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

 

US Federal Reserve Powell’s 50 bps Rate Cut: A Case of Panic or Politics?

  

"Theorie des Geldes" did not become the playbook for policy makers. The 1920s were marked by the brave new era of the Federal Reserve system promoting inflationary credit expansion and with it permanent prosperity. The nerve of this Doubting-Thomas, perma-bear, crazy Kraut! Sadly, poor Ludwig was very nearly alone in warning of the collapse to come from this credit expansion. In mid-1929, he stubbornly turned down a lucrative job offer from the Viennese bank Kreditanstalt, much to the annoyance of his fiancée, proclaiming "A great crash is coming, and I don't want my name in any way connected with it."—Mark Spitznagel

US Federal Reserve Powell’s 50 bps Rate Cut: A Case of Panic or Politics?

Was Federal Reserve’s Jerome Powell’s 50-basis-point rate cut a data-driven economic response, or was it aimed at tilting the presidential election odds in favor of the Democrats?

The U.S. Federal Reserve began its rate-cutting cycle with a surprise 50-basis-point reduction on September 18, 2024.

Figure 1

Historically, or based on the Fed's interest rate cycle, economic recessions or financial panics have often followed the Fed's interest rate cuts, a pattern that has been consistent since the 1970s.

In the present episode, as US stocks have been rocketing to establish back-to-back milestone highs. However, this supposedly presage a "long-term bull market," rather than a temporary spike—anchored on the popular rationale for a forthcoming economic slowdown that would signify a "soft landing."

The spillover effects of the easy money regime have not been limited to the US but global in scale.

Figure 2

US officials could be sugarcoating the current economic conditions. From a labor perspective, unemployment rates inevitably rise after the rate-cutting cycle begins. (Figure 2, upper window)

According to Mises Institute's chief editor Ryan McMaken: 

if one looks closely, one will not find a case of the FOMC slashing the target interest rate by 50 basis points when the economy “is in great shape.” On the contrary, a 50 bps (or larger) cut to the target rate tends to come just a few months before recession and a rising unemployment rate. If one looks only at the unemployment rate in these cases, one could see how the economy might look decent even when the Fed starts a rate-cutting cycle. Over the last thirty years, 50-basis-point panic cuts come when the unemployment rate is barely up from recent lows. 

Uncannily, the last time the Fed initiated a series of rate cuts with a 50-basis point reduction was on September 18, 2007. 

Like today, as pointed out in a thread on x.com by analyst Sven Henrich, US stock markets raced to their all-time highs while the notion of a soft landing permeated the landscape. (Figure 2, lower tweet) 

However, a recession began in December 2007, just three months later. 

This recession was not officially recognized until well into 2008, even as the Fed denied it in February of that year.

Figure 3

The S&P 500 $SPX soared by 6% in about a month to reach a new zenith. Yet, one and a half years later, the SPX plummeted by 57%, hitting its trough in March 2009. (Figure 3, upper chart)

As a side note, mirroring trends in the U.S., the Philippine PSEi 30 rocketed by 17% in less than a month to an all-time high of 3,873.5 on October 8, 2007, before crashing by 56% just over a year later.

On the other hand, the Fed has opened the 2024 cycle with a "panic" 50-basis point rate cut even when financial conditions have been the easiest since at least September 2023, according to Goldman Sachs calculations. (Figure 3, lower graph)

This means the Fed has opened the liquidity spigot even while U.S. (and global) stocks are experiencing a record-breaking winning streak accompanied by unprecedented levels of debt!

The transmission mechanism has been expressed in different economic spheres.

Figure 4 

As Bank of America’s Savita Subramanian observed, “We believe the key difference between this easing cycle and past cycles is the profits trajectory. Historically, profits have almost always been decelerating as the Fed first cuts rates, but that’s not the case today” (Figure 4, upper chart)

Of course, loose monetary conditions tend to spill over not just into share prices but also through various economic channels, partly via profit expansion (wealth effect).

Furthermore, as Credit Bubble Bulletin’s analyst Doug Noland noted, Unrelenting growth in government debt, intermediated through “repos,” the money market fund complex, the Securities Broker/Dealers, and the Rest of World (ROW). Unprecedented speculative leverage that creates both demand for securities and liquidity for asset inflation and history’s greatest Bubble. A historic Bubble in government debt issuance that has fueled asset Bubbles and resulting massive inflation in perceived household wealth, along with ongoing elevated incomes and spending. (bold mine)

So why would the Fed cut rates when current monetary conditions are easy?

U.S. presidential contender Donald Trump believes that Powell’s rate cut was a "political move."

Last June, Mr. Trump stated that he would not reappoint Jerome Powell.

Putting pressure, days before the interest rate decision, three Democratic leaders urged the Fed to implement a 75-basis point decrease.

By boosting the markets and delaying an economic slowdown, this move could increase the odds of a Democratic victory for President Biden's anointed Kamala Harris.

Has Powell thrown his lot with the Harris-Walz ticket to secure his reappointment?

For a non-partisan observer, will Powell’s panic cut result in a "this time is different" "soft landing?"

