Which Is the Black Swan for the Philippines: The Big One or War?

 

Never think that war, no matter how necessary, nor how justified, is not a crime—Ernest Hemingway 

In this issue: 

Which Is the Black Swan for the Philippines: The Big One or War?

Part 1. Thesis: Nature: The Big One

1A. The Wittgenstein Trap

1B. Between Tectonics and Politics

Part 2. Anti-Thesis: Human Action: Man-Made Disasters

2A. Brewing Crisis: Second ‘Ayungin’ Thomas Shoal Incident

2B. Chinese 36 Stratagems in Action

2C. Escalation Beyond the Shoals

2D. The Root of War: Human Action

2E. Thai-Cambodia Border Clash and Thai’s Domestic Policy Fissure

2F. Fatalities: Wars Eclipse Earthquakes

2G. Unknown Unknowns-Black Swan Event: The Final Trigger

Part 3. Synthesis: Nature’s Convulsions vs. Man-Made Catastrophes

3A. The Human Trigger

3B. The Shape of Future Wars and the Grey Swan

3C. War Economies and Systemic Fragility

3D. Conclusion: The Shape of the Next Black Swan

 

Which Is the Black Swan for the Philippines: The Big One or War? 

Nature versus human action—which would happen first, and which would be deadlier?

Part 1. Thesis: Nature: The Big One 

A string of significant earthquakes—magnitude 5 and above—has recently shaken the Philippines.

Figure 1 

From Cebu’s 6.9 (September 30) to Davao Oriental’s 7.4 (October 10), to Negros Occidental and Zambales’s 5.1 (October 11), to Surigao del Sur’s 6.0 (October 11), to Surigao del Norte’s 6.2 (October 17) and to Ilocos Norte’s 5.2 (October 17), the tremors have been relentless and have drawn public anxiety. Both Cebu and Davao Oriental continue to record over a thousand aftershocks. (Figure 1) 

Despite denying possible interconnections among these tremors, officials and media have begun to promote the likelihood of "The Big One" in the National Capital Region—a 7.2-magnitude quake expected to “bring catastrophic destruction” to Metro Manila. 

The Philippine Institute of Volcanology and Seismology (PHIVOLCS) bases its forecast or hazard assessments on the West Valley Fault’s recurrence interval of 400–600 years, suggesting that “its next movement may possibly happen earlier or later than 2058.”

A Japan International Cooperation Agency (JICA) study further estimates that The Big One could result in 33,500 fatalities and 113,600 injuries.

Adding to the anxiety is talk of a “Culebra Event,” coined by independent researcher Brent Dmitruk, describing a potential chain reaction of earthquakes triggered by tectonic stress transfer across fault systems—like a slithering snake (culebra in Spanish). Though unsupported by mainstream seismology, the idea captures public fear that defies conventional models and timelines.

The Philippines, of course, is no stranger to major quakes and has endured two major quakes in modern history:

The Moro Gulf Earthquake (August 17, 1976, magnitude 8.1) near Mindanao and Sulu caused 5,000–8,000 deaths, from both quake and tsunami.

The 1990 Luzon Earthquake (July 16,1990. magnitude 7.8) centered in Rizal, Nueva Ecija, killed 1,621 and injured 3,500, destroying buildings even in Metro Manila—though fatalities in the NCR were limited to three.

First, these events show that even the strongest recorded quakes—occurring decades ago and in poorer eras—produced casualties below 10,000.

Second, with today’s supposed technological advances, stricter building codes, and a “wealthier” economy, it is doubtful that "The Big One" would match JICA’s apocalyptic estimates—unless the quake’s magnitude or duration exceeds historical precedents.

Third, when PHIVOLCS says it may occur "earlier or later than 2058," it essentially admits ignorance or uncertainty, dressed up as science. The 400–600-year interval is a broad statistical range—based on paleoseismic trenching data—not a clock.  

If the Big One hits in 2058 or later, many of us won’t be around to validate the prophecy—unless futurist Ray Kurzweil’s “Singularity” delivers on its promise to merge machine intelligence and humanity in the quest for immortality.

Fourth, earthquake prediction remains closer to numerical choreography than precise science.

As Wikipedia notes: “After a critical review of the scientific literature, the International Commission on Earthquake Forecasting for Civil Protection (ICEF) concluded in 2011 that there was considerable room for methodological improvements. Many reported precursors are contradictory, lack measurable amplitude, or are unsuitable for rigorous statistical evaluation." 

Even behavioral studies of animals as predictors have failed to establish reliability—no constants, no reproducibility. 

As Wikipedia notes, many earthquake ‘predictions’ are remembered only when they appear to hit — a textbook case of selection bias. In reality, misses vanish quietly into obscurity, while lucky coincidences are framed as scientific foresight. 

To date, no model has achieved reproducible accuracy in predicting the exact timing, magnitude, or location of a major quake—anywhere in the world. 

1A. The Wittgenstein Trap 

Seen through Wittgenstein’s Ruler (as applied by Nassim Taleb): 

Unless you have confidence in the ruler’s reliability, if you use a ruler to measure a table, you may also be using the table to measure the ruler. 

Applied here, government agencies present statistical intervals as confidence. If a quake happens within the range, it validates neither the model nor the state—it only confirms that earthquakes happen eventually.

If it doesn’t, the model isn’t falsified—it’s simply "extended." 

Duh! 

That’s the Wittgenstein trap: the model (the ruler) is never truly tested by reality (the table). Every outcome is reinterpreted to preserve authority. 

The likelihood that earthquake models hit their prediction—timing, location, and magnitude—is effectively near zero. 

Their utility lies not in prophecy but in policy: infrastructure codes, disaster preparedness, funding and others. More importantly, the political need to manage fear. 

Keep this in mind, the "Big One" may eventually occur—but whether it happens as predicted is almost entirely coincidental. 

And when it does, its qualitative effects are likely to depart significantly from the scenarios sold to the public by official experts. 

1B. Between Tectonics and Politics

Figure 2

Earlier, we proposed in our October 10 post on X.com that these seismic episodes may be “coincidental geologically, yet symbolically it feels as though the ground beneath us—literally, institutionally, and metaphorically—is shifting.”  (Figure 2) 

That remark, written amid an unfolding corruption probe, captured a deeper truth: instability in governance mirrors instability in nature. Both release pressures accumulated over time—one through tectonic strain, the other through moral decay—manifesting as eroding trust, public fatigue, and cynicism toward those meant to uphold order. 

Thus, the “Big One” is not merely a geological prophecy but an allegory for a state under pressure, its faults widening both underground and within. Economic tectonics—liquidity cycles, capital migrations, and policy misalignments—converge with political fault lines, creating a landscape where what is called “resilience” may simply be the calm before the rupture. 

For while nature’s tremors follow blind physics, the greater danger lies in human volition—where pride, fear, and miscalculation can unleash catastrophes far deadlier than any fault line. 

The next rupture may not come from the earth, but from the choices of men. 

