Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission

 

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today—Laurence J. Peter 

Wishing you an exciting 2026: record highs, easy money, and all the risks that come with it. 

In this issue: 

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission

I. The Echo Chamber of Optimism

II. Institutional Conflicts of Interest: Agency Problem and the Information Asymmetry

III. Global Euphoria vs. Local Fragility: A Market That Failed to Respond—Despite Every Attempt to Boost It

IV. Engineered Rallies and the BSP’s Easing Cycle Elixir

V. Mounting Concentration Risk and the ICTSI Distortion

VI. Foreign Selling, CMEPA, and the Gaming Bubble

VII. From Equities to Energy: Bailouts Without Calling Them Bailouts

VIII. A Lone Divergence: Mining and the War Economy

IX. The Philippine Treasury Market Confirms the Diagnosis

X. Conclusion: When Policy Loses Its Grip

XI. Epilogue: The Façade of January Effects 

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission 

Why the PSEi 30 underperformed despite rate cuts, engineered rallies, and unprecedented policy support 

I. The Echo Chamber of Optimism

Figure 1

Does the public even remember the barrage of starry-eyed headlines and sanguine projections that dominated discourse from late-2024 through 2025? (Figure 1) 

From Goldman Sachs’ overweight upgrade on Philippine equities (November 2024), to the relentless amplification of projected PSEi 30 returns by the mainstream echo chamber, to a business media outfit hosting a Pollyannish stock market outlook forum in February 2025, optimism was not merely expressed—it was drilled into the public consciousness. 

Strangely, at the forum, Warren Buffett’s aphorism—“be greedy when everybody is fearful”—was cited ironically at a time when virtually every expert was advocating optimism. Even “cautious optimism” emerged as the most defensive stance. 

All told, media and institutional narratives throughout 2025 projected rising equities anchored on a strengthening GDP—an assumption that would soon have the rug pulled out from under it.

Figure 2

In hindsight, the establishment’s posture resembled a classic denial phase in a deflating PSEi 30 bubble cycle. (Figure 2)

II. Institutional Conflicts of Interest: Agency Problem and the Information Asymmetry 

The fundamental problem lies in the structural conflicts of interest between financial institutions and the investing public. 

This dilemma reflects classic agency problem and asymmetric information. The objectives of buy- and sell-side institutions—fees, commissions, deal flow—diverge materially from those of retail investors seeking risk-adjusted returns. 

As a result, sales pitches camouflaged as institutional research or news are designed to attract savings/capital, not to interrogate risk–reward tradeoffs. The information disseminated to the public is therefore shrouded in adverse selection and biased framing. 

Despite serious unintended consequences from excessive interventions—easy money distortions, fiscal crowding-out, regulatory interference, capital controls, bailouts, and capital-market price manipulation—this savings-depleting dynamic receives scant acknowledgment. 

III. Global Euphoria vs. Local Fragility: A Market That Failed to Respond—Despite Every Attempt to Boost It 

There is also little recognition that the Philippine Stock Exchange has vastly underperformed, despite extraordinary efforts to support it.

Figure 3 

As global central banks embarked on a historic easing campaign and global equities posted a third consecutive year of double-digit gains, the PSEi 30 closed 2025 as the second-worst performer in Asia, ahead of only Thailand. (Figure 3, topmost pane) 

Of 19 national bourses tracked by Bloomberg, 16 ended the year higher, averaging a striking 19.22% return—led by South Korea, Pakistan, Sri Lanka, and Vietnam. The Philippines, alongside Bangladesh and Thailand, stood out as an underperforming outlier. (Figure 3, middle graph) 

This flagrant underperformance—despite substantial engineered pumps in Q4—laid bare the market’s internal fragilities. 

IV. Engineered Rallies and the BSP’s Easing Cycle Elixir 

In December, a series of price-distorting late-session “afternoon delight” and pre-closing “rescue pumps” lifted the PSEi 30 by 0.51% MoM. 

These were concentrated in banks and property stocks, echoing the mainstream narrative that rate cuts should disproportionately benefit them. (Figure 3, lowest table) 

Additional support came from ICTSI, following its powerful October–November advance. Although the rally peaked on December 12 before a mild pullback, ICT’s surge drove the services sector up 10.5% and lifted the headline index by 1.67% in Q4.

