Showing posts with label competitive devaluation. Show all posts
Showing posts with label competitive devaluation. Show all posts

Sunday, August 16, 2015

Phisix 7,400: Deteriorating Headlines and Market Internals, China Devalued In Response To Deflating Bubbles

Devaluation of a country’s currency has now become a regular means of restricting imports and expropriating foreign capital. It is one of the methods of economic nationalism. Few people now wish stable foreign exchange rates for their own countries. Their own country, as they see it, is fighting the trade barriers of other nations and the progressive devaluation of other nations’ currency systems. Why should they venture to demolish their own trade walls? Ludwig von Mises

In this issue

Phisix 7,400: Deteriorating Headlines and Market Internals, China Devalued In Response To Deflating Bubbles

-China’s Devaluation: Response to Hissing Bubbles and Hardly About a Currency War
-The Implications of China and Asia’s Devaluations
-China Devaluation: The BSP Response
-Asian Devaluation: The Impact to Carry Trades and the Export of Debt Deflation
-Phisix 7,400: Deteriorating Headlines and Market Internals
-Told You So: Miseries of Philippine Casinos Compounds!

Phisix 7,400: Deteriorating Headlines and Market Internals, China Devalued In Response To Deflating Bubbles

The Chinese government startled the world with about a 3% devaluation conducted in three days this week.

It’s really not a surprise for me.

Two weeks ago I warned[1],
China’s remimbi has been static because the Chinese government has been using its forex reserve to support the currency, as well as, to counterbalance what has been a swelling account of capital outflows (euphemism for capital flight)…

So the Chinese government has been fighting domestic financial-economic battles on multiple fronts: the stock market, the property market, capital flight and the yuan.

Up to what extent can the Chinese government maintain the façade of normality? Up to what extent before the unravelling?
There is another self-made demon the Chinese government has been waging war against, which I omitted to mention. It is industrial excess capacity.

China’s Devaluation: Response to Hissing Bubbles and Hardly About a Currency War

The media, particularly western media has attributed the actions by the Chinese government as the instigation of ‘currency war’. (When the news broke out because of the lack of info I fell for this.)

A currency war means competitive devaluations or the race to debase currencies by several nations in order to cheapen them. The goal, for such actions, is to grab foreign currency revenues through seizing export market share. It is a fallacious mercantilist-protectionist concept that sees trade as a sole function of “cheapness”. Such deceptive idea comes with the exclusion of other human aspects for the engagement of trade, particularly subjective values and preferences expressed in terms of quality, sentiment, social signaling, aesthetics, culture, as factors of production or etc....

In reality, such devaluations has been designed to protect certain sectors (particularly exporters or foreign exchange earners) through the conduct of political subsidies via monetary or credit expansion. Such has been commonly complimented by regulatory trade barriers.

In short, devaluations represent a wealth transfer or politically based resource redistribution mechanism that comes at the expense of the average citizenry. 



This CNY-USD chart from Yahoo Finance shows us why the Chinese government resorted to last week’s actions. 

Since 2014, it’s been the third time for the yuan (CNY) to weaken. The difference with the predecessors has been in the method and degree of depreciation. In January and subsequently in November of last year, the yuan declined through a series of relatively more market based actions.

This all changed when Chinese government tightened its ‘soft peg’[2] last March. Pls note of the flat line prior to last week’s actions.

Apparently the Chinese government did not anticipate the strengthening of the USD, especially against Asian currencies. The CNY-USD soft peg meant that as the USD rose, the yuan ascended or firmed along with the USD. This also means that the CNY climbed relative to her trading partners. The USD dollar and the CNY’s rise may perhaps been partly seen by Chinese authorities as increasing signs of disequilibrium, especially in the context of her struggling economy.

This perhaps might have partially paved way for last week’s significant 3% depreciation. The possible intention has been for the market to reprice the yuan to reflect on the market levels (new equilibrium)

As a side note, the yuan has depreciated by 5.6% from January 2014 through last week. This means last week’s depreciation accounted for 51% share of the total since January 2014.

But this perspective looks rather simplistic. That’s because the Chinese government KNEW beforehand that the markets would reprice the currency lower or through downside adjustments. Said differently, the Chinese government recognized of the extant downside pressures on her currency.

