to growing slack in the private sector—a burst of deficit spending should put a floor under it. 

Along with this, the specter of stagflation rises.

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks

It is no coincidence that the rise in the USD to Philippine peso exchange rate has closely correlated with public spending.

Put differently, monetary inflation in support of the “trickle-down” policies that lead to the “twin deficits” emasculates the purchasing power of the peso against the USD and gold. 

So there you have it.  The BSP’s ‘dovish’ stance is largely in consonance with the acceleration of the national government’s intensifying deficit spending. 

While intended as a GDP “stimulus,” these measures also serve other underlying political agendas—facilitating access to cheaper domestic savings for pre-election financing, geopolitical activities, other domestic political objectives, and cushioning banks from worsening balance sheet challenges. 

As the above shows, the Philippine government and the establishment have been so hooked on stimulus in the hope that it will deliver some form of utopia. 

Yet, the more the interventions, the deeper the imbalances, the greater the probability of risks. 

___

References: 

Daniel Lacalle, The U.S. fiscal nightmare. Yellen cannot expect a strong economy with higher spending and taxes, dlacalle.com May 26, 2024 

Bangko Sentral ng Pilipinas, Consumers are Pessimistic in Q2 and Q3 2024, But Optimistic for the Next 12 Months*, June 28, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, Businesses are Less Optimistic in Q2 2024, Q3 2024, and the Next 12 Months*, June 28, 2024, bsp.gov.ph  

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10, 2024  

Prudent Investor, Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness May 12, 2024

 

Never Believe Anything Until It Is Officially Denied: US Recession, the Stable Peso, and Stagflation

 

It’s not “wealth” that’s being wiped out. It’s market capitalization. The wealth is in the cash flows. The wealth is in the denominator. The market cap was speculation encouraged by a reckless Fed. That was the “policy error—John P Hussman, Ph.D. 

 

In this issue 

 

Never Believe Anything Until It Is Officially Denied: US Recession, the Stable Peso, and Stagflation 

I. US Fed and Treasury Denialism: From Transitory Inflation to 75 bps Rate Hike to Recession 

II. Bitcoin Collapses on Liquidity Drought! 

III. Global Stocks and Bonds Plunged, the Bear Market Linkage Between the S&P 500-PSEi 30 

IV. Divergent Policies: ECB’s Makeover QE and the Doggedness of Bank of Japan’s Low Rate Policy 

V. Denialism: The "Stable" Peso 

VI. Denialism: Stagflation in the Transport Sector 

VII. Denialism: Public Sentiment Indicates Worries Over Stagflation 

 

Never Believe Anything Until It Is Officially Denied: US Recession, the Stable Peso, and Stagflation 

 

"Never Believe Anything Until It Is Officially Denied."  

 

German political leader Otto von Bismarck, journalist Claud Cockburn and Washington attorney Edward Cheyfitz are among some of the people attributed to this controversial quote. 

 

I. US Fed and Treasury Denialism: From Transitory Inflation to 75 bps Rate Hike to Recession 

 

An observant bloke would see a lot of political denialism these days, specifically when applied to inflation. 

 

Monetary and financial officials here and abroad previously attributed inflation to a "transitory" phenomenon. 

 

But no matter how officials deny it, the intransigence of inflation has forced US officials to admit their mistakes.  

 

Of course, citizens not only of the US but the world have carried the cross of their policy blunders.  

 

Below represents incredible confessions by two key US officials. 

 

First, the Federal Reserve Chairman Jerome Powell. 

 

Yahoo Finance December 1, 2021: The nation’s economic steward said it will back off of using the word “transitory” to describe the fast pace of price increases, as Federal Reserve policymakers acknowledge the increasing risk of more persistent inflation. “We tend to use [the word transitory] to mean that it won’t leave a permanent mark in the form of higher inflation,” Fed Chairman Jerome Powell told Congress on Tuesday. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.” 

 

Next, US Treasury Secretary Janet Yellen. 

 

CNN June 10: US Treasury Secretary Janet Yellen admitted Tuesday that she had failed to anticipate how long high inflation would continue to plague American consumers as the Biden administration works to contain a mounting political liability. 

 

In a recent comment to address surging inflation, Federal Reserve Chairman Jerome Powell dismissed the idea that official rates will increase by 75 bps earlier. 

