It
always ends this way. If you go back and you look at Rome. You look at the Ming
Dynasty or you look at Zimbabwe - it always, always, always ends this way. And
the question is how can you delay it… The end game we’re all talking about here
is a very unpleasant one. It means that the financial arrangement that the state
has created is no longer sustainable by society. And that’s how overly indebted
societies end and they move on to a new type of arrangement. So it isn’t going
to be a pretty change - if we get there. And that’s why it is so urgent that we
act now. It is not just a matter of numbers. It’s a matter really of political
liberty. Because the government will not voluntarily let itself go out of
business. It will use all of its powers - I’m not talking about just our
government but any government - will use all of its powers in order to fund
itself –Lawrence B. Lindsey, former
Member of the Board of Governors of the Federal
Reserve System in a panel discussion
with Richard Fisher, Alan Greenspan and moderated by Bloomberg’s Betty
Liu, Paying for the Past: How Will Rising Interest Costs Affect
Economic Growth?
In this issue
Phisix 7,600: 5.2%
1Q GDP Another Data Pump! DBP Accused of Market Manipulation; Scapegoating The
US Dollar
-Market Forces
Upstage Index Managers
-Market Manipulation
Exposé: State Bank DBP Used ‘Wash Sales’ to Conceal Losses from Bond Yield
Spikes!
-GDP Announcement
Frontrunning; Broad market Selloffs Spills Over to the Phisix basket
-Blaming the US
dollar for the Wrong Reasons; Why The Peso will Weaken
-1Q 2015 GDP:
Questionable Data Quality and Contradictory Figures and Logic!
Phisix 7,600:
5.2% 1Q GDP Another Data Pump! DBP Accused of Market Manipulation; Scapegoating
The US Dollar
Market Forces
Upstage Index Managers
Last week, I mentioned that four
stock market forces, particularly the rapidly deteriorating market breadth,
dramatically shrinking volume, the highly skewed distribution of trading
activities towards the top 15 heavy biggest market cap issues and the bearish
chart head and shoulders formation have converged to bring about a possible
conclusion to the divergence between headline performance and broad market
developments
In conclusion, I wrote[1]:
The divergent forces reveals of a stark conflict between the headline and the general sentiment that will have to be resolved. A healthy trend (on either direction) will depend on its resolution.
So with this week’s selloff at the
Philippine Stock Exchange, it would appear that these forces have exercised
ascendancy over those manipulating the headline indices. With market forces
gaining the upperhand, my predictions would now look prophetic.
Yet to add a major fundamental factor
to the current stock market pressures, parallel developments at the bond markets
characterized by rapidly flattening yield spreads, incipient signs of yield
curve inversions and increased incidences of interventions to calm the treasury
markets highlight signs of increased strains, to wit: Shriveling market driven
liquidity and emergent signs of funding pressures at the banking system
For the month of April, the
Philippine central bank, the Bangko Sentral ng Pilipinas revealed that in the
context of credit and liquidity, while money supply inched higher to
9% from a revised 8.7% in March, growth in the banking system’s portfolio
continues to dwindle; production loans, which
account for 80% share of total loans, grew by 15.1% compared to 15.9% last
March. Bank loan growth to the supply side peaked in July 2014 at 20.92% and has
declined almost in succession through April. Nonetheless, consumer loans
regained some momentum up by 20.1% from 19.8% last March.
So with statistical GDP sharply
falling below expectations and with stalling credit activities, it’s easy
extrapolate that portfolios of financial institutions would likely see increased
signs of pressures from the mismatches between bank client’s debt servicing
capabilities and the still growing loan portfolio levels
Yet the Philippine central bank, the
Bangko Sentral ng Pilipinas, continues to assuage the public that everything’s
fine, so everyone should just move along because there is nothing to see. This
week bank capitalization has
been used as the talisman effect to ward off all sins of omission.
Back to local stocks, the Philippine
benchmark fell by 2.94% over the week to trim year to date gains to 4.84%. The
Phisix has now been down 6.7% from the pinnacle at 8,127.48
Last Thursday, selling pressures sent
the Phisix probing into the mid-7,400 levels before another last minute pump
which brought the index back to 7,500. The marking the close pump again saved
the day!
