Mass speculation is a peak in confidence phenomenon. It only occurs once the crowd is convinced that prices only go up. That requires either clear long-term trend lines that can be easily extrapolated or popular celebrity figures who can aim the crowd toward the next flash mob—Peter Atwater
In this issue:
Strong Economic Recovery? Mobility Trends in 1H January Still Sharply Down, PSE’s Incredible Small Cap Bubbles!
I. Strong GDP in 2021? 1H January Mobility Trends Still Miles Away from Normal!
II. Proxies of Demand and Supply: November’s Falling Bank Lending, Retreating Industrial Production and Imports
III. Recession of 2020 Won’t Be Resolved by Vaccines, Rescue Policies Will Exacerbate Economic Woes
IV. Climaxing PSYEi 30? Small Cap Bubbles Take Center Stage!
Strong Economic Recovery? Mobility Trends in 1H January Still Sharply Down, PSE’s Incredible Small Cap Bubbles!
I. Strong GDP in 2021? 1H January Mobility Trends Still Miles Away from Normal!
Figure 1
The Philippine economy, according to the establishment, is supposed to recover strongly this year, right?
But has there been a normalization of social movements, a proxy of the economy, to support such biases?
Or, has there been substantial improvements in mobility from the start of the year to facilitate transactions in a largely brick-and-mortar economy?
Sadly, the answer is no.
Sure, mobility trends have been higher from the strict lockdown periods of the ECQ and MECQ from mid-March to May 2020. (Expectations for a robust rebound has largely been premised from the “re-opened” 2021 against a “closed” 2Q last year).
But since reaching an interim peak in mid-December, mobility indicators for the first two weeks of January appears to have regressed to the levels of November and pre-December highs.
The Apple mobility trends exhibit a significant gap in all activities, with transit (-52% as of January 13) coming in last, while walking (-36%) and driving (-34%) showing the best. January 13, 2020 serve as the baseline for the index. In short, the lower class has had reduced access to transport compared to those with access to private passenger vehicles. [Figure 1. Top window]
On the other hand, Google Mobility trends reveal that the grocery and pharmaceutical segment more than fully recovered in parts of the mid-to-the-end of December, which suggests that despite political restrictions on assembly, the people still celebrated the Christmas and New Year holidays. However, since the onset of 2021, activities in this segment have retraced materially below the pre-high levels (-9% as of January 12). [Figure 2. Lower pane]
Meanwhile, Parks (-22%), Workplaces (-33%), Retail and Recreation (-35%), and Transit (-46%), which represent the other segments of social mobility, still registered a significant distance from normalization. The baseline for Google Index is February 17, 2020, almost a month since the Chinese government began its campaign to contain the Covid-19 outbreak through a massive near-nationwide lockdown.
The news of the spreading virus abroad began to influence domestic public movements at its outset. Google’s mobility index started its descent in late February, subsequently plunged in early March ahead of the mid-month lockdown. Apple’s index amplified this effect. Notable declines in movements emerged in late January, worsened in February, accelerated in early March then crashed during the ECQ.
That said, if the current mobility trends persist through this quarter, the GDP for the period will likely register a NEGATIVE change compared to the same period last year.
As discussed last week, the National Government has already programmed the extension of the health protocols or the less-rigorous lockdown in 2021.
The surfacing of a more infectious variant or mutation of the virus would only justify this.
And that’s from the mobility perspective alone.
II. Proxies of Demand and Supply: November’s Falling Bank Lending, Retreating Industrial Production and Imports
If the present social mobility indicators are at November to early December levels, how would this translate to the economic realm?
The BSP’s bank lending to the households and retail industry provides a clue to the likely spending activities involved.
Last November, bank loans to the retail industry contracted by 5.96%, likely the first in decades, while consumer credit growth tumbled to 7.06% from 7.9% a month ago. Since culminating in July 2018, loans to the supply side of the consumers have been headed south. The pandemic only accelerated the downside trend. [Figure 2. Upmost pane]
And that’s a snapshot of the demand side.
Figure 2
Neither has the supply-side shown any significant improvements.
If the Government’s data is to be believed, the reopening has barely boosted industrial production and imports. For November, industrial production registered -13.8%, for a stunning 23 of 24 months of contraction. Pinning the blame on the pandemic alone would only signify half-truths. [Figure 2. Middle pane]
Bank loans to this sector also posted -4.2% in November, its 16 consecutive months of deflation.
Imports also recorded an 18.9% contraction last November, its 19-straight months of contraction. [Figure 2. Lowest window]
To be sure, income, jobs, and wage losses or reductions have likewise contributed to the slowdown in mobility, aside from the extended restrictions on movement, as well as the public’s fear of acquiring the disease.