 

Reuters May 4: Federal Reserve Chair Jerome Powell on Wednesday said central bank officials are not "actively" considering a rate hike of three-quarters of a percentage point at coming monetary policy meetings. "A 75 basis point increase is not something that the committee is actively considering," Powell said in response to a question at a press conference following the Fed's latest meeting, at which it decided to lift rates by half a percentage point and signaled more increases are coming. 

 

However, the streaking inflation impelled the FED to change its stance and increase rates by 75 bps, last week, the largest since 1994! 

 

CNBC June 15: Jerome Powell said Wednesday’s 75-basis-point hike was due in part to the Federal Reserve being worried about inflation expectations increasing. Most measures still show that Americans expect inflation to return to normal in the coming years, but there were some signs of stress, Powell said. 

 

But their action increased public concerns over the likelihood of a "hard landing" or a recession. Incidentally, the same authorities have brushed this off. 

 

Philstar.com June 10: The United States is unlikely to suffer an economic downturn, despite sky-high inflation, US Treasury Secretary Janet Yellen said Thursday. "There's nothing to suggest that there's a recession in the works," she said during an interview at The New York Times' economic forum. 

 

AFR.com June 16: So, Powell had his work cut out on Wednesday (Thursday AEST) to convince pundits that the American economy could avoid one. The Federal Reserve approved the largest rate increase since 1994 and signalled it would continue to lift rates this year to combat inflation, which is running at a 40-year high. But Powell said he was confident of a soft landing, where the Fed slows the economy enough to bring down inflation without causing a recession. His words seemed to assuage the markets and key indices jumped after he delivered his outlook. “There’s no sign of a broader slowdown that I can see in the economy,” the US central bank chairman said at his press conference. “People are talking about it a lot. Consumer confidence is very low and that’s probably related to gas prices, and also stock prices to some extent for other people. But that’s not what we’re seeing. We’re not seeing a broad slowdown,” he said. 

 

Are these denials a confirmation of the onset of a US recession? 

 

II. Bitcoin Collapses on Liquidity Drought! 

Figure 1 

  

The US Fed appears to be aggressively hiking amidst a falling stock market, which should mark the first-ever event. (Figure 1, upper pane) 

 

This attempt to thaw the massive selloffs (rocketing yields) in the bond markets through the series of tightening measures has pounded the liquidity-dependent global assets markets. 

 

The crypto sphere was monkey hammered over the week, with its overall market cap crashing by 25.8%, principally on Bitcoin's harrowing 30% collapse!  (Figure 1, middle window) 

 

Bitcoin, the principal member of the crypto population, presently trades at the USD 19,000 level, representing a low of December 2020.  

 

Also, this level indicates a massive pullback of the price gains acquired by Bitcoin when it surged to over USD 65,000 in November 2021!   

 

As Newton’s second law of motion states, "For every action, there is an equal and opposite reaction." 

 

The massive run on lenders Celsius Network and Babel Finance and troubles in crypto hedge fund Three Arrows Capital have exacerbated the predicament of the crypto universe.  

 

Ironically, despite the crumbling prices, the crypto population continues to swell. It was up by .51% to 19,920 this week, or 22.7% YTD! 

 

The bottom may not be on the horizon yet. 

 

The crypto crash is a testament to what happens when central bank liquidity dissipates! 

 

Yet, in the crypto sphere, never believe anything until it is officially denied. 

 

With mounting doubts about its viability, officials of Celsius Network claimed they were ready to meet the challenges.  

 

Celsius Blog June 8:  "We at Celsius are online 24–7. We’re working around the clock to continue to serve our community. Celsius has one of the best risk management teams in the world. Our security team and infrastructure is second to none. We have made it through crypto downturns before (this is our fourth!). Celsius is prepared. At this already challenging time, it’s unfortunate that vocal actors are spreading misinformation and confusion. They have tried unsuccessfully, for example, to link Celsius to the collapse of Luna and falsely claim that Celsius sustained significant losses as a result. They have stirred confusion around HODL mode and the importance of protecting user accounts. And the list goes on." 

 

However, its supposed bulwark succumbed to mass withdrawals.  