Also Friday’s spectacular 2.2% ramp
from the day’s opening through the midday session ended with a nerve racking
‘marking the close’ dump where almost half of the last minute gains had been
erased! Friday’s pump and dump resulted
to just a 1.01% gain by the Phisix!
While index management activities
continue to bustle, they seem as losing efficacy to provide support for the
headline number.
Market
Manipulation Exposé: State Bank DBP Used ‘Wash Sales’ to Conceal Losses from
Bond Yield Spikes!
If I am not mistaken, a germinal
exposé on banking strains and market manipulations have already surfaced in
media.
Remarkably yet, the source of losses
and unscrupulous activities has emanated not from the stock market but from the
Philippine treasury markets!
Last week, the Philippine state audit
firm, the Commission on Audit (COA) unearthed what they allegedly claim as
“unsound banking practice” resorted to by a Philippine state owned bank, the
Development Bank of the Philippines (DBP). The bank supposedly engaged in a
series of “wash sales” with a domestic privately owned financial company in
order to minimize losses to only Php 717 million from the bank imposed allowable
loss quota of only Php 800 million.
With a go signal from the bank’s
highest authorities expressly stated via a corporate resolution, the wash sale
transactions had been conducted from January to March of 2014 with the goal of
shifting the bank’s “long-dated ‘available-for-sale’ peso government
securities worth P20 billion” to a ‘hold-to-maturity’ portfolio in order “to
avoid increasing the mark-to-market losses and preserve the accrual
income” according to the Inquirer[2]. (italics mine)
Some background required here. Growth
in money supply ripped by a prodigious 30++% for 10 successive months, i.e. from
July 2013 to April 2014. So during the time period of January to March 2014,
this window signified as the last inning—or the seventh to the ninth months—of
such outrageous rate of money supply growth. The streak o f30++% money supply
growth rate eventually led to rising yields, and of course
subsequently, 8 quasi tightening moves by the BSP.
In terms of yield changes, allow me
to use the 10 year treasury as example. The duration bid as consequence from the
BSP’s financial repression (negative real rates) policies sent its yield to a
record low to 3.042% in May 2013. I called this the convergence trade—where
the gap between US counterpart and domestic yields has undeservingly narrowed.
The spike in money supply growth,
which was exacerbated by changes in BSP’s SDA policies, sent the same yield
higher—by March 2014, the 10 year yield hit 4.571%. That’s only 153 bps spread
from bottom to peak. As of Friday, the same yield has been at 4.347% (data from
investing.com).
And so, a change of spread by 150 bps
or less has been enough to bleed DBP by more than Php 717 million for them to
employ “wash sales” to conceal and curb their losses.
150 bps is peanuts compared to the
coming yield hikes!
Notice that despite all the
interventions 10 year yields have not meaningfully retrenched. Yet what more if,
say, treasury yields rises by 200 bps & above from current levels?
Not
possible?
In the week ending May 15, yield of one month bill skyrocketed to
3.638% from May 8’s 2.05% which means that in ONE week, the yield of one month bills flew
by 159 bps! Of course, expected interventions have materialized to temporarily contain the
tensions at the treasury markets. As of Friday, the one month yield fell back to
2.193%
And given today’s mercurial yield
activities particularly at the short end of the treasury markets, to what extent
of losses has the banking system been exposed to?
Take notice of the slowing loan growth
despite a still monetary stimulative (negative real rates) environment? My guess
is that balance sheets stress could have been forcing banks to restrict loans on
a broad based basis. This is contrary to claims by the BSP that slowing loan
growth have been from supposed BSP macro policies.
Also to what degree of market
manipulations have banks and financial institutions engaged for them to pad up their
balance sheets or camouflage financial losses?
Likewise how many public and private
financial institutions have cloaked their losses by the use of the accounting
mirage of designating losing assets as ‘hold-to-maturity’?
Does the BSP know?
For all the banking statistical
façade, the DBP affair reveals that bank losses have emerged!
And not only that, if DBP’s
actions have been representative of the industry, then a lot of those published
‘solid’ statistical numbers may have been a charade.