Or, is it merely delaying an inevitable economic reckoning? 

In the end, the USD price of gold sprinted to an all-time high. (Figure 4, lowest tweet)

Is this milestone driven by a mounting #FOMO among emerging market central banks? Is it a safe-haven response to the escalating Israel-Palestine war, Israel-Hezbollah war, or a broader war theater in the Middle East? Is it also factoring in global central banks trapped in their easy money policies, which have accelerated speculative mania and intensified systemic leverage?

We are living in interesting times. 

 

What Surprise is in Store for the 2024 Year of the Wooden Dragon?

 

I cannot find a single convincing argument that tells me that astrologers won’t do better than economists…The problem is the arrogance of these economists, they’re making people rely on theories that have not worked, do not work, and are really dangerous—Nassim Nicholas Taleb

 

In this issue

What Surprise is in Store for the 2024 Year of the Wooden Dragon?

I. Year of the Dragon: Leap Years, US Presidential Elections, Culmination and Escalation of Global Conflicts

II. Year of the Dragon:  Eve of the Great Depression and the Year of the Dotcom Bubble Bust

III. Year of the Dragon’s Impact on the Philippines: GDP and CPI

IV. Year of the Dragon’s Impact on the Philippines: USD and the PSE

 

What Surprise is in Store for the 2024 Year of the Wooden Dragon?

Will the Wood Dragon roar in 2024?

 

From The Chinese Zodiac: The Year of the Wood Dragon 2024 is also known as Yang Wood on Dragon, or Jia Chen 甲辰 in Chinese. The fixed element of the Dragon (Chen) is Earth (Wu 戊), which represents stability, honesty and loyalty. The variable element of the Dragon in 2024 is Yang Wood, or Jia 甲, representing growth, creativity and flexibility. The Wood Dragon is the most creative and visionary of the dragons. They are optimistic, ambitious and adventurous. They like to explore new ideas and challenge themselves. They are also generous, compassionate and loyal to their friends. Therefore, the Year of the Dragon in 2024 is expected to be a time of visionary leaders, innovators and problem solvers. 2024 is also predicted to be a great year to start new projects, explore new opportunities and create value for yourself and others. (bold original)

 

I. Year of the Dragon: Leap Years, US Presidential Elections, Culmination and Escalation of Global Conflicts

 

Leap years are an outstanding feature of the Year of the Dragon. 

 

Further, they are associated with US presidential elections.  From 1952 to 2012, the distribution of Presidential victors had been even: 3 Republicans (Eisenhower 1952, Bush Sr. 1988, and Bush 2000) and 3 Democrats (Johnson 1964, Carter 1976 and Obama 2012).  But a Democrat, Lyndon Johnson, won in the last Wooden Dragon in 1964.  Will a Democrat President prevail this year?

 

We're no believers in astrology, but they occasionally provide propitious or serendipitous clues.  

 

For instance, we cited the possibility of an outbreak of war in 2022, which included a buildup of Russia-Ukraine tensions.    A month later, Russia launched its Special Military Operation against Ukraine, which remains ongoing.

 

The Year of the Dragon highlights both the end and escalation of conflicts.  The Treaty of Taipei, signed and ratified in 1952, ended the Second Sino-Japanese War.  The Soviet Union also withdrew from Afghanistan in 1988.

 

World War 2, which began in 1939, escalated in 1940 with the widening of the theater of war, which included the Battle of France, Netherlands, Belgium, and others.

 

In 1964, newly elected President Lyndon Johnson escalated U.S. involvement in the Vietnam War following the Gulf of Tonkin incident.

 

Also, the US military causalities in the fateful Afghan War reached a milestone of 2,000 in September 2012 and concluded in 2021 with a Taliban victory.

 

Applying to current events, could the Russia-Ukraine War culminate this year of the Dragon...with a Russian victory?

 

Will the Israel-Palestine War expand into a regional, if not a global war?   The US and its allies have started to strike at Iranian-supported targets in Yemen, Syria, and Iraq even before the year of the Dragon.

 

The former US Presidential advisor, Ms. Pippa Malmgren, recently wrote that World War III is already here but unfolding in an unconventional process. (bold added)

 

People strangely assumed that WWIII would have to look and feel like WWII. They could not make allowances for the fact that technology had evolved and the domains of warfare have changed. As the Pentagon said last week, space is now the most important warfighting domain, and “space-based missions are essential to the U.S. way of war.” The war in Ukraine and the attacks from and in Gaza are only possible because of satellites. But, the media needs visuals and a storyline to explain conflict. Ukraine and Gaza are easy for the media because they fulfill the old requirements. There are dead humans, and there are shocking photo ops. The old rule still applies, “if it bleeds, it leads.” These events reinforced the idea of what a war looks like. It provided clear symbols of war, including tanks, troops, and bombings. Both are also land wars, which makes them easy to report on. You can send a journalist there. However, the actual war we are in is vastly larger and more serious, but it is in places the public can’t see and where there are no journalists – space, above and below the open oceans, in the realm of technology and cyberwar. The actual war between the superpowers and their proxies has been, until now, invisible. It has had no overarching framework in the media that a regular person can comprehend. So, the sudden warnings from a range of senior NATO Commanders that the public must be ready for war matter because the gap between the invisible war, and the visible war is finally closing. Spectators can start to see the invisible war now. (Malmgren, 2023)

 

Let us see.