Figure 4

For context, the BSP’s first rate cut in August 2024 was initially sold as an elixir, propelling the PSEi 30 up by a remarkable 13.4% in Q3 2024. Yet a surprise weak Q3 2024 GDP print (+5.2%) triggered a sharp reversal: –10.23% in Q4 2024 and –5.33% in Q1 2025. After another significant setback in Q3 2025 (–6.46%), the index fell –4.9% in 2H 2025. (Figure 4, topmost window) 

Despite repeated interventions, the PSEi 30 closed 2025 down 7.29%. 

V. Mounting Concentration Risk and the ICTSI Distortion 

Since peaking in 2018, the PSEi 30 has recorded six negative return years out of the last eight—an unmistakable sign of a debt-trapped, late-cycle economy. (Figure 5, middle chart) 

The index’s internals underscore this bearish backdrop: 24 of 30 constituents ended 2025 in the red, averaging a –6.87% decline. (Figure 4, lowest image)

Figure 5

Yet again, ICTSI—the PSE’s largest market-cap stock—nearly single-handedly prevented a deeper collapse. Its 46.9% full-year gain pushed its free-float weight to a record 17.8% in mid-December, ending the year at 16.5%. (Figure 5, topmost diagram) 

Consequently, the combined free-float weight of the top 5 heavyweights to a record 53% but closed at 52.16% still proximate to an all-time high. (Figure 5, second to the highest visual) 

Adjusted for the peso’s 1.6% YoY depreciation to a record low, the PSEi 30 fell 8.78% in USD terms—its seventh year of decline since 2017. (Figure 5, second to the lowest image) 

The dollar index DXY fell by about 9.6% in 2025. 

VI. Foreign Selling, CMEPA, and the Gaming Bubble 

The broader PSE fared no better. Outside a handful of names, most issues declined and market internals remained weak. (Figure 5, lowest chart) 

While synchronized “national team” pumping supported headline levels, it was largely offset by persistent foreign selling—a dominant force since 2018.

Figure 6 

Foreign participation rose to 49.18% of gross volume in 2025, the highest since 2021. (Figure 6, topmost window) 

That said, under globalization and financialization, “foreign selling” does not necessarily imply foreign fund liquidation. Many elite-owned firms operate through offshore vehicles and could be part of the ‘foreign’ trading activities. 

In the meantime, gross and main board volume (MBV) rose 14.64% and 19.13% in 2025, but most of this activity peaked around the CMEPA rollout in July and slowed materially thereafter. Ironically, the capital-consumption effects of the law generated unintended consequences: asset bubbles, negative returns, and corroding liquidity. (Figure 6 middle image) 

For example, as the government cracked down on digital gambling, the PLUS gaming bubble accounted for a staggering 11.65% of main board volume in Q3 2025, revealing how speculative excess merely migrated into the PSE—absorbing retail savings in the process. 

In 2025, concentration activities intensified: the top 10 brokers averaged 63.44% of Q4 main board volume; the top 20 accounted for over 82% both in Q4 and full-year 2025 MBV. 

VII. From Equities to Energy: Bailouts Without Calling Them Bailouts 

Engineered rescue rallies are not cost-free. They amplify concentration risk, intensify late-cycle fragility, and expose deeper balance-sheet stress driven by debt-financed asset support and misallocation. 

This pattern extends beyond equities. 

Authorities initiated a soft bailout of the energy sector—first indirectly via the SMC–AEV–MER asset-transfer triangle, and later through Real Property Taxes (RPT) waivers favoring elite-owned IPPs. This was followed by another buy-in: Prime Infrastructure’s acquisition of a 60% stake in FGEN’s Batangas LNG project, alongside higher consumer charges via GEA-All layered on top of FIT-All. 

VIII. A Lone Divergence: Mining and the War Economy 

For the first time, the mining sector not only outperformed but diverged meaningfully from the PSEi and broader market. Its performance reflects exposure to global commodity dynamics—finance, geopolitics, and the war economy—rather than domestic demand. (Figure 6, lowest graph) 

While retracements are possible given overbought conditions, current signals suggest any correction may be cyclical rather than trend-reversing. 