Why so?

Here I propound a much more important factor: China’s intensifying bursting bubble.

During the initial phase of depreciation in the 1Q of 2014, I warned that China’s hissing bubbles could have incited capital flight[3]. Then it was popularly rationalized by media to many irrelevant factors including to “shake out currency speculators”, to “liberalize exchange rate”, as well as the entrenched media template “to promote exports”:
What they or the consensus seem to be missing or ignoring is that these could be incipient signs of capital flight. This may even be capital flight by those in power. The PBoC could be trying to deflect on the issue by putting up strawmen.
Earlier, I even suspected that US dollars from sales of US treasury papers and or from her record foreign reserves would be used to fund or finance such outflows: “But where it gets interesting is, could it be that US dollars being supplied to the Chinese financial markets have been used to fund outflows?[4]”

One year and five months after, I can now say BINGO!


The reason for the depreciation/devaluation of the yuan has been mainly due to capital flight mostly in response to intensifying signs of financial instability from China’s popping bubbles. 

The capital flight can be seen in JP Morgan’s capital outflow chart (left window) and presently in the massive decline of record forex reserves (right)

As Dr Ed Yardeni aptly noted[5]: (bold mine) The underlying mess in China may be best reflected in the country’s rapidly rising capital outflows. Over the 12 months through July, the trade surplus totaled $541 billion, a tad below June’s record high. Over the same period, China’s nongold international reserves fell by a record $318 billion. This implies record capital outflows totaling $859 billion over the past 12 months through July.

To chronicle on the yuan’s latest saga, let us go back to the first CNY-USD chart.

The first depreciation occurred during the 1Q 2014 when a product “Credit Equals Gold No.1” of one of the biggest “shadow banking” institution, China Credit Trust, almost defaulted.

The succeeding depreciation again was popularly attributed to the shake out of the one way ‘rising yuan’ trade.

Then in March 2014, China experienced the first onshore bond market default via Shanghai Chaori Solar Energy Science & Technology Co which failed to make full interest payments on its bonds.

As the yuan bottomed and mounted a rally, several billionaires went on air to announce selling of their Chinese assets. These included Asia’s richest Li Ka Shing and property tycoon Song Weiping of Greentown China Holdings.

Another magnate Pan Shiyi co-founder and chairman of Soho China Ltd. even analogized China’s economic conditions as the “Titanic Moment” with reference to the doomed “unsinkable” British ocean passenger liner that claimed 1,500 lives and which was fictionalized into a best-selling movie.

The pre-announcement activities by these elites could have most likely been part of the initial outflow pressures that plagued the yuan.

The next phase of the weakening of the yuan coincided with the bankruptcy of Haixin Iron & Steel Group in November 2014.

The falling yuan again was mechanically imputed to as stimulus in the face of slowing growth and broadening disinflation

Then the tightening of the US dollar peg came about last March.

Three months after, the stock market crisis emerged. The Chinese government threw the entire kitchen to save the stock market.

As part of the measures to stabilize the stock market, the Chinese government imposed capital controls on sellers. Another, foreign investors became a convenient scapegoat to the crash. It has not just been about blaming, the Chinese government launched a crackdown against ‘malicious short sellers’ which included foreigners. For instance, the Chinese subsidiary of US hedge fund Citadel LLC, Citadel Securities’ account has been frozen.

And in response to the June selloff, foreigners sold equity “shares at a record pace”. If the selling had been accompanied by conversion back to USD and repatriated, then this should add to the current trend of outflows. Yet more US dollars would be required to fund those outflows.

And given the faltering global trade, US dollars have become a lot less of accessible to the Chinese economy.


Here is the Bank for International Settlements on the Chinese economy’s 1Q US dollar loans[6]: (bold mine) During the first quarter of 2015, cross-border lending to emerging Asia fell by $53 billion, slowing its annual growth rate to almost zero from its most recent peak of 33% in Q4 2013. This decline was more than accounted for by a $56 billion fall in cross-border claims on China, which brought down their annual growth rate to zero. The latest contraction in lending to China, which was driven by a $64 billion decline in cross-border claims on banks, took the outstanding stock of claims on the country to $963 billion at end-March 2015.

