S&P 500 and Global Equities: Behind The Best 71-Day Returns Since 1987; China’s Credit Rockets! Continued Ascent of US Primary Dealer Holdings of T-Bills

A delirious stock-exchange speculation such as the one that went crash in 1929 is a pyramid of that character. Its stones are avarice, mass-delusion and mania; its tokens are bits of printed paper representing fragments and fictions of title to things both real and unreal, including title to profits that have not yet been earned and never will be. All imponderable. An ephemeral, whirling, upside-down pyramid, doomed in its own velocity. Yet it devours credit in an uncontrollable manner, more and more to the very end; credit feeds its velocity—Garet Garett

S&P 500 and Global Equities: Behind The Best 71-Day Returns Since 1987; China’s Credit Rockets! Continued Ascent of US Primary Dealer Holdings of T-Bills

Figure1

This first chart shows that the S&P 500 has registered the fourth-best return in 71 days and the best return since 1987. (chart courtesy of Charlie Bilello)

But here’s the rub. Beneath the surface, of the top four best returns in 71-days, namely, 1975, 1930, 1987 and 1943, yearend returns were either strikingly single digit or stunningly negative.

Said differently, by the close of the year, the gains of the top four were completely or mostly reversed.

The possible reasons:

-1975 signified the tail end of 1973-1975 recession.

-1930 represented the onset of the Great Depression

-1987 saw the horrific Black Monday crash and

-1943 may have been the prelude to the post World War 2 the short recession of 1945.

Will the SPX follow the same path?

Figure 2

The next chart (also from Charlie Bilello) shows the intensifying euphoria that has engulfed global equity markets.

Forty-six of the forty-eight national ETFs including the Philippines have posted positive returns! The average returns have been an astounding 12%, the best start since 1987! (returns in USD)

1987 again!

Will global equity markets share the same fate of the SPX?

The third chart comes from Ed Yardeni’s Country Briefing: China

It shows how the Chinese government has panicked to have incited the unleashing a tsunami of credit at a scale never seen before!

Figure 3

The perspicacious Doug Noland with the nitty gritty:

China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 TN annualized). This was 55% above estimates and a full 80% ahead of March 2018. A big March placed Q1 growth of Aggregate Financing at $1.224 TN – surely the strongest three-month Credit expansion in history. First quarter growth in Aggregate Financing was 40% above that from Q1 2018. 

Over the past year, China's Aggregate Financing expanded $3.224 TN, the strongest y-o-y growth since December 2017. According to Bloomberg, the 10.7% growth rate (to $31.11 TN) for Aggregate Financing was the strongest since August 2018. The PBOC announced that Total Financial Institution (banks, brokers and insurance companies) assets ended 2018 at $43.8 TN.

March New (Financial Institution) Loans increased $254 billion, 35% above estimates. Growth for the month was 52% larger than the amount of loans extended in March 2018. For the first quarter, New Loans expanded a record $867 billion, about 20% ahead of Q1 2018, with six-month growth running 23% above the comparable year ago level. New Loans expanded 13.7% over the past year, the strongest y-o-y growth since June 2016. New Loans grew 28.2% over two years and 90% over five years. 

China’s consumer lending boom runs unabated. Consumer Loans expanded $133 billion during March, a 55% increase compared to March 2018 lending. This put six-month growth in Consumer Loans at $521 billion. Consumer Loans expanded 17.6% over the past year, 41% in two years, 76% in three years and 139% in five years. 

China’s M2 Money Supply expanded at an 8.6% pace during March, compared to estimates of 8.2% and up from February’s 8.0%. It was the strongest pace of M2 growth since February 2018’s 8.8%. 

South China Morning Post headline: “China Issues Record New Loans in the First Quarter of 2019 as Beijing Battles Slowing Economy Amid Trade War.” Faltering markets and slowing growth put China at a competitive disadvantage in last year’s U.S. trade negotiations. With the Shanghai Composite up 28% in early-2019 and economic growth seemingly stabilized, Chinese officials are in a stronger position to hammer out a deal. But at what cost to financial and economic stability?