  

Reuters (June 13): Bitcoin fell as much as 14% on Monday after major U.S. cryptocurrency lending company Celsius Network froze withdrawals and transfers citing "extreme" market conditions, in the latest sign of the financial market downturn hitting the cryptosphere. The Celsius move triggered a slide across cryptocurrencies, with their value dropping below $1 trillion on Monday for the first time since January 2021, sparking worries the rout might spill over into other assets or hit other companies. 

III. Global Stocks and Bonds Plunged, the Bear Market Linkage Between the S&P 500-PSEi 30 

 

Again, it's not just bitcoin and the crypto world.  

 

The monetary drought has buffeted global stocks and bonds, which are on track to post the worst quarterly returns in history. (Figure 1, lowest window) 

 

In short, mounting liquidity strains have prompted the liquidity-dependent financial marketplace to raise liquidity in panic.  

What's more, the axiom "when the US sneezes, the world catches a cold" still applies. 

 

It was a bloodbath for global equity markets last week. 

 

Figure 2 

Except for China, Asian equity markets also wobbled. Japan's Nikkei (-6.7%), Australia's All Ordinaries (-6.74%), and South Korea's Kospi (-6.0%) endured the most losses. (Figure 2, upmost window) 

 

While the PSEi fell 3.04%, the US benchmark, the S&P 500, dived by 5.8% this week. 

 

The historical bear markets of the S&P 500 and the PSEi 30 appear synchronized. (Figure 2, middle window) 

 

The MSCI World Index appears to be testing the bear market. Nonetheless, the number of countries with equities at least 20% off their 52-week highs remains lower than in 2020. (Figure 2, lowest pane) 

 

Such dynamic highlights the contagion effects of the interconnected global financial markets. 

 

But no trend goes in a straight line. Bear markets tend to have the sharpest but unsustainable clearing rallies.  

 

Generating positive returns require accurately picking the bottom and implementing it. However, this may be similar to the analogy of "picking up nickels in front of a steam roller," or profitably catching bottoms are elusive, and instead may lead to the fatal, "catching a falling knife." 

 

Accurate timing does not only represent the principal challenge. The other concern is to weigh the probability and payoffs from estimated positioning and its implementation. And this requires both flexibility and discipline.   

 

IV. Divergent Policies: ECB’s Makeover QE and the Doggedness of Bank of Japan’s Low Rate Policy 

 

 

Figure 3 

Interestingly, the seeming conviction of the FED to tighten doesn't seem to be shared by other central banks. 

 

Bond yields in Europe have surged because of inflation backed by receding market liquidity.  (Figure 3, upmost pane) 

 

In response, the ECB announced plans to implement a new tool to address the fragmenting risks in its bond markets with a revision of its QE.  

 

Earlier, the ECB also confirmed plans to raise rates in July.  Perhaps unconvinced by the ECB measures, the euro fell by .2% this week. 

 

Meanwhile, the Bank of Japan bucked the global trend of rising rates to maintain its low policy rates.  

 

Reinforcing its policy of putting a cap on the yields of its treasuries, the USD Yen soared to a 24-year high! (Figure 3, middle and lowest windows) 

 

The BoJ thinks that its cap will work, but the market takes the opposing view. 

 

Because of the cap, the sinking yen represents the market's exhaust valve. 

 

Needless to say, varying policies of central banks are likely to amplify the distortions in the global marketplace and exacerbate financial stress. 

 

V. Denialism: The "Stable" Peso 

 

Here are the domestic account of "Never Believe Anything Until It Is Officially Denied."  

Inquirer, June 13: The Department of Finance (DOF) is confident that the Philippine peso remains stable and backed by a firm economy after the local currency depreciated to 53 against the US dollar on Friday, the weakest in about three and a half years. “Strong macroeconomic fundamentals continue to support the peso, despite external headwinds from tighter monetary policy actions by the US Federal Reserve and inflationary pressures from heightened global fuel prices,” DOF chief economist Gil Beltran said in a statement…Also, Beltran said the peso continued to be in “the middle of the pack of the most stable currencies” in Asia, ranking 8th among 11 Asian currencies in terms of strength. The peso depreciated by 5.4 percent to 50.77 to the US dollar at the end of 2021 from 48.04:$1 at end-2020. At the same time, three currencies —including the Japanese yen, Thai baht, and South Korean won—depreciated faster. “In 2022 [so far], the peso was one of the strongest Asian currencies, ranking second only to the Vietnamese dong,” Beltran said.  