So China’s access to international credit has been drying up!

Moreover, the Chinese central bank backed the Chinese government’s funding of $483 billion to prop up the stock market, plus another potential $322 billion. This translates to a huge credit-money supply expansion.

A big surge in July’s credit growth in the Chinese banking system has been due to loans extended to institutions that took part in the stock market stabilization program. The unintended consequence of the Chinese government’s stock market rescue through credit expansion has been to emaciate the yuan!

To summarize: Defending the US dollar soft peg required access to US dollars. Unfortunately, such window has been closing for the Chinese economy. Moreover, outflows and or capital flight have been compounding on the supply conditions of an already scarce US dollar. Finally, domestic credit expansion to save the stock markets translates to relatively more money supply vis-a- vis the US dollar (whether the Fed tightens or keeps policies at current levels). This implies supply side influences on the yuan’s weakness.

Hence, inflationism PLUS the scarcity of US dollar supply reveals why the US CNY soft peg cannot be sustained. Acting like a relief valve, China’s central bank, the PBOC, simply relented on the building pressures on the peg. The PBoC responded by allowing the markets to partially revalue the yuan. Hence the devaluation!

This means that the Chinese government’s actions have hardly been about the currency war, but about defending the unsustainable—the USD-CNY ‘soft peg’ in the face of a deflating bubble.

Also this implies that there has barely been a pre-emptive ‘engineering’ of the yuan’s decline, a view held by many (even as far back in 1Q 2014). Rather, the Chinese government acted IN RESPONSE to the ongoing deteriorating conditions. It is a reaction an unfolding series of actions at the marketplace.

The problem is that the Chinese government has been waging economic and financial war in too many fronts: property, stock market, industry, capital outflows or capital flight and the yuan. Yet Chinese government’s insolent comport seems like the adulterated version of King Canute: the belief that politics is superior to nature or to economic laws. Yet the obverse side of such insolence must be desperation.

Also last week’s depreciation or devaluation could now be seen as a nasty side effect of China’s stock market rescue. Said differently, the Chinese government focused on saving the stock market either without knowledge of the malevolent consequences of credit expansion on the yuan, or that the government just took on the gambit to save face in the hope to reverse the underlying sentiment that has driven BOTH the stock market crash and capital flight.

This also means that for as long China’s bubbles deflates, the yuan will fundamentally weaken as capital will look for safehaven elsewhere, away from an imploding bubble economy.

Also, the intensity of China’s bubble deflation will most likely reflect on the scale of yuan’s decline.

As for the trade issue, this would signify the subsidiary effects.

The Implications of China and Asia’s Devaluations

The paradox is that ‘safehaven elsewhere’ have also been manifestations of bubbles…but to a lesser degree than China’s predicament.

Even in the Philippines it’s been popularly held that weak currency equals G-R-O-W-T-H. But why then the violent response on China’s repricing of the soft peg?

What’s the problem then with the current actions by the Chinese government?

Let me enumerate.

Well, it’s a sign that the Chinese government has been losing control over her current financial-economic conditions.

It’s also a sign that her bursting bubbles has been seeping through the various pores in China’s system.


It is also a further sign that the global dollar liquidity has been shrinking, thus reinforces the strengthening of the US dollar as safehaven dynamic. 

And because it has been a “US Dollar” problem, hence, it is a $963 billion US dollar based debt problem for China (see BIS quote above). The good news has been that China’s dollar based credit has been down from $1.1 trillion to $963 billion as of 1H 2015. But the $963 billion comes in the face of the US dollar exhibiting more signs of relative scarcity.

And China’s US dollar based problem extends to the outstanding US dollar credit worth a staggering $9 trillion (!) to non-bank borrowers outside the United States provided for by banks and bond investors, according to the Bank for International Settlements.

So while it may be true that the bulk of “offshore dollar credit is mostly found in economies where it represents a single-digit percentage of credit” with China as example, “Other larger emerging market economies, like Brazil, India and Korea, have rates around 10%. Dollar credit reaches a fifth to a third in places with closer ties to the US like Mexico and the Philippines and high fractions in Bolivia, Peru and Cambodia.”[7]

So China’s US dollar problem has equally been an emerging market and Asia US dollar problem!


