PSYEi 30: Emperador Replaces SCC; An Exclusive Membership Club for the Elites

A speculator is a man who observes the future, and acts before it occurs—Bernard Baruch 

PSYEi 30: Emperador Replaces SCC; An Exclusive Membership Club for the Elites  

 

The PSE says it uses several measures to assess whether to change members of its elite composite index.  

Among the PSE requirements are “a float level of at least 15 percent, the ranks among the top 25 percent by median daily value per month in nine out of 12 months and ranks among the highest in market capitalization”. 

Semirara was recently booted out in favor of Emperador.  

SCC saw the doors because its share prices remain on a free fall. Meanwhile, Emperador has been one of the rare outperforming issue or a bull in a field populated by bears. 

BLOOM’s experience, being ejected at the low, and re-enlisted at a high, shows us the real reason for the PSE’s change of the members of the index.  

The PSE looks for issue/s that have an upside price momentum going. That’s because such issues tend to boost the index level. Or, the PSE gives most weight to the “ranking of the highest market capitalization”. 

The PSEi, formerly the Phisix, represents a fixed basket of thirty (30) common stocks of listed companies, carefully selected to represent the general movement of the stock market, according to the PSE Academy. 

Or it is supposed to be an indicator of the general state of the Philippine business climate, according to the Wikipedia.  

Sadly, it is neither.  

The PSEi can be analogized as an exclusive country club whose members are the elite. The rotating membership consists of holding companies and their subsidiaries.  

The PSEi’s membership showcases the economic inequality structurally embedded in the socio-political-economic system.  

That said, fetishes of such institutions may have been influencing substantially market pricing and valuations.  

  

Though retail investors have been growing, mainly through the online platform, they comprise a minute 1.13% share of the population in 2019. Plainly stated, stock market trades continue to be dominated by domestic and foreign financial institutions, which are mostly controlled by the elites. 

But the latest rally has come about with shrinking participation of foreign trades, which dropped to a 5-year low last week. The PSYEi and the peso have been rallying on thinning trade and significantly reduced foreign participation. Has the BSP imposed implicit capital controls through the community quarantine?  

As a side note, yes, the PSE registered foreign buying this week mainly because of the listing of Ayala Land’s AREIT. 

 

 The deepening use of marking the close pumps has increasingly impaired the pricing system. This deliberate gaming of the system has skewed immensely the distribution of market cap weightings, as well as the PE ratios. 

 

Based on 2019’s PER, current prices reflect an average PER of 19 for a 20% decrease and an average of 30 PER for a 50% reduction. For the 27 firms that have announced the 1H 2020 PER, the aggregate earnings deflation has been at 56%. And non-financial firms have engaged in heavy borrowing despite the earnings collapse! 

Perhaps we can post the detailed breakdown of the 2Q and 1H performance upon the completion of the publication of 17Q reports by PSYEi 30 firms. 

 Free access to politically imposed cheap credit differentiates the elite from the mom-and-pop entrepreneurs, who are the main victims of the current lockdown policy. 

Despite the recent crash, the market has yet to clear imbalances accrued over the years 

No less than the BSP’s 2020 FSR has sensed this. 

Looking ahead, it would be a major oversight to expect that the economy could still go back to business-as-usual. COVID-19 is leaving scars that even a proven vaccine may not remove. The old economy has to “re-fit” into the new normal of social distancing. Business paradigms that relied on scale (incurring high fixed costs and catering to the retail market in mass) will have to rethink how they can operate in the post-COVID-19 world. Air transport (planes that cost from USD77 million to USD450 million depending on the model, ferrying hundreds of passengers per trip) and big shopping malls, for example, may not be as viable under reduced floor and foot traffic.  

And the “refitting process” of the credit driven race-to-build supply economy will unlikely be smooth such that even firms of the elite will likely suffer. 

Inflationism Promotes Inequality, Immorality and Economic Hardship

Contra to what has been advertised by politicians and the mainstream, the policy of inflationism has essentially been political than about economics (e.g. couched by technical vernacular as “unemployment” or economic recovery) or social welfare.

That’s because inflationism is a policy which redistributes resources from society to the government and to politically favored groups.

I previously pointed out how a study from the Bank of England subtly admitted that their QE policies favored the political elites which indirectly has promoted “inequality”.

Yet we see more evidences of how central bank’s inflationist policies deepens the economic divide, from the CNBC,

The latest round of QE announced by Bernanke yesterday has sparked growing controversy about how Fed policy has mainly helped the wealthiest Americans.

Economist Anthony Randazzo of the Reason Foundation wrote that QE “is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality.”

Donald Trump – not usually one for distributional analyses of monetary policy – said on CNBC yesterday that “People like me will benefit from this.”

The reason is simple. QE drives up the prices of assets, especially financial assets. And most of the financial assets in America are owed by the wealthiest 5 percent of Americans.

According to Fed data, the top 5 percent own 60 percent of the nation’s individually held financial assets. They own 82 percent of the individually held stocks and more than 90 percent of the individually held bonds.

By helping to reinflate the stock market in 2009 and 2010, the Fed created a two-speed recovery. The wealthy quickly recovered much of their wealth as stocks doubled in value. But the rest of the country, which depends on houses and jobs for their wealth, remained stuck in recession.

