Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

An election is a moral horror, as bad as a battle except for blood; a mud bath for every soul concerned in it—George Bernard Shaw

In this issue

Fear the ‟Trump Trade‟ or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us

I. US Election Narrative: Fear the Trump Trade!

II. Market Chaos Erupts after Fed’s September Rate Cut

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

V. The Biden-Harris Legacy of "Proxy Wars"

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

Fear the Trump Trade or a Pushback on Fed Policies? Trump or Harris: The Era of the Bond Vigilantes is Upon us 

Is the "Trump Trade" responsible for recent market convulsions, or does this represent a pushback against the Fed’s actions? Why political-economic trends in motion tend to stay in motion. 

I. US Election Narrative: Fear the Trump Trade!

Trump's Rising Election Odds Sends Emerging Markets Into Tailspin, Causes Biggest Stock Drop In 10 Months (Yahoo, October 27) 

The Bangko Sentral ng Pilipinas (BSP) might have to do more to support the Philippine economy if former US President Donald Trump returns to power and starts a global trade war, which can hurt the entire world and, in turn, dim local growth prospects. (Inquirer.net, October 28, 2024) 

THE RETURN of Donald J. Trump to the US presidency could cause Asian currencies such as the Philippine peso to weaken, analysts said. (Businessworld, October 29, 2024) 

At first glance, it may seem that the following headlines or excerpts were conveyed for Halloween. 

Then, I realized that the U.S. elections are coming up this week. 

Mainstream media has painted an impression that the recent setbacks in the marketplace mean that a Trump win/presidency, or the "Trump Trade," could be detrimental to the markets. 

Let us examine what led to this perspective. 

In October, the Bloomberg spot U.S. dollar index surged by nearly 3% compared to the previous month. The S&P 500 slipped by 0.99%, the iShares MSCI Emerging Market ETF (EEM) dived by 3.07%, and the Global X FTSE ASEAN ETF (ASEA) tanked by 3.9%. The U.S. 10-year Treasury yield surged by 48 basis points (12.7%). 

Meanwhile, at home, the Philippine peso plunged by 3.6%, and the PSEi 30 plummeted by 1.78%. 

The prevailing sentiment in the speculative marketplace has shifted from excessive optimism to risk aversion.

Who else to blame but the leading contender in the prediction markets, Trump!

II. Market Chaos Erupts after Fed’s September Rate Cut 

But does this widely accepted perception accurately reflect causation, or is it intended to shift the Overton Window in favor of the opposing contender, Kamala Harris?

Figure 1 

The rising 10-year yield actually started just after the US Federal Reserve initiated its 50-basis-point rate cut on September 18th. (Figure 1, topmost chart)

It is rare to witness such a combination of powerful forces ripple through other market indicators.

Figure 2

Rising Treasury yields have been accompanied by an appreciating U.S. dollar index, which has also contributed to increased volatility in the bond market (MOVE Index) and volatility premiums across asset markets—including equities, oil, and foreign exchange—as well as a spike in U.S. Credit Default Swaps (CDS). (Figure 1, middle and lower graphs, Figure 2 topmost and lower images)

Figure 3

This dynamic coincided with a spike in the Economic Surprise Index and gold's widening outperformance against the TLT iShares 20-Year U.S. Treasury bond prices. (Figure 3, middle topmost and middle visuals) 

Incredible. 

The most striking indicator of the impact of the Fed's rate-cutting cycle that began in September is that it occurred under the loosest financial conditions since at least December 2022. (Figure 3, lowest diagram) 

In other words, global financial markets have significantly pushed back against the Fed’s easing policy by effectively re-tightening conditions! 

Of course, one could interpret this as "buy the rumor, sell the news." 

Still, other factors are at play—such as unrestrained public spending, surging debt levels, escalating debt servicing costs, geopolitics and more!

Nevertheless, resonating with the "Overton Window" during the pandemic in support of lockdowns and vaccines, the Gramsci-cult elite-controlled media shifted the rhetoric to blame Trump’s predilection for tariffs.

III. Global Economic War and the Inflation Scorecard: Trump versus Biden-Harris; Trump’s Tariffs as Negotiation Card 

First and foremost, yes, while it is true that global trade restrictions did rise in during Trump 1.0 (2017-2021) regime, his successors, the Biden-Harris tandem, pushed for MORE trade barriers, which hit a record high in at least 2022! 

Figure 4

As the IMF chart reveals, the global economic conflict spans both parties, with both candidates appearing inclined toward de-globalization. 

(Note this shouldn’t be seen in a simplistic lens but related to geopolitical developments) 

Second, financial easing amidst the loosest monetary conditions translates to a potential comeback of inflation, which aligns with the perspective that Trump’s trade war results in higher inflation. 