Just look at how the US dollar vis-à-vis Asian currencies responded or coincided with the yuan’s devaluation. Except for the Thai baht, the rest of Asia got trounced.

Yet the run on Malaysia’s ringgit has been spectacularly relentless! The ringgit was routed by a ghastly 3.92% this week! Year to date, the ringgit has collapsed by about a shocking 16.7% and by about 28% year on year!

As I have been repeatedly pounding here, since currencies are prices or exchange ratios, they have economic ramifications. It’s not just about the weakness or depreciations. Importantly, it is about the degree or scale of price volatility. The intensifying currency volatility in Asia would translate to massive dislocations. It will disrupt economic calculation and incite economic discoordination that should have profound effects on economic conditions and magnify external, as well as internal, debt woes.

Yet just how much more can the Malaysian financial system absorb of the continued thrashing of her currency, the ringgit, before her financial system snaps or breaks? This question applies to Indonesia too.



Asia’s stock markets have been exhibiting increased strains from their wilting currencies. Indonesia, Malaysian and Taiwan’s stocks have now been flirting with the bear market. Thailand’s stocks have now drifted lower than the level where it experienced a crash last December.

The damage from the current severe downdrafts on Asian currencies will be shown in future data. That’s what stocks in Asia has been telling us.

That’s with the exception of the Philippines where headline index continues to be cosmetically embellished by manipulations. Ironically, this also applies to China, where her Frankenstein stock markets have relied on direct government manipulations.

And if the momentum of tanking Asian currencies will be sustained, then the economic adjustments will likely swing from deceleration to a standstill or to a downright collapse. This will occur if credit flows will sharply subside...if not, suffer from an outright seizure.

China Devaluation: The BSP Response

And how has central banks reacted?

Vietnam’s central bank gave the currency war crowd a fodder by mimicking China’s PBoC’s approach of widening the dong’s trading band to allow for the depreciation of her currency. The USD-VND rose by about 1.3% this week.

To me, it was a partial delight for the Philippine Bangko Sentral ng Pilipinas (BSP) to pushback on popular demands to further ease (by cutting reserve requirements).

The BSP maintained current rates this week because of an expected pickup in consumer inflation.

If the BSP obliged with the establishment’s desires, then this would have amplified the losses of the peso.

However, as usual, the BSP didn’t go further enough to dismantle the financial repression (negative real rates) stimulus in favor of the government and of the elites.

Again the BSP alludes to inflation risk as a STRICTLY supply side phenomenon[8]: “upside risks coming from pending petitions for power rate adjustments and the impact of stronger-than-expected El Niño dry weather conditions on food prices and utility rates. On the other hand, modest rise in food and commodity prices, and slower global economic activity could pose downside risks to inflation.”

The BSP has been caught in logical confusion. They associate upside inflation risk on “El Niño dry weather conditions on food prices”, while at the same contradicting this by saying “with modest rise in food and commodity prices…could pose downside risks to inflation”.

Yet if they are expecting higher inflation then why not raise rates to preempt it?

Obviously, the BSP doesn’t know the future. So they go on public saying contradictory statements, in the hope the public remains dense to their muddling.

It’s a bait and switch intended to hedge the BSP’s position.

Apparently, too the BSP has been hooked into maintaining current policies for them to stay paralyzed.

Last week I wrote[9]:
And the irony too is that the BSP looks at CPI as STRICTLY a supply side phenomenon. But when they imposed on financial repression policy of negative real rates as economic subsidy in 2009, they see this in terms of boosting aggregate demand through monetary easing. So how has aggregate demand through policy easing been affecting CPI? They never explain. Instead they engage in equivocation or they weasel or fudge.
Well the following article validates and confirms my position.

From the Inquirer (bold mine)[10]: Guinigundo said below-target inflation was not a concern for the central bank, noting that the decline would be caused by supply-side factors that the BSP has no power over. Policies set by the central bank affect demand conditions in the economy.

Uh uh.

See again of the bait and switch? The BSP emphasize on inflation risk as a supply side phenomenon in order to whitewash the BSP’s policies. Boom will be due to them, bust is due to the market. PERIOD. The BSP can never go wrong!

