It’s not “wealth” that’s being wiped out. It’s market capitalization. The wealth is in the cash flows. The wealth is in the denominator. The market cap was speculation encouraged by a reckless Fed. That was the “policy error—John P Hussman, Ph.D.
In this issue
Never Believe Anything Until It Is Officially Denied: US Recession, the Stable Peso, and Stagflation
I. US Fed and Treasury Denialism: From Transitory Inflation to 75 bps Rate Hike to Recession
II. Bitcoin Collapses on Liquidity Drought!
III. Global Stocks and Bonds Plunged, the Bear Market Linkage Between the S&P 500-PSEi 30
IV. Divergent Policies: ECB’s Makeover QE and the Doggedness of Bank of Japan’s Low Rate Policy
V. Denialism: The "Stable" Peso
VI. Denialism: Stagflation in the Transport Sector
VII. Denialism: Public Sentiment Indicates Worries Over Stagflation
Never Believe Anything Until It Is Officially Denied: US Recession, the Stable Peso, and Stagflation
"Never Believe Anything Until It Is Officially Denied."
German political leader Otto von Bismarck, journalist Claud Cockburn and Washington attorney Edward Cheyfitz are among some of the people attributed to this controversial quote.
I. US Fed and Treasury Denialism: From Transitory Inflation to 75 bps Rate Hike to Recession
An observant bloke would see a lot of political denialism these days, specifically when applied to inflation.
Monetary and financial officials here and abroad previously attributed inflation to a "transitory" phenomenon.
But no matter how officials deny it, the intransigence of inflation has forced US officials to admit their mistakes.
Of course, citizens not only of the US but the world have carried the cross of their policy blunders.
Below represents incredible confessions by two key US officials.
First, the Federal Reserve Chairman Jerome Powell.
Yahoo Finance December 1, 2021: The nation’s economic steward said it will back off of using the word “transitory” to describe the fast pace of price increases, as Federal Reserve policymakers acknowledge the increasing risk of more persistent inflation. “We tend to use [the word transitory] to mean that it won’t leave a permanent mark in the form of higher inflation,” Fed Chairman Jerome Powell told Congress on Tuesday. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”
Next, US Treasury Secretary Janet Yellen.
CNN June 10: US Treasury Secretary Janet Yellen admitted Tuesday that she had failed to anticipate how long high inflation would continue to plague American consumers as the Biden administration works to contain a mounting political liability.
In a recent comment to address surging inflation, Federal Reserve Chairman Jerome Powell dismissed the idea that official rates will increase by 75 bps earlier.
Reuters May 4: Federal Reserve Chair Jerome Powell on Wednesday said central bank officials are not "actively" considering a rate hike of three-quarters of a percentage point at coming monetary policy meetings. "A 75 basis point increase is not something that the committee is actively considering," Powell said in response to a question at a press conference following the Fed's latest meeting, at which it decided to lift rates by half a percentage point and signaled more increases are coming.
However, the streaking inflation impelled the FED to change its stance and increase rates by 75 bps, last week, the largest since 1994!
CNBC June 15: Jerome Powell said Wednesday’s 75-basis-point hike was due in part to the Federal Reserve being worried about inflation expectations increasing. Most measures still show that Americans expect inflation to return to normal in the coming years, but there were some signs of stress, Powell said.
But their action increased public concerns over the likelihood of a "hard landing" or a recession. Incidentally, the same authorities have brushed this off.
Philstar.com June 10: The United States is unlikely to suffer an economic downturn, despite sky-high inflation, US Treasury Secretary Janet Yellen said Thursday. "There's nothing to suggest that there's a recession in the works," she said during an interview at The New York Times' economic forum.
AFR.com June 16: So, Powell had his work cut out on Wednesday (Thursday AEST) to convince pundits that the American economy could avoid one. The Federal Reserve approved the largest rate increase since 1994 and signalled it would continue to lift rates this year to combat inflation, which is running at a 40-year high. But Powell said he was confident of a soft landing, where the Fed slows the economy enough to bring down inflation without causing a recession. His words seemed to assuage the markets and key indices jumped after he delivered his outlook. “There’s no sign of a broader slowdown that I can see in the economy,” the US central bank chairman said at his press conference. “People are talking about it a lot. Consumer confidence is very low and that’s probably related to gas prices, and also stock prices to some extent for other people. But that’s not what we’re seeing. We’re not seeing a broad slowdown,” he said.
Are these denials a confirmation of the onset of a US recession?
II. Bitcoin Collapses on Liquidity Drought!
Figure 1
The US Fed appears to be aggressively hiking amidst a falling stock market, which should mark the first-ever event. (Figure 1, upper pane)
This attempt to thaw the massive selloffs (rocketing yields) in the bond markets through the series of tightening measures has pounded the liquidity-dependent global assets markets.