Part 2. Anti-Thesis: Human Action: Man-Made Disasters

Figure 3

2A. Brewing Crisis: Second ‘Ayungin’ Thomas Shoal Incident

While the heebie-jeebies over “The Big One” and other earthquakes often grip the public, a more insidious tremor unfolds daily in the South China Sea. Media reports chronicle near-constant confrontations between China’s military and Philippine forces: Chinese jets tailing Philippine Coast Guard aircraft over Bajo de Masinloc, warships aiming lasers at Filipino fishermen, and water cannons battering resupply missions to contested shoals. (Figure3) 

The Second ‘Ayungin’ Thomas Shoal incident on June 17, 2024 marked one of the most volatile flashpoints in recent years. 

During a resupply mission to the BRP Sierra Madre—a grounded WWII-era vessel serving as a Philippine outpost—China Coast Guard (CCG) personnel rammed, boarded, and wielded machetes and axes against Philippine Navy boats. The skirmish left several Filipino personnel injured, one severely. Some officials described it as a “near act of war.” 

Even prior to this, China’s repeated use of water cannons had already prompted warnings that a Filipino fatality could trigger the 1951 U.S.–Philippines Mutual Defense Treaty (MDT). 

Still, officials refrained from escalating the matter, citing the absence of firearms—an example of legal technicalities serving as political veneer. 

But let’s be candid: this "restraint" was not a purely local decision. 

The United States, already deeply entangled in the Russia–Ukraine war and the Israel–Palestine–Hezbollah–Iran conflict, has been supplying arms, intelligence, logistics, funding and etc., across multiple theaters, likely sought to avoid opening another front with China. With its strategic bandwidth stretched thin, Washington may have quietly signaled Manila to stand down, avoiding direct escalation with Beijing. 

2B. Chinese 36 Stratagems in Action 

China’s tactical behavior in the South China Sea mirrors or aligns with several of the Thirty Six Stratagems, a classical Chinese playbook for deception and maneuver: 

1. Beat the grass to startle the snake – China’s repeated use of water cannons, laser targeting, and close flybys—especially when Philippine vessels are accompanied by media or U.S. observers—serves as deliberate provocation to test: 

A) Philippine resolve and limits under Marcos Jr.’s more assertive maritime stance; 

B) U.S. response thresholds under the 1951 Mutual Defense Treaty—will Washington truly go to war for Manila or is this just posturing? 

C) Sphere of Influence: Test ASEAN’s cohesion, identifying weak links, wavering partners, and potential recruits for Chinese influence 

2. Sacrifice the plum tree to preserve the peach tree – Accept small losses to secure larger strategic interests. China may tolerate reputational costs (international condemnation, legal rebukes) to maintain de facto control of contested waters and normalize its presence. 

3 Make a sound in the east, then strike in the west – Create diversions to mask true objectives. While public attention centers on high-profile flashpoints like Second Thomas Shoal, China quietly fortifies other positions such as the Paracel, (Subi Reef) Spratly Islands and Luconia Shoals, expanding influence with minimal resistance U.S. Army Pacific. 

There are more, but we opted to limit it to these. 

2C. Escalation Beyond the Shoals 

Philippine leadership has also amplified its rhetoric on Taiwan, signaling a shift from territorial defense to strategic alignment with U.S. interests. Defense Secretary Gilberto Teodoro’s visit to Mavulis Island, the northernmost Philippine outpost near Taiwan, was interpreted by Beijing as a provocative move. 

The United States, for its part, has accelerated its military buildup in the Philippines—provoking sharp responses from Beijing. 

• MRC Typhon: Mid-Range missile platform capable of launching SM-6 and nuclear capable Tomahawk missiles 
• NMESIS: Anti-ship missile system
• MADIS: Air defense system designed to counter drones and aerial threats 

These deployments have drawn sharp rebukes from China, which views them as encirclement. 

2D. The Root of War: Human Action 

While wars may have complex causation, their ignition essentially boils down to human action—impulse, emotion, pride, ambition, ideology, faith, fear or the pursuit of power. 

Figure 4 

Whether it’s:

• Mythic provocation (Helen of Troy)
• Territorial hunger (Lebensraum)
• Political culture (Bushido, Spartan honor)
• Ideological clash (nationalism, communism, democracy)
• Faith and doctrine (religious wars)
• Oppression and independence (colonial revolts) 

…each war is a man-made disaster, often more devastating than nature’s fiercest convulsions. (Figure 4) 

Again, history’s wars are rarely accidents of circumstance; they are the culmination of deliberate human choices, ambitions, and fears. Each cause—territorial, ideological, or psychological—reflects a particular configuration of human action under pressure 

2E. Thai-Cambodia Border Clash and Thai’s Domestic Policy Fissure 

Take the recent case of the Thai–Cambodia border clashes, which erupted on July 24, 2025, and lasted five days. The conflict resulted in 38 confirmed deaths, over 300,000 civilians displaced, and dozens injured. A U.S.–China–ASEAN-brokered ceasefire was reached on July 28 in Putrajaya, Malaysia, though violations were reported within days.

While tensions trace back to colonial-era boundary ambiguities—notably the Franco-Siamese Treaties of 1904 and 1907—the immediate trigger was political destabilization in Thailand. A leaked phone call between Prime Minister Paetongtarn Shinawatra and Khleang Huot, Deputy Governor of Phnom Penh, exposed internal rifts between Thailand’s civilian leadership and its military establishment. The fallout led to Paetongtarn’s ouster, which reportedly emboldened the Thai military, escalating border hostilities and complicating diplomatic restraint. 

This episode exemplifies how domestic political fractures—especially civil-military dissonance—can act as a proximate cause of war, even when historical grievances simmer in the background. 

Although the engagement occurred without the direct involvement of superpowers, the casualties, displacement, and property damage were almost comparable to those from a major earthquake. 

2F. Fatalities: Wars Eclipse Earthquakes 

But this is a mere tremor compared to the tectonic toll of modern wars. In the Russia–Ukraine conflict and the Israel–Palestine–Hezbollah–Iran escalation, aggregate casualties have surged into the tens of thousands, with entire cities reduced to rubble and economies hollowed out. 

Zooming out, the 20th century offers even starker metrics:

• World War I: ~20 million deaths
• World War II: ~60–85 million deaths (approximately 500,000 to 1 million Filipinos perished)
• Korean War: ~3 million deaths
• Vietnam War: ~2–3 million deaths

 These are not just numbers.  Wars inflict far greater devastation on society—its people, its social fabric, capital, financial and economic wellbeing—than most natural disasters. 

2G. Unknown Unknowns-Black Swan Event: The Final Trigger 

Former U.S. Defense Secretary Donald Rumsfeld, defending the absence of evidence linking Iraq to weapons of mass destruction, famously invoked the concept of “unknown unknowns”—the things we don’t know we don’t know. 

In many ways, Black Swan events fall under this same category. They share three defining traits: they are unpredictable, highly improbable, and extremely consequential—whether catastrophic or transformative. 

Part 3. Synthesis: Nature’s Convulsions vs. Man-Made Catastrophes 

The fault lies not in our stars, but in ourselves—Shakespeare (Julius Caesar) 

Geological cycles and seismic displacements will inevitably occur—whether tomorrow, next year, or within our lifetime. But despite their scientific veneer, no current technology can predict their timing or magnitude with precision. And when framed within historical context, their feared impact may be less apocalyptic than media portrayals suggest. 