Bizarrely, they say their policy affects only demand conditions. But demand conditions affect supply conditions and vice versa… 


…or has the demand and supply curve been abolished?

Or has it been that the BSP, like the establishment economics, have been entirely overwhelmed by quant models or statistics that sees the demand and supply curve and prices as their coordinating mechanism as irrelevant?

The BSP has been uncannily silent about the weak peso as a likely cause of higher inflation.

Why?

Because the BSP plays an influential role in the pesos’ exchange rate ratios? Because the BSP supplies the peso notes and has stacks of foreign currency reserves mainly through the US dollar notes and US dollar assets? Because demand policies have largely influenced domestic liquidity conditions through the credit channel of the banking system which consequently affects the supply side?

Since the peso’s role in contributing to prospective inflation would fall onto the laps of the BSP, this has to be purposely evaded?

Booms create geniuses…even geniuses whom spout folderols.

Nonetheless, present responses by regional central banks should translate to more currency pressures for Asia.

And if China’s conditions have been affecting Asia, so will Asia’s conditions boomerang back to China.

Asian Devaluation: The Impact to Carry Trades and the Export of Debt Deflation

The current currency volatility will also significantly affect arbitrages or carry trades on Asia

The global financial organization, the Institute of International Finance explains[11]: A more rapid and disorderly CNY decline than we expect would put more pressure on already-weak Asian currencies.  It would also feed into the ongoing unwinding of carry trades—RMB denominated, but also USD—funded carry trades involving other EM Asian currencies (Chart 1.2). These would be rendered much less attractive by the combination of higher FX volatility, lower EM Asian yields (triggered by decelerating Chinese and regional growth and the deflationary impact of low commodity prices), and a stronger USD

Of course the issue won’t be just about ‘carry trades’ but also about the funding or the leverage backing those cross border arbitrages. How much of the unwinding of carry trades have been due to margin calls? How much of the losing position will require added collateral? How of carry trades have been executed through indirect means, and thereby not covered by the above index?

Yet declining carry trades could also imply the rush to hold US dollars. This may also imply deleveraging, which subsequently, could likewise imply cross asset liquidations.

The IIF also adds that the Fed rate hike may be postponed: “one immediate impact of the CNY devaluation was a sharp reduction in the probability of a September rate hike implied by Fed funds futures”

Again, the FED’s prospective tightening has hardly been a factor in the current round of emerging market-Asian currency depreciations.

Finally with almost all of Asian currencies now in a decline, in the world of falling demand mainly due to constrained balance sheets from debt overload, what will be exported is ‘excess capacity’.

For instance, cheap credit has induced China’s political economy to build capacity from an annual capacity of 150 million tons in 2000 to an eye-popping 750 million tons in 2010! This according to analyst David Stockman represents “a rate of heavy industry growth never before witnessed anywhere”.[12]

The 300 million tons or 40% gain since 2010, adds Mr. Stockman, signify “a striking measure of the current global derangement”. And thus, “China’s steel capacity expansion in just the last four years exceeds the combined capacity of the entire steel industry of Europe and North America combined.” (bold and italics original)

But China’s current demand has far less than the capacity and will even slow: “ Yet China’s sustainable domestic need is arguably less than 500 million tons per year—once its spree of constructing empty apartment buildings, unpopulated cities, redundant highways, bridges, airports and high speed railroads and unneeded industrial capacity comes to an end—as it surely must and will. Even the comrades in Beijing are signaling a resignation to that unavoidable outcome.”


Worst, domestic media fantasizes about attaining “inclusive” G-R-O-W-T-H by pushing the government to establish a national ego boosting symbolical integrated steel industry—which only translates to the Philippines’ contribution to world’s excess capacity (that will paid for by losses of the purchasing power of the peso)!

These exemplify how credit booms feeds into the mainstream’s delusions of grandeur!

Nevertheless, the initial impact from the strong US dollar—weak Asian currencies will likely be to ‘export excess capacity’. The likely consequence from these would be to magnify the probability of a global debt deflation which should eventually be manifested through a global recession and a financial crisis. It’s not a farfetched idea that an Asian crisis could serve as the trigger.

