Why Isn't Gold Acting Like a Safe Haven—Yet? Part III: Is This Gold's Next Leg Up?

 

First of all there is need to remember that the gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion—policemen, customs guards, penal courts, prisons, in some countries even executioners—had to be put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done and hailed the dawn of the fiat-money millennium.—Ludwig von Mises 

In this issue: 

Why Isn't Gold Acting Like a Safe Haven—Yet? Part III: Is This Gold's Next Leg Up?

I. Introduction: From Finding the Bottom to Explaining the Reversal

II. The Gold Cycle: Cyclical bear, Secular bull

III. The New Plaza Accord: Intervention and Its Shrinking Half-Life

IV. Deepening Interventions Becomes Gold's Catalyst

V. When Former Headwinds Become Tailwinds

VII. Central Banks as Dip Buyers, and the Fund-Flow Tailwind

VI. Risk-Off, Inflationary, and Fiscal Signals Converge

VII. Central Banks as Dip Buyers, and the Fund-Flow Tailwind

VIII. Bottom line: Gold Is Pricing the Limits of Intervention 

Why Isn't Gold Acting Like a Safe Haven—Yet? Part III: Is This Gold's Next Leg Up? 

Intervention was supposed to stabilize currencies and bonds. Instead, each attempt is exposing the imbalance underneath—and gold is beginning to price it.

I. Introduction: From Finding the Bottom to Explaining the Reversal 

Figure 1 

This piece started as an attempt to answer whether gold had found a bottom. Events overtook the question. In the space of a week, gold cleared its 200-day moving average at $4,501, broke above $4,600, surpassed the 38.2% retracement of its decline from March's record, and confirmed the rounding-bottom pattern that had been forming since June. It was gold's third straight weekly gain—and its third strongest week of the year. 

The question of the bottom is no longer the interesting one. 

What's worth asking now is whether this is the start of gold's next leg toward its late January record near $5,400-$5,600, and — more importantly for this series — why it's happening.

Part I and Part II of this series argued gold's early-2026 weakness was a liquidity-stress phenomenon, not a failure of its safe-haven role — the gold-oil ratio compressing as energy-importing economies scrambled for dollars, gold sold because it remained liquid enough to fund margin calls, not because confidence in it had broken. Gold peaked above $5,500 intraday in late January, fell in a rounding top that hardened into a roughly 28% decline into late June, then based and turned. That much was covered in the earlier articles. 

What has changed is the pace and the trend—and, as the following analysis shows, the trigger. 

II. The Gold Cycle: Cyclical bear, Secular bull 

Gold's advance since the Nixon shock of August 15, 1971, has never moved in a straight line. It has progressed through a series of secular cycles, with cyclical bear markets occurring within the larger structural trend. Those corrections have varied considerably in both depth and duration.

Figure 2

The shortest cyclical bear market under a secular bullmarket was the 2008 decline, at roughly 26%, which resolved within about eight months. The deepest was the 2011–2015 decline, at roughly 48%, which lasted four years and marked the hiatus before the current cycle. February–June's roughly 28% decline over four months therefore looks much closer, in depth and duration, to the 2008 cyclical correction than to the 2011–2015 secular break. (Figure 2, topmost pane) 

Importantly, the structural forces behind the current advance have not disappeared. Central-bank de-dollarization, fiscal dominance, a geopolitical order drifting toward blocs, a deepening war economy, asset bubbles, and persistent inflation remain part of the monetary and institutional environment supporting gold. 

A liquidity-driven correction can therefore interrupt a secular advance without terminating the forces that produced it. If the current reversal holds, the February–June decline may prove to have been another cyclical bear market nested within the larger secular bull—not the end of the cycle itself. 

And if that interpretation is correct, the current advance would represent the third major leg of gold's post-Bretton Woods secular bull, following the 1970s advance and the 2001–2011 bull market. (Figure 2, middle graph) 

III. The New Plaza Accord: Intervention and Its Shrinking Half-Life 

On July 31, Japan's Ministry of Finance confirmed a coordinated yen-buying intervention with the US—the first joint action since 2011—after the yen slid toward 40-year lows near 163 to the dollar. 

The September 1985 Plaza Accord is the obvious comparison, but the history deserves care. Gold began rising in February 1985, before the Accord, and rallied roughly 50% from the Accord through November 1987—so gold did respond. (Figure 2, lowest image) 

What the Accord did not do was deliver gold's secular low. The dollar devaluation it engineered helped inflate Japan's property and stock bubble, which peaked in 1990 and produced the “lost decades,” with aftershocks plausibly extending through the 1994 Tequila crisis, the 1994 bond crisis (Great Bond Massacre), and the 1997 Asian financial crisis. 

Gold's actual secular bottom wasn't etched until the post-Asian-crisis, post-dot-com years around 1999–2001, symbolically marked by Gordon Brown's UK gold sales near the trough. 

The 1980–1999 gold secular bear was, in effect, the salad days of the dollar standard. 

A Plaza-style intervention can produce a real, tradeable cyclical gold rally without stabilizing the underlying system. Plaza's deeper legacy was several years of instability surfacing elsewhere, not durable currency-regime repair.

Figure 3

The yen's own history since 2022 makes the point more directly. Japanese authorities have repeatedly intervened to support the yen, yet each intervention has ultimately been followed by renewed downward pressure. (Figure 3, topmost pane) 

The pattern has been remarkably consistent: intervention produces an abrupt reversal, but the underlying trend eventually reasserts itself. 

That is the shrinking half-life in practice. The more fundamental forces driving the currency remain in place, so each intervention has to work harder to produce the same effect—and the market increasingly treats the intervention itself as evidence of the underlying imbalance. 

That caution has aged well. It took the bond market almost two weeks to fully erase the initial effect of the Fed-BoJ intervention. Then, on August 19, with 30-year Treasury yields pushing above 5.30%—the highest since 2007—the Treasury unexpectedly doubled its long-end buyback capacity, from a $2 billion to at least a $4 billion cap per operation, effective September 9. Yields fell instantly, equity futures jumped, and gold spiked. 