Still, situational awareness and preparedness should remain a universal goal—to prevent one from becoming a collateral of what Nature or Providence may unleash. 

3A. The Human Trigger 

By contrast, wars are man-made disasters—often triggered not by grand strategy, but by accidents, miscalculations, and misinterpretations, all fueled by human frailties. The daily confrontations in the South China Sea could easily escalate into a bilateral kinetic engagement, like the Thai–Cambodia or India–Pakistan border clashes.

Should escalation occur—and if the Philippines invokes the 1951 Mutual Defense Treaty with the United States—the world could awaken to the unthinkable: a third world war. This is not hyperbole—it’s a structurally plausible outcome.

And this could happen anytime. As long as belligerence dominates bilateral policy, the spark could ignite today, tomorrow, next week, or a year from now. The extent of destruction remains deeply unknown—dependent on the nature and scale of warfare employed.

3B. The Shape of Future Wars and the Grey Swan

Unlike World War II, which pursued territorial conquest, modern warfare is more strategic than expansive. In the Russia–Ukraine war, occupation has largely focused on Donetsk and Luhansk —ethnically Russian regions—with limited push toward Kyiv. In contrast, the Israel–Middle East conflict may reflect ambitions for a Greater Israel, with broader territorial implications.

Yet the Philippine public remains benumbed—desensitized by repetition and diversion, dulled by inertia. This jaded reaction blinds us to escalation, even when its architecture is already in place.

It’s not a Black Swan—it’s a Grey Swan: known, possible, but broadly discounted. 

3C. War Economies and Systemic Fragility 

Meanwhile, internal economic fragilities mirror these geopolitical tensions.

Figure 5 

The war economies of Thailand and the Philippines have been among the worst-performing Asian stock markets in 2025, down -8.97% and -6.73% year-to-date, respectively (as of October 17). Though internal fragility remains the primary concern, this also suggests that geopolitical tensions have contributed to the erosion of investor confidence. 

Despite global equities reaching record highs amid easy-money policies and the weak dollar, these two “war economies” remain laggards. 

If liquidity tightens globally, could leaders resort to military conflict—a survival mechanism cloaked in patriotism— as a means to divert public attention from political economic entropy? 

That’s our Black Swan. 

War is conscious cruelty compounded over time—the most preventable catastrophe, yet the one that most often eclipses nature’s fiercest convulsions.

3D. Conclusion: The Shape of the Next Black Swan 

In the end, both earthquakes and wars spring from ruptures—one from the shifting of tectonic plates, the other from the collision of human wills. The former is inevitable, a law of Nature; the latter is avoidable, yet repeatedly chosen. 

One humbles man before forces beyond comprehension; the other exposes the peril of his own hubris. Between Providence and pride lies the fragile equilibrium of civilization. Whether the next Black Swan rises from the earth’s crust or from the depths of human ambition, its impact will test not our technology, but our wisdom—our ability to foresee, restrain, and prepare before the unthinkable unfolds.

 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder

 

The choice of the good to be employed as a medium of exchange and as money is never indifferent. It determines the course of the cash-induced changes in purchasing power. The question is only who should make the choice: the people buying and selling on the market, or the government? It was the market that, in a selective process going on for ages, finally assigned to the precious metals gold and silver the character of money. For two hundred years the governments have interfered with the market’s choice of the money medium. Even the most bigoted étatists do not venture to assert that this interference has proved beneficial—Ludwig von Mises 

In this issue 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder

I. April 2023: The Thesis That Time Has Now Validated

II. September’s Seismic Shift: Mining Index Outpaces the PSEi

III. The Fiat Fracture: Gold's Three-Legged Bull Market and the Chronicle of Monetary Rupture

IV. Gold as Signal of Systemic Stress

V. Fracture Points: Tumultuous Geopolitics and the New War Economy

VI. A Militarized Global Economy and The Fiscal–Military Feedback Loop

VII. Economic Warfare: Tariffs, Fragmentation, and Supply Chain Bifurcation

VIII. World Central Banks Signal Distrust: The Gold Accumulation Surge and Fiat Erosion

IX. The Paradox of Philippine Mining Reform: Bureaucratic Control over Market Forces

X. The Philippine Mining Index Breakout: Gold Leads, Nickel Surprises, Copper Lags and the Speculative Spillover

XI. Conclusion: The Uneasy Return of Hard Assets in a Soft-Money World 

PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder 

Beyond the PSEi: Tracking the Philippine Mining Index's decoupling, the gold-fiat fracture, and the systemic risks that power resource equities. 

I. April 2023: The Thesis That Time Has Now Validated

Figure 1 

Back in April 2023, we predicted that rising gold prices would boost the Philippine mining index for several reasons: (see reference) 

1. Unpopular – It is the most unpopular and possibly the "least owned" sector—even "the institutional punters have likely ignored the industry." As proof, it had the "smallest share of the monthly trading volume since 2013." 

2. Lack of Correlation – "its lack of correlation with the PSEi 30 should make it a worthy diversifier" 

3. Potential Divergence – We wrote that "the current climate of overindebtedness and rising rates seen with most mainstream issues, the market may likely have second thoughts about this disfavored sector. Soon." 

4. Formative Bubble – We posed that "If the advent of the era of fragmentation or the age of inflation materializes, could the consensus eventually be chasing a new bubble?" 

Well, media coverage hardly noticed it, but the relative performance of the Mining sector vis-à-vis the PSEi 30—or the Mining/PSEi ratio—made significant headway last September. It critically untethered from its 5-year consolidation phase. (Figure 1, topmost chart) 

Recall: mines suffered a brutal 9-year bear market from 2012 to 2020. The Mining/PSEi ratio hit its secular low during the pandemic recession, pirouetted to the upside, peaked in September 2022, but remained rangebound—nickel lagged, and gold lacked sufficient momentum to lift the index. 

II. September’s Seismic Shift: Mining Index Outpaces the PSEi 

That dramatically changed in September. The Mining/PSEi ratio experienced a seismic breakout, powered by a decisive thrust in gold mines, buoyed further by surging nickel mines. 

But this time may be different. The 2002–2012 bull cycle was driven by Mines outrunning a similarly bristling PSEi 30. Today, the Mines are diverging—operating antithetically from the broader index—a potential reflection of gradual and reticent transition of market leadership. (Figure 1, middle graph) 

The September numbers underscore the shift (Figure 1, lowest table) 

PSEi 30: –3.28% MoM, –18.14% YoY, –6.46% QoQ, –8.81% YTD

Mining Index: +25.86% MoM, +47.97% YoY, +35.07% QoQ, +63.96% YTD 

So yes, it fulfilled our projections of a bull market in motion while validating our ‘diversifier’ thesis. Still, despite its massive run, the sector remains disfavored—its share of the monthly main board volume remains the smallest.

Figure 2

Even with the gaming sector’s bubble showing cracks, speculative interest in PLUS and BLOOM (at 4.38%) nearly matched the ten-issue Mining Index (4.46%) in September. In short, market sentiment still favors gaming over mining. (Figure 2, topmost image) 

Ultimately, the mining sector’s performance—and its transition to a potential secular bull market—will hinge on its underlying commodities. 