However, that shouldn’t hold water; inflation under Trump’s administration was milder than the inflation epidemic during the Biden-Harris administration. 

Consequently, with higher inflation came higher interest rates as well. 

Third, Trump’s push for tariffs represents a carryover from his 2016 campaign trail. 

He used tariffs as leverage for negotiation but eased up on strict currency regulations, as noted in this Yahoo article. 

Trump has likened his tariff plan to a new "ring around the collar" of the US, with tariffs often described not as part of negotiations but with those high duties as an end goal in themselves to protect US industry… 

He promised during that campaign to impose tariffs, renegotiate NAFTA, and withdraw from the Trans-Pacific Partnership. "Promise kept," PolitiFact said of all three. 

Trump also took action on a fourth promise to declare China a currency manipulator but ended up compromising, according to the group. 

IV. Emerging Market and ASEAN Stocks, the PSEi 30 Hit a Record High in Trump’s Term, Philippine Peso Flourished Under Trump!

Figure 5

Fourth, stock markets haven’t been exactly hostile to Trump.

The ASEAN ETF (ASEA) reached an all-time high in 2018 or during the early phase of his administration, and the Emerging Markets ETF (EEM) also hit a milestone that year and also surged to a fresh record toward the close of Trump’s term. Both markets, however, eventually succumbed to the pandemic recession.

Similarly, the Philippine PSEi 30 hit a significant peak in January 2018, also coinciding with Trump’s administration.

On the currency front, the Philippine peso rallied from October 2018 to the end of 2021.

In fact, contrary to contemporary analysis, the USDPHP fell by 3.7% from January 20, 2017, to January 20, 2021 (Trump’s tenure).

In contrast, under the Biden-Harris administration, the USDPHP has increased by an astounding 21% from January 20, 2021, to the present (October 31, 2024)!

While past performance does not guarantee future outcomes, the scorecard between the contending parties shows a stark difference in the accuracy of the current predominating narratives. 

In a word, propaganda. 

Nota Bene: Past performance is not a guarantee of future results. Our purpose is to highlight inaccuracies in media claims. We don’t endorse any candidates. 

V. The Biden-Harris Legacy of "Proxy Wars"

Fifth, the world is on the brink of, or already embroiled in, a form of World War III, fought across multiple spheres. 

The U.S. suffered a humiliating defeat in the 20-year Afghanistan War, ultimately withdrawing in the face of a relentless war of attrition led by the Taliban’s guerilla tactics. Both the Trump and Biden administrations negotiated withdrawal terms, but the Biden-Harris administration oversaw a controversial chaotic exit in August 2021. 

That aside, a series of conflicts has marked the Biden-Harris administration’s legacy. 

The kinetic conflict began with the Russia-Ukraine war in 2022, spread to the Israel-Palestine/Hamas war in 2023, and has since escalated to include confrontations involving Israel-Hezbollah or the "Third Lebanon War," and even the precursory phase of Israel-Iran Conflict in 2024. 

Simultaneously, following Obama’s failed "Pivot to Asia," geopolitical tensions have been mounting in the Taiwan Straits, the South China Sea, Central Asia, and other parts of the world. 

Notably, these ongoing and emerging conflicts are interconnected.

For example, the U.S. has been supplying not only aid but also arms to its allies to counter hegemonic rivals.

Figure 6

Aside from supplying 70% of conventional weapons, U.S. military aid/grants to Israel soared to all-time highs in 2024! (Figure 6, topmost chart)

That is to say, the current conflicts represent "proxy wars" where the U.S. led NATO forces engage indirectly to pursue hegemonic objectives.

VI. Trends in Motion Tend to Stay in Motion: World War III’s Multifaceted Aspects

The Global Warfare has also entered the economic and financial spheres—seen in the weaponization of the U.S. dollar through asset confiscations targeting so-called "axis of evil" nations, and in the reinforcement of a modern-day "Iron Curtain" marked by significant restrictions on trade, investments, capital flows, and social mobility.

Mounting trade imbalances, which helped fuel the rise in trade barriers from the Trump administration to Biden-Harris, have also laid the groundwork for today’s outbreak of kinetic conflicts.

Geopolitical tensions have surfaced as a growing cold war in other regions as well.

This hegemonic competition to expand sphere of influences has percolated to Africa, Latin America, the South Pacific, and the Global South (BRICs), some of which channeled through mercenary or gang wars and local civil wars. (Dr. Malmgren, 2024)

Ironically, four of the five ASEAN majors, specifically, Indonesia, Thailand, Malaysia and Vietnam recently signed up for the BRICs membership.

The implicit cold war has also extended into previously uncharted areas: underwater territories, space, the Arctic, the Pacific, mineral resources (like rare earth elements), and technological domains such as DNA research, cyberspace, and microchips (Malmgren, 2023).

