Phisix: Philippine 4Q 6.9% GDP: A Story of Government Pump and Mounting Excesses

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.—Joan Robinson

In this issue:

Phisix: Philippine 4Q 6.9% GDP: A Story of Government Pump and Mounting Excesses

-Statistics Isn’t Economics

-6.9% GDP: All Growth Eggs in One Basket, The Construction Show!

-6.9% GDP: What Happened to the Consumer Boom Story?

-6.9% GDP: Where Was Investments?

-Slump in Construction Material Prices in the Face of a Construction Boom?

-Has 4Q GDP Been All About Government Construction Projects?

-Record Phisix: Intensifying Deliriums over G-R-O-W-T-H!

Phisix: Philippine 4Q 6.9% GDP: A Story of Government Pump and Mounting Excesses

In the following exegesis of 4Q GDP, I piece together data from different government agencies and use economic theory to see how consistent and compatible the flowery growth statistics have been with real events.

Statistics Isn’t Economics

It must be known statistics isn’t economics.

Aggregate numbers represent as segments of economic history. These numbers hardly accurately capture in quantitative context the complex multi-dimension human activities. They are not theory.

As the great Austrian economist Ludwig von Mises explained[1],

Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. statistics is a method for the presentation of historical facts concerning prices and other relevant data of human action. It is not economics and cannot produce economic theorems and theories. The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics.

Yet statistics are favorite tools used by politicians to attain political objectives.

As Scottish poet novelist and literary critic once Andrew Lang wrote, politicians use statistics in the same way that a drunk uses lamp-posts—for support rather than illumination.

Like drunks, G-R-O-W-T-H statistics have been used to incite hysteric pump and push of financial asset prices with arrant disregard of risks.

Nonetheless, my interpretation of 4Q GDP will be founded from two frameworks: One, the law of demand: “The law of demand states that, other things remaining same, the quantity demanded of a good increases when its price falls and vice-versa”.

Second the price system as defined by the great Austrian economist Nobel Prize winner, Friedrich von Hayek[2]:

The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a coördinated utilization of resources based on an equally divided knowledge has become possible…

The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.

In short, the pricing system signals the decentralized interactions or coordination process in the marketplace that summarizes the intertemporal balance of supply and demand. 

Prices are sine qua non for economics.

Now to the data.

6.9% GDP: All Growth Eggs in One Basket, The Construction Show!

On the left is the expenditure side of the accounting calculation of the 4Q GDP.

The NSCB recaps this as: On the demand side, Household Final Consumption Expenditure (HFCE) together with the sustained investments in Fixed Capital Formation and the remarkable performance of external trade all contributed to the healthy growth of the economy in the fourth quarter and for the full year 2014.

While it is technically true that HFCE did contribute to 4Q performance, it is hardly in the conditions as “framed” above which I explain below.

Fixed capital investments had almost entirely been about construction. Notice too of the absence of mention of the big decline of capital formation. Without the construction booster, capital formation would have declined even more (discussed below)!

Also, the “remarkable” external trade did NOT contribute to growth based on accounting computation of GDP. While exports grew by 15% relative to imports 5.3%, it is not the percentage that makes for the GDP computation. The fact that nominal export data (748,063) remains LESS than imports (813,848), where NET exports posted -65,785, external trade accounted for a reduction and NOT an addition to the accounting GDP*.

Aside from construction, it is the Government Final Consumption Expenditure (GFCE) that had been instrumental in delivering the 4Q figures.

*Expenditure GDP= HFCE + GFCE + Capital Formation + (Exports-Imports)+ statistical discrepancy

On the right side represents calculation of the GDP by industry.

The NSCB concludes: The robust performance of Industry sector particularly by Manufacturing and Construction and supported by the Trade, Real Estate, Renting & Business Activities, and Transport, Storage & Communication, boosted the fourth quarter performance and paved the way for the annual GDP to post a growth of 6.1 percent

I marked in the red box, the share contribution of these sectors to the overall GDP. Those green numbers reveals which sectors outperformed the GDP. Also, capturing additional share of the GDP pie means that these sectors accounted for critical weights to the 4Q performance.