And why shouldn’t the DBP’s
actions be illustrative of the many activities engaged by both public and
private institutions?
Just look at the brazen frequency
of the manipulation of the PSE’s benchmark indices. This has hardly seem as a
single entity affair. This looks likely a handiwork of many participants in
seeming complicity.
Didn’t I previously warn that
losses will eventually arise from the shadows, but applied to the stock
market?
Also I previously quoted (from the
fifth edition of his classic Manias, Crashes and Panics), historian Charles
Kindleberger’s[3] observations that unethical behavior snowballs during market
inflection points.
Below is from the third edition.
(bold mine)
The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And the signal for panic is often a revelation of some swindle, theft, embezzlement, or fraud
“To avoid increasing the
mark-to-market losses and preserve the accrual income” which has represented the
official DBP goal seem to resonate with the venal actions of sauve qui peut
or save himself who can.
DBP, as a government agency, seems
the first. How many more have been hidden? How many has the BSP
identified and contained?
Yet there are many vulnerable spots
that plague the BSP: knowledge problem, the gaming of the system by the banking
system and regulatory capture.
Do you recall who said this?
There are no absolutes in dealing with these issues. There are many ifs and buts. And, a number of factors and variables, including concerns related to technology and geopolitics, would need to be considered.Friends, there is no crystal ball for these things. So, as we continue to navigate a challenging economic landscape this year, it is imperative that the intent of policies from central banks and other authorities is clearly understood by the public.
Well the admission of the knowledge
problem comes from no less than from the BSP governor in a speech that I have
quoted last March[4]
Signs of times?
GDP Announcement
Frontrunning; Broad market Selloffs Spills Over to the Phisix
basket
Candidly, I hardly expected a
significant move given last week’s GDP week.
My impression for the convergence of
the bearish forces has been one of a medium to long term
process.
Recall that, despite the furious
rally to record highs by the index which began from the start of 2014 until
April 10 2015, MORE THAN HALF or the MAJORITY of the population of listed stocks remains embroiled in bear markets—technically
down 20% from the highs of mostly 2013.
The SILENT majority, which never
recovered from their respective zeniths in May 2013 whose momentum had been
foiled by Bernanke’s taper tantrum, endured aborted run ups or has traded
sideways or continues to plumb new depths, through this period (2014-5).
So the record headline in the
Philippine Stock Exchange had basically been a rotational pump on 15-20 issues
from the major basket of the key bellwether
Thus, in spite of all the
barrage of flowery statistical reports issued by government, by the
establishment, and by mainstream media, the record benchmark last April which
hallmarked the President’s visit at the PSE, which has engrossed the gullible,
little has been known or aired that in the sphere of stock market activities,
the silent majority been parting ways with popular wisdom!
And such divergence became even more
conspicuous specifically this year or in the face of the string of record
setting highs.
This week’s below expectations GDP
report contributed to the intensified selling pressure.
As I have recently noted, I suspect of frontrunning activities by some politically connected parties whom may have learned of the
below par report before its publication and this may have aggravated the selloffs.
Current developments have been
unlike the 3Q GDP 2014 pre announcement activities. The pre 3Q GDP 2014
announcement revealed of sustained upside momentum going to the day of the
report.
When the 3Q report was announced on
November 27 where GROWTH was at 5.3%, which has been almost been similar today,
the Phisix tumbled 1.2% (red arrow left). However, the one day decline was fully
recovered 3 days after, thanks to the index managers. Although global selling pressures,
largely unrelated to GDP, eventually dragged local stocks lower last
December.
In 2015, pumps and dumps presaged
GDP announcements.
Sharp pumps anteceded the 4Q GDP
official broadcast. The PSEi index soared by 3.3% in 4 days prior to the report
(blue arrow center).
In contrast, huge dumps preceded the
1Q GDP report which had been aggravated by the day of revelation. Four day
losses tallied 3.59% before the report (red arrow right).
Due to marking the close sessions,
this week’s index losses have been substantially mitigated. However, the broad
market’s market’s violent response last week highlights the continuing stark
divergence between the headlines and the broadmarket.