The point is that these evolving conflicts underscore the interconnectedness of U.S. foreign and domestic policy.

Given the powerful forces behind this trajectory or the "deep state"—including the Military-Industrial Complex, the National Security State, Straussian neoconservatives promoting the "Wolfowitz Doctrine," the energy industrial complex, Big Tech, and Wall Street—it is unlikely these developments will cease, whether under a Trump 2.0 administration or (Biden carryover through) a Harris regime.

Put simply, while media narratives may further lobotomize or impair the public’s critical thinking, potentially deepening societal division, a meaningful change in the U.S. and global sociopolitical and economic landscape remains unlikely if elections continue to focus on what I call as "personality-based politics."

As investor-philosopher Doug Casey rightly observed, "Trends in motion tend to stay in motion until they reach a crisis."

VII. Global Kinetic Warfare and the Cold War as Products of the Fed’s and Global Central Bank’s Easy Money Regime

Lastly, the public tends to overlook that current trends are merely symptoms of deeper issues or mounting disorders stemming from the decadent U.S. dollar standard.

As investor Doug Noland astutely wrote 

Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But late in the cycle, perceptions shift. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold. It bears repeating: Things turn crazy at the end of cycles. (bold mine) [Noland, 2024] 

Easy money has long fueled, or been instrumental in financing, the global war machine, leading to today's bellicose conditions.

Easy money has also powered the growth of big government and contributed to economic bubbles and their eventual backlash, as evidenced by China’s unparalleled panicked bailout policies to prevent a confidence crisis from imploding. 

The push for easy money is likely to persist, whether under a Trump 2.0 or a Harris administration. 

As Professor William Anderson noted, 

The unhappy truth is that both platforms will need the Federal Reserve System to expand its easy money policies, despite the massive damage the Fed has already done by bringing back inflation. While Harris claims to defer to the “experts” at the Fed, Trump wants the president to have more power to set interest rates. Obviously, neither candidate is acknowledging the economically perilous situation in which the government ramps up spending, which distorts the markets, and then depends upon the Fed to monetize the resulting federal deficits. As the debt grows and the economy becomes progressively less responsive to financial stimulus, the threat of stagflation grows. The present path of government borrowing and spending all but guarantees this outcome, and the candidates have neither the political will nor the economic understanding to do what needs to be done. (Anderson, 2024) 

U.S. debt is fast approaching $36 trillion, while global debt reached $315 trillion in Q2 2024 and counting. (Figure 6, middle and lower charts) 

"Trends in motion tend to stay in motion until they reach a crisis."

VIII. Conclusion: Trump or Harris: The Era of the Bond Vigilantes is Upon Us 

While the "Trump trade" provides a convenient pretext for the current tremors in the global financial market, this narrative relies on inaccurate premises and misleading speculative claims that are unsupported by empirical evidence. Instead, these assertions aim to sway the voting audience ahead of this week’s elections. 

In contrast, the current financial market convulsions reflect a significant pushback against the Fed’s and global central banks’ prolonged easy-money policies. As investor Louis Gave of Gavekal recently noted, "Zero rates were a historical aberration that need not be repeated." 

Needless to say, regardless of who wins the U.S. presidency, political agendas will continue to advocate for easy money and various forms of social entropy and conflict. 

Unfortunately, there is no such thing as free lunch forever. 

Although trends in motion tend to stay in motion, the era of the bond vigilantes is upon us.  

Things have been turning a whole lot crazy. 

___

References 

Yahoo Finance, What Trump promised in 2016 on tariffs. And what he delivered (a lot). October 28, 2024, 

Dr. Pippa Malmgren The Cold War in Hot Places, March 12, 2024 

Dr. Pippa Malmgren WWIII: Winning the Peace, October 28, 2023 drpippa.substack.com 

Doug Noland, Vigilantes Mobilizing, Credit Bubble Bulletin, November 1,2024 

William L. Anderson  The Great Retreat: How Trump and Harris Are Looking Backward, August 30, 2024 Mises.org 

Louis-Vincent Gave, Behind The Bond Sell-Off, Evergreen Gavekal October 31, 2024

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

  

The risk of catastrophe will be very high. The nation could erupt into insurrection or civil violence, crack up geographically, or succumb to authoritarian rule. If there is a war, it is likely to be one of maximum risk and effort – in other words, a total war. Every Fourth Turning has registered an upward ratchet in the technology of destruction, and in mankind’s willingness to use it– Strauss & Howe: The Fourth Turning

In this issue

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

III. Asian Currencies in the Shadow of a Strong US Dollar

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

V. The BSP’s Increasing "Borrowed Reserves"

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?"

Is the Philippine Peso Immune from the Rising Risk of a Sino-Philippine Military Conflict? Why the Silence over its Risks?