In short, submerging Asian currencies means exporting debt deflation

Yet a further risk down the road is that if path of monetary and credit expansion won’t be stopped, then debt deflation can morph into hyperinflation. All these will be conditional on feedback or the reactions by authorities on unfolding actions in the marketplace.

Phisix 7,400: Deteriorating Headlines and Market Internals

As the peso got smoked, the Phisix fell by 1.65% this week. Momentum suggests that a third attempt to breach the support levels could happen soon.

The reason why the domestic headline index continues to outperform the regional peers has been due to stock market manipulation AND hope which continues to be provided for by media headlines.

As I previously wrote[13],
The reason why the Philippine assets remain relatively sturdy has been because sellers have NOT yet been aggressive since the HEADLINES tell them so. The establishment believes that the boom can still be maintained even when the core has been eroding.  They are relying on HOPE. And this is the reason behind the headline management. They manage statistics and the markets to keep intact what they see as ‘animal spirits’. The exposé on DBP’s wash sale should be a wonderful example.

Besides, headlines shows of no crunch time yet, here or overseas. But no one can guarantee how long this endures.

But when reality eventually filters into the headline; perhaps as in the form of economic numbers or a surprise missed interest payment by a major company, or the appearance of a major global event risk, then bids will evaporate.
Yet no matter the actions by index managers, such aura of invincibility has apparently been wearing off. 

Let me cite some data from last week.



Export growth rates also shrank for all three months in the 2Q (year on year). Exports have declined in 6 out of 7 months. Exports to China and the US were down in June by 30.2% and 4.3% respectively as against gains posted by exports to Japan, Hong Kong and Korea.

Foreign portfolio flows have posted outflows for 5 successive months from March to July.

Media reports of a BSP study which shows that bank earnings have been “muted” because of the “industry’s shift away from treasury earnings and corporate lending, to the more difficult but more profitable retail segment” [14]. Additionally “imposed higher capitalization requirements and other prudential restrictions to curb lending to certain industries, particularly real estate” also contributed to its slowdown. The BSP didn’t say that bank credit to a majority of domestic industries have been trending down since the 2H of 2014. And this has been the reason for the current clamor by the establishment institutions for the BSP to “ease”.

Meanwhile, the US credit rating agency S&P cites increased risks on Philippine banks as “windfall profits for Philippine banks are over” as “trading gains will remain muted” and “rising interest rates will continue to lower banks’ gains from fixed-income investments”.[15]

The BSP talks about the banking industry’s paradigm shift and of their beneficial policy actions of controlling credit. Meanwhile, the S&P talks about banking basics.

The fantastic disparity between BSP and the S&P outlook on the domestic banking system can be analogized to former US president John F. Kennedy who famously asked his two advisers working on the same mission if “The two of you did visit the same country, didn't you?”


The BSP sees no problem with this flattening yield curve trend as exemplified by the yield spread between the 1 month bill relative to 5,7, and 10 year bonds. 

The flattening trend has been repeatedly interrupted by manipulations since April 2015. Nevertheless the trend continues.

Finally, the government once again conceded that their G-R-O-W-T-H targets won’t be met, because it is alleged to be “too high”.

Like last June, the Philippine government appears to be playing down G-R-O-W-T-H expectations for a soft landing. Eventually ‘soft’ landing will become ‘hard’ landing.

But the government can always rely on their statisticians to pump these numbers, similar to 4Q 2014 and 1Q 2015

Manipulations in stocks seem as if that they have been losing ground too.



The carnage in the broader market has only accelerated. Losers walloped gainers by a huge margin of 213! It’s been three successive weeks for broadbased selloff!

Losers dominated gainers in 4 of the 5 trading days even when the PSEi gained in 2 of the 5 sessions.

Of the 30 issues comprising the index, 10 posted gains as 19 closed lower while a single issue was unchanged.



It is interesting to note that almost HALF or 13 of index issues have now fallen into the grip of the grizzly bears even as the PSEi remains at record levels. Yet there are 6 additional issues that are bear market candidates.