The Treasury's buyback program had already been operating since May 2024. The August move therefore wasn't the introduction of a new tool, but an expansion of an existing one. The important point is what happened despite that intervention: long-term yields had continued rising, suggesting diminishing returns from efforts to absorb duration and stabilize the long end. (Figure 3, middle image) 

This time the effect lasted one day! By Friday, the 30-year yield had regained the entire drop and then some, closing at 5.27%, while the 10-year sat at 4.74%—a single basis point from its pre-intervention high. 

Wolf Richter's account of the episode is worth noting for its diagnosis: the rise in long-term yields wasn't market dysfunction requiring correction, but the consequence of the government having to sell roughly $1 trillion in new debt over three months to fund the deficit, with buyers demanding compensation for inflation risk, the fiscal trajectory, and the sheer volume of paper that must clear the market every few months. Those pressures cannot be resolved by a signaling exercise from the Treasury secretary. 

Treasury Secretary Bessent himself all but conceded the point on CNBC the following morning, repeatedly describing the move as "signaling." 

Nor is Treasury the only official-sector actor absorbing government debt. The Federal Reserve's balance-sheet reduction ended in December 2025, after which it began purchasing Treasury bills and other short-term Treasuries to maintain an ample supply of reserves. Its outright Treasury holdings have subsequently been rising, reaching roughly $4.54 trillion by August 19, 2026. FRED (Figure 3, lowest visual) 

This may not be technically classified as quantitative easing (QE), but economically it represents renewed official-sector absorption of Treasury securities. And the more revealing point is what has happened alongside it: long-term Treasury yields have continued to rise. 

The implication is straightforward: despite the labeling, official-sector absorption of Treasury debt is increasing, yet it is not preventing the market from demanding higher yields on longer maturities. That is evidence of diminishing intervention effectiveness, not evidence that the underlying pressure has been resolved.

Figure 4 

And the underlying pressure is not static. The US national debt has now crossed $40 trillion, while interest costs have continued to accelerate. According to the figures cited by ZeroHedge, interest expense had already reached roughly $1.37 trillion in 2026, about 20% above the comparable period a year earlier. (Figure 4, topmost and middle images) 

This is where intervention encounters a structural problem. Deficit spending creates the borrowing requirement; rising yields increase the cost of servicing that borrowing; and higher interest costs, in turn, enlarge the deficit and require still more borrowing. The market is therefore confronting a moving target: official-sector intervention may temporarily absorb Treasury supply or suppress yields, but the fiscal requirement generating that supply continues to expand. 

The effectiveness of intervention consequently diminishes as the underlying imbalance grows. What might once have been sufficient to stabilize the market becomes progressively less effective when the volume of debt, the interest burden, and the compensation demanded by investors are all rising together. 

Two interventions in three weeks have produced only temporary relief, while the fiscal, currency, and bond-market pressures behind them have quickly reasserted themselves. That is the more important signal for gold. Yields of 10 and 30 year treasuries were at milestone highs (Figure 4, lowest diagram)

Figure 5 

Japanese Government Bons (JGB) yields tell a similar story. 

They remain below their immediate pre-intervention spike, but have begun climbing again, touching a fresh three-decade high near 2.94% on August 18 before easing only slightly. Figure 5, topmost image) 

The same pattern is emerging in Japan: intervention can alter market prices temporarily, but it does not remove the underlying pressure on the currency and sovereign bond market. 

IV. Deepening Interventions Becomes Gold's Catalyst 

For gold, however, the significance is different. 

Gold had already been trading around and holding the $4,000 level from late June through early August. 

First, the Fed-BoJ intervention provided the catalyst for the first lift-off from that base, reinforcing $4,000 as the floor. 

Then, Bessent's Treasury backstop came afterward, adding fuel to an advance that was already underway. 

The initial decline in long-term yields quickly disappeared, but gold retained its momentum. 

The result was the sequence described at the beginning of this piece: gold broke its 200-day moving average at $4,501, moved above $4,600, surpassed the 38.2% retracement of its March decline, and confirmed the rounding-bottom pattern that had been forming since June. 

The significance therefore goes beyond the failure of either intervention to suppress yields. The interventions themselves are becoming part of the mechanism driving gold higher. Attempts to contain currency and bond-market pressures are adding to the monetary and financial imbalances that gold is increasingly pricing. 

This is where the comparison with the Plaza Accord becomes more interesting. The 1985 agreement did not simply weaken the dollar; it set in motion adjustments that eventually surfaced elsewhere in the financial system. 

Today's bilateral intervention comes against a far more leveraged fiscal and monetary backdrop, with sovereign debt, currency instability, and official-sector intervention increasingly interacting with one another. 

If history rhymes, the contemporary bilateral Plaza Accord may mean more than a break of the recent high—it may mark the beginning of sharply higher gold prices. 

V. When Former Headwinds Become Tailwinds 

WTI crude was up roughly 5% this week, back above $86, as the US-Iran standoff over the Strait of Hormuz shows no sign of resolving and Washington prepares tighter sanctions. (Figure 5, middle graph) 

That is worth pausing on because oil-driven dollar demand was the mechanism Part I and Part II identified as suppressing gold earlier this year: energy importers scrambled for dollars, and gold was sold for liquidity even as the safe-haven case strengthened. 

The same forces are now coinciding with gold's advance rather than working against it. 

That is not a contradiction. It means the liquidity-stress channel has been overtaken by the larger fiscal-currency-risk channel this piece has been tracking. The same energy shock that once forced gold sales for dollar liquidity is now compounding, rather than competing with, the debt and currency concerns driving the bid for gold. 

There is another important change in the relationship between gold and Treasury yields. Earlier in the year, rising 30-year Treasury yields appeared to place a ceiling on gold's advance. Now the relationship appears to be changing: gold is rising even as the 30-year yield pushes above the level at which the Treasury's intervention sought to stabilize it. 

The market is therefore no longer responding to higher yields simply as an opportunity cost for holding gold. It is increasingly interpreting those yields as evidence of the fiscal and currency pressures that make gold more attractive in the first place. 