While the local media is abuzz with the worsening standoff in the territorial dispute between the Philippine government and China, and the Philippine Peso nearing record levels, financial experts are oddly silent about the economic risks involved.

I. Reverse Psychology? Philippine Peso as One of Asia’s Worst Performing Currencies?

Figure 1

Mainstream experts seem more confused than ever about the state of the US dollar-Philippine peso $USDPHP. 

As the $USDPHP approaches a milepost, they appear to be sugarcoating the fragility of the Philippine peso by attributing the peso’s weakness to the divergent policy conditions between the US Federal Reserve and the Bangko Sentral ng Pilipinas (BSP). (Figure 1, topmost image)

They are actually defending the Philippine peso when they allude to the strength of the US dollar, the elevated Gross International Reserves (GIR), and other possible BSP toolkits. 

Using what seems as reverse psychology, a foreign institution even projected that the peso would "become one of Asia’s worst-performing currencies," given the BSP’s ‘dovish’ stance. (Figure 1, middle visual)

Bizarrely, they placed a marker for this: the USDPHP would "hold at 58 per dollar, although it may weaken to as low as 58.60, which would be a few centavos away from the record-low 59 it hit in 2022." 

Amazing. 

The thing is, the news was hardly a projection; it was a description of present events. 

The USDPHP signified the fourth worst currency in Asia (year-to-date), after the Japanese yen $USDJPY, South Korean won $USDKRW, and Indonesian rupiah $USDINR—as of June 21st. (Figure 1, lowest chart) 

By placing a boundary for the "worst in Asia" assumption to hold, it translates to either a positional stasis or that most Asian currencies would do better because of the so-called ‘dovish’ stance of the BSP. 

Figure 2

Ironically, the nominal yield spread between the 10-year Philippine BVAL and US Treasury bonds has been rising in favor of the former.

Operating under the belief of arbitrage opportunities, the consensus thinks that relatively higher (nominal) rates for the Philippine Treasury should favor the peso.

But this dynamic has barely been the case, as a relatively lower Philippine yield has coincided with a strong peso and vice versa from 2019 to Q1 2022. Since then, USDPHP has climbed ahead despite the spread—or the correlation broke from Q2 2022 to the present. (Figure 2, topmost diagram) 

In brief, this loose correlation does not support the popular thesis.

II. Blissful Oblivion or Willful Negligence: Is the Philippine Peso Immune to the Growing Risk of a Military Conflict?

Here is what the Overton Window critically overlooks: the escalating standoff over the territorial dispute between the Philippines and the Chinese government.

Haven't you noticed? The Sino-Philippine West Philippine Sea showdown has been splashed all over mainstream media. Despite this, there is nearly ZERO attribution about it to the Philippine peso or the Philippine economy. This stark contrast underscores the disconnect between the intense diplomatic and military tensions and the lack of insights into its potential economic fallout.

That is to say, while the risks of the Philippines becoming the Ukraine of Asia grows with every confrontation, the consensus oxymoronically sees such risks as non-existent. 

Could they be talking about the Philippines? Why the complete absence of the mounting risks of war?

This seemingly incredible blindness represents either "blissful oblivion" or "willful negligence" over the possible cataclysmic risks from an outbreak of violence. 

As I recently posted on my X (formerly Twitter) account, at the onset of wars, the currencies of those involved—namely the Russian ruble $USDRUB, Ukraine’s hryvnia $USDUAH, and Israel’s new shekel $USDILS—materially fell against the US dollar. (Figure 2, lower image)

That's a blueprint for the Philippine economy that we should expect when water cannons and knives escalate into a shooting battle.

Aside from a possible plunge in the Philippine peso, depending on the scale of war, we can expect a double "deep" recession, a possible stock market crash (if it remains open), rolling brownouts—when power plants become military targets—which means disruptions in digital payments and bank ATM withdrawals, massive disruptions in the division of labor, and the BSP printing more money—which leads to stagflation!

While we earnestly pray that this does not happen, as there are other peaceful options like Vietnam’s "bamboo diplomacy," the Asian version of foreign policy neutrality, it is a risk that every Philippine resident confronts as contending parties to territorial claims remain intransigent and lean on belligerency.

Although we won’t expand further on the geopolitical dimension of the rising risks of a Sino-Philippine military conflict, it's crucial to note that the US dollar-Philippine peso exchange rate is not insulated from these rising tensions. 

My brief two cents on the Philippine government’s turnaround regarding the alleged "armed aggression" of China in an X thread. 

III. Asian Currencies in the Shadow of a Strong US Dollar 

Operating under the de facto US dollar standard, the US and its political, economic, and financial activities overseas have a distinctive impact on the world. 

In addition to the transition away from globalization and domestic politics, geopolitics is another key factor contributing to the recent increasing value of the USD. 

An abrupt rise in the US dollar is often a sign of emerging economic distress.