Beijing has become the poster child for Stop and Go stimulus measures. China employed massive stimulus measures a decade ago to counteract the effects of the global crisis. Officials have employed various measures over the years to restrain Credit and speculative excess, while attempting to suppress inflating apartment and real estate Bubbles. Timid tightening measures were unsuccessful - and the Bubble rages on. When China’s currency and markets faltered in late-2015/early-2016, Beijing backed away from tightening measures and was again compelled to aggressively engage the accelerator. 

Credit boomed, “shadow banking” turned manic, China’s apartment Bubble gathered further momentum and the economy overheated. Aggregate Financing expanded $3.35 TN during 2017, followed by an at the time record month ($460bn) in January 2018. Beijing then finally moved decisively to rein in “shadow banking” and restrain Credit growth more generally. Credit growth slowed somewhat during 2018, as the clampdown on “shadow” lending hit small and medium-sized businesses. Bank lending accelerated later in the year, a boom notable for rapid growth in Consumer lending (largely financing apartment purchases). And, as noted above, Credit growth surged by a record amount during 2019’s first quarter. 

China now has the largest banking system in the world and by far the greatest Credit expansion. The Fed’s dovish U-turn – along with a more dovish global central bank community - get Credit for resuscitating global markets. Don’t, however, underestimate the impact of booming Chinese Credit on global financial markets. The emerging markets recovery, in particular, is an upshot of the Chinese Credit surge. Booming Credit is viewed as ensuring another year of at least 6.0% Chinese GDP expansion, growth that reverberates throughout EM and the global economy more generally.

So, has Beijing made the decision to embrace Credit and financial excess in the name of sustaining Chinese growth and global influence? No more Stop, only Go? Will they now look the other way from record lending, highly speculative markets and reenergized housing Bubbles? Has the priority shifted to a global financial and economic arms race against its increasingly antagonistic U.S. rival? 

Chinese officials surely recognize many of the risks associated with financial excess and asset Bubbles. I would not bet on the conclusion of Stop and Go. And don’t be surprised if Beijing begins the process of letting up on the accelerator, with perhaps more dramatic restraining efforts commencing after a trade deal is consummated. Has the PBOC already initiated the process?

April 12 – Bloomberg (Livia Yap): “The People’s Bank of China refrained from injecting cash into the financial system for a 17th consecutive day, the longest stretch this year. China’s overnight repurchase rate is on track for the biggest weekly advance in more than five years amid tight liquidity conditions.”

Figure 4

US primary dealer holdings of T-Bills and Floating Rate Notes have been spiraling upwards. Why? Have they been accumulating USTs for their account or on behalf of clients? Have these intensifying accumulation been about the growing scarcity of risk-free collateral?

Four different charts that are related (see Garet Garrett excerpt)

The year of the pig.

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

The Skyscraper Index offers an opportunity to look inside at the business cycle in action. Artificially low interest rates stimulate the demand for land, especially in central business districts. Higher land prices create an incentive to build taller buildings, and taller buildings require new technologies in building systems, such as air conditioning, plumbing, and elevators, as well as new building technologies such as lifting cranes and cement pumpers. Such processes permeate throughout the economy, not just skyscrapers. In this manner you see how central bank policy can have pervasive negative effects throughout the building as well as throughout the economy—Professor Mark Thornton

In this issue

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

-Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

-Emergent Divergences Exposes More Cracks on the Property Bubble!

-Expect GDP Week Volatility 

Phisix 7,240: Ne Fronti Crede: Magnified Volatility and Emergent Divergences Exposes More Cracks on the Property Bubble!

Trust not to appearances

Ne fronti crede “Trust not to appearances”—signifies a maxim attributed to the Roman poet Virgil (Publius Vergilius Maro)

Ne fronti crede can be applied to what’s going on in the Philippine financial markets.

For instance, the PSEi closed this week down by only .08%. While such largely insignificant number has accounted for a second straight week of seeming placid weekly performance for the headline index, it’s also the second week where internal volatility has been camouflaged by engineered attempts to cosmetically spruce up the Phisix.

Trust Not To Appearances: Magnified Volatility And Emergent Divergences Behind Tranquil Phisix

First and foremost, end session pumps and dumps again punctuated this week’s enhanced but ensconced volatility. Pumping contributed 18.79 points or +.26%, while dumping delivered 46.34 points or -.64% of the week’s outcome. In all, the PSEi 30 gyrated by .9% over the past week mostly from a two session pump and dump!