 

February 2022: Russian-Ukraine War

October 2023: Israel-Palestine War

 

If the year of the Dragon spotlights escalation, will a third "major" front open in 2024?  Where? The Middle East? Central Asia? East Asia? South Asia? Southeast Asia? The Arctic region? Europe? South America?

 

We carry over the same conclusion as last year.

 

Today, there are barely any signs that primary participants in the "hegemonic war" will sue for peace. 

 

The lack of interest in negotiations by opposing parties, the sustained shipment of arms, the continued provocations and counter provocations, the widening coverage of the war to include economic and trade protectionism, and the weaponization of finance (US dollar) and commodities, and intensifying political propaganda—all point to mounting risks of escalation (nuclear exchange). 

 

While trade protectionism has been on the rise, the war aggravated it.

 

Further, with the global economy skating on thin ice, wars serve as a convenient scapegoat to extend or expand the political tenures of the leaders. 

 

Even worse, with expanding vested interests of the politically influential "triumvirate" sectors, perhaps the backbone of the deep state—the military-industrial complex, oil and energy, and finance industries—benefiting immensely from the "proxy" conflict, amicable settlement becomes less of an option for their political leaders.

 

The surprising path that may end the war this year is when one party succeeds in subjugating the other.  (Prudent Investor, 2023)

 

Will the outcome of the US elections alter their incumbent foreign policy framework?

II. Year of the Dragon:  Eve of the Great Depression and the Year of the Dotcom Bubble Bust

 

It is not just about geopolitics.  The Year of Dragon played a pivotal role in ushering in economic eras.

 

1928 (Year of the Dragon) represented the climax, the inflection point, or the eve of the Great Depression of 1929. 

 

2000 also saw the implosion of the Dotcom bubble.

Figure 1

Today, while global debt spirals into unprecedented heights, the leveraged speculative asset bubbles have intensified.  (Figure 1, upper chart)

 

For the first time, global asset bubbles have conjointly been inflating spurring mania in AI, FANG, and meme stocks, cryptos, and several national equity benchmarks have morphed into the "everything bubble," anchored on hopes of support from credit easing policies by central banks.  (Figure 2, lower graph)

 

These are symptoms of the worsening monetary disorder.

 

So, if history should rhyme, and if the zeitgeist of this Chinese horoscope prevails, the Year of the Dragon could showcase either an implosion of this massively inflating bubble or see its culmination.

 

III. Year of the Dragon’s Impact on the Philippines: GDP and CPI

 

How did the Philippines do under the previous Year of the Dragon?

 

Nota Bene:  Because of the uniqueness of different periods, past performance does not guarantee future results.

Figure 2

In the Year of the Dragon, headline GDP fluctuated from a low of 3.4% in 1964—the year of the Wooden Dragon as today—to a high of 8.8% in 1976.  The average GDP in the last 6 Dragon years was 6.04%. (Figure 2, upper chart)

 

The CPI helped shape the GDP.   The dragon years captured the upside trend of the CPI cycle, which culminated with 13.9% in 1988, and equally the downside. (Figure 2, middle and lowest diagrams)

 

In the Wooden Dragon of 1964, the CPI was 7.3%.  The average CPI of the last five dragon years was 8.06%.

 

IV. Year of the Dragon’s Impact on the Philippines: USD and the PSE

Figure 3

In the last four years of the dragon, the USD-Php increased in two and decreased in the other two.  But because of the outsized 24% return of the end-of-the-year (BSP) quote in 2000, the average USD-Php payoff was 4.9%.

Figure 4

 

Domestic stock market returns have been volatile during the Year of the Dragon. 

 

Caught with the bursting dotcom bubble, the PSEi 30 cratered by 30.3% in 2000 but soared by 21% in 1976 (pre-Presidential Referendum 1977) and 33% in 2012 (post-Great Recession and 2010 Philippine elections).   Thus, the average 5-year return was 7%.  Nonetheless, the PSEi 30 rose in four of the last five dragon years.

 

But when adjusted for inflation, the average 5-year "real" return was a deficit of 1.1% from the sharp plunge in "real" returns in 2000.

 

Despite a lower than the government target GDP in 2023, the PSEi 30 raced to a 6.2% return in the first six weeks of 2024 or on the eve of the Year of the Dragon. 

 

Will global and domestic financial conditions remain favorable to the bulls?

 

Or will the "problem-solving" Dragon help inflate local and international asset bubbles to its climax?

 

 

____

References

 

Pippa Malmgren, WWIII: An Update for Taylor Swifties and Other "Mere Spectators”, Dr. Pippa’s Pen & Podcast, February 4, 2024

 

Prudent Investor Newsletter, What Surprise is in Store for the 2022 Year of the Water Tiger? January 23, 2022