In 2016, we wrote, 

Divergence or rotation can only be affirmed when gold mining stocks will move independently from the mainstream stocks. The best evidence will emerge when both will move in opposite directions. This had been the case from 2012 through 2015 when miners collapsed while the bubble industries blossomed. It should be a curiosity to see when both trade places. Time will tell. [italics original] (Prudent Investor, 2016) 

That’s a bullseye!

III. The Fiat Fracture: Gold's Three-Legged Bull Market and the Chronicle of Monetary Rupture 

Gold’s long-term ascent is a chronicle of monetary rupture. (Figure 2, middle chart) 

The first major break came under Franklin D. Roosevelt, with Executive Order 6102 (1933) and the Gold Reserve Act (1934), which outlawed private gold ownership and revalued the dollar’s gold peg from $20.67 to $35 per ounce. This statutory debasement set the modern precedent for political interference in money. 

The second rupture—Nixon’s 1971 “shock” ending Bretton Woods convertibility—ushered in the fiat era. Untethered from monetary discipline, gold surged from $35 to ~$670 by September 1980, a 19x return over nine years, driven by double-digit inflation, oil shocks, and institutional distrust. This marked the first leg of the post-gold-standard bull cycle under the U.S. dollar’s fiat regime. 

The second leg (2001–2012) unfolded over eleven years, beginning around $265 in February 2001 and peaking near $1,738 in January 2012—a 6.6x return. 

This phase reflected a response to cascading financial crises and aggressive monetary easing: the dotcom bust, 9/11, the Global Financial Crisis, and the Eurozone debt spiral. Central bank interventions—QE and ZIRP from the Fed and ECB—amplified gold’s role as a hedge against fiat dilution. 

The third leg (2015–) began in late 2015, bottoming near $1,050 in the aftermath of China’s devaluation. Over the next decade thru today, gold climbed past $3,800—a ~3.6x return—driven by global central bank accumulation, geopolitical fracture, asset bubbles, inflation spillovers, and record leverage across public and private sectors. 

As a sanctuary asset, gold has not only preserved purchasing power but also signaled systemic fragility. Real (inflation-adjusted) prices have reached all-time highs, underscoring gold’s function as a monetary barometer. (Figure 2, lowest diagram) 

Today, its strength reflects more than cyclical momentum—it mirrors the widening cracks of the fiat era. 

Gold’s trajectory—marked by 9-, 11-, and 10-year legs—suggests that mining valuations may be more tightly coupled to global monetary dysfunction than domestic policy alone. 

With gold now approaching USD 4,000, history suggests we may well see prices reach at least USD 6,000.

For resource-driven economies like the Philippines, this episodic repricing offers a potent lens for evaluating mining equities.  Rising gold valuations, persistent inflation, and the flight to real assets amid waning faith in fiat systems suggest that mining performance may be more tightly coupled to global monetary dysfunction than domestic policy alone. 

Still, each leg has emerged from distinct fundamentals—past performance may rhyme, but not reprise. 

IV. Gold as Signal of Systemic Stress 

Last March, we launched a three-part series forecasting that gold would sustain its record-breaking run. 

In the first installment, we argued that gold has historically served as a leading indicator of economic and financial stress: "gold’s record-breaking runs have consistently foreshadowed major recessions, economic crises, and geopolitical upheavals."

Figure 3 

Today, that reflexive relationship remains in play. 

As global growth falters under the weight of fiscal imbalance and geopolitical strain, central banks have turned decisively toward rate cuts, reversing the tightening cycle that began in 2022. By September, the scale of collective policy easing has already approached pandemic-era levels, underscoring a synchronized monetary response to mounting economic stress. (Figure 3, topmost window) 

V. Fracture Points: Tumultuous Geopolitics and the New War Economy 

In the second part, we explored how monetary disorder underpins gold’s sustained upside. "Gold’s record-breaking rise may signal mounting fissures in today’s fiat money system, " we wrote, “fissures expressed through escalating geopolitical and geoeconomic stress. "  

Those fissures have widened. Over the past month, geopolitical tensions have intensified across multiple fronts, amplifying systemic risks for both commodity markets and global capital flows. In Europe, the Ukraine war has evolved from proxy engagement to near-direct confrontation, punctuated by Putin’s claim that "all NATO countries are fighting us." 

Hungarian Prime Minister Viktor Orbán echoed this unease, posting on X: (Figure 3, middle picture) 

"Brussels has chosen a strategy of wearing Russia down through endless war… sacrificing Europe’s economy, and sending hundreds of thousands to die at the front. Hungary rejects this. Europe must negotiate for peace, not pursue endless war." 

Paradoxically, Hungary is part of EU and NATO. 

In the Middle East, Trump’s proposed Gaza peace plan has been welcomed by parts of the EU but criticized by both Israeli hardliners and Hamas, exposing deep political rifts that could derail any lasting truce. 

Washington has also expanded its Caribbean military buildup apparently eyeing Venezuela—a Russian ally—under the pretext of targeting “drug smugglers.” 

Compounding these tensions are the looming U.S. government shutdown, ICE-fueled riots, EU fragmentation, and territorial disputes across Asia (including the Thai-Cambodia and South China Sea flashpoints). Together, these developments erode international interdependence and deepen the sense of global instability. 

VI. A Militarized Global Economy and The Fiscal–Military Feedback Loop 

Adding fuel to the fire, debt-financed fiscal stimulus through military spending has reached unprecedented scale. According to SIPRI, global military expenditures rose 9.4% in real terms to $2.718 trillion in 2024—the highest total ever recorded and the tenth consecutive year of increase. (Figure 3, lowest visual) 

This war economy buildup echoes historical patterns, where militarism became not just a tool of statecraft but a structural imperative. 

Modern defense economies increasingly resemble historical warrior societies such as Bushido Japan, Sparta, and Napoleonic France, where militarism evolved from a tool of power into a systemic necessity. 

In these societies, idle warriors or elite military classes threatened internal stability, compelling leaders to redirect aggression outward. Hideyoshi’s invasion of Korea, for instance, was less about conquest than about pacifying a restless samurai class. 

Today’s massive defense spending serves a parallel function: sustaining industrial output, protecting elite interests, and demanding perpetual geopolitical justification. The result is a fiscal–military feedback loop in which peace itself undermines the architecture of power. 

This militarized economic order breeds a dangerous paradox: when growth depends on arms production and deterrence, the line between defense and aggression dissolves. As nations over-arm to preserve influence and momentum, the world risks sliding into a self-fulfilling conflict dynamic—where fiscal expansion, political ambition, and national pride coalesce into the very forces that once ignited global wars. 

VII. Economic Warfare: Tariffs, Fragmentation, and Supply Chain Bifurcation 

These geopolitical flashpoints are layered atop escalating geoeconomic risks that mirror economic warfare. 

The U.S. has rolled out sweeping new tariffs—10% on lumber and 25% on furniture and cabinetry—adding to earlier steel and aluminum levies that have rattled European industries. With a stronger euro hurting export competitiveness and rising trade barriers disrupting supply chains, Europe’s manufacturing base faces mounting stress. 