 

Figure 4 

 

A few days after this news, the USD peso soared to close the week higher by 1.42% to 53.75, representing the third-largest gainer in the region after the Indonesian rupiah (+1.87%) and the South Korean won (+1.53%). (Figure 4, upmost window) 

 

Sure, this strong move by the USD peso pushed YTD returns to slightly below the average return of the region at 5.6%. Or, the USD peso ranked 5th of the nine regional currencies published at Bloomberg. Year-to-Date (YTD). (Figure 4, middle pane) 

 

But the thing is, the USD peso started its upside move in June 2021. In this instance, the USD peso posted the third-best returns in the region from December 31, 2020, through last week. (Figure 4, lowest window) 

 

In any case, picking historical points to prove a political point signifies a biased sample.  

 

 

Figure 5 

If history is a guide, the USD peso tends to be strong in periods of economic and financial distress. The USD peso returned 15.12% in 2008 or during the Great Recession and 8.5% during the taper tantrum in 2013. (Figure 5, upper window) 

 

While the USD peso fell by 3.7% and 5.16% in 2019 and 2020 (record recession), this was principally due to BSP operations to support the peso through massive "USD short" positions. Such positions included the intensive use of unconventional tools such as the "Other Reserve Assets" (or financial derivatives) and extensive external public borrowings. 

 

Besides, how is comparing volatility equivalent to being "stable"? Merriam-Webster defines stable as not changing or fluctuating. 

 

And how will the record string of public sector deficits be financed if not through debt, inflation, and taxes?   

 

And how about the supposed "prudence" from the streaking record highs of external debt? (Figure 5, lowest pane) 

 

And what is the influence of the other factors, such as rising rates and tightening liquidity abroad, and others, on the USD peso? 

 

How would these be supportive of the peso? 

 

Confusing statistics (history) with causality may not be a sound approach when interpreting or forecasting the markets.   

 

Economics is not about the talisman of statistics. 

 

VI. Denialism: Stagflation in the Transport Sector 

 

Never believe in stagflation until it is officially denied.  

 

Businessworld, June 17: “STAGFLATION” is unlikely to pose an immediate risk to the Philippine economy, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said. “The BSP does not view ‘stagflation’ — an economic condition characterized by slow growth, high unemployment, and rising inflation — as an immediate risk to the Philippine economy,” he said in a statement on Thursday. 

 

ABS-CBN News June 19: Outgoing Department of Trade and Industry (DTI) Secretary Ramon Lopez said Saturday that stagflation is unlikely to happen in the country, citing a rosy economic outlook. Stagflation happens when there is slow economic growth, high inflation, and a high unemployment rate. "Stagflation, malabo dahil nga dito sa growth momentum that we are experiencing despite the challenges," Lopez told ABS-CBN's TeleRadyo. 

 

For authorities to chime in and say that stagflation is not a risk should, on its own, be interesting. 

 

Why reckon with "stagflation" in public when it is not a risk worth considering? Are some sectors starting to press authorities for answers on these matters? 

 

One example. The distressed Transport sector. 

 

Inquirer, June 17: “As the saying goes: ‘A desperate man will cling to a knife.’ We don’t want to put the drivers in that kind of situation, which is why we are making this request,” Suntay said. Taxi driver Gregorio Laude, a father of two, said the increase in flagdown rates would be a big help for his family. The 56-year-old used to earn P5,000 a day working from 5:30 a.m. until 4 p.m. From that amount, he would take home around P2,000 to P3,000. But over the past months, his earnings have gone down to around P700 to P1,000. Before the weekly skyrocketing prices of petroleum products, Laude paid around P1,300 to P1,500 for gasoline daily. He now pays P3,000. Apart from that, the “boundary” was raised from P900 to P1,300 by the taxi owner, who reasoned that there were more passengers now after pandemic restrictions were relaxed in Metro Manila.  “It’s not just the gas, but the boundary as well, which consumes what we would normally collect for the day,” Laude said. He also used to get an additional P20 to P30 in tips from at least four out of every 10 passengers. If he is lucky, a generous passenger would give him P50 to P100. “Of course, they understand our situation and they themselves would voluntarily give a tip, sometimes bigger,” Laude said. 

