Chart of the Day: Bears Reclaim Thailand's SET

Following yesterday's decline, Thailand's SET has regressed back to the bear market territory

The above represents the chart of the day: Thai's major equity benchmark the SET has fallen by 21.55% from the February peak (as of yesterday). 

The SET has already broken the August 'yuan devaluation' lows and seems at pace to test the December 2014 support. (images from Bloomberg)

Of course, the SET's weakness can be traced to the rising US Dollar as seen via the resurgent USD THB (via Google finance). 

Given the current pace of appreciation of the USD relative to the Thai bath, it would seem that a possible breakout by the USD Thb from the September highs would be manifested or coincidental with a likely breakdown by the SET of December lows.

What would be the ramification from such scenario? We'll find out soon.

Asian Crisis Watch: Bears Snare Fourth Asian Bourse: Thailand's SET

Membership to the Asian Bear Market Club has been growing amazingly fast.

Thailand's major equity bellwether, the SET, highlights the fourth bourse (Asia ex-China) to join the bear's camp during last three trading days.  

The above represents the SET down 20% from the May 2013 highs.

That's because today's crash aggravated the existing sagging conditions of the SET

Of course, the bears' week old Asian recruits include Hong Kong, Taiwan and Indonesia.  

Also, bears now control two major ASEAN indices.

Well, Thailand's stock market quandaries have been abetted by the falling currency,  the baht.

Like the rest of Asia, the US dollar against the baht has recently been surging

As I have been saying, the more the bears gain recruits, the greater the chances for an Asian Crisis 2.0. Of course, an Asian crisis will most likely have a global fallout.

Worst, a China crisis PLUS an Asian crisis will likely usher in a 1929 like global crisis but with the epicenter situated in Asia.  

Thailand’s Parallel Universe: Record Stock Market Volume in the face of a Stagnating Economy

The consensus holds that stock markets have been about G-R-O-W-T-H.

Let us see how this applies to Thailand’s case.

From Nikkei Asia: (bold mine)

Despite political unrest and other woes, the Stock Exchange of Thailand (SET) in 2014 recorded the highest average daily trading value among ASEAN bourses for a third consecutive year.

Trading rallied on the SET and its benchmark index shot up after the military staged a coup d'etat on May 22, bolstering hopes that the economy would revive. However, some analysts believe the market may have overheated…

In 2014, average daily trading value was 45.47 billion baht ($1.38 billion), down 9% from the previous year. Although second place Singapore closed in at $1.3 billion, the SET managed to retain its top slot in ASEAN. The benchmark index gained 15% over the year.

The country had been in a political deadlock since late 2013 when anti-government protesters took to the streets in Bangkok. The economy shrank in the first quarter of 2014 sending the SET index to an 18-month low.

Thailand’s SET has indeed ballooned by 15% in 2014. This would have been much higher except for the December shakeout highlighted by an intraday 9% crash in the middle of that month as shown in the chart from stockcharts.com

Despite recent signs of recovery, the SET appears to remain under pressure.

The article suggest of a cognitive dissonance, a rally based on hope (of an economic recovery) and a denial (Thailand’s statistical economy hardly recovered through the 3Q).

The SET has risen 15% in  the face of stagnating economic performance which could have even been negative in real terms. 

Since government makes the statistics, so they can show whatever they want.

The important question is how has the stock market rally been funded?

The most likely answer has been by credit.

Loans to the private sector soared to a record before the third quarter slowdown. Consumer loans has also bulged to a record last September 2014. 

Ironically record consumer loans hasn’t translated to retail spending which on a year on year basis has remained negative in 2014 through October (albeit signs of improvements from the previous rates of deep declines).

Those issued loans haven’t been circulating to bid up consumer prices either, statistical inflation rate slumped to .6% last December! The oil price collapse may have compounded on this trend.

Yet on a month to month basis, December marks the largest contraction of consumer spending.  So even if we  go by the September-October data where consumer spending was last  reported, the same story can be derived: Thai consumers withheld spending. 

But those record loans has ballooned Thai’s banking system balance sheet and money supply M3. The latter possibly from the 364 billion baht stimulus announced last October.

Yet this coincides with the reports of swelling of non-performing loans.

So where has all these money issued been funneled to? 

The most likely answer is on the speculative markets.

Even as the economy stagnates, Thailand’s property markets has sizzled. As of the 3Q 2014 housing y-o-y gains has increased to 3.29% according to Global Property Guide. In nominal terms based 2009 baht, housing prices have been spiraling to the upside (right)!