So unless investments improved and or bank credit uptake materially picked up in December, revenue, income, jobs, and wage deficits or losses accrued in the 1H of January would only compound on November’s conditions.
By extension, although people’s movement in 1H January 2021 may register the same level as November 2020, there are stark differences in the financial and economic conditions during these time periods.
III. Recession of 2020 Won’t Be Resolved by Vaccines, Rescue Policies Will Exacerbate Economic Woes
In any case, the mainstream notion that a vaccinated public attaining a herd immunity would revive the economy via restored confidence represents a popular delusion.
Vaccines Equal Socio-Economic Miracles??? The BSP Owns the Stock Market Bubble! December 13
As an aside, a vaccinated public assumes the advertised efficiency rates of vaccines. But there have been reports of deaths from such ‘rapidly constructed’ vaccines.
Figure 3
That’s because the recession of 2020 has barely been about shattered confidence or the ruffled Keynesian animal spirits.
Instead, the recession of 2020 is about the lockdown socialism, which intensified pre-existing maladjustments and imbalances:
-resulting in the staggering destruction of capital—the forced transition into a digital economy imposed gargantuan losses to the brick-and-model enterprises.
Moreover, the BSP’s money printing aggravates this process. The BSP’s assets soared by 46.9% in November to Php 7.34 trillion, or about 37% of the 2019 GDP or 40% of the estimated 2020 GDP. [Figure 3. Topmost pane]
-the upsetting of Say’s law by inducing a massive supply shock—the substantial disruptions and dislocations in the supply network,
From the Inquirer (January 16): The DA officials have blamed the higher prices on numerous factors such as the ongoing pandemic, the devastating typhoons that destroyed crops, and the unwillingness of poultry and hog raisers to farm anew following the glut and the spread of the African swine fever, respectively.
Don’t forget to include the latent effects of price controls.
-its consequential damage to demand--channeled through losses or cuts in income, wages, jobs in response, razed consumption,
-the amplification of financial distress—manifested by the upsurge in bank credit impairments had been compounded by a plunge in credit transactions.
Though the various bank credit delinquency measures rose anew in November, the growth rate slowed. But that’s largely due to the BSP’s debt moratorium, which expired last December. [Figure 3. Middle window]
There are two ways to view bank lending conditions from the BSP's data. The first is bank lending under Financial/Monetary Account. The second is the banking system’s balance sheet. Under the first metric, growth of the universal and commercial bank’s credit portfolio slowed to a near stop, up by a scanty 1.15% last November. However, the aggregate bank lending inched higher by only .51% over the same period, which means Thrift and Cooperatives dragged down credit activities of its larger kin.
Under the banking system's balance sheet, Total Loan Portfolio (excluding Interbank and Repos) suffered a -.5% contraction in November.
Considering the hefty growth rate of PSE debt, where non-financials borrowed 10.2% more YoY in the 9 months of 2020, it is almost certain that the diminishing rate of credit growth of the banking system reflects on the credit deflation by proprietorships and non-listed firms/corporations in the broader economy.
Meanwhile, bank savings deposit growth rate slowed to a still brisk 19.51% in November from 21.93% a month ago, suggesting a cash flow buildup by the relatively small number of banked population, which of course, represents a natural reflexive response to the downturn, a positive development. [Figure 3. Lowest window]
-the smothering political shackles on entrepreneurial activities through a wall of regulations (and taxes) under the pretext of health protocols and consumer protection.
-Finally, the magnification of social and economic inequality through a divergent path as symbolized by the K-economy. The Apple Index showcases the significant variance between the decreasing rates of transit (public transports) and driving, as explained above. Furthermore, through its tsunami of liquidity injections, the BSP bailed out the stock market, representing an implicit transfer of resources to publicly listed firms at the economy's expense. That is, by the inflation of their collateral values, firms owned and controlled mostly by the elites continue to have easy access to low-cost credit, thereby bestowing upon them the privilege of access to resources even as the general economy struggles.
How to revive the economy?
The BSP should cease its policy of inflating the money supply. That is, the BSP and the NG should desist from bailing out the financial system or implementing the public transfers, which constitute consumption, thereby diluting savings or capital.
Instead, the government should unleash the entrepreneurial spirits by freeing them from political barriers, interventions, and redistribution. Or, it should allow the markets to determine the natural course of the economy.
But this is unlikely to happen considering the ideology driving the leadership’s governance.