In the perspective of market
internals, here is the daily scoreboard denoting of the difference between advancing and declining issues
from Monday to Friday: (Monday) 53 to 115, (Tuesday) 31 to 161 (!), (Wednesday)
54 to 132, (Thursday) 60 to 105, and (Friday’s gain) 106 to 68.
In total, losers crushed
gainers by a mammoth margin of 277, the biggest since December 2013! Bear
markets WITHIN the PSE have only DEEPENED!
Broad market tensions have spilled
over to the Phisix basket.
The noose on the bulls, in
particular, the index managers appears to be tightening.
Previously I have noted of 7 index
issues that have been entangled by their respective bear markets, namely, AGI,
BLOOM, EMP, LTG, MPI, PCOR and SMC.
This week, DMC’s 10.98% week on week
astounding crash forced the issue to join the ranks of the bears.
Meanwhile, PLDT (-2.8%), Megaworld
(-8.48%) and shockingly former highflyer and one of the previous best performers
of the year, URC (-5.05%) have either knocked on the bear market’s doors or have
found themselves at the doorsteps of the bear’s dominion!
Yet if there should be no improvement
on their respective price actions, and if a test of the 7,400 will occur soon
with these issues as part of the sustained downside momentum, then ONE THIRD of
the Phisix issues may fall under the bear market’s trance!
So unless the index managers
expand their effort to buoy issues at the PSEi basket, the room from which index
managers to operate on will likely narrow.
And any further compression of
issues on the uptrend or at record levels will squeeze index managers that will
eventually force their capitulation to the bears!
Hasn’t it been an interesting
coincidence that the BSP issued a report stating that business confidence
“was more bullish for Q2 2015” last Friday (May 29th) in the light of intense selling spree? Has
this been a part of their signaling channel or communication tools used by the
central bank to influence public’s expectations?
Perhaps signs of desperation to save
a scuttling ship?
Blaming the US
dollar for the Wrong Reasons; Why The Peso will Weaken
The mainstream brayed that most of
the recent selling have been due to exogenous factors, particularly they pinned
the blame on the firming US dollar as having caused the latest stock market
selloff.
That’s because for them nothing can
go wrong in the Philippines. They take the 1Q GDP’s underperformance as another
anomaly.
Let us look at some facts on the
supposed link between the US dollar and cratering stocks.
1) The US dollar
index (DXY) seems to have bottomed only
last May 15, from where it reversed course to move higher and regain about half
of the lost ground from its March highs.
2) ASEAN currencies have weakened
ahead of the DXY.
The USD
rupiah rebounded from April 19, the
USD ringgit rallied from the
recent low of April 28. The USD
baht has bounced back from the low of
May 22. So far, the USD
peso which has been rangebound (see green
trend line at Phisix chart) has started an ascent in April 28.
3) How have this influenced their
respective stocks? A quick answer, falling stocks foreshadowed the rally in the
USD.
Indonesia’s JKSE
appears to have inflected on April 7 a week before the USD
rupiah’s rally. Malaysia’s KLSE has a
colossal head and shoulder formation where the right shoulders’ seeming reversal
occurred last April 21 a week prior to the USD ringgit’s rebound.
Thailand’s SET’s recent run
looks to have climaxed last February, about three months earlier than the
USD-baht’s recovery in May.
The Phisix’s record bullrun seems to
have culminated last April 10 or 18 days before the USD php
reversal.
What the facts tell us has been that
since stocks fell antecedent to their corresponding currencies then the
establishment’s causal flow runs backward: deteriorating stocks incited
the fall of their respective currencies!
This, of course, represents
oversimplistic accounts of rationalization of market activities based on
available bias or the rush to associate easy to recall current events with
market actions.
Yet the refusal to impute domestic
developments represents a sign of self-attribution bias—the
attribution of success to one’s skills, abilities and efforts but imputation of
failures to either bad luck or to external factors. It's also a sign of denial.
Having suffered the least loss during
the week, the peso even bested Asian currencies. Paradoxically, Philippine
stocks have been the worst performer in Asia week-on-week.
So how is it that weak domestic
stocks have signified a consequence of a strong dollar when peso outperformed?