Figure 3 

Unlike its popular portrayal, the rising value of the USD is not an anomaly. 

Using the US dollar index $DXY as a benchmark, it has been in an uptrend since 2021, supported by a reverse head-and-shoulders pattern. More importantly, the longer-term trend shows a 9-year uptrend. (Figure 3, topmost and second to the highest graphs) 

The $DXY is composed of a weighted basket of developed economy currencies, including the European euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. 

The uptrend in the USD is evident across several ASEAN currencies, including the Indonesian rupiah $USDIDR, the Philippine peso, the Malaysian ringgit $USDMYR, and the Vietnam dong $USDVND, though it's not shown in the chart. (Figure 3, second to the lowest chart) 

In the long term, however, the USD has underperformed against the Thai baht $USDTHB and Singapore dollar $USDSGD. (Figure 3, lowest window)

Using the mainstream's logic, the Bank of Indonesia (BI) unexpectedly raised rates in April in an attempt to "anchor the rupiah". Despite this move, the $USDIDR pair carved out a milestone high last week. Was the BI's decision still "dovish"? 

The essence lies in the fact that Asian currencies exhibit asymmetric performances that are underpinned by their idiosyncratic or unique domestic conditions. 

A sweeping generalization of a strong USD represents a fallacy of composition.

IV. The Gross International Reserves is no Talisman Against the Uptrend of the USDPHP

Figure 4

More intriguing is the widespread conviction that the country's foreign exchange reserves (GIR) serve as a talisman against the rising US dollar, which appears to be more of a manifestation of faith or defending piety than an analysis based on economic theory and data.

If this belief were valid, then $USDPHP pair would have underperformed. Alternatively, there wouldn’t have been an uptrend in $USDPHP if the GIR had functioned as advertised. (Figure 4, topmost image)

Instead, we see that the GIR fell upon its drawdown by the BSP to defend the peso when the $USDPHP carved a record in 2022.

Ironically, the BSP accelerated its accumulation of GIR in 2019-2020 just at the late stage of the peso's rally.

Since then, it has been a tango for the GIR and USDPHP as both proceeded higher.

Separately, as evident from the BSP's annual balance sheet, the strength of the $USDPHP has coincided with an increasing percentage share of BSP's local currency issuance against its total liabilities. (Figure 4, middle chart)

In short, the primary driver of the USD/PHP's uptrend has been the BSP's money printing operations, not the GIR.

V. The BSP’s Increasing "Borrowed Reserves"

Furthermore, what authorities say is often taken as "gospel truth," with few questioning the numbers behind them.

Let us turn to the GIR. 

The Philippine government borrowed USD 2 billion in early May.

The BSP described the increase in its GIR for the same month as follows: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024) 

Subsequently, the BSP also disclosed that its Balance of Payments (BOP) showed a surplus during the same period: "The BOP surplus in May 2024 reflected inflows arising mainly from the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, and net income from the BSP’s investments abroad." (BSP, 2024)

See that? The BSP admitted that "borrowed reserves" has constituted a part of its GIR and BOP. Hence, the USDPHP ignored them and proceeded higher. (Figure 4, lowest graph)

Figure 5

May’s US dollar borrowings will likely add to the USD 128.7 billion of external debt, which was up by 8.32% in Q1 2024. (Figure 5, topmost graph)

External debt has soared past the BSP’s GIR of USD 104.1 billion for the same period.

Yet, as acknowledged by the BSP, part of external debt has been incorporated into the GIR.

There’s more to consider.

As the Philippines’ April GIR showed, based on IMF’s International Reserves and Foreign Currency Liquidity (IRFCL), the BSP has been selling off its gold reserves and has boosted its use of Other Reserve Assets (ORA).  The BSP’s physical gold reserves last April signified a multi-year low! (Figure 5, middle pane)

Other Reserve Assets comprise financial derivatives, short-term currency loans, repos, and other liquid assets. (IMF, IRFCL)

During the international easy money era, ORA became a feature in the GIR build-up from 2018-2020 and the rally of the peso. (Figure 5, lowest chart)

However, rising costs compelled the BSP to reduce its use in 2022. Nonetheless, the BSP returned to it last April 2024.

The thing is, "borrowed reserves" represent "US dollar shorts," which is attendant with an increasing likelihood of maturity mismatches, especially during times of stress.

Furthermore, "borrowed reserves" will need payment or refinancing. The greater the borrowings, the higher interest payments, refinancing, and principal payments, even in the assumption of steady rates, which translates to increased pressure for organic sourcing of USD revenues.

Otherwise, the economy and government would be forced to continue borrowing externally to meet growing USD liquidity needs, while increasing domestic liquidity, which would amplify the pressure for the Philippine peso to depreciate further. 