All actions have consequences. As incessantly explained here, while price fixing has been portrayed as a legitimate function out of technical reasons (specific volume required in defining “marking the close”), such convolutes the price coordination mechanism that works to foster imbalances. And market distortions have not been limited to the absurd mispricing of equity securities, but as prices, they project false signals into the economy.

Such false signals unduly and undeservingly nourish and feed on economic maladjustments—specifically the frenzied contest to seize market share through unbridled supply side expansion financed by credit.

Next, symptoms of divergences seem to have reemerged in this week’s trading session. 

 

  

The property sector, which astonishingly zoomed by 2.52% and partly helped by the service sector which was up 1.33%, essentially negated losses by industrials (-1.71%), finance (-1.27%) and holding (-.18%) sectors for the PSEi to close almost neutral.

The service sector’s rise was principally due to TEL’s +1.76. This emerged as losses of the lesser significant market caps GLO (-1.06%) and ICT (-1.66%) had been eclipsed by TEL’s gains

Of the PSEi 30 basket, 2.33 issues declined for every issue that rose. The skewness of the distribution of price changes can be seen in the upper right window.

An incredible THREE of the top 5 issues, which accounted for 40.09% of the PSEi’s market cap were up 2.5% and above. Or the average weekly return for the 40% of the PSEi’s market cap, or the top 5, was at 1.47%!!!

Meanwhile, since the top 15 of the PSEi basket accounted for 80.73% of the index market cap weighting, theaverage return for the top 15 collapsed to a NEGATIVE .29%. This means losses by most overrun gains of the top 5 based on the average.

Applied to the entire index, the average return dropped to a NEGATIVE .51%.

Essentially, because of the highly skewed market cap weighting system, SMPH, ALI and JGS neutralized the performance of the entire index!

That’s how the index can be or has been gamed or manipulated.

Nevertheless, the headline index, or its components, wanted to take profits, but invisible forces decided to repeal the laws of economics by virtue of selective or targeted asset pumping and price fixing!

Emergent Divergences Exposes More Cracks on the Property Bubble!

My initial impression to the panic bidding on property issues was to suspect some refreshing news in the industry. But seen from the overall performance of the sector, particularly from the 7 largest market cap, which comprised 95.64% of the property sector’s market cap (as of January 20), that’s hardly the perspective.

That’s because not only has the gains been limited to two of the biggest market weighted firms, in specific, SMPH and ALI, the other two much lesser PSEi market weighted property firms went into the opposite direction! Or, MEG and RLC suffered enormous losses -1.32% and -3.27% respectively!

Meanwhile, FLI was down -1.8% for the week, whereas DD and VLL were unchanged. In short, such vicious gains were restricted to only two of the biggest property firms!

Even more, divergent outcomes can be seen in the price trends of the components of the property index. The chart on the lower right reveals of the shocking disparity between record setting SMPH (blue) compared to the rest, all of which have been strenuously recovering from their December lows. Only DD has so far outperformed.

It remains to be seen whether momentum and leadership by SMPH will succeed, in the interim, to pull out her peers out of the morass. Or, if the underperformance of the industry will eventually weigh on SMPH.

Fascinatingly, last week I noted of the observation by Global Property Guide that high end residential property prices has been suffering from downside pressures: “In The Philippines, the average price of 3-bedroom condominium units in Makati CBD fell by 5.14% during the year to Q3 2016, in sharp contrast with y-o-y increases of 5.41% during the same period last year. Housing prices dropped 1.15% q-o-q during Q3 2016.” (Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2017

 

Data from the Bank for International Settlements has corroborated GPG’s findings.

3Q residential commercial nominal property prices (flats) in Makati plunged into negative territory (-2.99%) as shown in the upper left pane! BIS data here.

HIGH end user or consumer property prices have been in a sharp decline for the SIXTH consecutive quarter or from year end of 2015!

Paradoxically, the sharp fall has occurred even as the BSP launched a secret/silent Php 200 billion bond buying stimulus in the 1Q of 2016! In short, the BSP’s action has, so far, failed to reignite demand for end user properties.