Said differently, the pesos’ regional
outperformance doesn’t square with the stock market losses to validate the
mainstream’s impression that the strong US dollar caused last week’s stock
market losses.
But this is NOT to deny of the role
of the US dollar in relation to the current developments though. I just do not
subscribe to the arrant incomprehension of the market process.
Things do not happen just
because, or mostly out of perceived random actions, but rather, events are
essentially shaped by people’s incentives expressed as actions and reactions in
the aggregate.
So as I have been stating here,
current events have represented only a sequential chain of action–reaction
developments that has been triggered by the May 2013’s Ben Bernanke’s taper
tantrum. Current events signify a continuing or unfolding process from the 2013
episode.
In other words, the opening of
the proverbial global bubble’s Pandora box has unleashed what I call as the
periphery to the core dynamics or the feedback loop of hissing bubbles from emerging
markets to developed economies and vice versa.
This feedback mechanism has been
progressing from which weakening currencies, crashing oil and commodities,
amplified stock and bond volatilities have only signified as symptoms…symptoms
which will likely be magnified soon.
A sharply slowing global economy, as
exhibited by a downturn in global trade and world industrial
production and the spate of interest cuts by global central
banks have also signified as real
economy symptoms.
A further exhibit has been the discernible slowdown of the US economy. The US 1Q GDP 2015 has been revised to down to
-.7% or a contraction! Yet Federal Reserve
of Atlanta’s real time forecast for the 2Q GDP has been at a measly .8% as of
last week! So the slowdown continues.
And a remarkable recent development has been record corporate profits crumbling back to reality (charts from
Gavekal)
So if anything goes wrong, where the
US falls into a recession, this will likely unleash a liquidity crunch that will
lead to multiple economic blowups on heavily indebted nations around the
world.
The above events are not bullish for
the peso or for peso assets.
I believe that peso will
substantially weaken overtime.
Like stocks, the peso’s current
strength has been artificially buoyed by statistical props and by market
interventions
The peso seems vulnerable from
three dimensions—internal, regional and global.
1) Internal—any pronounced
weakness in the domestic economy or in the local financial sphere will spur
acceleration in capital outflows that will not be limited to foreign money but
may as well induce resident capital flight
There have already been
inchoate signs of resident capital flight. I have pointed out that in the
BSP’s Balance of Payment report for 4Q 2014 and for the entire 2014, the
financial accounts registered net outflows largely on local residents’
increased purchases of foreign assets, capital or deposit placements or outflows
due to credit activities abroad[5].
2) Regional—any major blowups
in one of our neighbors will likely cause a domino effect and spillover to the
domestic assets. Such contagion will impact internal dynamics that will
reinforce outflows that will be vented on the peso.
Geopolitics, like a military event at
South China Sea can likewise serve as a trigger.
The establishment loves to think that
the Philippines can ‘decouple’ from the world, yet last week’s Asian stock
market rout debunks such an idea as utter fantasies
3) Global—changes in monetary
policies by the US Federal Reserve may force the domestic treasury markets to
align domestic rates with that of the US. Changes in domestic treasury markets
may then compel the BSP to accommodate these via formal policies.
In addition, any reversal of monetary
policies by other major economies as Europe or Japan may incite volatility which
again may be transmitted to the region and to domestic assets as contagion.
Moreover, contagion may not only be
due to changes in monetary policies but from precipitate alterations in
marketplace conditions that can incite the contagion mechanism. Geopolitical
events, aside from economic deterioration, can also ignite such a
contagion.
As for the talisman statistics of
foreign exchange reserves, recent history tells us that when the peso has been under duress,
like during the 2013 taper tantrum, the BSP will use these reserves as defensive
wall against speculative outflows.
So far this has worked. It has
temporarily worked because the outflows have been moderate and wasn’t
sustained as the liquidity effects from other central banks (ECB and BOJ)
replaced the FED’s actual QE3 tapering.
Philippine forex reserves dropped by
6.9% from the peak in January 2013 until January 2014 but has recovered only
1.8% from the January 2014 lows.
But it’s a totally different scenario
when crunch time arrives. That’s because the outflows will signify a
tsunami and not just high tide.