IX. The Philippine Treasury Market Confirms the Diagnosis 

The warning signs extend to Philippine treasury markets.

Figure 7

By end-2025, the Philippine BVAL curve had clearly steepened relative to the flattish 2023–2024 profile, though it remained less extreme than the pandemic-era 2022 BSP rescue year. This shift points less to growth optimism and more to rising risk premia. (Figure 7, upper diagram) 

While short-dated T-bill yields have not fallen back to 2022 levels—despite policy rate cuts, aggressive RRR reductions exceeding pandemic-era easing, and the doubling of deposit insurance—long-term yields remain materially higher than in 2023–2024, signaling mounting market concern over fiscal conditions, debt supply, and credibility. 

The resulting mixed yield configuration, occurring alongside slowing GDP growth and persistently elevated bank lending rates, reflects not selective liquidity management but a failure of monetary transmission: BSP sought genuine easing, yet impaired bank balance sheets, malinvestment, and fiscal overhang have rendered markets far less malleable than policymakers expected. 

X. Conclusion: When Policy Loses Its Grip 

Taken together, the events of 2025 expose a Philippine financial system increasingly governed by intervention rather than price discovery—and increasingly constrained by balance-sheet fragility rather than cyclical weakness. 

Despite aggressive policy easing activities, engineered equity support, regulatory inducements, and explicit and implicit bailouts, markets failed to respond as expected. Instead, concentration deepened, liquidity thinned, and monetary transmission weakened. 

The underperformance of the PSEi 30 was not an anomaly but a symptom. Equity pumps masked deterioration; index ‘strength’ concealed internal decay. 

The peso weakened, bond yields re-priced fiscal risk, bank lending rates remained elevated, and savings were quietly consumed through speculation and policy distortion. What appeared as support increasingly functioned as stress transfer—from institutions to households, from balance sheets to prices, and from the present to the future. 

In this sense, 2025 was not merely a bad year for Philippine equities. It was a year in which markets signaled—clearly and repeatedly—that policy credibility, strained by diminishing returns and collapsing transmission/tightening effective liquidity, had become the binding constraint. 

Until balance-sheet repair, fiscal discipline, and genuine price discovery are restored, further intervention may sustain appearances—but not balance-sheet health or durable confidence. 

XI. Epilogue: The Façade of January Effects 

January has historically been a strong month for the PSE, often reflecting the so-called ‘January effect’—seasonal inflows driven by year-end cash balance surpluses, portfolio reallocations, and tactical positioning. 

Using the January 2018 peak as the reference point, the PSEi 30 has posted January gains in five of the past eight years (62.5%). Yet over that same post-2018 cycle, full-year returns have been negatives/deficits in six of those years (75%). The implication is clear: early-year strength has repeatedly failed to translate into durable annual performance. (Figure 7, lower chart) 

Even so, institutional cheerleading is likely to intensify. Seasonal rallies will be framed as confirmation of recovery, even as stimulus-driven activity continues to deepen debt-led imbalances and erode household savings. 

This is not to suggest that the PSEi 30 must necessarily close 2026 in negative territory. Rather, when façade substitutes for structure—when form is elevated over substance—market fragility increases. 

Under such conditions, for the general market, the probability of risk and loss continues to outweigh potential gains, regardless of how loudly institutions beat the drum for a bull market. 

Meanwhile, the risk of a meltdown looms. 

____

Select References 

Prudent Investor Newsletters, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 07, 2025 

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025 

Prudent Investor Newsletters, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025 

Prudent Investor Newsletters, The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t Substack, November 16, 2025 

Prudent Investor Newsletters, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025 

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 3, 2025 

Prudent Investor Newsletters, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025 

Prudent Investor Newsletters, The Ghost of BW Resources: The Bursting of the Philippine Gaming Stock Bubble Substack, July 6, 2025 

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

 

 

 

 

 

 

 