Four sectors virtually gained GDP share at the expense of the rest. The construction sector added .7% share in 4Q. This represents a fantastic surge in the sector’s GDP share. The other three posted modest gains, namely, public administration and real estate garnered .13% a piece, while manufacturing added .1%.

So from the industry perspective, 4Q GDP has essentially been a construction act, with cameo roles played by the real estate, government and manufacturing.

The numbers from the NSCB speak for themselves.

And to what I consider as main bubble industries, real estate, construction and financial intermediation, their cumulative share of GDP rose to 40.37%.

So from the general standpoint, Philippine 4Q GDP has almost been an all (growth) eggs in one basket. That basket is the construction sector.

6.9% GDP: What Happened to the Consumer Boom Story?

It has been assumed that domestic consumers played a key role in 4Q GDP performance.

Yet all it takes is to scrutinize the HFCE data presented by the National Statistical Coordination Board to expose on the difference between what seems and what has been.

Technically yes, consumers supposedly contributed. But what the NSCB didn’t publicly say has been that consumption growth rates have been struggling. Ever since the 3Q 2013, consumption growth has been on a steady decline.

HFCE posted marginal gains 4Q, i.e. 5.1% from a revised 3Q 5.0%. This is marked by the blue trend line on the left box. The original 3Q data has been at 5.2% as I previously shown in my 3Q analysis. So if we plot the original data, the 4Q HFCE reveals a decline instead of a gain. Through data revision, decline transformed into G-R-O-W-T-H. This marks a fantastic example of what the late economist Ronald Coase warned about, if you torture data long enough, it will confess (to anything).

As for revisions, what happens, for instance, if next month the 6.9% 4Q GDP will be revised downwards by 2% to 4.9%? There will probably be a riot in the mainstream.

Well but that’s what the NSCB just did to the mining industry. Mining industry’s 3Q growth has been sharply degraded from 7.8% to 5.2% as shown above data from the NSCB, and as previously shown in my 3Q GDP analysis. Because the mining industry’s contribution to the overall GDP (4Q .63% share) has been inconsequential, there has been no furor over such data changes. 

Yet the above represents statistically significant changes. If an investor of the mining industry bases one’s decisions on official data then economic calculations would have been severely distorted by the dramatic alterations in government statistics.

Of course, headline GDP will hardly experience big downside revisions as this will have enormous political, bureaucratic and market implications. But the above incident puts a question on the reliability or integrity of the GDP numbers.

As I have been saying here, since governments make the data they can say whatever they want. And it would be a mistake to swallow hook, line and sinker on the veracity of these numbers.

The origin of the GDP has been due to the political desire to finance wars[3]. And because GDP numbers have substantial political, economic and market implications, there will always be a strong predilection by political leadership to exert influence on them.

Now back to the HFCE.

It would be fruitless to pettifog over statistics as to whether 4Q increased or decreased. Yet the NSCB’s data on the trade industry should reveal of the actions of consumers from the government’s perspective.

Having peaked in 4Q 2013, the growth rate of the retail industry has been in a slomo decline. The zenith of retail growth rate appears to coincide (on a one month lag) with the peak of the HFCE in Q3 2014.

But surprise, the retail growth rates in 4Q 2014 plummeted from 6.1% in 3Q to 4.1% 4Q or by 2%! In percentage terms that would be tantamount to a 33% decline—a crash!

Since retail trade constitutes 78% of the 4Q GDP trade output, overall trade growth rates has sharply slowed to 5.3% 4Q from 6.4% 3Q. So retail performance contradicts any positive spin of a robust growth in consumer spending via the 4Q HFCE.

The irony has been that the downdraft in consumer activity has been happening during what used to be a seasonally strong quarter due to Christmas holidays!

And another paradox, even as retail activities significantly ease, there has been spike in wholesale trade output. Wholesale output has zoomed to the highest level since 2013!

Has importers and manufacturers been engaged in channel stuffing or forcing wholesalers to acquire more inventories than required?

And what has the ballooning divergence between wholesale and retail trade tell us? It tells us that if retail activities don’t improve significantly soon, there should be a huge inventory build-up on the wholesalers. If the goods are perishable, then this will translate to losses soon. If goods are non-perishable, then the accrual of surplus inventories should imply of a big slowdown in wholesale trade activities which should be transmitted to consumer goods imports or consumer based manufacturing.