The crypto sphere was monkey hammered over the week, with its overall market cap crashing by 25.8%, principally on Bitcoin's harrowing 30% collapse! (Figure 1, middle window)
Bitcoin, the principal member of the crypto population, presently trades at the USD 19,000 level, representing a low of December 2020.
Also, this level indicates a massive pullback of the price gains acquired by Bitcoin when it surged to over USD 65,000 in November 2021!
As Newton’s second law of motion states, "For every action, there is an equal and opposite reaction."
The massive run on lenders Celsius Network and Babel Finance and troubles in crypto hedge fund Three Arrows Capital have exacerbated the predicament of the crypto universe.
Ironically, despite the crumbling prices, the crypto population continues to swell. It was up by .51% to 19,920 this week, or 22.7% YTD!
The bottom may not be on the horizon yet.
The crypto crash is a testament to what happens when central bank liquidity dissipates!
Yet, in the crypto sphere, never believe anything until it is officially denied.
With mounting doubts about its viability, officials of Celsius Network claimed they were ready to meet the challenges.
Celsius Blog June 8: "We at Celsius are online 24–7. We’re working around the clock to continue to serve our community. Celsius has one of the best risk management teams in the world. Our security team and infrastructure is second to none. We have made it through crypto downturns before (this is our fourth!). Celsius is prepared. At this already challenging time, it’s unfortunate that vocal actors are spreading misinformation and confusion. They have tried unsuccessfully, for example, to link Celsius to the collapse of Luna and falsely claim that Celsius sustained significant losses as a result. They have stirred confusion around HODL mode and the importance of protecting user accounts. And the list goes on."
However, its supposed bulwark succumbed to mass withdrawals.
Reuters (June 13): Bitcoin fell as much as 14% on Monday after major U.S. cryptocurrency lending company Celsius Network froze withdrawals and transfers citing "extreme" market conditions, in the latest sign of the financial market downturn hitting the cryptosphere. The Celsius move triggered a slide across cryptocurrencies, with their value dropping below $1 trillion on Monday for the first time since January 2021, sparking worries the rout might spill over into other assets or hit other companies.
III. Global Stocks and Bonds Plunged, the Bear Market Linkage Between the S&P 500-PSEi 30
Again, it's not just bitcoin and the crypto world.
The monetary drought has buffeted global stocks and bonds, which are on track to post the worst quarterly returns in history. (Figure 1, lowest window)
In short, mounting liquidity strains have prompted the liquidity-dependent financial marketplace to raise liquidity in panic.
What's more, the axiom "when the US sneezes, the world catches a cold" still applies.
It was a bloodbath for global equity markets last week.
Figure 2
Except for China, Asian equity markets also wobbled. Japan's Nikkei (-6.7%), Australia's All Ordinaries (-6.74%), and South Korea's Kospi (-6.0%) endured the most losses. (Figure 2, upmost window)
While the PSEi fell 3.04%, the US benchmark, the S&P 500, dived by 5.8% this week.
The historical bear markets of the S&P 500 and the PSEi 30 appear synchronized. (Figure 2, middle window)
The MSCI World Index appears to be testing the bear market. Nonetheless, the number of countries with equities at least 20% off their 52-week highs remains lower than in 2020. (Figure 2, lowest pane)
Such dynamic highlights the contagion effects of the interconnected global financial markets.
But no trend goes in a straight line. Bear markets tend to have the sharpest but unsustainable clearing rallies.
Generating positive returns require accurately picking the bottom and implementing it. However, this may be similar to the analogy of "picking up nickels in front of a steam roller," or profitably catching bottoms are elusive, and instead may lead to the fatal, "catching a falling knife."
Accurate timing does not only represent the principal challenge. The other concern is to weigh the probability and payoffs from estimated positioning and its implementation. And this requires both flexibility and discipline.
IV. Divergent Policies: ECB’s Makeover QE and the Doggedness of Bank of Japan’s Low Rate Policy
Figure 3
Interestingly, the seeming conviction of the FED to tighten doesn't seem to be shared by other central banks.
Bond yields in Europe have surged because of inflation backed by receding market liquidity. (Figure 3, upmost pane)
In response, the ECB announced plans to implement a new tool to address the fragmenting risks in its bond markets with a revision of its QE.
Earlier, the ECB also confirmed plans to raise rates in July. Perhaps unconvinced by the ECB measures, the euro fell by .2% this week.
Meanwhile, the Bank of Japan bucked the global trend of rising rates to maintain its low policy rates.