The Ghost of BW Resources: The Bursting of the Philippine Gaming Stock Bubble

An inflation tends to demoralize those who gain by it as well as those who lose by it. They become used to “unearned increment.” They want to hold on to their rela­tive gains. Those who have made money from speculation prefer to continue this way of making money to the former method of working for it…The trend in an inflation is toward less work and produc­tion, more speculation and gam­bling—Henry Hazlitt

In this issue: 

The Ghost of BW Resources: The Bursting of the Philippine Gaming Stock Bubble

I. Why Our Prescient Warning? Seven Disturbing Parallels

II. One: Gaming at the Core

III. Two: Distortions: Market Dominance and Turnover

IV. Three: Post-Crisis Timing

V. Four: Inflation and the Illusion of Prosperity

VI. Five: Prohibition, the Satirical Theater of Morality and Potential Political Controversies

VII. Six: The South Sea Parallel

VIII. Seven: Bull Traps and Secular Cycles

IX. Conclusion: Bubble Cycles: The Rhyming of History 

The Ghost of BW Resources: The Bursting of the Philippine Gaming Stock Bubble 

From BW Resources to PLUS and BLOOM: The Anatomy of a Gaming Stock Market Bubble Reborn, 7 disturbing parallels

I. Why Our Prescient Warning? Seven Disturbing Parallels 

At the peak of the euphoria surrounding the Philippine gambling bubble, I issued a subtle warning via tweet (x.com post): (Figure 1)

Figure 1

"Strange fascination with gaming bubbles. Has the Philippine financial community forgotten the BW Resources bubble, w/c soared in a bear market's 'bull-trap' phase & crashed in 1999, exposing unsustainability & 'manipulation?' Learn from history—recurring bubbles in market cycles"

Certainly, 2025 is not 1999. The economy, financial architecture, and technological landscape have evolved. The composition of the Phisix—now the PSEi 30—has changed. The circumstances behind the BW scandal were unique. 

Despite the passage of time and evolution of market instruments, a troubling déjà vu grips the Philippine financial landscape. The current gaming bubble echoes the BW Resources scandal with unsettling fidelity—both in structure and in consequence. 

Below are seven disturbing parallels that merit scrutiny, not dismissal. 

II. One: Gaming at the Core 

BW Resources began as an online bingo firm with a nationwide franchise. It was, fundamentally, a gaming enterprise. 

Today’s speculative darlings—Digiplus Interactive Corporation [PSE: PLUS] and Bloomberry Resorts Corporation [PSE: BLOOM]—are likewise gaming firms, riding a digital demand boom.

Figure 2

PLUS has enjoyed a windfall: retail sales surged 181% (YOY) year-on-year in 2024, while net income growth vaulted 207%. In Q1 2025, net income soared 110% to Php 4.2 billion. (Figure 2, topmost window) 

Riding on the coattails of PLUS, BLOOM—a relative newcomer to online gaming—launched its digital platform in April, coinciding with a sharp rally in its share price. The timing fueled market excitement, further amplifying speculative fervor toward the sector. 

III. Two: Distortions: Market Dominance and Turnover 

BW Resources once commanded a disproportionate share of market turnover. (Figure 2, middle graph) 

At its peak, its market cap eclipsed stalwarts like San Miguel and Ayala Corporation (Hamlin, 2000). 

In mid-June 2025, PLUS and BLOOM’s combined turnover reached over 20% of the mainboard. (Figure 2, lowest image) 

As the bubble began to deflate, their aggregate volume still accounted for 16.9% of June’s total. 

The collapse saw a further explosion in turnover: in June, PLUS plunged 48.15%, BLOOM fell 17.2%, and their combined turnover share spiked to 22.2%. PLUS alone captured 17.8% of weekly volume—33.3% on Friday alone! Astounding. 

The stunning magnitude of PLUS's volume share—a firm which used to be on the sidelines—suggests that this represents a corporate-specific boom-bust episode driven not by savings but by leverage. 

Remember that the banking system's credit portfolio stands at an all-time high, mostly powered by consumer credit. 

The spike in volume as PLUS shares collapsed may indicate ‘margin calls’ or the selling of other PSE-listed shares to bolster collateral backing leveraged PLUS positions. This could explain the PSEi 30's 1.13% drop last Friday. 