People hardly appreciate of the
changes of the psychological character of the marketplace during major
inflection points.
The reason why the Philippine assets
remain relatively sturdy has been because sellers have NOT yet been
aggressive since the HEADLINES tell them so. The establishment believes
that the boom can still be maintained even when the core has been eroding.
They are relying on HOPE. And this is the reason behind the headline
management. They manage statistics and the markets to keep intact what they
see as ‘animal spirits’. The exposé on DBP’s wash sale should be a wonderful
example.
Besides, headlines shows of no crunch
time yet, here or overseas. But no one can guarantee how long this
endures.
But when reality eventually
filters into the headline; perhaps as in the form of economic numbers or a
surprise missed interest payment by a major company, or the appearance of a
major global event risk, then bids will evaporate.
From the domestic stock market
perspective, the low volume record run suggested that bids have already been
weakening. But the aggressive the push by index managers on bids
particularly at the closing bell allowed some sellers to be able to take
advantage to sell at higher prices. But the volumes had not been enough to
accommodate all those who wanted out, so selling pressures mounted. Those
cumulative pressures were eventually ventilated during the last two weeks. And
those selling activities had been justified based on headline events (dollar,
GDP). But market actions already pointed at this direction.
Thus a panic is when bids have all
but vanished at current levels, and where the next level of bids can be found on
the floor or at vastly lower levels
So essentially when liquidity
dissipates panic sets in.
Hence, almost all of global
central bank actions, namely those serial slashing of rates and various forms of
easing and market interventions, have been intended to keep panic away by
repeated injections of liquidity.
Unfortunately since liquidity
represents no free lunch, the consequence has been to inflate larger
bubbles.
1Q 2015 GDP:
Questionable Data Quality and Contradictory Figures and Logic!
Statistics is not economics.
Statistics can show supposed growth
in economic activities but they cannot put food on the table.
The public has been easily mesmerized
by the acceptance of headline data.
Meanwhile experts interpret these numbers mean rather than opening the hood for investigation.
The 1Q GDP 2015 report seems even
worse than the 4Q 2014 contemporary.
I am not talking of performance. I am
referring to the qualitative content of the GDP.
In particular, the mishmash of the
government’s questionable data, and most importantly, the glaring contradiction
between the government’s own numbers and on economic logic.
In the 4Q 2014 I raised the issue of
the big revision of the mining industry. Well, that’s small beer now.
I marvel at the massive data
revisions made by the National Statistical Coordination Board which I expected
to be applied only on the last quarter. But instead I find that current
revisions, which apply to many sectors, extend way back to early 2014 or to even
to 2013!
The above represents big examples of
the significant variances between current revised growth rates (blue) and the
original (red) growth rates in the mining, utilities and construction sector
Because my initial impression was
that revisions occur only during the last quarter, to my regret, I didn’t save
the previous files.
Data quality is important because
they serve as pillars to the GDP construct.
Here is the 1Q 2015 GDP by industry
(in 2000 constant peso prices) in comparison with 1Q 2014
I break the data down to show the %
change (left most), the gdp share as well as the changes in GDP share.
I highlight in red what popular
opinion says as the current slowdown as having been due to the lack of
government spending.
Government spending I classify here
as public administration, public construction, education, health and sewage.
However, given that there has been no categorization between and public and
private education, my inclusion of education implies all education is public. So
if I add them up the share of government spending to 1Q GDP amounts 13.97%.
Again this assumes all education has been public.
My point: Based on proportionality
alone, the emphasis on the lack of government spending clearly misses the forest
for the trees.
It’s no different when look at the expenditure segment of the GDP. The governments’ final consumption accounts for
only 10.08% of GDP.
While government spending contributes
to statistical growth, such growth will not bringing about food on the average
citizen’s table.
Government spending is political
spending. They are hardly geared to satisfy the consumers but designed to
promote the interests of those in charge and their cronies
Additionally, government spending are
not free lunches. These are resources forcibly extracted from the productive
agents of the economy. Thus to substitute real economic spending with political
spending undermines productive activities, leads to imbalances and to capital
consumption.