 

Inquirer, June 15: The transport sector is in a “deadly spiral” and the next administration should “get us out of this”. This was stressed by the group Move As One Coalition (Move As One) on Tuesday (June 14) as transport inflation remained high in May, having a 24.5 share in the overall 5.4 percent inflation rate last month…The coalition said this was reflected in rising oil prices, drivers losing jobs, public transportation supply collapsing, more commuters experiencing longer lines and waiting times, and crowded commutes in enclosed spaces…The Pagkakaisa ng mga Samahan ng Tsuper at Operator Nationwide told INQUIRER.net that because of the oil price hikes, drivers are losing P363 per day for every 20 liters of diesel needed for short routes. As a result, some PUV drivers and operators have already decided to stop plying their routes for now because the cost of diesel, which already registered a net increase of P41.15 per liter since last Jan. 1, had eaten up all their earnings. 

 

Perhaps authorities and experts have become so fixated with politics or the instant gratification of the commuting public that they seem to have forgotten the fundamentals of price ceilings. 

 

Figure 6 

 

From Econoport: "The resulting shortage of goods can lead to consumers having to queue up in line to get the good, government rationing, and even the development of a black market dealing with the scarce goods." (Figure 6, upper pane) 

 

The anecdotes reinforce the economic theory on why the socio-economic distress from the supply side in response to price caps has led to the shrinking availability of public transport, the long lines and waiting times for commuters, and unauthorized charging by those still plying the routes.  

 

It represents a textbook response. 

 

Yet, free rides by authorities only transfer their burden to the public treasury through higher public spending.  

 

Moreover, since subsidies given to the affected drivers by authorities address the demand side when the supply side signifies the problem only strengthens the case of stagflation. 

 

And how are developments in the Transport sector such as reduced output, rising prices, and decreased jobs not symptoms of stagflation? 

 

Why the intense refusal to raise fare prices or ideally allow the price system to determine people's actions? 

 

Because authorities want to defend the commuters' welfare? By inducing shortages? Or, how does pushing for transport deficiencies help the welfare of the commuting public? Yes, one can pay lower prices only if one can secure a ride from the growing scarcity of public transport. IF. 

 

With lower employee mobility, how will this impact production? 

 

Or are authorities defending the fare limits to put a cap on the CPI? 

 

By extension, a depressed CPI theoretically lowers bond yields that, in effect, represent a subsidy to public spending. 

 

You see, that's how central planning works. Use political smoke and mirrors to pick winners and losers to seek more funds to spend on other boondoggles.  

 

As pawns of vile politics; damned the consumers! 

 

But there’s more. 

 

VII. Denialism: Public Sentiment Indicates Worries Over Stagflation 

 

SWS, June 16: The national Social Weather Survey of April 19-27, 2022, found 34% of adult Filipinos saying their quality-of-life was worse than twelve months before (termed by SWS as “Losers”), 32% saying it got better (“Gainers”), and 34% saying it was the same (“Unchanged”), compared to a year ago. The resulting Net Gainers score is -2 (% Gainers minus % Losers), classified by SWS as fair (-9 to zero).  

 

Let us suppose the accuracy of the SWS poll. 

  

The survey does not include the reasons behind the changes in the quality of life.  

  

But, the survey deals with the massive changes in mobility. Or its data compares a social environment limited by pandemic restrictions against reopened one.  

 

The Google Mobility chart provides, in clarity, the scope of changes covering the stated period. (Figure 6, lowest pane) 

 

Despite the increase, the majority (losers and unchanged) remained unconvinced of a better life?  Why? 

  

What happened to the reopening?  Why was it insufficient to persuade the majority of a return to normal? 

  

What "other" factors constrained public sentiment to see a better quality of life than last year?  

  

Was it inflation, which also saw increased perceptions of self-rated poverty, aside from the hunger incidences? 

  

How are these not supposed to be symptoms of "stagflation" instead of a "growth momentum?" 

 

Evidence provided by manufacturing, transport, and even retail points to the mounting risk of stagflation, which appears to be bolstered now by the general sentiment.   

 

It becomes more conspicuous why authorities have ramped up its echo chamber to deny it.