IV. Three: Post-Crisis Timing

Figure 3

BW Resources peaked and imploded in 1999, two years after the Asian Financial Crisis (AFC), when GDP contracted by 0.51% in 1998. (Figure 3, upper chart) 

The current bubble climaxed four years after the pandemic-induced recession of 2020, when GDP shrank by 9.6%. 

V. Four: Inflation and the Illusion of Prosperity 

The BW Scandal was a product of easy money-fueled inflation. 

Since peaking at 12.5% in 1994, the CPI headed downhill until the 9.4% spike in 1998, belatedly brought about by the AFC. The CPI dropped significantly to 6.1% in 1999 as the BW scandal unfolded. 

Similarly, CPI rose from 3.9% in 2021 to 6% in 2023, then plummeted to 3.2% in 2024. 

As the great economist Henry Hazlitt noted, 

"A vital function of the free market is to penalize inefficiency and misjudgment and to reward efficiency and good judgment. By distorting economic calculations and creating illusory profits, inflation will destroy this function. Because nearly everybody will seem to prosper, there will be all sorts of maladjustments and investments in the wrong lines. Honest work and sound production will tend to give way to speculation and gambling. There will be a deterioration in the quality of goods and services and in the real standard of living" (Hazlitt, 1969). [bold added] 

As Hazlitt warned, inflation distorts economic calculation, rewards speculation over production, and erodes real living standards. Despite disinflation, the purchasing power of the common tao continues to decline. 

Elevated self-rated poverty and hunger suggest a deteriorating standard of living. (Figure 3, middle and lowest panes) 

As a side note—and quite ironically—despite the falling rate of CPI, sentiment metrics such as self-rated poverty and hunger continue to trend upward, even in the face of recent declines. Consider this: the current environment operates under an easy money regime that has buoyed all-time highs in fiscal stimulus, near-record employment, unprecedented public debt, expanding bank credit, and systemic leverage. But what happens if this constellation of highs begins to unravel? 

Many turn to gambling not for leisure, but as a desperate attempt to bridge income gaps, service debt, and or as a coping mechanism—a form of psychological escapism from personal financial straits. 

In this prism, rising gaming revenues hardly represent economic progress, but rather a transfer from the vulnerable public to the house casino. 

VI. Five: Prohibition, the Satirical Theater of Morality and Potential Political Controversies 

The implosion of the BW Resources stock market bubble effectively opened a Pandora’s Box of political ramifications. It exposed systemic corruption, egregious stock market manipulation, and other conflicts of interest with connections reaching the highest echelons of power (Pascual and Lim, 2022). 

Following the contemporary political assault on Philippine Offshore Gaming Operators (POGO), political evangelists have opportunistically piggybacked on this sentiment, advocating for increasingly vocal and deeper prohibitions anchored on the supposed social sanctity or righteousness of a total ban on digital gambling. 

Yet the crackdown on POGOs appears entangled in deeper geopolitical currents—linked to Chinese interests under the previous administration and potentially reflecting the broader US–China hegemonic rivalry, made manifest through diverging diplomatic relations between alternating political regimes in the Philippines. 

Crucially, in a populist climate framed by social-democratic ideals, the magnitude of state intervention often becomes a currency of political capital—the larger the crackdown, the louder its resonance among voters. 

History repeats: the public once clamored to ban jueteng, which helped trigger People Power II and the ouster of President Joseph E. Estrada. Eventually, the state legalized it through STL under PCSO. 

Wikipedia notes: "One of the suggested reasons for legalization was to eliminate repeated corruption scandals... It has been compared to the tribulations in the United States regarding their prohibition of alcohol." 

Or rather, legalization signified the ‘nationalization’ of what was once a fragmented, decentralized, and implicitly local government (LGU) controlled shadow economy—effectively converting informal vice into formal state enterprise. 

In the same vein, one might ask: what became of the Philippine drug war, "Operation Tokhang"? 

Aside from the escalating calls for prohibition, will other political controversies emerge from this bubble bust? 