It is also worth noting that rising gold prices and rising 10-year Treasury yields have historically coexisted during the stagflationary periods of the 1970s. (Figure 5, lowest chart) 

The parallel with today is not exact—the degree of systemic leverage is vastly different—but the coexistence of rising nominal yields and rising gold is not unprecedented when inflation, fiscal pressure, and confidence in the monetary regime become dominant forces. 

VI. Risk-Off, Inflationary, and Fiscal Signals Converge 

Gold's rise also came as risk appetite weakened. The S&P 500 fell about 1.4% on the week, its first weekly decline in a month, dragged by a rough five days for technology; the Nasdaq lost roughly 2%. That gives this week's move a stronger risk-off component: equities fell while gold rose. 

But it was not a conventional flight to safety. Oil was rising, long-term Treasury yields were rising, and gold was rising with them. Growth concerns and inflation/fiscal concerns were therefore appearing simultaneously: stocks were pricing weaker risk appetite, while oil and bond yields were pricing inflation, supply, and fiscal pressures. 

That combination is arguably more important for gold than a conventional risk-off episode. Gold was not merely benefiting from falling risk assets; it was responding to the same underlying deterioration that was simultaneously pushing up oil and long-term yields. 

Curiously, Bitcoin also surged more than 22% during the week, briefly moving above $77,000, reflecting both renewed risk appetite in the crypto market and, potentially, a safe-haven bid amid concerns over currencies and the monetary system. Short covering amplified the move. 

Taken together, the week's price action looks less like a simple flight to safety than a convergence of risk-off, inflationary, and fiscal signals—and gold is increasingly responding to all three. 

VII. Central Banks as Dip Buyers, and the Fund-Flow Tailwind

Figure 6

Central banks were buying into the selloff. The World Gold Council's Q2 2026 data showed central banks adding 102 tonnes of gold during the quarter, even as gold prices fell roughly 16%. (Figure 6, upper diagram) 

As of the first half of 2026, Poland remained the largest reported buyer at 82 tonnes, followed by Uzbekistan at 41 tonnes, China at 40 tonnes, and Kazakhstan at 27 tonnes. World Gold Council: Central Bank Gold Statistics, June 2026 (Figure 6, lower graph) 

The significance is not the absolute volume, but the direction of demand during the correction. While more price-sensitive and leveraged holders were liquidating, official-sector demand was increasing. Central banks were therefore absorbing part of the supply released by the selloff, providing an important counterweight to the liquidation pressure that drove gold lower. 

The longer-term demand signal remains equally important. The World Gold Council's survey found that 89% of reserve managers expect official gold holdings to increase over the next 12 months. That suggests the buying is not simply a reaction to short-term price movements, but part of a broader shift in reserve preferences.

Figure 7

Fund flows provide a second layer of support. Gold held the $4,000 area for close to two months as renewed ETF inflows emerged, while the two previous stretches of stronger fund flows—roughly August–October 2025 and November–February 2026—preceded significant advances, including the run into January's record. (Figure 7, upper image) 

The pattern does not mean ETF flows mechanically determine prices, but it does show that renewed investment demand has tended to accompany—and at times precede—the next major leg higher.  

Independent ETF data reinforce the change in direction: global gold ETFs returned to inflows in July after May–June redemptions had flushed out leveraged positions, with flows continuing into August. The important development is therefore not simply the amount of money flowing into gold, but the transition from forced liquidation to renewed accumulation. 

India's Dhanteras and Diwali season could provide an additional, though more modest, seasonal catalyst into year-end, alongside whatever short covering remains from a positioning backdrop that has been reduced but does not appear fully washed out. (Figure 7, lower visual) 

The ownership dynamics are therefore changing. Central banks were accumulating while weaker and more leveraged holders were liquidating; as that selling pressure subsided, ETF flows turned positive. The correction consequently did not destroy the underlying demand structure. Instead, it transferred gold from more price-sensitive holders toward buyers with a stronger strategic (non-price sensitive) incentive to own it. 

That matters for the next leg. The same selloff that removed speculative excess also created the conditions for a stronger base: official buyers absorbed supply, leveraged positions were reduced, and investment flows are now returning as gold moves higher. 

VIII. Bottom line: Gold Is Pricing the Limits of Intervention 

The question this piece opened with has effectively been answered by the market: gold has bottomed. What deserves scrutiny now is why, because the explanation is not the conventional one. 

Two interventions in three weeks—one in currencies, one in the bond market—have produced only temporary effects in the markets they were intended to stabilize. Yet their significance for gold has been the opposite. 

The Fed-BoJ intervention provided the catalyst for gold's first lift-off from the $4,000 base; Bessent's Treasury backstop then added fuel to an advance already underway. The interventions did not extinguish the underlying pressures. They exposed them—and, in doing so, reinforced the forces driving gold higher. 

The same energy shock that once forced gold into liquidity sales is now moving with gold rather than against it. This week's equity sell-off adds another layer: stocks fell while gold, oil, and long-term yields rose together. That is not a simple flight-to-safety trade. It is a combination of risk-off, inflationary, and fiscal signals—a more distinctly stagflationary configuration. 

The next leg will not necessarily be linear. $4,600 now needs to establish itself as support rather than prove to have been a temporary spike, while a sustained break below $4,300 would materially weaken the bullish structure. But the more important question is no longer technical. 

Gold is increasingly pricing the widening gap between what governments can credibly promise about their currencies and debt markets and what they can actually deliver. The interventions are themselves becoming part of that price signal: each attempt to contain currency or bond-market pressure produces a temporary market response, while the underlying imbalance quickly reasserts itself. 

And that is ultimately what makes this leg different from the earlier stages of the cycle. Gold is no longer simply rising because investors fear what might happen. It is rising because the market is beginning to price what governments are already doing—and the diminishing effectiveness of their attempts to contain the consequences. 

____

References

-Why Isn’t Gold Acting Like a Safe Haven—Yet? The Gold–Oil Ratio and the Liquidity Stress Behind Early-Crisis Gold Weakness (Part II)—April 5, 2026 

-Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)— March 22, 2026

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

Bulls of 1929 like their 1990s counterparts had their eyes glued on improving profits and stock valuations. Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings—Dr. Kurt Richebächer 

In this issue 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade 

Has BBM’s SONA Cycle Peaked? While the headline index has shown resilience in July, market internals reveal structural weaknesses. The unraveling of the Yen-Yuan carry-trade increases global contagion risks. 