While the unwinding of the previous imbalances will likely represent a painful process, the healing phase should be fast.
As the great dean of the Austrian school of economics, Murray N. Rothbard wrote in the Great Depression:
The recession periods of the business cycle then become inevitable, for the recession is the necessary corrective process by which the market liquidates the unsound investments of the boom and redirects resources from the capital goods to the consumer goods industries. The longer the inflationary distortions continue, the more severe the recession-adjustment must become.
Murray N. Rothbard, The Great Depression, Mises.org p xxvii
Otherwise, by postponing the market clearing process, imbalances should amass further that pushes the economy into an eventual crisis and or depression.
IV. Climaxing PSYEi 30? Small Cap Bubbles Take Center Stage!
Move aside bitcoin, FANG stocks, TESLA, here comes the small caps!
Figure 4
From Bloomberg/Yahoo Finance: (January 15): Ascribe it to what you want: a boom in retail trading triggered by injections of government cash, stay-at-home orders and commission-free brokerages, maybe even the buy-low approach on steroids. More than 1 trillion shares changed hands in December over lightly regulated quotation systems run by firms like OTC Markets. In a note titled “This Is Ludicrous,” Bespoke Investment Group summed up the recent action. It cited 59 U.S.-listed stocks that are trading at prices that are more than 10 times sales and have more than doubled in the past three months. Stocks currently in that category have risen 760% since March and have a combined market capitalization of $320 billion, according to George Pearkes, global macro strategist at the firm. “There are an awfully large number of stocks that have both exploded higher and trade at a ‘that can’t be real’ multiple,” Pearkes wrote. “There are almost always a few names in this bucket, but over the last few months this number has exploded up to 59 at the moment.”
Speculative excesses in the US appear to have percolated to the microcap or penny stocks. [Figure 4, top and middle windows]
The same dynamic appears to have landed in the Philippine stock market.
Proof?
As share prices of several small-cap issues rocket to the moon, the average daily trade smashed to another record-setting high last week! [Figure 4. Lowest pane] Such milestones have typically been associated with the inflection points of the headline index.
Figure 5
Last Friday, seven of the top 10 trading spots had been dominated by issues with market caps of below Php 50 billion! Amazing!
And many small-cap issues have infiltrated the territory previously dominated by the big market caps since the advent of 2021.
Importantly, PSE participants appear to have been enchanted by two issues, Apollo Global Capital Inc. (PSE: APL) and Premiere Horizon Alliance Corp. (PSE: PHA).
APL and PHA, ranked second and third last Friday, have been consistently within the top 20 most traded issues since December 28 and 29, respectively.
Yet stunningly, both have assumed leadership by alternatively taking the most traded spot twice this week! Year to date, APL and PHA have delivered incredible returns of 134% and 161% in the only ten trading days of 2021!
PHA’s share prices had also been the market’s darling in January 2019, vaulting to a record as one of the most traded issues that had been easily surpassed last Friday (January 15).
APL’s last winning streak climaxed in January 2018, coinciding with the pinnacle of the headline index at 9,058.
Both issues then gave up almost all their gains to be reanimated only by the recent events spurred by the BSP’s historic liquidity injections.
Here is the thing.
Instead of the usual landscape which limits speculative bubbles to select issues, 2021’s manic buying (vertical prices) has spread to at least 20 firms; namely, BSC, ACEN, T, IS, DITO, TBGI, MAH, DWC, AR, AT, FNI, GEO, MARC, NI, ORE, ACEX, COL, and UBP as well as the fledging candidates of SFI, ARA, SUN, IMP, COAL, and ACEX.
Rampaging prices have occurred mainly on nickel mining, telecom, and some energy issues.
Monetary liquidity, which earlier moved into the big market caps appears to have rotated towards the third liners, which breadth of speculative activities and intensity of price actions seem unparalleled since the post-Asian Crisis era.
Unless the BSP continues to inflate aggressively, artificial booms will turn into a bust. That is, asset and economic boom-bust cycles can be expressed by Newton's third law of motion, "for every action, there is an equal and opposite reaction".
As evidenced by incredible mispricing and the fantastic surge in volume traded, the rotation towards small caps most likely heralds the culmination of the BSP sponsored stock market boom.
As analyst Peter Atwater astutely tweeted
Just a reminder that manias require acceleration. In order to attract a crowd, you need a rapidly growing crowd.
Verticality is a statement on both the rush of new participants as well as the dopamine rush experienced by those already involved
Instead of attaining financial stability, policies inducing boom-bust cycles deliver the opposite results: economic and financial instability, at worst, a crisis.