If history is a reliable compass, financial distortions often leave behind trails of corruption, regulatory compromise, and partisan leverage. The unraveling may reveal ties between speculative fervor and institutional patronage—suggesting that what began as financial exuberance could metastasize into yet another political saga. When markets deflate, the silence seldom lasts. 

Echoing the BW scandal, will malfeasance reemerge? As economic historian Charles Kindleberger once warned: "The propensity to swindle grows parallel with the propensity to speculate during a boom; the implosion of an asset price bubble always leads to the discovery of frauds and swindles" (Kindleberger & Aliber 2005) 

VII. Six: The South Sea Parallel

Figure 4 

While intense volume spikes amid a share collapse are associated with 'capitulation' or a theoretical ‘bottom,’ we harbor doubt that this is the case. 

From our humble perspective, whether a bounce occurs or not, the Philippine gaming bubble may have likely been pricked. 

PLUS’ chart, born of BSP’s easing cycle, evokes the South Sea Bubble of 1720—a spectacle of leverage, speculation, and political complicity. (Figure 4, upper and lower graphs) 

The South Sea Bubble was a major financial crisis that shook Britain in 1720, driven by wild speculation in the South Sea Company. The company had been granted a monopoly on trade with Spanish South America and took on a central role in managing the national debt by converting the King’s personal debt into the nation’s debt. Investors were drawn in by promises of immense profits. The company fueled the frenzy by allowing shareholders to borrow against their own South Sea stock as collateral, encouraging dangerous levels of leverage. The bubble was also part of a broader shift toward modern finance, including the creation of paper money and the rise of institutions like the Bank of England, which was established in 1694 to help manage government borrowing and stabilize the financial system. When confidence collapsed, share prices crashed, collateral became worthless, and forced liquidations deepened the ruin. The episode exposed corruption at the highest levels of government and business, leading to political fallout and reforms in financial regulation.  (Cwik, 2012) 

Isaac Newton, emblematic of intellectual prowess, became entangled in the bubble. After initially profiting, he reinvested heavily—and ultimately went broke. It’s often said the experience prompted him to declare: "I can calculate the motions of the heavenly bodies, but not the madness of people." (chart from Dr. Marc Faber) 

Ironically, Newton’s third law of motion—"for every action, there is an equal and opposite reaction"—finds metaphorical resonance here: South Sea shares returned to their starting point, as did the illusions of prosperity they once inspired. 

VIII. Seven: Bull Traps and Secular Cycles

Figure 5 

The BW scandal unfolded and climaxed in 1999 during a "bull trap" in a secular bear market. Once exposed, the market plunged until its 2002 trough—where the next bull cycle began. (Figure 5, upper chart) 

Today, the bear market persists. A “bull trap” rally is being engineered through easy money, fiscal stimulus, market interventions, and statistical optics—all framed within a carefully curated Overton Window, reminiscent of the ‘easing cycle’ powered "bull trap" of Q3 2024, as exhibited by prevailing media headlines. (links here, here and here) (Figure 5, lower diagram, Figure 6, media images)

Figure 6

IX. Conclusion: Bubble Cycles: The Rhyming of History 

The bursting of the Philippine gaming bubble represents more than a mere market correction—it embodies the cyclical nature of speculative excess that has plagued financial markets throughout history. 

The parallels between today's gaming bubble and the BW Resources scandal of 1999 are symptomatic of deeper structural patterns in market psychology, monetary policy and political misdeeds and imbroglios. 

As Mark Twain allegedly observed, "History doesn't repeat itself, but it often rhymes." Beneath the veneer of technological advancement and regulatory sophistication, the fundamental drivers of speculation—easy money, leverage, political interventions and human greed—remain unchanged. 

For those who understand the pattern, the current gaming bubble's burst may indeed signal the end of the artificial "bull trap" and the resumption of the secular bear market that never truly ended. 

In the end, the house always wins—not just in gaming, but in the grander casino of speculative markets where bubbles, once formed, must eventually burst. 

Yet, the silence after bubbles burst is rarely permanent. It’s often the prelude to scapegoating, reform, or reinvention—sometimes all three.  