VI. The Trickle-Down Political Economy’s Dependence on "Twin Deficits" Depletes FX Buffers 

Given the entrenched "trickle-down" political-economic architecture driving the borrowing-to-spend (to prosperity) paradigm, which has engendered a record savings-investment gap, it is difficult to envision a structural shift in the current dynamics—specifically, a transition away from debt dependence—without a disorderly adjustment. 

Underpinned by Keynesian ideology, the establishment has made little or no effort to promote this essential structural change.

Rather than acknowledging the accruing tradeoffs from transitioning to a centralized political economy anchored in fiscal spending (infrastructure and the war economy) and increasing bureaucratization, the consensus continues to promote the illusion of a consumer-driven economy. 

Figure 6

A strengthening economy would swell trade deficits, given the structural shortcomings in local production, while an acceleration of the fiscal deficit would magnify the credit-financed "twin deficits." 

As evidence, April’s trade deficit expanded as imports grew by 12.6%, driven by increases in capital imports (+10.5%) and consumer goods (+15.7%). (Figure 6, top, middle and lowest chart) 

Therefore, authorities would need to rely on remittances, tourism, service exports, FDIs, foreign portfolio flows, or borrowings to cover the FX deficits.

VII. Thinning FX Buffers: Slowing Remittances and Tourism, Debt-dependent FDI, and Volatile Foreign Portfolio Flows

Figure 7

Despite record-high nominal Overseas Filipino Workers (OFW) remittances last April, their growth rate has been slowing down primarily due to base effects.

Moreover, remittance flows are heavily influenced by global economic conditions, which may face hurdles from increasing barriers to social mobility. For instance, rising economic barriers and increased nationalism are expected to slow OFW flows.

On the other hand, vigorous tourism growth in 2023, fueled by strong domestic "revenge travel" and improved foreign arrivals, appears to have cooled down in 2024.

While FDI flows seem to be improving, the majority of these flows consist of debt. Reported FDI flows were up 23% last March and 42% in the first quarter, with debt accounting for 68% and 62% of the share, respectively.

Intercompany debt infusions do not guarantee genuine investments. Instead, they expand the USD shorts.

Additionally, taking sides in the geopolitical hegemonic contest could deter investors, making politics rather than markets the determinant of investment flows.

Meanwhile, volatile flows from foreign portfolio exposure cannot be relied upon to boost demand for the peso. This is primarily due to the structural inadequacy of the capital markets' depth (PSE and the fixed income market), which remain dominated by the elites.

Another fundamental reason is that portfolio flows are heavily dependent on global risk conditions.

Lastly, services exports appear to be the remaining hope to cushion the peso via USD revenues. So far, the industry is said to be on track to meet its growth targets this year.

However, any slowdown in this sector would exacerbate USD funding pressures.

VIII. USDPHP is Driven by the Real Economy; Questioning a War-Hawkish Public and Financial Experts, "You Two Are Discussing the Same Country, Aren't You?" 

It is clear that the USDPHP has not been primarily driven by BSP-FED policy divergence but by real economic factors, including the BSP’s domestic monetary operations. 

If the current arrangements have resulted in thin buffers, imagine what an outbreak of military conflict would do. 

The striking divergence between a war-hawkish leaning public and the absence of discussion about its risks in the domestic financial sphere reminds me of the glaring disparity in the fact-finding report by two of former US President John F. Kennedy's foreign policy advisors, Victor Krulak and Joseph Mendenhall, on Vietnam. President Kennedy reportedly asked both, "You two did visit the same country, didn't you?" 

Paraphrasing Kennedy and alluding to local media and domestic financial experts, "You two are discussing the same country, aren't you?"

_____

References: 

Bangko Sentral ng Pilipinas, End-May 2024 GIR Level Rises to US$104.48 Billion June 7, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, BOP Posts US$2.0 Billion Surplus in May 2024; End-May GIR Rises to US$105.0 Billion June 19, 2024 bsp.gov.ph

International Monetary Fund, INTERNATIONAL RESERVES AND FOREIGN CURRENCY LIQUIDITY GUIDELINES FOR A DATA TEMPLATE, p.25 imf.org

 

The Philippine PSEi 30 Jumped 3.9% Courtesy of the "National Team," The "Powell Pivot:" A Christmas Gift to the Wall Street of the World?

 

This Power Elite directly employs several millions of the country´s working force in its factories, offices and stores, controls many millions more by lending them the money to buy its products, and, through its ownership of the media of mass communication, influences the thoughts, the feelings and the actions of virtually everybody. To parody the words of W. Churchill, never have so many been manipulated so much by few--Aldous Huxley, Brave New World Revisited 

 

In this short but chart-rich issue: 

The Philippine PSEi 30 Jumped 3.9% Courtesy of the "National Team," The "Powell Pivot:" A Christmas Gift to the Wall Street of the World? 