It looks as if the average citizenry has been borrowing money to speculate on stocks and real estate based on a rationalized “hope” rather than engage in productive investments.

And the increasing use of leverage for speculation has hardly even spilled over to retail consumption.

Such developments seems like deepening signs of a massive accretion of malinvestments where more and more resources have been channeled into unproductive activities. Incipient signs of rising NPLs have been symptoms of these.

And the surge in the US dollar-Thai baht has only been exposing on the vulnerabilities of the system which recently has been vented through strains in the speculative markets.

As one can see from Thai example, it has been liquidity and credit and the subsequent confidence that drives pricing of financial markets rather than real economy. 

Take away credit and liquidity, so goes fickle confidence.  

And it would seem that the identical twins in the form of chart pattern between the Philippine Phisix and the Thai SET has diverged: temporary or new trend?

Thailand’s Junta Government Clamps down on Facebook and Media

Thailand’s coup regime has just censored Facebook. 

From Reuters:

Thailand's information technology ministry blocked Facebook on Wednesday and planned to hold talks with other social networking sites to stem protests against the military government, a senior official said.

"We have blocked Facebook temporarily and tomorrow we will call a meeting with other social media, like Twitter and Instagram, to ask for cooperation from them," Surachai Srisaracam, permanent secretary of the Information and Communications Technology Ministry, told Reuters.

So the new military government will open only media sites for as long as they sing hallelujahs on them

This applies to Mainstream Media too…

Print and broadcast media have already been instructed to refrain from critical reporting of the military's May 22 takeover.

As I noted last weekend, Thailand has a gigantic bubble that appears to be in the process of unraveling. And Thai junta government’s increasing recourse to repression may just aggravate the current deteriorating conditions.

So what’s next? Will the new Thai government impose capital controls?

Nonetheless even in the face of Thailand’s contracting economy and the recent putsch, such factors hasn’t been a barrier for the stock market bulls. 

Notice the contradictory forces at work: contracting economy and rising stocks. So who says stock markets are about the economy?

And if there is any sign of financial market pressure it has been in Thai’s currency, the USD-baht…

…which seems poised for a breakout.

Again these are evidences of massive disregard for risks or "peak complacency".

Thai Central Bank Hopes that More Bubble Blowing will Solve Political-Economic Woes

Thailand’s politics has been in a mess since the last semester of 2013. 

But politics has only been an aggravating factor to what has been a slowing statistical economy for Thailand (annualized). 

Except for the anomalous one time spike, Thailand’s economy has been largely performing below the average at 3.77% (calculated by tradingeconomics.com based from 1994 until 2013) from 2012-2013. The World Bank says that Thailand economy grew by only 3% in 2013 

So given the growing slack in the economy worsened by a political crisis that has rendered the incumbent government paralyzed, what recourse has the Bank Thailand recently taken to provide cushion to her economy?

The answer from the Wall Street Journal Real Times Economics Blog:

After holding policy steady for months as the country’s disintegrating political situation took its toll on the economy, the Bank of Thailand finally reached its breaking point Wednesday, cutting overnight rates by a quarter-percentage point in a close vote.

Wednesday’s decision takes the benchmark rate to 2.0% from 2.25%, and comes as the BOT said economic growth won’t even reach the central bank’s 3% target this year – after it was forecast at 4% as recently as November. Economic growth already has slowed from 6.5% in 2012 to 2.9% in 2013, bottoming out at just 0.6% in the final quarter of the year.

That illustrates the depths to which Thailand’s economy has sunk as massive demonstrations seeking the overthrow of Prime Minister Yingluck Shinawatra enter their fifth month.

Price pressures were seen as one reason the BOT remained on hold in preceding months: While inflation wasn’t high enough to warrant a rate increase as in India or Indonesia, it wasn’t quite benign enough to allow the central bank to ease policy either.

As I pointed out in January 2013, Thailand has a credit bubble.

And to give you an update on what Thailand’s low interest rates regime have engendered aside from a stagnating economy…

Loans to the private sector continues to massive inflate. In my estimates, through 2013 until January 2014 credit growth ballooned by about 9%

Such rate of growth has likewise been reflected on money supply growth. Thailand’s M3 jumped by an estimated 9.8% over the same period. 

Thailand credit and money growth has been thrice the rate of the economic rate of growth. So the question is where has all these money creation been spent or invested? 