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

The following post is a follow-up on my July 21st, “The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects” 

Since its interim peak on July 19th, the PSEi 30 has dropped 2.97%—as of the week ending August 2nd—supported by this week’s decrease of 1.79%, marking its second consecutive decline. 

The major Philippine benchmark fell in 5 of the last 9 trading days. 

Interestingly, this week’s larger decrease came as the Philippine government is expected to announce the Q2 GDP—which has been widely projected to outperform—and June’s labor force survey. 

The authorities are also set to release July's CPI print, which the BSP expects to show a bounce from last month.

And it's also earnings season, where the consensus expects Q2 earnings to exceed expectations. 

Meanwhile, the establishment and media have been peddling the idea of the “ghost” month affecting the stock market’s performance, earnings, and the economy. 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

First, let's examine the performance of the Philippine Stock Exchange last July*. 

*Nota Bene:

-The base reference matters. In my perspective, the 2013 starting point represents the real peak of the PSEi 30 based on volume and market internals.

*Annual returns of the PSEi 30 partially represent an apples-to-oranges comparison due to marginal changes in its membership.

*The data indicated reflects nominal returns and not CPI-adjusted or real returns.

Figure 1

Thanks to the pre-SONA pump, the PSEi 30 jumped 3.23%—representing its second-best monthly performance in 2024 and the biggest July returns since 2018. (Figure 1, topmost image)

It was also the largest of the BBM's pre-SONA pumps over the last three years.

On a year-to-date basis, the PSEi 30's meager 2.62% returns signified its best showing since 2019, which highlights the ongoing bear market.  (Figure 1, middle graph)

Despite this, diminishing returns continue to be a scourge on the PSEi 30.

But how about the volume?

Though July's gross turnover was up 11.3% from a year ago, in peso terms, its depressed level, which was almost equal to 2021, reinforced the downtrend since 2015. (Figure 1, lowest chart)

Figure 2 

Gross volume includes the published special block sales and the undeclared substantial share of cross-trades.

In the first 7 months of 2024, gross volume fell by 8.4% year-over-year (YoY) to Php 865.5 billion, marking a third consecutive annual decline. (Figure 2, highest window)

This means that the paltry improvement last July has not been significant enough to cover this year's volume deficit.

The 7-month main board volume likewise dropped 3.69% to Php 702.7 billion, which signified levels below 2018. (Figure 2, middle visual)

Resonating with the gross volume levels in peso, it has been a downhill for the main board volume since peaking likely in 2013.

Amazing.

The more than a decade-long depression in the PSE's gross and main board volume represents the decadent conditions of capital or savings.

It must be emphasized that these volumes have been inflated by foreign trade, pumps by the "national team," and intra-day dealer trades.

In the first 7 months of 2024, the share of foreign participation has risen from 45.44% in 2023 to 48.8% this year. (Figure 2, lowest diagram)

Foreign investors remained marginal sellers, posting Php 27 billion in outflows, their fifth consecutive year of net selling.

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

As for the "national team," the Other Financial Corporations (OFC) could be part of this cabal engaged by authorities to prop up the index.

Clue?

The BSP on the OFC’s activities in Q1 2024: The BSP on the OFC’s activities in Q1 2024: “The QoQ growth in the other financial corporations’ domestic claims was attributable to the increase in its claims on the other sectors, the central government, and the depository corporations. The other financial corporations’ claims on the other sectors grew as its investments in equity shares issued by other nonfinancial corporations and loans extended to households increased. Likewise, the sector’s claims on the central government rose as its holdings of government-issued debt securities expanded. Moreover, the sector’s claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares. (bold added) [BSP 2024]

Figure 3

The growth of OFC’s claims on the private sector slipped from 9.5% in Q4 2023 to 8.5% in Q1 2024, which was also reflected in the claims on depository institutions, whose growth rate decreased from 20% to 13.9%. 

Nevertheless, both claims surged to record highs in nominal peso levels, reflecting the returns of the PSEi 30 amounting to 7% and the Financial Index to 17% in Q1 2024. (Figure 3, upper and middle charts) 

OFCs have not just been funding the government; they have also been propping up the PSE! 

To emphasize, the percentage share of the free float capitalization of the top three banks reached an unprecedented 22.7% of the PSEi 30 last May! (Figure 3, lowest image) 

Though it has slipped, it has remained within a stone's throw of 21.85% as of the week of August 2nd. 

The same banking heavyweights command a whopping 89% of the overall Financial Index pie, which is stunningly higher than the 79% share in the week of July 16, 2023.  

This outgrowth partially reflects the decrease in the number of members from 9 to 7, due to the exclusion of Rizal Commercial Bank and Union Bank. 

The only non-bank member of the index is the Philippine Stock Exchange [PSE:PSE].

Figure 4

The Financial Index has not only starkly outperformed, alongside ICT, electrifying the gains of the PSEi 30, but it has also been absorbing a greater share of the depressed volume of the PSE. (Figure 4, topmost graph)

That is, the uptrend in the Financial Index has climbed along with its estimated volume share of the PSEi 30, comprising 18.15% last June. (Figure 4, middle image)

As such, the concentration of gains in the index has also resonated in the context of gross volume.

To wit, the rising concentration risk comes amidst a declining trend in profit growth of the banking system, where a bulk of it represents accounting profits. For instance, mark-to-market losses are concealed via record Held-to-Maturity (HTM) assets, and BSP relief measures that understate NPLs, etc.

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy

And it is not just banks.

While year-to-date (YTD) gains of the PSEi 30 members have been evenly distributed (as of August 2), the returns of the top five issues have defined the index's performance rather than the overall breadth. (Figure 4, lowest pane)

For instance, the traded volume of the top 20 most active issues increased by 40% this July compared to a year ago and was up by 2.17% YTD 2024 from the previous year.

In the same vein, the volume of the Sy Group soared 46.6% last July from the same month in 2023 and was up 7.3% YTD 2024 compared to a year ago. 

This indicates that the heavy index pumping last July by the Philippine version of the “National Team” amplified the percentage share of the top 20 issues and the Sy Group in the context of volume. 