The U.S. recently raised tariffs on Philippine exports to 19%, part of a broader “reciprocal” trade posture that threatens ASEAN and EU economies alike. Export controls targeting Chinese tech and semiconductor firms underscore the growing bifurcation of global supply chains, especially in the AI and chip sectors. 

VIII. World Central Banks Signal Distrust: The Gold Accumulation Surge and Fiat Erosion

Figure 4

Amid this widening fragmentation, central banks have accelerated their gold accumulation—buying despite record-high prices. 

As the World Gold Council reported, central banks added a net 15 tonnes of gold in August, consistent with the March–June monthly average, marking a rebound after July’s pause. Seven central banks reported increases of at least one tonne, while only two reduced holdings. (Figure 4, topmost and middle charts) 

Notably, as political institutions, central bank reserve management decisions are not profit but politically driven. 

The Bangko Sentral ng Pilipinas (BSP), additionally, was the world’s largest seller of gold reserves in 2024, citing profit-taking at higher prices. Yet in 2025, it resumed small purchases—ironically, at even higher price levels. (Figure 4, lowest graph)  

Figure 5 

Measured in Philippine pesos, gold and silver prices are extending their streak of record-breaking highs (Figure 5, upper window) 

As history reminds us, the BSP’s massive gold sales in 2020 preceded the 2022 USD/PHP spike, suggesting that the 2024 divestment—intended to support the peso’s soft peg—could again foreshadow a breakout above PHP 59, perhaps by 2026? 

Most strikingly, global central banks’ gold reserves have grown so rapidly that their aggregate gold holdings are now nearly on par with U.S. Treasury holdings—a clear sign of eroding faith in the contemporary U.S. dollar-based order. (Figure 5, lower image) 

The modern-day Thucydides Trap—intensifying hegemonic competition expressed not only in geopolitics, but also in economic, financial, and monetary spheres—has increasingly powered the gold-silver tandem. 

Viewed in this light, as gold rises against all currencies, the message is clear: it is not gold that’s appreciating, but fiat money that’s depreciating. Gold is no longer just insurance asset— it is, and remains, money itself. 

IX. The Paradox of Philippine Mining Reform: Bureaucratic Control over Market Forces 

In the absence of commodity spot and futures markets—a critical handicap to price discovery, risk management, and capital formation—the state’s default response has been to expand taxation and administrative controls instead of developing genuine market mechanisms. 

Rather than pursuing market liberalization or introducing commodity exchanges to improve efficiency and productivity, the Philippine social democratic paradigm of reform remains fixated on taxation, administration, and bureaucratic control. 

The passage of the Enhanced Fiscal Regime for Large-Scale Metallic Mining Act (RA 12253) and the push for the Mining Fiscal Reform Bill mark the government’s latest attempt to "modernize" the fiscal framework of the mining industry. 

On paper, these reforms promise stronger oversight, greater transparency, and a "fairer share" of mineral wealth between the state and the private sector. The new regime introduces margin-based royalties, a windfall profits tax, and project-level accounting rules meant to simplify tax compliance and reduce leakages. Yet, beyond the reformist veneer lies a system still anchored on bureaucratic discretion—where regulators retain broad authority to interpret profitability thresholds, accounting standards, and tax computations. 

In practice, this discretion perpetuates the opacity and arbitrariness that the law sought to correct. Rather than institutionalizing transparency, the framework risks entrenching regulatory capture, enabling bureaucrats to negotiate or manipulate fiscal obligations behind closed doors. 

The very mechanisms intended to enhance oversight—royalty audits, windfall assessments, and transfer pricing reviews—may instead become new venues for rent-seeking and selective enforcement. This tension between statutory ambition and administrative reality leaves the industry vulnerable not only to corruption but also to uneven enforcement across operators and regions—cronyism. 

In the short term, elevated metal prices could conceal these governance flaws, boosting fiscal receipts and lifting mining equities under the illusion of reform-led success. But when the commodity cycle turns, the cracks will widen: weak oversight, inconsistent standards, and arbitrary taxation could resurface as deterrents to investment and valuation stability. 

Thus, what was framed as a fiscal modernization drive may ultimately reinforce the industry’s old paradox—where boom times mask systemic fragility, and reforms collapse when prices fall. 

X. The Philippine Mining Index Breakout: Gold Leads, Nickel Surprises, Copper Lags and the Speculative Spillover 

Lastly, while gold mining shares primarily contributed to the breakout of the Philippine Mining Index, nickel mines also sprang to life and added to the rally. The Philippine Stock Exchange recalibrated the composition of the Mining Index last August to reflect sectoral momentum. 

Gold-copper Lepanto A and B replaced Benguet A and B, while gold-silver miner Oceana Gold was newly included.

Figure 6

This partial reconstitution, combined with price action, reshaped the index’s internal weightings: as of October 3, gold-copper mines accounted for 74.65%, nickel 23.53%, and oil just 1.83%—a notable shift from March 31’s 68.3%-27.44%-4.25% distribution. (Figure 6 topmost graph)

From March 31st to October 3rd, gold mining shares surged 112%, driven by tailwinds from soaring gold and silver prices. Nickel mining shares, surprisingly, jumped 66.4% despite depressed global nickel prices. Meanwhile, solo oil exploration firm PXP Energy sank 16.5%. 

The biggest ranked mines in the index, in descending order, were Apex Mining, OceanaGold, Philex, Nickel Asia, and Atlas Consolidated. (Figure 6, second to the top image) 

USD prices of Silver and Copper surging while Nickel consolidates. (Figure 6 second to the lowest visual) 

While gold’s rally was the primary engine of the index breakout—amplified by the inclusion of more gold-heavy names—the rebound in nickel miners was more ironic. 

With easy money fueling an “everything bubble,” a rising tide appears to be lifting all mining boats. 

Another factor is that local nickel miners have mirrored the moves of international ETFs such as the Sprott Nickel Miners ETF [Nasdaq: NIKL], which advanced largely on global liquidity flows rather than on improvements in the underlying metal market. (Figure 6, lowest diagram) 

In essence, the surge in nickel shares reflects financial rotation and speculative spillover—capital chasing laggards and cyclical exposure amid abundant liquidity—rather than any meaningful recovery in nickel fundamentals. If the bids are to be believed, nickel prices would eventually have to rise and remain elevated; otherwise, the rally risks running ahead of earnings reality. 

Meanwhile, despite a resurgent copper price—also mirrored in ETFs like the Sprott Copper Miners ETF [Nasdaq: COPP]—some local copper mines have made little progress in scaling higher. 

We are yet to see substantial breakouts from the peripheral mines, suggesting that speculative flows have been highly selective, favoring liquidity and index-weighted names over broader participation. 

Ironically, the divergence between copper and nickel prices underscores the fragility of the latter’s mining rally. 

While copper’s surge has been confirmed by both spot prices and mining equities—reflected in the coherent ascent of ETFs like COPP—nickel’s stagnation contrasts sharply with the outsized gains in nickel mining shares and ETFs like NIKL. 