I have no updates on the Thailand’s housing statistics. But the World Bank figures gives some clues.  Growth in the construction growth sector remains positive but may be on a seminal downtrend. 

On the other hand, note that growth in real investment and equipment has been on a decline since the 4Q of 2012 and has turned negative during the 2nd Q of 2013. In other words, Thailand’s economy has been materially slowing even prior to the outbreak of the political crisis. 

Additionally while growth in housing loans appear as slowing down, % of housing loans relative to the economy remains at near the record 80% level. 

And the more important factor has been the surge in Non-performing loans (NPL) from 2012-2013.

And Thailand’s slowing exports as I noted earlier, has only swelled her balance of trade deficit and shrank her current account surplus. And this implies that part of her trade deficit may have been financed by the growth in private sector debt.

And it is not just the private sector, Thailand government’s external debt has ballooned by about 35% since January 2012 through the 3rd Q of 2013.

The other possible channel for excess credit growth and money creation has been to balloon a massive denial rally in Thailand’s stock market as measured by the SET (stockcharts.com) since the post New Year crash of 2014.

In sum, Thailand’s central bank intends to prevent a surge in NPLs from becoming a systemic risk by keeping interest rates low. The Thai central bank may also be desiring to keep the construction boom (or even the stock market boom) afloat in order to maintain the picture of positive statistical growth.

The question is how feasible and lasting will this be? Without productive growth, there will be lesser resources generated to pay for existing liabilities. Worst, zero bound rates will induce more borrowing, which should add to Thailand’s debt burden.

Thailand’s currency, the baht, vis-à-vis US dollar has recently been rallying and so as with her bonds whose yields have reached the lows of post-taper turbulence in June 2013. 

The rallying baht and sinking yields has given the impression of a relief in “inflation” pressures, thus justifying the trimming of official rates.

But my guess is that Bank of Thailand (BoT) may have partly used her foreign currency reserves to attain such picture of calm. The BoT’s forex reserves has shrank from July 2013 which adds to the earlier decline.

In short, the BoT applied financial band aids to what has been a debt cancer.

Nonetheless with even more borrowing for households to speculate, which will be also manifested in her elevated money supply figures, the pressures on the baht will resurface in the near future, and so will such be reflected on the inflation data as well as in her bonds via rising yields.

And Thai’s debt problem will be further exposed by higher bond yields in the developed economies or even by a slowdown or a meltdown in China.

By the way, New Zealand has been the first among developed nations central banks to raise interest rates.  

As one would note, like all the rest of her peers, the Thai central bank thinks that policies that promote and support debt will solve their nation's economic problems. The problem is these officials keep applying the same panacea without generating the desired results, so they keep on adding more. Either this or they are just kicking the proverbial can down the road.

Yet the problem with “kick the can” policies is that this only increase the imbalances in the system that magnifies the potential harm from a blowup. 

For central banks, one must provide more alcohol to solve the problem of alcoholism.

EM Crisis Over? Thailand Hit by a Bank Run

The emerging market turmoil is over eh?  

Well, one of Thailand’s state owned bank just experienced a bank run. Yes you read it right…state owned.

From the Wall Street Journal (bold mine)

Depositors have withdrawn nearly $1 billion from a bank linked to a foundering rice-subsidy program, the bank said Monday, in one of the first signs that Thailand's months-old political stalemate is starting to affect the economy.

Adding to the pressure on Prime Minister Yingluck Shinawatra, a government agency Monday forecast economic growth rates would slow in the months to come because of the unrest. The prime minister has faced street protests since November calling on her to resign.

Woravit Chailimpamontri, chief executive at Government Savings Bank, said that depositors withdrew 30 billion baht, or $930 million, over the past three days after the bank extended a 5 billion-baht loan to a financial cooperative involved in a state-subsidy program.

The cooperative, which buys rice from farmers at up to 50% above market prices, has been singled out by the antigovernment protesters as representative of the kind of damaging populist policies pursued by the prime minister to build rural support, which has translated into large parliamentary majorities.

As the withdrawals at Government Savings Bank worsened, Mr. Woravit said it wouldn't extend any further loans to the Bank for Agriculture and Agricultural Cooperatives, which manages the rice subsidy program.

In recent weeks, the Yingluck administration has struggled to secure loans from commercial banks to pay the rice farmers, who are demanding payment for grain they already handed over to the government.

This is a prime of example of the realism of UK Prime Minister’s popular quote “The problem with socialism is that eventually you run out of other people's money”. 