The impression that governments know
how to spend resources efficiently signifies as another myth. Despite all the
headlines about rampant corruption, pork barrels, wastages, junkets and boondoggles, the
public remains enthralled with the so called magic of government spending. The
public cannot reconcile nirvana fallacy from real
events.
As Arthur Seldon joint founder
president, of the Institute of Economic Affairs, wrote in Capitalism[6]
Wherever it is used, government is so disappointing or worse—inefficient, unaccountable and corrupt—that it is best not to use it at all except for functions where all its faults have to be tolerated to obtain the services required…In short, the price of government is so high that it should be avoided wherever possible.
Back to the GDP, just look at the
fantastic revisions on durable equipment and on retail activities.
For durable equipment, Q1 2014 GDP
which was originally at 22.7% suddenly just grew by a puny 4% on the current
data. That’s essentially a remarkable 82.3% collapse which should equally have a
big change in the headline GDP for 1Q 2014. But why the unchanged headline?
Could it be that 1Q durable goods
growth of 14.3% have been borrowed from 1Q 2014? The NSCB seems as engaged in
Dagdag bawas (add-substract) which I thought was an election trick.
Government statisticians can just
alter public data with impunity to suit their ends?
Also look at retail
activities.
Remember this?[7]
But surprise, the retail growth rates in 4Q 2014 plummeted from 6.1% in 3Q to 4.1% 4Q or by 2%! In percentage terms that would be tantamount to a 33% decline—a crash!Since retail trade constitutes 78% of the 4Q GDP trade output, overall trade growth rates has sharply slowed to 5.3% 4Q from 6.4% 3Q. So retail performance contradicts any positive spin of a robust growth in consumer spending via the 4Q HFCE.The irony has been that the downdraft in consumer activity has been happening during what used to be a seasonally strong quarter due to Christmas holidays!
Well that 4Q 2014 number just got
lower!
At the bottom section of the above
chart I highlight the NSCB trade data.
It showed that for the 4Q 2014
GDP, the revised retail trade data reveals that growth CRASHED by 72%! So I am
right about the statistical padding!
And by forcing down 4Q to 1.9% they
then exhibit that current 1Q 2015 grew by 3.3%, this would represent a 73.7%
improvement, NICE!
This supposedly backs the ‘growth’ in
HFCE.
And if one looks at their revision disclosure;
for durables equipment there hasn’t been any. For trade, it just says QSPBI
(Quarterly Survey of Philippine Business and Industry) Updates and additional
Financial Statements
Fickle surveys? Or surveys designed
to show what the government wants to show?
Just look at how bizarre, if not
comical, the growth charts are for the trade industry which constitutes the
retail, wholesale and repair sectors (left).
For 1Q GDP, trade grew by 5.41%. Since
trade has the second largest share of the GDP, at 15.2% next to manufacturing at
24%, then the industry’s 1Q growth at 5.41% materially contributed to the 5.2%
GDP.
But retail activities, which
contributed 77.4% of the sector’s spending output, grew by only 3.3%! So the
bulk of the growth has been borne by wholesale trade at 13.1%. Wholesale trade
accounts for 18.63% share of the sector.
As a side note, I plotted the nominal
figures of retail and HFCE (right).
In nominal terms, from peak to peak
basis, retail activities have only inched higher compared to the highs of 2013!
This is against zooming HFCE.
Yet how are HFCE being financed? Jobs and wages? Hardly (as shown
in 2014). Remittances showed a late March spike. Business profits, dividends,
rents, interest income, inheritance, speculation in stocks or properties? Or has
it been from credit? Or manna from heaven? Or from pulling rabbit out of the
statistical hat?
So where are households spending
their money outside the retail? Next to food which has the largest share in the
spending basket with 39.1% is miscellaneous goods and services at 13.2%. The
miscellaneous category[8] consist of Personal care, prostitution (This is no joke, see
section 12-2), personal effects, social protection (e.g. retirement homes,
rehabilitation), insurance, financial services and other services (legal
representation, burial fees and etc.), most of which are sourced from retail
outlets. As for financial intermediation, this segment grew by only 4.33%. But
the BSP chief lately noted in a speech that insurance has a penetration rate of
only 1.8%. So this really represents an iota to household spending.