So today’s growth halleluiah may transform into an economic storm overtime.

And data from the Philippine central bank, the Bangko Sentral ng Pilipinas, seem to uphold the ongoing substantial slowdown in consumer spending. Banking loans to the trade industry has exhibited a notably substantial decline from 3Q through the 4Q (see right window).

In addition, statistical inflation seem to confirm the ongoing cascade in consumer spending as statistical inflation rate has been on a downtrend, as shown in the lower pane (data from the BSP and tradingeconomics.com)

The law of demand tells us that ceteris paribus (given all things equal), as the price of price of a product increases, quantity demanded falls. So from the law of demand, we can glean that the previous bouts of the high inflation has harried domestic consumers to incite them to reduce demand, therefore, statistical CPI has been falling. And such reduced consumer activities has been reflected on 2 year trends of HFCE and retail trade GDP, as well as, BSP loans to the retail industry.

But it appears that prices have not fallen enough to spur demand.

This is the establishment’s 4Q 6.9% GDP!!!

As a reminder, the above comes from government data, not mine. Anyone can just go the website, plot the data covering the extended time series in a spread sheet, convert them to charts, and see what’s been going on from their perspective.

It has also been a puzzle how accurate those HFCE numbers have been given the sharp decline in the government’s CPI measures, aside from the slump in the growth rate of retail output. In other words, the HFCE growth rates hardly seem as compatible with the ongoing deterioration of the other consumer data series. Since HFCE constitutes over 70% of GDP, all it takes is for government statisticians to pump this category in order to post growth!

As a side note, BSP consumer loans have sizzled during the 2H 2014 even as retail activities have slowed (upper right chart). But most of the gains from the loan growth have been about auto loans which accounts for 34% of the latest BSP data on consumer loans. Credit card loans which posted an upside spike in November have also subsided in December. Since only a few segment of Philippine economy has access to consumer banking credit facilities, apparently the loan growth hasn’t prompted a rebound on consumer demand.

And what about the supposed bonanza on consumers from collapsing oil prices?

Let us say Pedro has a budget of 100 pesos for energy products. Assuming products of energy prices collapsed by 50% and quantity demanded remains the same, Pedro will have 50 pesos to spend on non-energy products. Popular wisdom says this will be spent. What this shows is a shift from “need” expenditures to “want” expenditures. Said differently Pedro’s has more disposable money.

But in the real world there are other options than spending. Disposable money may be saved or used to pay down debt. Importantly, if Pedro’s overall income doesn’t grow, then there will be NO additional growth in spending potential. It is income growth that gives consumers additional spending power.

In essence, having more disposable income means more about “utility” or satisfaction experienced by the consumer of a good.

On the supply side, the loss of energy suppliers will be offset by the gains of non-energy producers (if spent) or by banks (if saved). But again if these beneficiaries choose to pay off debt or save on the added earnings rather than invest, then there will hardly be any growth from the industry side which should transmit to as income growth to the consumers. Again it is income growth that gives consumers additional spending power.

The above theory supported by empirical data as provided by government, says that consumers hardly benefited from collapsing oil prices as of the 2H of 2014. Yet this goes against popular wisdom.

In addition, an even more disturbing sign from 4Q 6.9% GDP—as manifested by the brewing divergence of retail and wholesale trade—has been that of the swiftly widening imbalance between demand and supply.

Think of it. Domestic consumers have been dramatically slowing even as the supply side mostly via property sector (casino-hotel, shopping mall, housing, vertical condos) has been building massive capacity in anticipation of the opposite—perpetual robust consumer spending.

Sometime soon economic reality will force the establishment to acknowledge such mounting malinvestments. The ordinal flow of the cycle will be excess capacity, financial losses then credit problems.

6.9% GDP: Where Was Investments?

I have noted above that in the NSCB press release government placed a positive spin on fixed investments but omitted the negative contribution by capital formation.