Thai’s government extended subsidies to farmers at the expense of the rest of the society in order to buy popular votes via state sponsored loans. However economic reality eventually exposed on the mirage of such free lunch policies. 

Now the foolishness and resource draining activities by the government has been seen by the financial institutions. So they withhold from further extending loans to Thai’s Government Savings Bank. In short, other financial institutions have become aware of the risks of potential financial losses. So depositors stampede out from the bank, while other banks withhold provision of financing.  The mass withdrawals in the face of unbacked or insufficient reserves now extrapolates to a classic bank run.

Naturally, the Thai central bank will step in to bail out the Government Savings Bank. But of course the question is how will the bailout be done? Loans in exchange for what? Another question: what will be the real effects of such bailout? Intensifying consumer price inflation? 

And there is also the issue of which banks or financial institutions have significant exposure in the government bank. Will there be a contagion? Or will Thailand’s central bank, the Bank of Thailand, like China’s PBOC, do a “whack a mole” approach of bailing out any delinquent debt burdened entities that surface? 

Remember, Thailand like any ASEAN has been a bubble economy, whom has largely depended on credit inflation that has bolstered asset prices to generate statistical growth.

Nevertheless it’s been a don’t worry be happy for Thai’s financial markets.

Yields of Thai’s 10 year sovereign has declined (bond rallied) even in the face of the 3 day mass bank withdrawal.

The Thai baht which has been bludgeoned since Abenomics-Taper seems to be having an oversold bounce.

And Thai stocks as benchmarked by the SET has been having a field day. Like the Philippines, they are in a denial rally mode.

But some segments of the credit markets haven’t shared the same enthusiasm as with the stock market punters and treasury bulls. 

Default risks as measured by the 5 year CDS has topped the 2013 Abenomics-Taper highs. Will this bank run up the ante?

Now some harsh reality for the mainstream throng afflicted by the Aldous Huxley syndrome who keeps chanting “forex reserves”, “forex reserves”, “forex reserves”!

Realize that Thai forex reserves from a high of US $189 billion has now declined to US 167 billion (top) (most likely used to defend against tanking baht)  whereas government external debt keeps advancing (bottom). External debt has reached $139 billion and continues to grow. Thus in the context of proportionality, external debt now comprises 83% of Thai’s forex reserves. That’s a very slim cushion.

But but but…now if we reckon Thai’s overall debt levels which has been at nearly 200% of GDP according to estimates from the World Bank, with Thai’s GDP at US$ 366 billion in 2012, this means that Thai’s debt should be way above $500 billion. This means that any contagion from a credit event would render forex reserves a puny shield which seems a "laughable" alibi based on attribute substitution fallacy--because the forex defense smoke screen is a 'fugasi'.

If you fail to notice, we seem to seeing INCREASING account of debt problems surfacing in Asia. These are signs that current conditions are hardly hunky dory. And equally these are signs that the current episode of debt problems have been most likely the icing on the cake. This serves as more evidence of the periphery to core dynamic of a typical credit bubble cycle. As Doug Noland of the Credit Bubble Bulletin nicely puts it “EM is the global “subprime.”

There is no such thing as free lunch. Excessive debt will have its day of reckoning, which seems sooner rather than later.

Of course, the worst part is that when (and not if) these imbalances come unglued, the reaction should be swift and dramatic. That’s why I see the 2014-2015 window as very fertile environment for a global black swan event. 

Caveat emptor.

Thailand's political nightmare exposes her financial fragilities

Following an escalation of political violence, Thailand’s government declared a 60 day emergency rule yesterday

The New York Times reports

The embattled government of Prime Minister Yingluck Shinawatra declared the imposition of emergency rule in Bangkok and surrounding areas on Tuesday, suggesting a more aggressive posture toward protesters who have occupied parts of the city during the past two months and are seeking to overthrow the government.

But officials said they had no plans to crack down on protesters, who have escalated their campaign over the past week by blocking government offices, taking over major intersections and staging daily marches across Bangkok. The emergency decree enacted Tuesday gives the government the power to invoke curfews, censor the news media, disperse gatherings and use military force to “secure order.”…

Protesters have been attacked by unknown assailants in recent days. Three grenade attacks left one person dead and dozens injured. The government and the protesters have blamed each other for those attacks.

The emergency decree, which is valid for 60 days, was passed under the same law that a different government used in 2010 to start a military crackdown that left dozens of people dead. Underlining the seesaw power struggle that has gripped Thailand for the better part of the past eight years, the man responsible for the crackdown four years ago, Suthep Thaugsuban, a former deputy prime minister, is now leading the antigovernment protests.