___

References 

Henry Hazlitt, Comments on Inflation, May 1960 Fee.org 

Kevin Hamlin, Confidence Game, Institutional Investor, August 1, 2000 

CLARENCE PASCUAL AND JOSEPH LIM Corruption and Weak Markets: The BW Resources Stock Market Scam, March 2022 UP Center for Integrative and Development Studies, cids.up.edu. ph 

Henry Hazlitt, Man vs. The Welfare State p. 133 Arlington House, 1969, Mises.org 

Wikipedia, Jueteng 

Kindleberger, Charles P., and Robert Z. Aliber. Manias, Panics, and Crashes: A History of Financial Crises. 5th ed., Palgrave Macmillan, 2005. Chapter 9. 

Paul F. Cwik, The South Sea Bubble, April 3, 2012, Mises.org

  

Important Insights from the Philippine PSEi 30’s Melt-Up!

 

Investors believe in Keynesianism.  They believe that increased government spending will make us all richer.  This illusion is what is driving this stock market. Bubbles are based on illusions—Dr. Gary North 

In this issue

Important Insights from the Philippine PSEi 30’s Melt-Up!

I. Philippine PSEi 30 Returns Among the World’s Highest

II. Lessons from China’s Previous Easy Money Experiments

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience

IV. Retail Players Emerge

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion

Important Insights from the Philippine PSEi 30’s Melt-Up!

What does the outperformance of the PSEi 30 likely mean?

I. Philippine PSEi 30 Returns Among the World’s Highest

The Philippines' primary equity benchmark, the PSEi 30, stretched its weekly winning streak to five with this week’s 0.53% gain.

This week’s gains pushed its year-to-date returns to 15.8% (as of October 4th).

Figure 1

Accompanied by a massive rally in the Philippine peso, the Philippines' ETF, the EPHE, joins the ranks of global top equity ETFs in terms of US dollar returns (as of October 2nd). (Figure 1, upper window)

Year to date, the PSEi 30 ranked fourth in Asia, after Pakistan, Hong Kong, and Taiwan. (Figure 1, lower image) 

With 16 of the 19 regional benchmarks up by an average of 13.13% in local currency terms, we can generalize that 2024 has been a year of the bulls. Of course, we have two more months to go.

II. Lessons from China’s Previous Easy Money Experiments

Despite recent elevated rates, the current surge in global stocks signifies a product of easy money.

Due to the massive coordinated bailout package unleashed by Chinese authorities to rescue its struggling asset markets (stocks and real estate), Chinese and Hong Kong equities skyrocketed, rising by a stunning 23.4% and 31% over the last four weeks.

However, the returns of China’s equity markets have been capped due to a week-long holiday.

Figure 2

Though many international experts have suddenly become apostates to a perceived return of China’s bull market, I recently pointed out in a tweet that... (Figure 2)

"While previous episodes of government stimulus did bolster valuations, they turned out to be short-lived, highly volatile, and resulted in diminishing returns for #SSE levels. The 2016 & 2020 support had little impact on its bear market. Will history rhyme?"

Or whatever boom that took place before tended to morph into a bust. Even worse, the subsequent stimulus produced diminishing returns with the lower levels of the Shanghai Composite Index (SSE).

In other words, monetary inflation or stimulus from credit expansion must be applied at a much larger scale than before to magnify the effects of a boom. 

As the great Dean of Austrian economics, Murray Rothbard, once warned 

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. (Rothbard, 2015)

China’s experience has somewhat resonated with the Philippines.

Figure 3

It took a combination of historic rate cuts, massive reductions in reserve requirements, unprecedented relief measures, and direct injections by the BSP into the banking system via the expansion of its balance sheet to rescue the Philippine PSEi 30 in 2020. (Figure 3, upper image) 

The PSEi 30 peaked in 2022 along with the cresting of the BSP's assets. 

It is also not a coincidence that the PSEi has wilted in the face of the slow-motion erosion of the BSP’s balance sheet, which was eventually reversed in 2023. 

The BSP’s U-turn put a floor under the PSEi 30 and rebooted the current rally. 

One can probably thank Other Financial Institutions (OFCs) for representing part of the National Team supporting the PSEi 30. 

The BSP has been rebuilding its asset base, this time from external borrowings by the National Government and the banking system. 