Reinforcing its policy of putting a cap on the yields of its treasuries, the USD Yen soared to a 24-year high! (Figure 3, middle and lowest windows)
The BoJ thinks that its cap will work, but the market takes the opposing view.
Because of the cap, the sinking yen represents the market's exhaust valve.
Needless to say, varying policies of central banks are likely to amplify the distortions in the global marketplace and exacerbate financial stress.
V. Denialism: The "Stable" Peso
Here are the domestic account of "Never Believe Anything Until It Is Officially Denied."
Inquirer, June 13: The Department of Finance (DOF) is confident that the Philippine peso remains stable and backed by a firm economy after the local currency depreciated to 53 against the US dollar on Friday, the weakest in about three and a half years. “Strong macroeconomic fundamentals continue to support the peso, despite external headwinds from tighter monetary policy actions by the US Federal Reserve and inflationary pressures from heightened global fuel prices,” DOF chief economist Gil Beltran said in a statement…Also, Beltran said the peso continued to be in “the middle of the pack of the most stable currencies” in Asia, ranking 8th among 11 Asian currencies in terms of strength. The peso depreciated by 5.4 percent to 50.77 to the US dollar at the end of 2021 from 48.04:$1 at end-2020. At the same time, three currencies —including the Japanese yen, Thai baht, and South Korean won—depreciated faster. “In 2022 [so far], the peso was one of the strongest Asian currencies, ranking second only to the Vietnamese dong,” Beltran said.
Figure 4
A few days after this news, the USD peso soared to close the week higher by 1.42% to 53.75, representing the third-largest gainer in the region after the Indonesian rupiah (+1.87%) and the South Korean won (+1.53%). (Figure 4, upmost window)
Sure, this strong move by the USD peso pushed YTD returns to slightly below the average return of the region at 5.6%. Or, the USD peso ranked 5th of the nine regional currencies published at Bloomberg. Year-to-Date (YTD). (Figure 4, middle pane)
But the thing is, the USD peso started its upside move in June 2021. In this instance, the USD peso posted the third-best returns in the region from December 31, 2020, through last week. (Figure 4, lowest window)
In any case, picking historical points to prove a political point signifies a biased sample.
Figure 5
If history is a guide, the USD peso tends to be strong in periods of economic and financial distress. The USD peso returned 15.12% in 2008 or during the Great Recession and 8.5% during the taper tantrum in 2013. (Figure 5, upper window)
While the USD peso fell by 3.7% and 5.16% in 2019 and 2020 (record recession), this was principally due to BSP operations to support the peso through massive "USD short" positions. Such positions included the intensive use of unconventional tools such as the "Other Reserve Assets" (or financial derivatives) and extensive external public borrowings.
Besides, how is comparing volatility equivalent to being "stable"? Merriam-Webster defines stable as not changing or fluctuating.
And how will the record string of public sector deficits be financed if not through debt, inflation, and taxes?
And how about the supposed "prudence" from the streaking record highs of external debt? (Figure 5, lowest pane)
And what is the influence of the other factors, such as rising rates and tightening liquidity abroad, and others, on the USD peso?
How would these be supportive of the peso?
Confusing statistics (history) with causality may not be a sound approach when interpreting or forecasting the markets.
Economics is not about the talisman of statistics.
VI. Denialism: Stagflation in the Transport Sector
Never believe in stagflation until it is officially denied.
Businessworld, June 17: “STAGFLATION” is unlikely to pose an immediate risk to the Philippine economy, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said. “The BSP does not view ‘stagflation’ — an economic condition characterized by slow growth, high unemployment, and rising inflation — as an immediate risk to the Philippine economy,” he said in a statement on Thursday.
ABS-CBN News June 19: Outgoing Department of Trade and Industry (DTI) Secretary Ramon Lopez said Saturday that stagflation is unlikely to happen in the country, citing a rosy economic outlook. Stagflation happens when there is slow economic growth, high inflation, and a high unemployment rate. "Stagflation, malabo dahil nga dito sa growth momentum that we are experiencing despite the challenges," Lopez told ABS-CBN's TeleRadyo.
For authorities to chime in and say that stagflation is not a risk should, on its own, be interesting.
Why reckon with "stagflation" in public when it is not a risk worth considering? Are some sectors starting to press authorities for answers on these matters?
One example. The distressed Transport sector.