I. The "Powell Pivot:" A Christmas Gift to the Wall Street of the World?  

II. Market Euphoria Spillovers to Asian Currencies and Bonds 

III. Buoyant Asian Pacific Equities led by the Philippines, Australia, Hong Kong and Record-Breaking India  

IV. Four Days of Pumps (and a Dump); The Fabulous Friday’s Ayala Corp Pump 

V. Pumps Concentrated on Heavyweight Holding Firms 

VI. Retail Sidelined Anew: Lethargic Breadth and Anemic Volume  

VII. Foreign Trades Agnostic to the Pumps 

VIII. Trade Volume Concentration Benefiting Heavy Caps 

IX. Broker Concentration: Symptoms of the "National Team" in Action 

X. PSEi 30’s Weekly 3.9% Return Courtesy of the Philippine "National Team?" 

 

The Philippine PSEi 30 Jumped 3.9% Courtesy of the "National Team,"  The "Powell Pivot:" A Christmas Gift to the Wall Street of the World?

Was the "National Team" the principal force behind the PSEi 30's weekly gain of 3.9%?

 

I. The "Powell Pivot:" A Christmas Gift to the Wall Street of the World? 

 

Figure 1 

 

The ZeroHedge wrote (December 16, 2023): Powell "pivoted" and everything exploded (bonds, stocks, rate-cut expectations, gold, oil, and crypto) as the dollar dumped…And world equity and bond markets added $4 trillion this week alone, and are up over $15 trillion since the November FOMC...(Figure 1, topmost window, bold original) 

 

Global financial conditions have been dramatically easing.  

 

Many Emerging Markets central banks have gone ahead of their developed market peers in slashing rates. Global financial markets have front-run the Fed's change in policy stance over the past weeks. Gold recently set a new price high. 

 

And last week's Powell Pivot or the US Federal Reserve Chair Jerome Powell's drift to a dovish stance also whet their insatiable speculative appetites.  

 

The "Powell Pivot" seemed like a Christmas gift to the world's Wall Street.  

 

II. Market Euphoria Spillovers to Asian Currencies and Bonds 

 

The global euphoria spilled over to Asia.  

 

The US dollar index $DXY fell by 1.34% this week.   

 

Except for the Philippine peso (+.64%) and the Malaysian ringgit (+.11%), most Emerging Asian currencies rose against the USD dollar. (Figure 1, middle graph) 

 

Reversing last week's gains, the USD dropped most against the Thai baht (-1.84%).  

 

Asian bonds rallied feverishly. 10-year Asian yields fell unanimously, or prices rallied. (Figure 1, lowest chart) South Korea, Hong Kong, and Singapore treasuries rallied the most.  

 

III. Buoyant Asian Pacific Equities led by the Philippines, Australia, Hong Kong and Record-Breaking India  

Figure 2 

Asian-Pacific equity benchmarks manifested this intensifying speculative mania. (Figure 2, topmost chart) 

 

Fourteen of 19 national bellwethers closed higher with an average of 1% WoW return.  

 

The Philippines' PSEi 30 bested its regional contemporaries, followed by Australia's All Ordinaries, Hong Kong's Hang Seng, and India's Sensex--which has been on a back-to-back record-breaking streak. 

 

Yet, the PSEi 30's blazing weekly return of 3.91% was the largest since July 14 this year. In the context of the PSEi 30's "full" market capitalization, the "Powell Pivot" granted its member-majority owners an impressive Php 287.4 billion bonus! 

 

But how robust was the rally? Could this mean the return of the bull market, as many in the establishment predict? 

 

IV. Four Days of Pumps (and a Dump); The Fabulous Friday’s Ayala Corp Pump 

 

First. Pumps and Dumps. 35% of the PSEi 30's weekly return came from net- aggregate pumps. (Figure 2, middle charts) 

 

Four days of massive pre-closing pumps and dumps have magnified the end-session volatility of the PSEi 30.  

 

One of the most remarkable events was Friday's (December 15) stunning gargantuan pump on Ayala Corp [PSE: AC]. [Figure 2, lowest pane] 

 

AC was last quoted up by 2.8% at the start of the pre-close floating phase. At the runoff, AC's gain spiraled to 7.93%! So, the index managers used the five-minute float to control and push AC's upside that fed into the index with an additional .4% gain from .68% to 1.06%. 

 

V. Pumps Concentrated on Heavyweight Holding Firms 

 

Second. Pumps on Holding Firms. 

Figure 3 

 

The top 10 issues were the primary beneficiaries of the week's gains. Essentially, the three biggest holdings firms—SM Investments (+9.7%), AC (+14.8%), and JG Summit (+8.5%)—posted the largest advances. (topmost graph) 

 

Although a majority (19/30) of the PSEi breadth leaned positive, the benchwarmers barely participated in this upside.  