The next is housing and utilities
with 11.9% share. Utilities (electricity steam and water)
grew by only 4.1% in 1Q. It’s only real estate that exceeds HFCE at 6.48%.
Transport is next with 10.3% share. Transport grew by 8.58% 1Q this is due to
fare hikes in MRT and LRT???
Overall the HFCE numbers DO NOT add
up!
Back to wholesale trade. So how the
heck can wholesale trade consistently outgrow languishing retail trade?
As I wrote last week, Wholesale
activities function as intermediaries for retail activities. These enterprises
are likely to be traders for local manufacturers or for importers, or they may
be importers themselves. Since wholesalers generally depend on retailers (with
the exception of supply shocks), the health of the retail activities should
resonate generally with wholesale activities.
So who has been buying their
products, if retail sales have been underperforming? Or have wholesalers given
up their role as traders and embarked on altruism by distributing goods for
free? Or have they been preparing for the storm to hoard massive amounts of
inventory? Or do they just burn what they buy?
It’s no wonder too why wholesale prices on a national scale have been contracting for 5 straight months!
Yet for wholesalers to continuously
stash on inventory would seem preposterous.
And where have wholesalers been
sourcing their goods?
While manufacturing supposedly grew
by 5.88%, such growth must have emerged only from March!
That’s because Philippine Statistical
Authority figures show that manufacturing (industrial production see left chart
from tradingeconomics) had
been NEGATIVE in January and February but spiked only in March!
I questioned the motives of the March
statistical pump[9]
Also, the Philippine industrial production amazingly leapt by 7.4% in March. Ironically too, such gains have been preceded by two months of negative growth.Has the recent slumps in OFW remittances and Industrial production been a product of statistical quirks from which current gains has smoothened out?Or has the current data been another statistical pump to justify the end of May release of 1Q 2015 GDP of 6+% and above?
How about imports?
Based on GDP data imports grew by
only 4.6%.
But PSA data shows that
imports have not only been very volatile but imports year on year may even
shrunk! There has been a huge negative growth rate for January -13.1% (!) as
well as in March (-6.8%)!
I doubt if February’s amazing 10.8%
jump was enough to recover the twin losses.
On a nominal dollar based
perspective, PSA twin negative growth for 1Q has brought imports down to
mid-2013 levels!
So the wholesale numbers does NOT add
up with either manufacturing or imports!
Even import data from NSCB and
the PSA don’t seem to square.
How about agriculture? Based on
government GDP this sector underperformed and grew by just 3.53%.
So the wholesale numbers does NOT add
up with agriculture too!
This leaves smuggling and bootleg
producers as the only sources for such incredible pace of wholesale
growth!
You see why the futility in reading
government data as an accurate representative of growth? From the origination of
numbers to the economic logic, they seem as self-contradictory!
5.2% growth, that’s what the
government wants the public to see.
But that's not the real score.
[1] See Phisix 7,800: Bearish Signals Converge; Yield Curve
Inversions Incite Interventions! May 24,
2015
[2] Inquirer.net ‘Wash sales’ had DBP brass’ blessing May 29, 2015
[3] Charles Kindleberger, The Emergence of Swindles Manias, Crashes
and Panics, Third Edition, p.66
[4] See Phisix 7,800: Record Phisix as the BSP Continues with
Deflation Spiel! March 9, 2015
[5] See Phisix 7,800: Peso Smashed, January Remittance Growth Rates
Plunges, Short Term Treasury Yields Spike!
March 22, 2015
[6] Arthur Seldon, Capitalism Celebrating a Life for Liberty, Gary Galles Mises.org May 28, 2015
[7] See Phisix: Philippine 4Q 6.9% GDP: A Story of Government Pump
and Mounting Excesses February 2,
2015
[8] Bangko Sentral ng Pilipinas Philippine Classification of Individual Consumption
Expenditure According to Purpose 2009 2009
bsp.gov.ph
[9] See The Philippine Potemkin Stock Market: Record Highs Outside,
Bear Markets Inside! May 17,
2015
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