Here is the NSCB’s take on investments: Investments in Construction rebounds Investments in construction posted a significant growth of 21.9 percent, a turnaround from a decline of 4.3 percent a year ago.  The growth was boosted by increased investments in the Private Construction which registered a growth of 25.7 percent from a decline of 2.2 percent in 2013. Likewise, Public Construction grew by 5.1 percent from a decline of 12.6 percent last year. Investments in Durable Equipment down For the fourth quarter of 2014, Investments in capital formation for Durable Equipment contracted to 0.6 percent from the double digit growth of 23.2 percent recorded last year. Increased investments were registered in twelve (12) out of the twenty (20) types of fixed asset investments. The following subsectors contributed to the decline in investments: Air Transport, negative 66.4 percent from 429.2 percent; Office Machines & Data Processing, negative 14.2 percent from 90.0 percent; and, Telecommunications & Sound Recording/Reproducing Equipment, negative 1.2 percent from 10.7 percent. Meanwhile, the following subsectors posted positive growths: Road Vehicles, 17.9 percent from 12.5 percent; Other General Industrial Machineries, 25.0 percent from 24.0 percent; and, Agricultural Machineries, 53.3 percent from 7.4 percent.

So while 60% of investment categories posted gains, it has been investment in construction that has provided the fulcrum for the 4Q 6.9% GDP.

Yet capital formation was a negative contributor to 4Q GDP. That’s because gains, like in the Agricultural machineries segment represents a paltry share (.5%) of the durable equipment expenditures which has not been enough to negate the sharp decline by Air Transport.

And the downtrend can hardly be seen as an anomaly. Capital formation and its main subsectors, fixed capital and durable equipment has been on a downtrend since Q1 2013. Q3 2014 posted a rebound that seemed to account for a dead cat’s bounce, as durable equipment has led to capital formation to a second and bigger negative output in 2014!

This is the establishment’s 4Q 6.9% GDP!!!

Yet any sustainable real economic growth should be driven by investments.

As I previously wrote[4],

Because investments drive growth. Business spending represents future income, earnings, demand, consumption, jobs, wages, innovation, dividends, capital gains or what we call as growth.

This also means that if the downturn in investments represents an emergent trend, then current rebound may just be temporary and would hardly account for as resumption to “high trajectory growth”.

Apparently investments have gone nowhere, yet the so-called boom.

From the expenditure side, 4Q GDP shows that capital formation has been negative, external trade has also been negative but only HFCE (household) and GFCE (government) expenditures delivered not only positive but a boom.

Yet as pointed above the HFCE’s performance has been diminishing.

So 4Q GDP seems indeed a puzzle.

Slump in Construction Material Prices in the Face of a Construction Boom?

Consumer spending has been down, investment has been down, so what fueled 6.9% 4Q GDP? Well as noted above it’s now a winner take all Philippine statistical economy in favor of construction…

Last December I noted of this striking economic data issued by the National Statistics Office.

This represents the Wholesale Price Index of construction materials. Basically, the data points to a collapse in construction material prices in the 2H of 2014. This hasn’t been an anomaly. Rather the above seems like a disturbing trend.

December’s NSO data exhibits a first negative year on year growth. On a month on month basis, the negative growth has been a two month dynamic.