Metrobank has recently stepped into the bear’s lair. So as with EDC and TEL. Curiously there are now 3 issues within the 15 majors who have joined the bear’s ranks. Fascinatingly, new record setter SMPH was suddenly crushed by an 8.35% loss last week.

I have noted that the PSEi has fallen into the bearish technical pattern called the death cross, where the 200 day moving averages has overshadowed the 50 day moving average counterpart.

As I said I am not a believer in it, but I have to watch it because chart patterns have signified as key tools for many market players.

In 2011, I wrote why policies of Ben Bernanke and ECB’s Jean Claude Trichet, and not the death cross, will determine market actions.



Yet this is an interesting perspective from Gavekal which shows of the number of issues operating under the ‘bullish’ golden cross (50 day ma over 200 day ma), as against the ‘bearish’ death cross (200 day ma over 50 day ma).

The chart above exhibits that only 40% of issues under the MSCI Philippines remain bullish as against 60% bearish. The interesting portion has been that the last time the same instance occurred, the PSEi was almost down by 20%. That was during the selling climax in taper tantrum days of 2013.

Presently, the PSEi has been down by less than 10%! This represents an empirical evidence of the incredible manipulation of the local index.


It is also interesting to note that Malaysian and Indonesian stocks have become predominantly bearish. This has been fittingly matched by the performance of their indices. But their indices have yet to enter the bear’s lair. 

Thailand seems to be fast catching up.

Told You So: Miseries of Philippine Casinos Compounds!

Sound and seemingly impervious to risk. That’s how authorities and the establishment limn of the Philippine economy.

Well, that’s not how it would look especially when one of the bubble industries continues to behave the way I predicted them.

Conditions of Philippine casinos have been worsening.

Bloomberry’s Solaire posted a net loss of P786.5 million in 2Q 015, worse than the net loss of P533.1 million in the first quarter and a turnaround from the prior year’s net income of P846.6 million, according to Businessworld[16]. For the 1H loses ballooned to P1.32 billion compared to a net income of P2.31 billion a year earlier.

Losses came from increased operating costs which jumped 32.3% to P10.98 billion in the six-months ending June, as a result of sustained expansions.

What gets interesting has been that gaming revenues grew by only 8.5% to P7.49 billion in the second quarter, slower than the 14.6% expansion to P8.09 billion in the first three months of the year.

Now all the previous wild cheering about G-R-O-W-T-H for the company has vanished.

It’s been little different with the older contemporary Travellers International Hotel Group operator of Resorts World which posted a 1.7% drop in profits in the 1H. The loss was imputed to “gaming revenues dipped alongside some foreign exchange overhang” according to the Inquirer[17].

RWM’s topline 2Q revenues plummeted 10.5% while 1H revenues had been down 7.9% year on year.

In other words, growth rates of the topline numbers have been in a slump. This come even as these companies continue to add capacity financed through debt. The “foreign exchange overhang” represents just a part of the growing debt onus.

And if topline revenues fall more, then losses will accelerate.

And here is a striking statement by an industry observer “It adds to the concern not just for Bloomberry, but the Philippine gaming industry in general”.

Yes, it’s easy to comment ex-post or when things have already been happening.

Here is what I wrote about in April 2013[18].
On the supply side, the growing numbers of casinos in the region may eventually reach saturation point (even assuming no recession).  The Philippine gaming industry has reportedly been growing at a CAGR of 28% (!!!), which is about THRICE 3x growth rate of developing Asia, the fastest in the region. (chart from ADB)

On the demand side, the fragile state of the global economy may mean that demand may evaporate when a crisis emerges…

And worst, such cumulative bullishness comes in the backdrop of artificially lowered rates, which industry operators and the unwitting public presume will be everlasting.

And even with the employ of hundreds of so-called experts, hardly anyone sees the risks from the above. Rose colored glasses seems to be the general consensus, especially promoted by media, in the presumption that this time is different.

At the end of the day, basic economic logic says that all these yield chasing activities (whether the shopping mall, casino, housing and vertical projects) will end badly.
Badly is exactly how events have has been turning out to be for this sector.

But here is what the mainstream continues to overlook. As I have recently noted[19].
Here’s another thing which no one seems to care about: IF those financial losses from these entities mounts, then losses eventually will parlay into a cash flow squeeze that will lead to contraction of balance sheets. Subsequently, this may evolve into problems associated with debt repayments and to debt access. Finally, the last stage will be a debt crunch.