This disconnect suggests mispricing: a speculative equity bid front-running a commodity rebound that hasn’t arrived. Without confirmation from the metal itself, the feedback loop sustaining nickel equities risks collapse, exposing the rally as a liquidity mirage rather than a durable trend. 

XI. Conclusion: The Uneasy Return of Hard Assets in a Soft-Money World 

The Philippine mining sector’s transformation from pariah to rising star is both cyclical and structural. It reflects not only higher commodity prices but also the global search for hard assets in an era of currency debasement, geopolitical fracture, and policy incoherence. 

Gold’s rise tells a story of distrust in fiat money; nickel’s divergence, of speculative excess born of liquidity overflow. 

The mining index’s ascent thus mirrors the world’s economic psychology—a blend of fear and greed, of safe-haven accumulation and ultra-loose money–financed speculative rotation. 

Whether this is a sustainable repricing or a liquidity mirage will depend on whether global monetary and fiscal regimes stabilize—or fracture further. The former seems close to impossible; the latter, increasingly probable. 

Either way, the Philippine mining story has become a proxy for something much larger: the uneasy return of hard assets in a soft-money world. 

Postscript: No trend moves in a straight line. Gold, silver, and Philippine mining shares are now extensively overbought—inviting a countercyclical pause, not an end, to their ascent. 

____

References 

Ludwig von Mises, The Real Meaning of Inflation and Deflation, January 2, 2024, Mises.org 

Prudent Investor Newsletter, Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds! Substack, April 27, 2023 

Prudent Investor Newsletter, Phisix 6,650: Resurgent Gold, Will Mining Sector Lead in 2016? Negative Yield Spread Hits 1 Month Bill-10 Year Treasuries!, Blogspot February 15, 2016 

Prudent Investor Newsletter Do Gold’s Historic Highs Predict a Coming Crisis? Substack, March 30, 2025 

Prudent Investor Newsletter, Gold’s Record Run: Signals of Crisis or a Potential Shift in the Monetary Order? (2nd of 3 Part Series), Substack, March 31, 2025 

Prudent Investor Newsletter, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025 

Prudent Investor Newsletter, The Long-Term Price Trend and Investment Perspective of Gold, Blogspot, August 02, 2020  

Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances—Ludwig von Mises 

In this issue

Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap

I. Introduction: The Banking System’s Wile E. Coyote Moment

II. NPL Benchmarks Unveil Minskyan Fragility and the Wile E. Coyote Moment

III. Diminishing Returns: Policy Stimulus-Backstop Backlash

IV. Banks’ Drift Toward Consumers: Credit Cards and Salary Loans Power NPLs Higher

V. Stagflation Signals and the Death Knell of Benchmark-ism: Labor Frailty Meets Inflation’s Third Leg

VI. The Wile E. Coyote Dynamic in Bank Investments via Available For Sale (AFS) Assets

VII. AFS Surge and Recession-Grade Financial Losses

VIII. Benchmark-ism and the Illusion of Confidence

IX. Velocity or Collapse: The Wile E. Coyote Reckoning

X. BSP’s Tacit Pivot: From Sovereign Risk to Banking Backstop

XI. Conclusion: The Velocity Charade Meets Its Limits 

Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap

The Wile E Coyote velocity game—credit expansion, AFS bets, and central bank lifelines—keeps Philippine banks afloat, but the stability it projects is an illusion

I. Introduction: The Banking System’s Wile E. Coyote Moment 

Inquirer.net, September 06, 2025: Bad debts held by the Philippine banking system rose to their highest level in eight months in July, as lenders—facing slimmer margins from declining interest rates—may have leaned more on riskier retail borrowers in search of yield. Latest data from the Bangko Sentral ng Pilipinas showed that nonperforming loans (NPL), or debts overdue by at least 90 days and at risk of default, accounted for 3.40 percent of the industry’s total loan portfolio. That marked the highest share since November 2024, when the NPL ratio stood at 3.54 percent. 

Time and again, we’ve detailed the escalating challenges facing the Philippine banking system—chief among them, its role in financing the government deficit amid elevated rates. 

This has led to record levels of held-to-maturity (HTM) securities, mounting investment losses from mark-to-market exposures, and potentially unpublished credit delinquencies buried in loan accounts. 

Together, these forces have contributed to the system’s entropic liquidity conditions: a slow, grinding erosion of institutional health masked by policy choreography. 

But recent developments take the proverbial cake. While NPLs remain elevated, their apparent ‘containment’ has served as public reassurance—an illusion of stability. 

Beneath that veneer, banks have shifted into a "velocity game" to preserve KPI optics: record-high credit expansion running in tandem with record-high NPLs. 

This statistical kabuki masks growing stress but sets the system on a path to its own Wile E. Coyote moment. 

While this sustains confidence in the short term, the moment loan growth slows, the cliff edge becomes visible—and the entire charade unravels. 

II. NPL Benchmarks Unveil Minskyan Fragility and the Wile E. Coyote Moment

Figure 1

Since the second half of 2022, Philippine banks have seen a structural uptrend in gross nonperforming loans (NPLs), with nominal levels breaching all-time highs by April 2024 and reaching a record Php 535 billion in July 2025. (Figure 1, topmost chart) 

Though the industry’s NPL ratio remains at a deceptively flat at 3.4 percent, this apparent stability is largely the effect of the ‘denominator illusion’: total loan growth (+11 percent) has been fast enough to offset the rise in bad loans.  (Figure 1, middle window) 

This accelerates procyclical risk-taking—banks extend more credit, often to riskier retail borrowers, to maintain headline ratios. 

Neo-Keynesian economist Hyman Minsky famously proposed that financial instability evolves in stages—from hedge finance to speculative finance, and finally to Ponzi finance—where borrowers can no longer generate sufficient cash flows to service debt and must rely on refinancing, rollovers, or asset sales to stay afloat (see references) 

But Minsky’s framework has a counterparty: the lender. 

In the Philippine case, banks have become enablers of this drift. To keep overleveraged firms and households solvent, they must sustain ever-faster credit expansion—rolling over weak loans, extending new ones, and deferring recognition of losses. 

This is the Minskyan drift on the supply side: not just borrower pathology, but lender complicity. 

A banking system whose apparent stability depends on pyramiding credit to increasingly marginal borrowers, refinancing delinquent accounts, and chasing yield into riskier consumer segments—exacerbating the very fragility it was meant to manage. 

The result is a velocity-dependent equilibrium—one that demands constant motion to avoid collapse. 

When the sprint falters or bad debts surge, the NPL ratio will spike—mechanically, inevitably—unveiling the proverbial skeletons long buried beneath the benchmark gloss. 

The system confronts its Wile E. Coyote moment: suspended mid-air, legs still spinning, gravity imminent. Once credit growth slows, the ground disappears—and the fragility long masked by velocity is fully revealed. 

III. Diminishing Returns: Policy Stimulus-Backstop Backlash 

This Minskyan drift is unfolding despite a full-spectrum easing cycle from the Bangko Sentral ng Pilipinas: reserve requirement cuts, interest rate reductions, the USDPHP softpeg regime, doubled deposit insurance, and lingering regulatory relief. 