Meanwhile, the average share of the top 10 brokers increased from 56.98% in July 2023 to 57.6% last month. 

Aside from the sluggish volume, the PSEi 30’s SONA gains have barely been reflected in the PSE’s constellation. 

The advance-decline spread last July 2024 was -150 compared to -166 in the same month a year ago. Again, the PSEi was up 3.23%.

Figure 5

This divergence reverberated in the YTD performance: although negative breadth has become less negative—or price declines have been less intense—a positive sign, they are still declining.  Again, the PSEi was up 2.62% YTD. (Figure 5, topmost diagram) 

Lethargic volume (a symptom of capital consumption), rising risks from the concentration of activities in trading volume (reflecting maladjustment in balance sheet exposure), select stock prices (inflation of mini-price bubbles), broker exposure (increased balance sheet leveraging?), as well as low levels of retail trades (low savings), and rising dependence on foreign trade (increasing reliance on global capital flows) translate to magnified risks of significant downside volatility or simply—a meltdown. 

A stock market meltdown leads to a decrease in collateral values that underpin bank lending, which magnifies balance sheet mismatches, increases illiquidity, and heightens the risk of insolvency within the industry and among its borrowers. It also weakens the balance sheets of investment, pension, and insurance funds (such as the government’s SSS and GSIS), potentially leading to increased capital deficits and further heightening the risk of illiquidity and insolvencies. 

The BSP would likely bail some of these out at the expense of the peso. 

During the stock market meltdown in March 2020, the Finance Chief called on the SSS and GSIS to boost or "rescue" the stock market. The BSP followed this up with record cuts in official rates, historic liquidity injections, and the implementation of various relief measures. The rest is history. 

The BSP implemented ex-Fed chairman Ben Bernanke advise, 

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse (Bernanke, 2009) 

The Philippine version of the national team likely exists for these reasons. 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

Incredibly, the establishment and media continue to entertain and mislead the public with the alleged influence of the so-called "Ghost Month" on stocks or the economy.

Because "Ghost Month" is a superstition rooted in Chinese tradition (religion), the media and establishment's embrace of it assumes that the markets and the economy are driven by Chinese culture, even when the Philippines is predominantly a Catholic population. (Figure 5 middle window)

For example, some BSP literatures cite the "Ghost Month" to rationalize the unexplainable. The BSP should address accusations of their having 'ghost employees' instead. 

The repetitive references to the so-called "Ghost Month" also assume that foreign participation in the financial markets and the economy is influenced by Chinese tradition.

Or, are investors or market participants in the PSE and the economy predominantly of Chinese descent or a practitioner of Chinese traditions?

Some PSE facts regarding the alleged misfortunes of the Ghost Month:

Since the PSEi uptrend from 2003 through 2023, August has closed lower in 14 of the 21 years, or 67% of the time, with an average change of -0.72%. Yet, August 2021 delivered a majestic 9.33% return, the highest since 2000. August 2022 also produced a 4.24% return, the highest since 2008. (Figure 5, lowest graph)

So, what happened to the "Ghosts" of 2021 and 2022? Did the PSEi call upon the movie comedians known as the "Ghostbusters" to foil the rut? Or, have these rallies been a product of the BSP's easy money campaign?

Ironically, the same media and establishment experts have been unanimously silent about the June 17th Ayungin Shoal incident, which involved a standoff between the Philippine and Chinese Coast Guard.

The incident could have triggered World War III—had the US agreed with the Philippines' interpretation, activating the 1951 Mutual Defense Treaty. Unfortunately, the US implicitly gave a cold shoulder to the Philippines, forcing the latter to negotiate and deal with Chinese authorities over the South China Sea. Naturally, the US is opposed to this.

The same echo chamber has been observed ignoring the ongoing shift to a war economy through its embrace of war socialism.

Superstitions are given precedence over facts that matter, translating to the brazen hoodwinking of the public that fomenting war is good for the economy while Ghosts will scare the wits out of investments. 

Won't a war lead to a partial transformation of the living population into ghosts? 

Yet, who would invest in a country on the brink of war? Who would like to see their investment ownership evaporate when enemy drones start wreaking havoc on crucial social, economic, and political edifices, exacting a heavy toll on life and disrupting the division of labor?

But don't worry, stocks and real estate will boom! 

Sorry, but that’s an absolutely stunning imbecilic logic. 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump

The scarcity of local volume translates to amplified vulnerability to volatile foreign sentiment, mercurial fund positioning, and flows. 

Proof?

The massive +4.7% rally by the Japanese yen $USDJPY stole this week’s thunder.

It smashed what the consensus called the “unstoppable” force, a speculative mania. 

To amplify its policy, the Bank of Japan (BOJ) reportedly timed its $36 billion intervention in July to coincide with softening signs in the US economy.

Furthermore, the Chinese yuan $CNY also rebounded by 1.1% week-over-week (WoW). The US dollar index fell by 1.1%. 

The unraveling of the yen and yuan carry trades unleashed a wave of de-risking and deleveraging that rippled across the globe.

Figure 6 

Asian currencies posted substantial gains. (Figure 6, topmost graph) 

The Philippine peso rallied by 0.46%, with the $USDPHP closing at 58.08 and looking poised to fall below the 58 levels and retest the 57.5 area this coming week.

The Philippines led the rally in ASEAN bonds. (Figure 6, middle window) The sharp fall in the 10-year Philippine bond yields strengthens the view that the BSP is about to cut rates.

Furthermore, as signs of mounting strains in the economy emerge, the "belly" of the Philippine treasury curve has also inverted—meaning yields of 2-to-7 year notes have dropped below the 1-year note and partly below the 6-month T-bills. (Figure 6, lowest chart)

Philippine treasuries appear to be defying the BSP’s projected increase in inflation.

Figure 7

The unwinding of the carry trades sent the Japanese stocks crashing.  The yen’s massive rally coincided with the Nikkei 225’s 5.81% nosedive last Friday, to register its 2nd largest one-day decline after the Black Monday crash of October 1987.  The Nikkei was down 4.6% WoW. (Figure 7, topmost and middle charts)

Asian stock markets closed mostly lower. Eleven of the nineteen bellwethers posted deficits, with an average decline of 0.47%. Aside from Japan, the most significant weekly declines were led by Taiwan and the Philippines.(Figure 7, lowest graph)

All of this indicates the magnified contagion risks associated with asset booms driven by financial leverage.