I can’t resist but to republish the NSO’s description of the fantastic collapse in wholesale prices[5] (bold mine): Year-on-Year Compared to a year ago level, the Construction Materials Wholesale Price Index (CMWPI) in the National Capital Region (NCR) posted a negative rate of 0.1 percent in December. Last month it was recorded at 0.8 percent and in December 2013, 2.4 percent. The downtrend was due to 14.9 percent decline in fuels and lubricants index. Slower annual increments were also noted in the indices of cement at 2.3 percent and tileworks, 2.7 percent. The rest of the commodity groups either had higher annual mark-ups or retained their last month’s rates with the indices of asphalt and machinery and equipment rental still registering a zero growth. The annual average growth of the CMWPI in 2014 rose to 1.9 percent. It was 1.8 percent in 2013. Measured from their 2013 rates, the annual average of the following indices increased during the year: sand and gravel, 4.3 percent; concrete products, 2.4 percent; hardware, 2.3 percent; plywood, 2.7 percent; lumber, 5.1 percent; G.I. sheet, 3.9 percent; glass and glass products, 2.2 percent; electrical works, 3.2 percent; plumbing fixtures and accessories, 6.1 percent; painting works, 1.2 percent; and PVC pipes, 3.0 percent. However, the annual average growth of fuels and lubricants index further dropped by 1.0 percent. The rest of the commodity groups had lower annual average increments during the year with the indices of asphalt and machinery and equipment rental having a zero growth…Month-on-Month On a monthly basis, the wholesale prices of selected construction materials in NCR further went down by 0.8 percent in December. This was attributed to the decreases registered in the indices of fuels and lubricants at -7.0 percent and cement, -0.2 percent. Higher monthly growths were, however, seen in the indices of hardware and reinforcing steel at 0.2 percent; plywood, 0.5 percent; plumbing fixtures and accessories, 0.6 percent; and PVC pipes, 0.1 percent. Movements in the other commodity groups either remained at their last month’s rates or had a zero growth. A series of price rollbacks was observed in gasoline, diesel and fuel oil during the month. Likewise, prices of cement were on the downtrend.  On the other hand, higher prices were noticed in plywood, steel bars, PVC pipes, plumbing fixtures and accessories like faucet, kitchen sink and angle valves.

While it may be true that collapse in oil prices might have some influence in the collapse in wholesale prices of construction materials, this should lead to declines ONLY on fuel related products.

But as noted above, decline in prices also affected many other commodity groups while some of the higher prices such as in the case of accessories, which are most likely from imports, may have been a result of a weak peso.

For instance, cement and construction equipment rentals have shown nearly zero growth amidst the reported 4Q credit fueled construction frenzy!

Yet the law of demand tells us that all things being equal as price of a product decreases, quantity demanded increases. This means that the construction boom should have at least neutralized the decline in wholesale prices of construction materials which hasn’t been the case according to the government statistics.

So forces that may have shaped the collapse in the wholesale prices of construction materials:

- demand slowdown (this has not been the case according to the 4Q GDP)

- surge in supply

- NSO data has been inaccurate

- 4Q GDP has been inflated

Let me use cement as an example.

Cement sales according to a news report posted 9.6% gains in 2014, where fourth quarter figure reportedly posted the highest growth. In 2013 cement sales grew by 6% from 2012, so in percentage terms growth rate of cement sales jumped by 60%. Nice.

Meanwhile cement sales in 1H posted 6% growth which implies that 2H sales boomed by over 13%. Cement sales seem to bolster government data on the second half construction activities. Ironically booming cement sales resulted to slight gains in annual prices and even negative prices month on month on December.

The only thing that explains the price activity of cement has been a surge in supply. Either from imports and domestic production, slumping prices of cement sales postulate to a massive capacity build up on expectations of a sustained construction boom that has forced down prices of cement.

While these figures would look good today, what happens when a construction slowdown occurs? What happens to the excess supply? Yet how much of the current supply has been financed by leverage?

Has 4Q GDP Been All About Government Construction Projects?

The article gives us a clue that a lot of construction activities have been due to “ongoing public-private partnership projects” and “infrastructure disbursements” that had been “channeled mostly to ongoing reconstruction and rehabilitation efforts in communities devastated by typhoon Yolanda”[6].

4Q GDP data reveals that both private and public construction activities have recently zoomed. Private construction activities have been on a spurt, where the rate of growth has almost reached the fiery pace during Q1 2013. On an annual basis, private construction growth activities in 2014 posted a 12.9% growth rate. This has surpassed 2013 growth rates at 9.3%. Public construction growth has turned positive in Q4 but the upside failed to reverse the earlier contraction which has led to a negative annualized growth of 1.5% in 2014 versus 14.9% in 2013.

Meanwhile real estate, renting and other business category has also rebounded from the 3Q 2014, this has been mostly due to “renting and other business activities” which accounts for 43% of the category’s weightings. On the other hand, the growth rate by “real estate” segment has been on a material decline. Annual growth by this sector has slumped from 18.3% in 2012-13 to 8.1% in 2013-14 with most of the big decline posted in 2H 2014.