And standing between the prospective deepening of losses by these major casinos are the various creditors which holds debts worth Php 61.25 billion! That’s broken down into RWM’s 1Q15’s Php 13.5 billion (left), Bloom’s Php 33.01 billion (1Q15 17Q middle) and MCP’s Php 14.74 (1Q15 17Q; right).

In short, establishment experts better pray for the swift recovery of the Chinese economy otherwise losses will likely morph into a debt crunch for some of these firms. And the casino credit crunch may transform into a causa promixa for a domestic credit event!
It’s not just the industry’s losses but the debt that have been used to finance such overcapacity that should be taken into account.

First, the industry’s debt problems, which eventually should be manifested in the banking system, will likely spillover to the other industries. When losses are recognized through growing bad loans, access to credit will tighten and interest rates rise. The risk of bankruptcies increases along with these.

Second, casinos have been emblematic of the race to build capacity in hotel and other retail sectors. So I expect the casinos woes to eventually get transmitted to the hotel industry first then to the other retail related industries.

The difference has been that these casinos have been new players in a saturated regional market whereas the other major listed retail players have been old players in a maturing domestic industry. Given the lack of market following, the former has been more vulnerable than the latter. Nonetheless it still should be a ‘periphery-to-the-core’ phenomenon.

As I have shown last week, slowing topline growth in the face of sustained capacity buildup can now be seen even in SMPH’s financial statements. Eventually this will overwhelm most of the fundamentals of publicly listed issues which mistakenly saw and acted on the presumption of the perpetuity of an artificial credit boom.

And once those topline numbers turn negative, that’s when the alarm bells will be sounded in the credit markets.

Third, I suspect that perhaps some of them may not survive at its current form. 2016 should be very interesting.

Finally, considering Chinese government’s recent devaluation; the hope for those Chinese high rollers to come rolling in or the goal to capture part of Chinese market by these casinos materially diminishes.

Here is Reuters for the appetizer[20]: The Chinese tourists who have become a common sight in the world's major cities fear their wings will be clipped if Tuesday's shock yuan devaluation develops into a deeper dent in their spending power. More than 100 million Chinese travel abroad every year, buying more luxury goods than any other nation. Shopping for the perfumes and designer clothes that can cost them twice as much at home is a major travel incentive.

The obverse side of every mania is a crash!



[2] In the middle of the spectrum are soft exchange rate pegs— that is, currencies that maintain a stable value against an anchor currency or a composite of currencies. The exchange rate can be pegged to the anchor within a narrow (+1 or –1 percent) or a wide (up to +30 or –30 percent) range, and, in some cases, the peg moves up or down over time—usually depending on differences in inflation rates across countries. Costa Rica, Hungary, and China are examples of this type of peg. Although soft pegs maintain a firm "nominal anchor" (that is, a nominal price or quantity that serves as a target for monetary policy) to settle inflation expectations, they allow for a limited degree of monetary policy flexibility to deal with shocks. However, soft pegs can be vulnerable to financial crises—which can lead to a large devaluation or even abandonment of the peg—and this type of regime tends not to be long lasting. Mark Stone, Harald Anderson, and Romain Veyrune Exchange Rate Regimes: Fix or Float? IMF Finance and Development March 8, 2008



[5] Ed Yardeni China Is a Mess (excerpt) August 11, 2015 Yardeni.com

[6] Bank for International Settlements BIS international banking statistics at end-March 2015 p.4 July 2015

[7] Bank for International Settlements Global dollar credit: links to US monetary policy and leverage p.8-9 January 2015

[8] Bangko Sentral ng Pilipinas Monetary Board Keeps Policy Settings Steady August 13, 2015



[11] Institute of International Finance Weekly Insight: China Shakes it Up August 13, 2015



[14] Inquirer.net Banks’ earnings remain muted August 14, 2015

[15] Businessworld Online S&P cites risk to Philippine banks August 12, 2015

[16] Businessworld Online No luck for Bloomberry: Casino costs mount, sales slow August 14, 2015




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