Figure 8 

Risks in the ‘periphery’ have reached the ‘core.’ 

The race to a series of record highs by the S&P 500 $SPX has echoed the PSEi 30’s muted rally in 2024. With the SPX down, the PSEi 30's SONA pump has started to wobble. (Figure 8, highest image)

Foreign outflows of Php 1.6 billion this week have partly resulted in the PSEi 30’s 1.79% decline.

In the backdrop of lethargic volume, concentrated activities, and a rising share of foreign participation, a continuation of global de-risking and deleveraging translates to more liquidations here and abroad, which could expose many skeletons in the closet of the Philippine financial system.

The SONA pumps of 2022 and 2023 not only surrendered all their gains; more importantly, the PSEi 30 closed lower than its base at the start of the pumps. (Figure 8, middle graph)

If history rhymes, the PSEi 30 could fall below its June 21st low of 6,158 during this SONA cycle (post-SONA dump).

Further, when the Philippine peso rallied in 2018 (USD PHP trended lower), it marked the onset of the PSE’s bear market. Will history repeat? (Figure 8, lowest chart)

Importantly, weren't we repeatedly told that easy money would fuel the embers for the rocketing of asset gains?

___

References

Prudent Investor, The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects, July, 21, 2024

Bangko Sentral ng Pilipinas, Q1 2024 Domestic Claims of Other Financial Corporations Rise by 2.8 Percent QoQ and 12.9 Percent YoY, July 31, 2024

Ben S. Bernanke, A Crash Course for Central Bankers, ForeignPolicy.com, November 20, 2009

  

USD-Php Spikes to 2005 Highs! Currency Devaluation Myths, Oversold Bear Market Rally Ahead?

 Devaluation means monetary expansion. The new money must enter the economy somewhere — payments to exporters, for example. The ensuing bubble is misinterpreted as a sign of the success of devaluation. But the bubble is accompanied by the well-known deleterious effects of a rising price level, income redistribution, and malinvestment. As the prices for exporters' factors of production rise and the benefits of devaluation fade away, there will be calls for more money expansion. If more than one country pursues this policy, there ensues a disastrous race to the bottom—Patrick Barron 

 

In this issue 

 

USD-Php Spikes to 2005 Highs! Currency Devaluation Myths, Oversold Bear Market Rally Ahead? 

I. Never Believe Anything Until It Is Officially Denied: USD-Php Spikes to 2005 Highs! 

II. Yen, Won, and the Peso: What Happened to the Supposed Power of FX Reserves?  

III. BSP Assets: Peso Vulnerable to the Lagging Share of International Reserves  

IV. Currency Devaluation Myths; No Trend Goes on a Straight Line: Expect a USD Php Pullback 

V. Treasury Markets Response to the BSP’s 2nd Rate Hike: Higher Yields, Regional Underperformance 

VI. Oversold Global Equity and PSEi 30: Bear Market Rally Ahead? 

 

USD-Php Spikes to 2005 Highs! Currency Devaluation Myths, Oversold Bear Market Rally Ahead? 

 

I. Never Believe Anything Until It Is Officially Denied: USD-Php Spikes to 2005 Highs! 

 

Furthermore, to reduce credit risk through the exchange rate channel, the BSP has used derivatives and loans in shoring up its Gross International Reserves (GIR), thus helped in the powering up of the peso. Other Reserve assets continue to absorb a significant role in the BSP’s GIR. 

… 

 

Should a surge in global inflation continue, this massive USD short position can be expected to unwind dramatically. 

 

*See BSP’s Diokno: No Asset Bubbles and Excessive Credit Growth; Ex-BSP Gov. Espenilla’s Minsky Moment, and Statistical Inflation of Real Estate Prices February 22, 2021 

 

You read this only here! 

 

 

Figure 1 

 

Mainstream media has played up the incredible activities of the peso. Well, has this not been climatic? (Figure 1, topmost pane) 

 

For the week, the Philippine peso was the weakest link in Bloomberg's roster of Asian currencies. The USD-Php spiked by 2.3%, its steepest weekly increase in years! (Figure 1, middle pane) 

  

Interestingly, monetary officials remain in steep denial. 

 

Inquirer, June 23: “We can see that the recent weakening of the peso along with other currencies in the region is consistent with [the] more aggressive monetary policy normalization in advanced economies, particularly the US Fed,” BSP Deputy Governor Francisco Dakila Jr. said during the briefing. Since the Philippine peso performs about average compared to its regional rivals when measured against the US dollar, Dakila claimed that external factors are the main reason for the local currency’s continued weakening. “You can see that this is more a strong dollar phenomenon rather than something that is attributable to domestic considerations,” he said. 

 

Inquirer, June 25: The Philippine peso flirted with the 55:$1 level in intraday trading on Friday, falling to its weakest position of 54.999 against the US dollar before eventually closing at 54.985. The local currency came close to having lost two pesos against the greenback in just two weeks or 10 trading days…Despite the fast depreciation, BSP Governor Benjamin Diokno maintained that the peso remained relatively stable compared to most other currencies in the region. “This [depreciation trend] is not only limited to the Philippine peso, it is happening globally,” Diokno said. “But the BSP remains committed to a market-determined exchange rate and we intervene only to ensure orderly market conditions and prevent excessive short-term volatility in the exchange rate.” 

The substantial two-week advance helped push the Year-to-Date returns of the USD-Php to 7.8%, the third-best after the USD-Japanese Yen (+17.5%), and the USD-South Korean won (+9.3%).  (Figure 1, lowest window) 

  

Year-on-Year performance shows a similar pecking order. 

  

A slight change in rankings changed when reckoned from 2021 until last week; the Thai baht supplanted the peso for the third spot. The USD yen and the USD won remain the leaders.  

  

The varying time perspective shows that the returns of the USD peso gained momentum only from last year through today.  