Layered atop record fiscal stimulus, these measures were designed to cushion the system—but they now reveal diminishing returns. 

The irony is sharp: instead of stabilizing credit dynamics, these policies have parlayed into rising risks—encouraging yield-chasing behavior and masking stress through refinancing. 

And to maintain the illusion of stability, authorities have upped the ante on benchmark-ism—using statistical bellwethers to project ‘resilience’ while embellishing markets to fit the narrative. 

As nominal NPLs climb and consumer credit deepens, the central bank faces an unenviable dilemma: tighten policy and risk triggering defaults, or deploy unprecedented, pandemic-style liquidity injections to preserve appearances even as the system runs out of runway. At the same time, banks themselves may be compelled to conserve liquidity and pull back on credit expansion, exposing the system’s velocity game for what it is. 

Needless to say, whether in response to BSP policy or escalating balance sheet stress, banks may begin pulling back on credit—unveiling the Wile E. Coyote moment, where velocity stalls and gravity takes hold. 

IV. Banks’ Drift Toward Consumers: Credit Cards and Salary Loans Power NPLs Higher 

This fragility is no longer confined to institutional (supply side) exposures—it’s now bleeding into the household sector. 

The banking system’s transformational pivot toward consumer credit—particularly credit card loans—has deepened latent risks, building a larger stock of eventual loan portfolio losses. 

While aggregate nominal consumer loans (including real estate) hit a record high in Q2 2025, non-performing loans also sprinted higher from their December 2022 bottom. Gross consumer NPLs now sit just 4.7% below their Q2 2021 peak. (Figure 1, lowest graph) 

Though recent increases have been broad-based, the lag in consumer credit delinquencies reflects delayed stress transmission—especially in motor vehicle and real estate segments.

Figure 2

Crucially, the share of consumer loans to banks’ total loan portfolio (net of interbank) reached an all-time high of 22.34% in Q2 2025. Year-on-year growth in consumer NPLs has accelerated from single digits in 2024 to double digits in the last two quarters. (Figure 2 topmost pane)  

As noted earlier, surging NPLs have accompanied blistering growth in credit card loans—both hitting record highs in Q2. (Figure 2, middle image) 

But it’s not just credit cards: salary loan NPLs also spiked to a record, juxtaposed against all-time high disbursements. (Figure 2, lowest graph)

Figure 3

Strikingly, even as bank lending hits new highs, consumer real estate NPLs have climbed over the past two quarters. This uptick comes despite previously stable delinquency rates—a counterintuitive anomaly given the record and near-record vacancy levels observed in Q1 and Q2 2025, potentially a product of sustained refinancing. (Figure 3, topmost diagram)  

These pressures are permeating into the demand side of the economy—further evidence of a consumer squeezed by inflation, debt, and the slow erosion of repayment capacity. 

Taken together, weak household balance sheets, rising camouflaged NPLs, and a slowing economy raise systemic risks that extend well beyond macro fundamentals—threatening institutional health and reaching deep into the financial sector’s core, even as headline growth continues to mask the underlying fragility. 

V. Stagflation Signals and the Death Knell of Benchmark-ism: Labor Frailty Meets Inflation’s Third Leg 

Credit risk pressures should intensify with the July labor market data, which unexpectedly exposes the labor market’s underlying frailty. 

The unemployment rate (5.33%) and unemployed population (2.59 million) surged to pandemic-era highs (August 2022: 5.3%, 2.681 million), while the labor participation rate fell to 60.7%—slightly above July 2023’s 60.1%. (Figure 3 middle and lowest images) 

Stunningly, despite a 1.51% YoY increase in population, the non-labor force swelled to 31.45 million, the highest level since at least 2021. 

Combined, the unemployed and non-labor force accounted for a staggering 42.5% of the 15-and-above population in July 2025—a July 2023 high. 

Ironically, authorities amusingly blamed the weather. 

For banks, a looming storm is brewing: fragile household balance sheets, concealed loan delinquencies, and a deteriorating labor market set the stage for increased NPL formation in Q3 2025, with potentially systemic consequences

Figure 4

There’s more. 

Authorities also reported that despite rice price controls and the 20-peso rollout, headline CPI jumped to 1.5% in August—exposing the likely anomalous 0.9% dip in July. More concerning is the CORE CPI breakout, rising from 2.3% to 2.7%, the highest since December 2024. (Figure 4, topmost visual) 

Historically, a negative spread—where CORE CPI exceeds headline—has signaled cyclical bottoms for headline inflation. 

History rhymes. Peak CPI in October 2018 marked the launchpad for the record run in gross NPLs, which climaxed in October 2021 before slowing. (Figure 4, second to the highest image) 

Likewise, February 2023’s peak CPI became the springboard for the recent all-time highs in gross NPLs—records now eclipsed or obscured by the Wile E. Coyote velocity game. 

The pattern is clear: Each cycle shows how households use credit to bridge spending power losses during inflation surges, only to leave borrowers delinquent in its wake. 

The fatal cocktail of surging unemployment and a potential third leg of the inflation cycle—stagflation—could be the coup de grâce for NPL benchmark-ism. The illusion of resilience may not survive the next impact. 

VI. The Wile E. Coyote Dynamic in Bank Investments via Available For Sale (AFS) Assets 

There’s another aspect we’ve barely touched—yet it has become a critical factor in the banking system’s health challenges, now showing symptoms of the Wile E. Coyote dynamic: investment assets. 

First, the distribution of bank assets reveals a transformational shift—from safeguarding liquidity to an entrenched addiction to leverage. This seismic rebalancing is evident in the rising share of investments and, more recently, the rebound in loan activity, both at the expense of cash reserves. (Figure 4, second to the lowest graph) 

Since the BSP’s historic rescue during the pandemic recession, the cash share of bank assets has plunged to an all-time low of 6.93% as of July 2025. 

Second, as we’ve repeatedly noted, the pandemic-level fiscal deficit has driven the banking system’s net claim on central government (NCoCG) to a record Php 5.547 trillion (up 7.12% last July). This is mirrored in Held-to-Maturity (HTM) assets, which rose 2.15% to a record Php 4.1 trillion. Today’s deficit is not just a macro concern—it’s manifesting as a liquidity squeeze across the banking system. And that’s before accounting for the adverse effects of crowding out. (Figure 4 lowest graph) 

Third, the very investments that carried the banking system through the pandemic—buoyed by the historic BSP cash injections—have now become a source of friction. 

The need for sustained liquidity from the BSP to keep asset prices afloat has morphed into a Trojan Horse for inflation and a fuel source for increasingly speculative risk-taking engagements. 

To stave off asset deflation, the BSP must inject liquidity—primarily via bank credit expansion—yet this comes at the cost of spiking inflation risk.

Figure 5

This dynamic is most evident in Available-for-Sale (AFS) assets, which now constitute 41% of gross financial assets, fast catching up to HTMs at 52%. (Figure 5, topmost window) 

VII. AFS Surge and Recession-Grade Financial Losses 

The record build-up of AFS assets has heightened exposure to mark-to-market shocks, transmitting valuation swings directly into capital accounts and investor sentiment. 