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience 

Of course, the difference between the bull market of 2009-2013 and today is that the PSEi 30 run has barely been supported by volume and breadth. 

Main board volume remains substantially below the level reached at even lower PSEi 30 levels in 2022. (Figure 3, lower graph) 

Because of this obsession with pumping the index to portray a bull market, the "national team" has concentrated its aggressive stock-pumping activities on the top heavyweights. 

As a result, the market capitalization share of the top five companies reached 51.1% last October 4, following a record 51.92% last April.

Figure 4

Furthermore, because RRR cuts and BSP rate cuts were sold to the public as policies that would accomplish economic nirvana, the Financial/Banking Index roared, with year-to-date returns spiking 37.7% and its index soaring to a record high! (Figure 4, upper chart) 

Astoundingly, shares of China Bank [PSE:CBC] have spiraled in ways echoing Bitcoin, GameStop [NYSE:GME], and Nvidia [Nasdaq:NVDA]! (Figure 4, lower pane)

CBC posted 91.3% year-to-date returns, with much of that accomplished in the last four weeks!

Figure 5

If history tells us anything, bank share prices going berserk could mean anything other than economic or financial prosperity. The experiences of Lehman Brothers and Bear Stearns provide examples: their share prices sprinted to an all-time high before collapsing, heralding the Great Financial Crisis (2007-2008). (Figure 5, topmost chart)

To be clear, we aren’t suggesting that CBC and other record-setting bank shares, such as BPI, are a simulacrum of Lehman; rather, we are pointing to the distortive behavior of speculative derbies that may hide impending problems in the sector. 

Of course, foreign buying did provide support to the national team. For the first time since 2019, the PSE posted net inflows of Php 108 million in the first nine months of 2024. (Figure 5, middle graph)

Meanwhile, in the PSE, the cumulative market share of the PSEi 30’s best-performing ICT and the three PSEi 30 banks has reached 32.73%, which is closing in on August's record of 33.14%.  

IV. Retail Players Emerge 

However, signs indicate that the retail segment appears to be jumping on board the developing mania, which has been marketed as another version of the "return of the bull market." 

Though still negative, 2024’s nine-month breadth has had the best showing since 2017. (Figure 5, lowest image)

Figure 6

Furthermore, the declining share of the top 10 brokers relative to the MBV could be another contributing factor. It was 60.4% in the week of October 4th, down from a recent high of over 65%. (Figure 6 upper visual) 

Major brokers could utilize 'done-through' trades or outsource trades with partner brokers to conceal or dilute this number.

Despite the paucity of volume, the trading share of the top 20 most-traded issues has dropped to about 80% for the fourth consecutive week from the previous range of 84-86%. (Figure 6, lower diagram)

Figure 7

Since the low on June 21st, the returns of the top 10 heavyweights delivered the bulk of the gains for the PSEi 30. While 23 issues closed higher, 2 remained unchanged, and 5 declined. The average return of the top 5 was 26.84%, while the average return for the top 10 was 26.4% (Figure 7, topmost graph) 

Breadth was largely incongruent with this week’s 0.53% returns, 83% of which were attributable to Friday’s pre-closing pump. Although 18 of the composite PSEi 30 issues closed down, the upside volatility allowed for a positive weekly return of 0.21% (Figure 7, middle image) 

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion 

Finally, SMC share prices continue to move diametrically opposite to the sizzling hot PSEi 30. (Figure 7, lowest graph) 

What gives? Will SMC’s debt breach the Php 1.5 trillion barrier in Q3?   

Have SMC’s larger shareholders been pricing in developing liquidity concerns? If so, why are bank shares skyrocketing, when some of them are SMC’s biggest creditors? 

Bottom line: The levels reached by the PSEi 30 and its outsized returns attained over a few months barely support general market activities, which remain heavily concentrated on the actions of the national team and volatile foreign fund flows. 

Instead, the present melt-up represents an onrush of speculative fervor driven by the BSP’s stealth liquidity easing measures, even before their rate cut. Moreover, real economic activities hardly support this melt-up.

___

reference 

Murray N. Rothbard, Why the Recurring Economic Crises?, August 27, 2015, Mises.org