 

Authorities repeatedly assert that factors affecting the foreign exchange rates are the relative 'stability' of the peso and external influences or developments (Fed hawkishness).  

 

Relying on the attribution bias for its public relations (PR) management, such frameworks assume the lack of connectedness between the domestic and international economies that have brought about the peculiarities in the price actions of the peso.  

 

In saying so, authorities betoken the inability of the markets to comprehend the 'data-driven' (historical) conditions as perceived and construed by them. To this end, they imply that the peso's fall has been a function of market failure! 

 

Yet, despite the rhetorical flimflam, should the USD-peso continue to scale higher, the basis of their claims will only disintegrate. 

 

Current developments only validate the axiom, "Never Believe Anything Until It Is Officially Denied."** 

 

**See Never Believe Anything Until It Is Officially Denied: US Recession, the Stable Peso, and Stagflation June 20, 2022 

 

II. Yen, Won, and the Peso: What Happened to the Supposed Power of FX Reserves?  

 

Figure 2 

 

The thing is, the peso (near its 17-year lows) joins select Asian currencies at milestone lows: the South Korean won (13.5-years), Japanese yen (24 years), and Indian rupee (all-time)! (Figure 2, topmost window) 

 

And for all that ritualistic belief that Foreign Exchange Reserves serve as a shield against a currency meltdown, be it known that FX reserves are adrift or near record highs in Japan, South Korea, and India! 

 

These are evidence that FX reserves are instead talismans for authorities than having a functional role against the complex untoward effects of unbridled credit expansion from an extended regime of low-interest rates.  

 

Using the Philippine construct, it is the composition that matters.  

 

FX reserves erected on leveraging signify "USD short" positions dependent principally on easy financial market conditions. 

 

The reversal of the easy money conditions only exposes the veneer of strength that magnifies the risks of a looming financial crisis! 

 

In the meantime, official policy rates have, to a certain extent, influenced the performances of these currencies.  

 

At historical lows, the Bank of Japan (BOJ) steadfastly refuses to budge, igniting further speculations of domestic inflation.  

 

And to defend its policy through Yield Curve Control (YCC), the BOJ has embarked on an unprecedented acquisition of the Japanese Government Bonds (JGB). Among central bank peers, the BOJ is the most daring in indulging in monetary experimentation. The BOJ is the most significant whale, controlling almost half of its JGB market! (Figure 2, middle panes) 

 

Meanwhile, the Bank of India has also tiptoed in raising rates. 

 

Unlike both, the Bank of Korea has serially raised rates from 2H 2021 through today. The central bank of South Korea raised a total of 125 bps. 

 

While the global tightening of financial conditions demarcates the operational limits of the BSP to support the peso, the market's expectations of inflation served as the 'trigger' for the meltdown. 

 

III. BSP Assets: Peso Vulnerable to the Lagging Share of International Reserves  

 

And as expected, the BSP has hesitantly raised rates, increasing by another baby step of 25 bps this week.   

 

And though the National Government has announced that it has partially paid back its (Php 300 billion) loans, the recent historic QE has skewed the BSP's portfolio towards domestic assets.  

 

Operating under a de facto US dollar standard, the BSP has kept its international reserves at a steady range of 85% to 88% of its total assets, which functioned as a cap on its issuances of domestic liabilities. (Figure 2, lowest pane) 

 

But under the pretext of the pandemic, the unparalleled emergency measures threw these limits under the bus. In March 2022, BSP asset growth has decelerated to 3.7% YoY. The massive Q1 external borrowings marginally increased the share of international reserves to 70.54% but had been insufficient to restore the gap.  

 

This glaring chasm exhibits the extent of monetary inflation engaged by the BSP relative to international reserves, rendering the peso vulnerable to massive price dislocations. 

 

Back in December 2021, we wrote***, 

 

The BSP must amass sufficient FX reserves to match domestic monetary operations required to maintain the de facto US currency reserve standard. Otherwise, with inadequate FX anchor, the peso must fall. 

 

***See External Debt Growth Accelerates in Q3! Why This Uptrend Will Continue, December 19, 2021 

 

IV. Currency Devaluation Myths; No Trend Goes on a Straight Line: Expect a USD Php Pullback 

 

Aside from the official spin, the consensus attempts to reason from price changes. 

 

Figure 3 

Attributing the Balance of Payment deficits may not adequately explain the tumbling peso. (Figure 3, upmost window) 

 

BOP deficits have hardly been a factor in two crucial episodes of the rising USD-Php, specifically in 1999-2005 and 2013-2018. 

 

Additionally, the idea that a falling peso should boost foreign revenue-dependent sectors, such as exports, tourism, BPOs, and others, is generally misleading. 

 

One, it represents a reductio ad absurdum in defining an economy. It frames the sectors as entirely driven by exchange rate fluctuations.  

 

For instance, following quarantine restrictions from the pandemic, the global reopening of economies compounded by government transfers has powered the recent domestic export boom. Exchange rates were barely the only factor. 

 

Two, it disregards the comparative advantages among nations.  

 

Three, although there may be some truth that the weakening peso may lead to growth in these sectors, this depends on the time length of adjustments. Once inflation erodes on the margins, the advantage vanishes. 

 

As the great Ludwig von Mises explained****,  

 

"However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption." 

 

****von Mises, Ludwig The Objectives of Currency Devaluation, Mises.org February 27, 2012 

 

The PSA data on exports and the USD peso highlights this correlation. Robust export growth occurs at the onset of the devaluation, but it eventually fades. (Figure 3, second to the highest pane) 

 

Next, the peso is on a 52-year downtrend. Did the Philippines become an export giant? Yes, if the answer is labor (OFW) exports. No, for goods. Not yet for services.    

 

Pushing this logic to the limits, if currency devaluation or the destruction of currency is the way to prosperity, why aren't Zimbabwe and Venezuela among the advanced or wealthiest nations? 

 

An anemic peso hasn't deterred imports too.  (Figure 3, second to the lowest pane) 

 

Part of exports depends on inputs from imports. 