Inquirer, June 17: “As the saying goes: ‘A desperate man will cling to a knife.’ We don’t want to put the drivers in that kind of situation, which is why we are making this request,” Suntay said. Taxi driver Gregorio Laude, a father of two, said the increase in flagdown rates would be a big help for his family. The 56-year-old used to earn P5,000 a day working from 5:30 a.m. until 4 p.m. From that amount, he would take home around P2,000 to P3,000. But over the past months, his earnings have gone down to around P700 to P1,000. Before the weekly skyrocketing prices of petroleum products, Laude paid around P1,300 to P1,500 for gasoline daily. He now pays P3,000. Apart from that, the “boundary” was raised from P900 to P1,300 by the taxi owner, who reasoned that there were more passengers now after pandemic restrictions were relaxed in Metro Manila. “It’s not just the gas, but the boundary as well, which consumes what we would normally collect for the day,” Laude said. He also used to get an additional P20 to P30 in tips from at least four out of every 10 passengers. If he is lucky, a generous passenger would give him P50 to P100. “Of course, they understand our situation and they themselves would voluntarily give a tip, sometimes bigger,” Laude said.
Inquirer, June 15: The transport sector is in a “deadly spiral” and the next administration should “get us out of this”. This was stressed by the group Move As One Coalition (Move As One) on Tuesday (June 14) as transport inflation remained high in May, having a 24.5 share in the overall 5.4 percent inflation rate last month…The coalition said this was reflected in rising oil prices, drivers losing jobs, public transportation supply collapsing, more commuters experiencing longer lines and waiting times, and crowded commutes in enclosed spaces…The Pagkakaisa ng mga Samahan ng Tsuper at Operator Nationwide told INQUIRER.net that because of the oil price hikes, drivers are losing P363 per day for every 20 liters of diesel needed for short routes. As a result, some PUV drivers and operators have already decided to stop plying their routes for now because the cost of diesel, which already registered a net increase of P41.15 per liter since last Jan. 1, had eaten up all their earnings.
Perhaps authorities and experts have become so fixated with politics or the instant gratification of the commuting public that they seem to have forgotten the fundamentals of price ceilings.
Figure 6
From Econoport: "The resulting shortage of goods can lead to consumers having to queue up in line to get the good, government rationing, and even the development of a black market dealing with the scarce goods." (Figure 6, upper pane)
The anecdotes reinforce the economic theory on why the socio-economic distress from the supply side in response to price caps has led to the shrinking availability of public transport, the long lines and waiting times for commuters, and unauthorized charging by those still plying the routes.
It represents a textbook response.
Yet, free rides by authorities only transfer their burden to the public treasury through higher public spending.
Moreover, since subsidies given to the affected drivers by authorities address the demand side when the supply side signifies the problem only strengthens the case of stagflation.
And how are developments in the Transport sector such as reduced output, rising prices, and decreased jobs not symptoms of stagflation?
Why the intense refusal to raise fare prices or ideally allow the price system to determine people's actions?
Because authorities want to defend the commuters' welfare? By inducing shortages? Or, how does pushing for transport deficiencies help the welfare of the commuting public? Yes, one can pay lower prices only if one can secure a ride from the growing scarcity of public transport. IF.
With lower employee mobility, how will this impact production?
Or are authorities defending the fare limits to put a cap on the CPI?
By extension, a depressed CPI theoretically lowers bond yields that, in effect, represent a subsidy to public spending.
You see, that's how central planning works. Use political smoke and mirrors to pick winners and losers to seek more funds to spend on other boondoggles.
As pawns of vile politics; damned the consumers!
But there’s more.
VII. Denialism: Public Sentiment Indicates Worries Over Stagflation
SWS, June 16: The national Social Weather Survey of April 19-27, 2022, found 34% of adult Filipinos saying their quality-of-life was worse than twelve months before (termed by SWS as “Losers”), 32% saying it got better (“Gainers”), and 34% saying it was the same (“Unchanged”), compared to a year ago. The resulting Net Gainers score is -2 (% Gainers minus % Losers), classified by SWS as fair (-9 to zero).
Let us suppose the accuracy of the SWS poll.
The survey does not include the reasons behind the changes in the quality of life.
But, the survey deals with the massive changes in mobility. Or its data compares a social environment limited by pandemic restrictions against reopened one.
The Google Mobility chart provides, in clarity, the scope of changes covering the stated period. (Figure 6, lowest pane)
Despite the increase, the majority (losers and unchanged) remained unconvinced of a better life? Why?
What happened to the reopening? Why was it insufficient to persuade the majority of a return to normal?
What "other" factors constrained public sentiment to see a better quality of life than last year?
Was it inflation, which also saw increased perceptions of self-rated poverty, aside from the hunger incidences?
How are these not supposed to be symptoms of "stagflation" instead of a "growth momentum?"
Evidence provided by manufacturing, transport, and even retail points to the mounting risk of stagflation, which appears to be bolstered now by the general sentiment.
It becomes more conspicuous why authorities have ramped up its echo chamber to deny it.