Instead, it has been commercial land prices that have been energized by the BSP. Makati commercial land prices vaulted 24.78% in the 3Q 2016 (see upper right window)! In 2Q, the growth rate was 20.44%! That’s two quarters of 20% growth rate. BIS data here.

Makati commercial land prices troughed in the 3Q of 2015 and recovered (V-shaped) sharply coincidental when the BSP begun its stimulus in 4Q 2015 and greatly expanded this 1Q 2016.

Surging commercial land prices suggests that property developers and mall operators have been in a bidding frenzy to acquire properties for future inventories!

So while faltering prices suggest of relatively weaker demand to supply, property developers have engaged in a fierce competition to acquire land for future development! 

In short, such dynamics represents a splendid manifestation of the discoordination between demand and supply! The outcome of which will be to ramp up credit financed overcapacity!

Of course, all these have transpired as credit expansion continues to rocket!

The banking system’s loans to the property sector in the 3Q registered a blistering 19.16%! Though this has been lower than in the 1Q’s +23%, the pace of growth seems to be picking up anew (see lower left pane).

Yet the torrid pace of credit growth in the property sector has landed the Philippines in second place, after Mexico, in IMF’s 2Q “real credit growth over the past year” data for the world!

And here’s more. To reiterate, since falling prices means demand for high end properties has been overshadowed by supply, yet supply continues to roll unabated!

Proof?

The Philippines even captured the world ranking, fifth in terms of global skyscraper output for 2016 (lower right window)!  From Quartz.com: “In 2016 the world saw the completion of 128 skyscrapers, up from 114 in 2015, according to the US-based Council on Tall Buildings and Urban Habitat (it defines a skyscraper as being higher than 200 m, or 656 ft).” 

Such developments remind me of the “skyscraper curse”, see infographics from Visual Capitalist).

Skyscrapers can function as key symptoms of the business cycle in progress or “they are simply a very visible manifestation of the business cycle phenomenon brought about by artificially low interest rates.”* (Boyle, Engelhardt and Thornton 2016)

Additionally, like any malinvestments, they are caused by false price signals: “Skyscraper Curse would arise if the same psychological factors that lead to overvaluation in asset markets also lead to skyscraper construction”. Hence, skyscrapers can serve as a useful indicator of boom bust cycles. Or skyscrapers may symbolize “monument to the successes of the past and as a harbinger of the suffering that is to come.”

Interestingly, the deluge of supply of skyscrapers has simultaneously emerged in ASEAN majors, particularly Indonesia, Philippines, Malaysia, Singapore and Thailand.

*Elizabeth Boyle, Lucas Engelhardt, and Mark Thornton Is There Such a Thing As a Skyscraper Curse? The Quarterly Journal of Austrian Economics (2016)

 

As a final observation, even from the government’s own GDP data (3Q or first 9 nine months), the combined share of retail, real estate and construction to NGDP has been rapidly growing to account for nearly 40% (left window). 

The same industries accounted for 38.3% share of loans from the banking system as of November 2016. Real estate loans may be inaccurately reported due to the BSP’s regulatory caps.

Yet such is a clarion sign of mounting concentration risks!

The above excludes the banking share of NGDP and banking loans. Banks, after all, are the chief financiers of the present bubble!

This only reveals that such awesome price bidding frenzy on select property equity prices comes in the face of ballooning risks!

Expect GDP Week Volatility

By the way, the Philippine government is slated to announce 2016 GDP next week. GDP week has almost always been accompanied by pre-GDP volatility (mostly massive pumping see right window).

Since 2015, in 6 occasions the PSEi has been frantically pushed up 2-3 days prior to the announcement. If I am not mistaken, last week’s pump could be a precursor to the coming week.

Yet not all has been about pumping. There was a GDP week dump in 2015 when 2Q GDP was reported at 5.6% and 1H GDP at 5.3%. There was also a bizarre insouciance in 2Q 2016, even when GDP was reported at 7.0% 2Q and 6.9%1H! Could it be that there was no insider tip for the 2Q 2016???

So yes, expect GDP to serve as classical conditioning for the Pavlov dogs to wildly go on a pumping spree!