 

Three. Pumps boosted the free-float share of the heavy caps.  

 

Pumps centered on these holding firms (SM, AC, and JGS) reflected the spike of their free float share of the PSEi 30.  (Figure 3, middle pane) 

 

In effect, together with the biggest holding firms, the top 10 issues closed the week with a remarkable 70.8% share of the free float market cap.  (Figure 3, lowest diagram) 

 

Again, a few elite issues determined the fate of the PSEi 30! 

 

VI. Retail Sidelined Anew: Lethargic Breadth and Anemic Volume  

 

Four. Breadth and volume reflected the lack of retail participation. 

Figure 4 

The aggregate weekly advancers led decliners by only 11 despite the PSEi 30 sizeable gains. The average daily traded issues barely bounced from the 2014 lows! (Figure 4, topmost graph) 

 

Though mainboard volume improved (up 42.8% WoW), helped by cross-trades, it remained below the week of December 1st level.  Besides, volume remained within its downtrend channel. (Figure 4, middle window) 

 

VII. Foreign Trades Agnostic to the Pumps 

 

Five. Little help from foreign savings.  

 

As stated here, shrinking volume is a symptom of declining savings.  

 

In view of this, savings or credit should improve, or the PSE would have to rely on fickle flows from foreign savings. Net weekly flow posted a negative Php 74 million as Friday's Php 448 million of inflows was short of offsetting the outflows of the three sessions.  

 

Importantly, while the foreign share of mainboard volume continues to rise, this comes amidst the backdrop of declining volume. And since foreign money has been net sellers, they have countered actions of the local version of the "national team." (Figure 4, lowest chart) 

Figure 5 

The BSP's Foreign Portfolio data showed a net outflow of USD 714 million from January to October 2023. (Figure 5, topmost window) 

 

VIII. Trade Volume Concentration Benefiting Heavy Caps 

 

Six. Heavy caps signify the center of the main board volume activities.  

 

The latest gains by the heavyweights resonate with the market liquidity or volume.  

 

For instance, the volume share of the three largest free-float market caps, represented by the Sy group, has been rising in tandem with the PSEi 30. (Figure 5, middle diagram)  

 

The top 20% share of the mainboard volume has also climbed alongside the PSEi 30, which marks an increasing concentration of trading activities towards the heavyweights.   (Figure 5, lowest graph) 

Again, the concentration of trade volume and price actions on the same issues are signs of coordinated activities.

 

IX. Broker Concentration: Symptoms of the "National Team" in Action 

 

Last but not least is the increasing broker concentration.  

 

Figure 6 

 

The top 10 brokers had a 61% average share of the mainboard volume this week. Its share has been on an uptrend as the PSEi 30 tumbled. (Figure 6, upper window)

  

Alternatively, the other (114) brokers have been fighting for the crumbs.   

 

The dominant majority of these elite brokers are institutional (caters to banks, non-bank finances, and other non-financial institutions), which means domestic and foreign institutional (private or public) clients are likely the source of the bulk of transactions.  

 

Bank lending to the financial industry has coincided with the gyrations of the PSEi 30.  Could some of it represent margin trades or trades by the industry—funded with leverage?  Along with the PSEi 30, bank lending growth to the finance industry has declined throughout 2023. (Figure 6, lower graph)  

Has the slowdown in volume also reflected the reduced participation by the financial industry?

As retail participation dissipates, these elite institutions represent the marginal price setters. Some of them could be the likely local version of the "national team." 

 

Could the Maharlika Investment Fund have been part of it?

Unfortunately, mispricing from such artificial "pretend and extend" activities distorts capital valuations, resulting in deeper resource misallocation that leads to more capital consumption. Therefore, aside from eroding savings, small brokers may carry the yoke of the increased activities by the "national team."  

 

In any event, Hong Kong's bear market has caused a wave of (small- and medium-scale) brokerage layoffs and closures.  

 

Sadly, unless volume improves, Hong Kong's predicament represents a likely template for the Philippines. It pains me to say that the bear market could strike hard on the marginal brokers of our industry. 

 

X. PSEi 30’s Weekly 3.9% Return Courtesy of the Philippine "National Team?"

 

In the end, trades, price activities, volume, and broker activities, which the market breadth reflected, showcased a likely methodical and coordinated tactic designed to embellish the PSEi 30 by the "National Team," rationalized and piggybacked on the "Powell Pivot."  

 

Though seasonal factors may help the interim momentum, it remains a bear market rally or a "bull trap" considering the increased fragility of the economic and financial structure. 

The Chinese government has repeatedly attempted to quash their bear market through the "national team" and other measures. Authorities have even warned the financial industry from making bearish calls. Bankers have even been banned from displaying their wealth! 

Still, China's equity benchmarks continue to find a floor.