  

Also, because public spending contributes to import growth, it helps drive the merchandise deficit higher.  Though increased revenues prompted a lower fiscal deficit, the public spending in the 5-months of 2022 is at a record high! (Figure 3, lowest left window)  

 

Financed by current and future taxes (debt) and/or monetary inflation, public spending has been instrumental in fueling economic distortions, capital consumption, price pressures, and the rising peso.  

 

For the moment, rising rates and the falling peso have yet to surface in the form of higher debt servicing costs of public debt. But the mediocre growth in debt servicing may be about the juggling of accounting. (Figure 3, lowest right window) 

 

Four, this exacerbates the economic maladjustments, contributing to the escalation of the boom-bust cycle. 

 

Finally, while there may be many other reasons, the more significant aspect is that currency devaluation represents a wealth redistribution scheme. Currency devaluation transfers wealth to sectors benefiting from FX revenues. It also acts as a wealth-shifting mechanism favoring borrowers at the expense of savers. 

 

Politically induced wealth transfers lead to a lower standard of living. 

 

With the consensus anchoring on the notion that economic growth can outrace mounting systemic liabilities, such convictions, translated into actions, ensures the path for a sustained weakening of the peso. 

 

To close, yes, the USD Php is overbought. Plus, given the increased public apprehension, the prospect of increased interventions by the BSP in the currency market, a global countercyclical risk-on environment, and the inauguration of the new President may prompt its pullback in the interim. 

 

No trend goes in a straight line. 

 

Again, the latest USD-Php run reinforces the 52-year trend, which originated ironically with the regime of the president-elect's father.  

 

Deja vu? 

 

V. Treasury Markets Response to the BSP’s 2nd Rate Hike: Higher Yields, Regional Underperformance 

 

Figure 4 

 

The media fixates on the peso's dive, but we barely hear the opinions of treasury traders. Yet, through their actions, treasury traders initiated concerns over inflation. They did this not only by pushing up the yields but also by reshaping the yield curve. 

 

The ambivalent response of the BSP, through baby steps increases in its policy rates, exacerbated the anxiety in the financial marketplace.  

 

The media covered the selloffs in the peso and equity markets. But there was little mention of the activities in the treasury markets, where the real action lies. 

 

It was a mixed week for BVAL treasuries.  

  

Treasury traders continue to discount official inflation statistics, mainstream projections, and actions of the BSP. 

  

Reflecting the second hike of BSP, yields of short-term maturities increased while bond yields, except for the 10-year, decreased. (Figure 4 topmost left pane) 

  

The spread between the PDS 10-year yield and the official rate continued to widen, reflecting the corresponding rise in the 10-year yield, which nearly negated the rate hike by the BSP! (Figure 4 topmost right pane) 

  

Nevertheless, the yields of 7- and 10-year bonds remain higher than the 20- and 25-year. (Figure 4 second to the highest left pane) 

  

This back-end inversion in the treasury curve suggests that traders see liquidity problems indicating a possible economic slowdown ahead. Yes, stagflation, folks. (Figure 4 second to the highest right pane) 

 

Unknown to most, some foreign institutions, like Nomura, have flagged the Philippines as vulnerable to food inflation.  (Figure 4 second to the lowest window) 

 

Add social risk to this, according to Allianz. Munich Germany, June 14 (Allianz SE): Net food-importing countries with a high level of social risk are the most vulnerable to social unrest in the current global environment. We identify 11 larger emerging markets that face a high risk of food-related protests in the next few years: Algeria, Bosnia and Herzegovina, Egypt, Jordan, Lebanon, Nigeria, Pakistan, the Philippines, Sri Lanka, Tunisia and Turkey. Out of these 11 countries, only Bosnia and Herzegovina and Egypt have so far embarked on consumer-oriented policies to mitigate the food price shock for households.  

 

According to the PSA, the share of agricultural imports to total imports rose to 13.52% in Q1 2022 from 12.98% in the same period last year. 

 

The rising share of agriculture imports accounts for the years of lack of investments due to massive resource misallocations from the low-interest rate regime of the BSP and the deeply entrenched protectionist policies of the National Government.  

 

And even with the incoming president designating himself as the interim head of the Department of Agriculture, the political climate of this sector is not going to change anytime soon.  

 

Circling back to the bonds, the irony is that domestic 10-year treasury yields continue to rise even as most of its counterparts in Asia posted declines. 

 

Further, since the benchmark domestic Treasury 10-year yield outsprints its US Treasury counterpart, it reflects the variable economic and financial conditions, which incorporate the monetary stance of the respective central banks. (Figure 4 lowest window) 

 

That is to say, the weakness in domestic bonds has diffused into the peso!  

 

VI. Oversold Global Equity and PSEi 30: Bear Market Rally Ahead? 

 

Figure 5 

Has the bear market rally begun?  

  

The US-led global market cap index gained USD 3.4 trillion in market cap this week. (Figure 5, highest window) 

 

Back at home, though the PSEi 30 closed the week down 1.8%, Friday's low volume, 2.51% surge, helped by a massive pre-closing (1.03%) mark-the-close pump, could catalyze the expected sharp oversold rebound.  

  

Both the RSI and MACD exhibit extended oversold conditions. (Figure 5, middle pane) 

  

Furthermore, the latest slump produced a (bullish) falling wedge. Also, the PSEi 30 has strayed far from the 50-day moving average.  

 

And in the political sphere, the financial community might participate in the inaugural ceremonies of the president-elect by bolstering the index. 

  

Finally, the impact of inflation and interest rates on the stock markets is not mechanical.   Since the millennium, the runup of the PSEi 30 came in the environment of falling rates. (Figure 5, lowest window) 

  

The first test of PSEi 30 in the face of a rising CPI and treasury yields emerged from 2016 to 2018. Although the PSEi 30 climbed to celebrate the advent of the new President then, the stock market honeymoon lasted only for about 1-year and 1-month.  

  

The BSP's response to the CPI and treasury yields, when it agitatedly raised rates by 175 bps in 7 months, resulted in the doldrums of market sentiment. The most affected sector from the BSP feedback was the banking system. The ensuing aversion from that reaction has guided the BSP's reluctance today.  

  

However, like developments abroad, the BSP is raising rates as the overleveraged and overpriced PSEi 30 is on a cascade. 

 

We are living in interesting times.