The moderating growth rate of real estate in the face of skyrocketing private construction activities seem to validate that most of the 4Q GDP growth must have likely been from private contractors and private operators (Public-Private partnership) of government projects.

So the 4Q 2014 boom has mostly likely been from the cronies and from government spending on infrastructure projects. As explained before[7], infrastructure projects are no free lunches. They would have to be paid for by taxes, debt or inflation and all these come at the cost of productive activities. This means current boom will be ephemeral unless there will be an uptick in the private sector, which as shown above hasn’t been the case.

Moreover, the material decline the growth rates in “real estate” outside renting, extrapolates to slower private construction activities that cater to the marketplace. Government projects have been underwritten by political goals.

The seeming divergence in the construction boom favoring the political projects has most likely abetted the downside pressures on prices of construction materials.

This may partly explain for instance, the zero growth in the rental prices of construction equipment. There seems to be no sudden deluge of imports or of domestic production via manufacturing of construction equipment to warrant zero growth in the light of a construction fever.

In addition, my warnings over slowing credit activities in response to or in the face of a flattening yield curve appear to have arrived[8]. BSP’s December data on the banking system’s credit activities has revealed a broadbased slowdown[9]! See right chart.

Also, on a year on year basis though domestic liquidity bounced slightly (9.6%) from last month’s (9.2%) lows, on month on month liquidity continues to contract[10]!

So both banking and liquidity have been manifesting a decline. Yet the fascinating 6.9% GDP.

Bank credit to the construction industry has nearly halved from the nearly 60% growth rates to just 27.6% in December. Has the construction industry been generating sufficient cash flows or do they have adequate retained earnings to self–finance the current boom? If not, then how have the current projects been funded? From private placements, domestic bonds, intercompany borrowing, borrowing from international markets or affiliates abroad, equity sales, etc…? Or is it that construction activities are bound to slow too?

Real estate, manufacturing, trade (as pointed above) and even financial intermediation has shown noteworthy decline in credit appetite. Among the bubble sectors, it has only been the hotel industry which has defied the overall downtrend.

For an economy that has become heavily dependent on debt, will slowing loan growth rates pave way for “higher” or “lower” growth trajectory?

I say lower growth and bigger credit risks.

Bank Loan growth vis-à-vis GDP performance has previously diverged where growth rate of bank loans swelled as GDP rates declined.

In 4Q the diverging trend appears to have reversed. But numbers alone don’t account for the real activities. As shown above, except for the construction industry which has now become the cornerstone of the Philippine economy, the domestic consumer, investments and even private sector real estate projects seem as materially slowing.

Again this is from government data.

Nonetheless credit intensity or the amount of debt used to generate GDP remains very significant (middle table). This is especially true for the bubble industries where credit to gdp ratio has considerably been more than 1.5.

And based on BSP data, the cumulative share of credit by the bubble sectors, particularly the construction, real estate, trade, hotel and financial sectors has ballooned to 50.35% of the total loans by the domestic banking system to the general industry in 2014. This compared to 49.61% in 2013 and 47.47% in 2012. In 2014, if we exclude the hotel, GDP by the same sectors, as noted above, commanded a 40.37% share.

What this illustrates has been the growing concentration of resource allocation as manifested by credit activities towards a few sectors thereby increasing their credit risks.

And this explains the flattening yield curve.

The deepening degree of the leverage in the system has upped the demand for short term relative to longer term loans. The flattening of the yield curve will reduce the incentives by banks to extend credit.

Thus the lower pace of credit growth will reduce demand. And by reducing demand, this will translate to lower statistical growth.

But the buck doesn’t stop here.

And given the huge amassment of supply side capacity, a prolonged slowdown will raise credit risks, which will have a feedback loop with growth that will manifest itself in the yield curve, systemic liquidity and eventually prices of risks assets.

But of course those headline GDP have been taken in face value by the consensus. It has been there to confirm the biases of the faithful who will hardly exert an effort or an inch to plumb into the details of the statistics which they have imbued as the gospel truth.

Yet underneath the hood of those government statistics have been red lights flashing all over.

Take a look at what’s been happening in 4Q.