A video of the man who threw a grenade that wounded 28 protesters captured here

Yet it’s rather odd, if not contradictory, for the Thai government to impose an emergency rule but claim “they had no plans to crack down on protesters”.  So what’s the emergency rule for?

Anyway, the aggravation of political violence headed towards election day in February 2, has led to increasing anxiety in Thai’s credit markets.  Default probability from Thailand’s 5 year CDS spread surged to September highs.

But the angst over Thailand’s politics has had mixed responses on her financial markets so far. Such has been partly due to the recent rally in US Treasuries, expectations for the Bank of Thailand to cut rates and the People’s Bank of China’s recent liquidity injections.

As a side note: to the surprise of the consensus, the Bank of Thailand kept rates on hold. It is bizarre, if not absurd, for pundits to expect that manipulation of interest rates to function like a magic wand that would solve real world economic problems. The economy is a micro dynamic. For instance, we shouldn’t expect interest rates to solve Thai’s political impasse that affects investor sentiment. Investors will be concerned about the sanctity of property rights that may be affected political turmoil, rather than by low interest rates. The Bank of Thailand surprisingly cut interest rates last November, yet the political nightmare and slowing economic growth continues. [note: the last sentence is an add on]

Thailand’s stocks (via the SETI) have recovered most of the New Year’s day crash but the rally appears to be faltering again.

Yields of Thailand’s 10 year local currency bonds have likewise recovered but like the stock market, pressures appear to have re-emerged.

Importantly, the US dollar-Thai baht is at a 3 year in spite of the recent decline.

Foreign investors were reported to have pulled $4 billion from stocks and bonds since October 2013

It would be easy to dismiss the effect of politics on the financial markets, but as I have been pointing out, Thailand has a credit bubble

Loans to the private sector ballooned by more than 20% over the last 2 years that has fueled a property bubble.

The credit bubble has been manifested in her monetary aggregate M3 which has swelled over the same period.

Thailand’s external debt which inflated by about 75% from 2010 will likewise be under pressure as the baht continues to weaken.

This will further impact Thailand’s once vaunted foreign exchange reserve cover which appears to be rapidly dwindling.

As you can see, political instability will only magnify Thailand’s fragile financial and economic conditions.

As I pointed at the start of the year, there are many potential flashpoints for a Black Swan event to occur. ASEAN may be one of them or if not would be vulnerable to a contagion.

Things are turning out to be very interesting.

ASEAN Crisis Watch: Indonesian Bond Market Convulses, Rupiah and Stocks plummet, Thai’s Stock Market New Year Meltdown

I was in a shut down mode when Thailand’s stocks, as measured by the SET, met the new year or 2014 with a 5+% collapse.

The stock market crash had been in tandem with equally a crumbling currency, the Thai baht. 

The USD-Thai Baht has reached a 3 year high yesterday, with the gist of USD Thai baht spike in over just two months. The plummeting baht appears to be accelerating.

All these had mostly been attributed to outflows from political jitters

 

While politics serve as a visible ‘cause’, they are actually aggravating circumstances to Thailand’s hissing credit Bubble.

Thailand’s stunning New Year meltdown serves as a reminder of how fragile ASEAN markets has been.

On the other hand, since last year I have been posting on the growing risks from Indonesia’s sharply deteriorating financial conditions which I call as the Indonesian crisis watch (see here here and here)

Yesterday, Indonesia’s local currency government bond market collapsed, with 10 year yields soaring to a 2011 high.

The bond meltdown has been accompanied with the continued foundering of the USD-rupiah which has now reached a 5 year high.

Indonesian stocks as measured by the JCI likewise fell yesterday. 

In contrast to the SET, the JCI remains relatively resilient. Although the path of least resistance has been on a downside albeit at a moderate pace compared to her peers.

Finally yields of 10 year Philippine government LCY bonds spiked yesterday as the US Treasury counterpart has now drifted at the plus or minus 3% level. 

Has this been another "one off" event as the mainstream likes to portray? Or are these signs of the cracking of the convergence trade? 

The Philippine peso has been in chorus with her ASEAN counterparts as the USD-Php hits a 3 year high.

It should be interesting to see how rising domestic and foreign interest rates along with the steep fall in the Peso will affect the small but concentrated highly leveraged financial system.

Like China, ASEAN markets and economies serve as potential triggers for 2014 Black Swan event.

Ignore the above facts at your own peril.