Put another way, most Americans have most of their wealth tied up in their houses (about 50 percent for most). For the top 5 percent, homes account for only 10 percent of wealth, while financial assets account for between one third and 40 percent.

By boosting the value of financial assets, Fed has helped the economy of Richistan but not the broader United States.

Bernanke is obviously aware of this criticism, which is why the latest round of easing is focused on mortgages. But here too, there is a divide between the rich and the rest. Despite lowered rates, banks remain strict on lending, restricting access to credit for most Americans. The wealthy and the asset-rich, however, will now enjoy even lower rates on their credit.

The policy of inflationism does not only promote societal inequality, they advance immoral actions such as “orgy of speculation”, recklessness and the sense of entitlement-dependency (moral hazard) which ultimately sows seeds to social instability.

At worst, inflationism fosters boom-bust cycles if not the destruction of the currency which leads to economic depression

As the late distinguished Professor Hans F. Sennholz warned,

Evil acts tend to breed more evil acts. Inflationary policies conducted for long periods of time not only foster the growth of government but also depress economic activity. Standards of living may stagnate or even decline as growing budget deficits thwart capital accumulation and investment that are sustaining the standards.

Inflation misleads businessmen in their investment decisions, which causes much waste and many bankruptcies. In fact, it is the root cause of the boom-and-bust cycle which wreaks havoc on economic activity. Indeed, inflation breeds many evils of which most Americans are unaware.

Open ended inflationism by the US Federal Reserve and the European Central Bank, will ultimately lead to economic impoverishment and social chaos.

How Multilateral Agencies Profit From Global Taxpayers

I have suggested that we should end or abolish the IMF, for many reasons such as the seeming perpetual advocacy of various forms of interventionism, incompetence, wealth transfer, moral hazard and political inequality.

This suggestion should also apply to the other multilateral agencies as well.

Pajama Media reveals how these institutions have used politics to foster wealth inequalities (bold emphasis added, italics original)

Many of Washington’s 2,600 technocrats working at the International Monetary Fund do not regard Dominique Strauss-Kahn’s lavish lifestyle as an anomaly.

Privately they admire it, recognizing it as a description of their own standard of living. They call their many unseen perks “golden handshakes.” At the World Bank, Inter-American Development Bank, the African Development Bank, and at the IMF, you find extravagantly paid men and women who masquerade as anti-poverty fighters for the Third World. As one World Bank vice president said upon his resignation: “Poverty reduction is the last thing on most World Bank bureaucrats’ minds.”

These global institutions are supposed to act as non-profits, but big salaries and big perks rule as the norm. And you’re paying for them: as the largest single contributor, American taxpayers pick up the tab.

By now everyone knows about DSK’s extravagant $420,000 employment agreement that included an additional $73,000 for living expenses — a provision explained thusly by the IMF: “To enable you to maintain … a scale of living appropriate to your position.” Most of the non-profit development world remained silent when the Fund announced a $250,000 “golden parachute” severance for the indicted managing director.

A PJM survey found that a common annual compensation package for senior management at the anti-poverty banks exceeds $500,000 — tax-free. World Bank President Robert Zoellick currently receives $441,980 in base salary and $284,500 in other benefits. Strauss-Kahn’s deputy, John Lipsky, receives $384,000 in base salary plus “living allowances.”

Some may argue as the IMF did that global financial leaders — even from governmental organizations – should be highly compensated. But the IMF and World Bank payments for their executives are three times the annual salary for U.S. Federal Reserve Chairman Ben Bernanke, and four times the salary of America’s Federal Reserve governors: Bernanke’s gross annual salary is set at $199,700; his governors receive $179,000.

The global banks’ stratospheric governmental salaries are not limited to chief executives. Ten of Zoellick’s deputies receive tax-free base pay of $321,00 to $347,000, plus enjoy an additional $210,000 in benefits. Even mid-level World Bank employees earn well into six digits: the average salary for a professional manager is $181,000, plus $97,000 in benefits. A senior adviser receives on average $238,000 plus $127,000 in benefits. A vice president receives $286,000 plus $153,000 in benefits.

The biggest hidden benefits are the off-the-book perks called “living allowances.” These perks can nearly double a stated salary. Of the 2,600 IMF and 10,000 World Bank full-time employees, all receive some form of supplemental living allowances in addition to their base pay. These include home leave grants, dependent allowances, travel perks, and education “grants” for their children to attend private schools. In addition, they offer generous pensions and health insurance policies.

Where do they get their lavish “golden handshakes”? From us, the productive sector, the taxpayers.

True, I am delighted that some of them have rediscovered the importance of economic freedom. But this isn’t anything new, as economic freedom has been long been advocated by classical liberals since the 19^th century.

In other words we don’t need to have highly paid bureaucrats to tell us something our ancestors knew, long ago.

Yet if economic freedom is to be nurtured, then the more these institutions are hardly needed because the services that they offer can sufficiently be provided for by the private sector.

Remember, the resources used to finance “golden handshakes” are resources that could have been used to generate productive rather than consumptive activities.

Worst, the above only shows of how the political divide from these institutions increases social inequality.

And as Cato’s Dan Mitchell aptly points out,

Redistribution from rich to poor is not a good idea, but it is far more offensive when the coercive power of government is used to transfer money from ordinary people to the elite.

This serves as another instance of politically based parasitism.