The impact is already visible: In Q2, Philippine banks suffered an income contraction of (-) 1.96%, driven largely by a surge in losses on financial assets totaling Php 43.782 billion—the largest since December 2020, at the height of the pandemic recession. Let it be clear, these are recession-grade losses. (Figure 5, middle chart) 

With fixed income rates falling and bond prices rallying, the source of these losses becomes clear by elimination: deteriorating equity positions and bad debt. This is reinforced by the all-time high in banks’ allowance for credit losses (ACL)—a supposed buffer against rising delinquencies that signals institutional awareness of latent stress. (Figure 5, lowest diagram) 

Yet, like NPLs, these record ACLs are statistically suppressed by spitfire loan growth.

VIII. Benchmark-ism and the Illusion of Confidence

Figure 6

Nonetheless, this structural shift helps explain the growing correlation between AFS trends and the PSE Financial Index. (Figure 6, topmost window) 

In this light, banks—alongside Other Financial Corporations (OFCs)—may well represent a Philippine version of the stock market “National Team”: pursuing benchmark-ism or, perhaps, reticently tasked with pumping member-bank share prices within the Financial Index to choreograph market confidence. 

Patterns of coordinated price actions—post-lunch ‘afternoon delight’ rallies and pre-closing pumps—can often be traced back to these actors. 

Whether by design or silent coordination, the optics are unmistakable. 

IX. Velocity or Collapse: The Wile E. Coyote Reckoning 

The implication is stark: even as banks expanded their AFS portfolios —ostensibly for liquidity and yield, they deepened their exposure to volatility and credit deterioration. 

Equity-linked losses began bleeding into financial statements, and provisioning behavior revealed a system bracing for impact. 

The liquidity strain was hiding in plain sight—concealed by statistical optics and benchmark histrionics.

Compounding this is the shadow of large corporate exposures—most notably San Miguel Corporation, whose Q2 profits were largely driven by asset transfers, shielding its Minskyan Ponzi-finance model of fragility 

For instance, if banks hold AFS equity stakes or debt instruments linked to SMC, any deterioration in valuation or repayment capacity would surface as mark-to-market losses or provisioning spikes. 

Alas, like Wile E. Coyote, banks now require another velocity game—pumping financial assets higher to sustain investment optics. 

Without it, they risk compounding their liquidity dilemma into a full-blown solvency issue.

X. BSP’s Tacit Pivot: From Sovereign Risk to Banking Backstop 

The drain in the banking system’s cash reserves appears to be accelerating. 

Following June’s 11.35% jump (+Php 224.78 billion), July posted a 12.8% contraction (–Php 281.87 billion), fully offsetting gains of June, and partly last May (+Php 66.11 billion). Nonetheless, cash and due from banks at Php 1.923 trillion fell to its lowest level since at least 2014. 

And July’s slump signifies a continuum of long-term trend. However, from the slomo erosion, the depletion appears to be intensifying. 

So, despite interim growth bounce of deposits and financial assets, net (excluding equities), the cash-due banks to deposit and liquid-assets-to-deposit ratios resume their respective waterfalls.  In July, cash to deposit ratio slipped to all-time lows, while liquid assets-to-deposit fell to pre-pandemic March 2020 lows! (Figure 6, middle chart) 

Ironically, July’s massive cash drain coincided with the implementation of CMEPA. 

Importantly, banks drew a massive Php 189 billion from the central bank’s coffers as shown by the BSP’s claims on other depository corporations (ODC). (Figure 6, lowest diagram) 

This wasn’t a routine liquidity operation—it was a balance sheet pivot, redirecting support away from direct government exposure and toward the banking sector itself. The implication is clear: the system is leaning harder on central bank liquidity to offset deepening reserve depletion.

Figure 7

By shrinking its net claims on the central government (NCoCG) while expanding its claims on ODCs, the central bank has effectively told the Treasury to park its funds at BSP, while opening its own balance sheet wider to banks. This reduces BSP’s exposure to sovereign credit, but leaves banks more dependent on central bank lifelines to cover liquidity shortfalls. (Figure 7, topmost visual)  

In practice, this means banks are now forced into a double bind. On one hand, they must absorb more government securities and expand credit to keep up the optics of balance-sheet strength. 

On the other, they rely more heavily on BSP’s injections to plug holes in cash reserves. This rebalancing masks systemic strain—liquidity looks managed on paper, but the underlying dependence on continuous velocity (credit growth, AFS positioning, and central bank drawdowns) signals fragility. 

Far more crucial, what emerges is a structural shift: the BSP’s balance sheet is less about backstopping fiscal deficits and more about propping up the banking system. Yet this is not a permanent fix—if banks stumble in their velocity game or government borrowing intensifies, the pressure could quickly return in the form of crowding-out, valuation losses, and even solvency fears. In short, the pivot may buy time, but it also deepens the Wile E. Coyote dilemma: run faster, or fall.

With the BSP pivoting towards a backstop, bank borrowing growth decelerated to 8.9% YoY or fell by 14% MoM in July to Php Php 1.58 trillion—about 17% down from the record Php 1.907 trillion last March 2025. (Figure 7, middle image) 

This deceleration underscores the limits of the velocity game: even with central bank support, banks are struggling to sustain credit expansion without exposing themselves to deeper asset and funding risks. 

XI. Conclusion: The Velocity Charade Meets Its Limits 

The deepening Wile E. Coyote dynamic—where velocity props up optics of loans and investments—is unsustainable. (Figure 7, lowest cartoon) 

Surging NPLs and rising latent loan losses belie the façade of credit expansion. 

Accelerated exposure to AFS assets injects mark-to-market volatility, while HTMs tie banks to the unsparing race of public debt. 

There is no free lunch. Policy-induced fragility is no longer theoretical—it is compounding and irreducible to benchmark-ism or statistical optics. 

The illusion of managed liquidity is cracking. Each policy lifeline buys time—but only deepens the fall if velocity fails. 

Yet banks and the political economy have locked themselves in a fatal trap:

• Deposit rebuilding is punished by state policy,
• Recapitalization is constrained by fiscal exhaustion,
• Capital markets are dominated by overleveraged elites,
•  Hedge finance is crowded out by Ponzi rollovers,
• Tax and savings reform is politically dead under “free lunch” populism 

In short: a trap within an inescapable trap. 

___

References: 

Hyman P. Minsky, The Financial Instability Hypothesis, The Jerome Levy Economics Institute of Bard College, May 1992 

Prudent Investor Newsletter Substack Archives: 

-Goldilocks Meets the Three Bad Bears: BSP’s Sixth Rate Cut and the Late-Cycle Reckoning August 31, 2025 (substack) 

-Philippine Banks: June’s Financial Losses and Liquidity Strains Expose Late-Cycle Fragility August 7, 2025 (substack) 

-Liquidity Under Pressure: Philippine Banks Struggle in Q1 2025 Amid a Looming Fiscal Storm May 18, 2025 (substack) 

-BSP’s Fourth Rate Cut: Who Benefits, and at What Cost? April 13, 2025 (substack) 

CMEPA 

The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback July 27, 2025 (substack)

The Seen, the Unseen, and the Taxed: CMEPA as Financial Repression by Design July 20,2025 (substack)