The Negatives:

Slumping CPI

Sinking growth rates of bank credit

Contracting liquidity

Plummeting retail GDP

Negative Capital Formation

Tanking construction prices

Flattening yield curve

Slowing growth rate of “real estate” GDP

The Positives:

Construction growth fever which has most likely been centered on government projects.

Soaring stock markets that has largely been engineered by serial last minute pumps (last week posted 3 astounding marking the close on January 26, 28 and 30.

Statistical GDP at 6.9% heavily centered on a construction binge.

Yet the consensus has been screaming G-R-O-W-T-H!

Little has been understood that 4Q GDP has been a government PUMP underpinned by mounting imbalances.

Record Phisix: Intensifying Deliriums over G-R-O-W-T-H!

A short note on record Phisix.

The Phisix has posted record after record closing, again on a series of last minute pumps. It appears that Philippine stocks have reached a stage where convictions of a one way street have become too heavily entrenched to almost religion like attachment or devotion. Risk and valuations has been entirely expunged out of existence.

As I recently noted, media recently commented that corporate earnings growth in 2014 has only been 6% and projected earnings growth for 2015 at 16%. 

Yet in 2014, Phisix generated 22.76% or the market paid a 3.79% premium for every 1% earnings growth. Yet the bizarrely, the conservative forecast of 8,000 for the yearend. It is as if the quoted experts don’t really believe in what they are saying.

The Phisix ended January up a stunning 6.35%! Annualized this would translate to 76.2% or Phisix 12,740.

As of January’s close, and if current returns are annualized, the markets are presently paying for a 4.76% (76.2/16) premium for every percentage of the 16% expected corporate earnings growth for 2015!!!

Let me just put some back of the envelop numbers here. If realized, the compounded yield of the 6% and 16% will be 22.96%. So if applied to a stock with Php 10 earnings, at the yearend, eps will be Php 12.296. Say the stock’s PER is 30 which makes prices at Php 300 at the start of 2014. If we apply 22.76% (2014 actual) and 76.2% (current annualized rate) to the base number, at the end of 2015, the stock’s price will be Php 649 or a 116% return over two years. So from 30 PER, the same stock will have 52.78 PER at the close of 2015!

That’s how delirious the markets have become. Again valuations have become inexistent as with risk. All that matters now is momentum or having more greater fools to buy stratospheric stock market prices from current wave of buyers. All these in the shibboleth of G-R-O-W-T-H!

We have seen this in 2013. By May, the Phisix was up 25% or a nosebleed rate of 5% per month. The rate of Phisix climb has become near vertical as seen via a 65% degree slope as with today.

Yet at the end of the year, the Phisix ended up only up by 1.33%.

Record stocks comes in the face of mounting risks from almost every corner of the globe; namely from the growing risk of a Greece exit ‘Grexit’, the rise of anti-EU politics (aside from Greece, Spain’s Podemus), an intensification of the standoff between US-Russia over Ukraine that risk an outbreak of a military conflict, the meltdown of junk bonds in the US possibly triggered by collapsing oil prices or even by emerging markets, oil prices and record low yields in the US have been nostalgic of 2008 scenario, a meltdown by key emerging economies (leading candidates, Argentina, Venezuela, Brazil, Mexico, Russia, Kazakhstan, Belarus the GCC and more) that could spread, a China credit bubble implosion, a failure or even a reversal of ECB and BoJ’s QEs, the possible leash effect from the SNB’s unexpected abandonment of franc-euro cap on emerging Europe and on financial institutions in developed economies that has portfolios anchored on the cap and lastly credit problems within ASEAN—Would you believe that a week back Malaysia’s PM had to deny on air that a crisis has been brewing?, This week Singapore’s central bank, the MAS made an emergency easing! In short, Singapore’s central bank just panicked over growing credit risks in their domestic system!

All it takes is for one Bear Sterns to usher in a Lehman moment or the Bear Stern equivalent during the Great Depression, the Austrian bank, the Creditanstalt.

As a final thought, if the BSP, suddenly cuts rate for one reason or another, say below inflation target, or external based alibis, then this proves that 4Q 6.9% GDP 2014 has all been a Potemkin Village.

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[1] Ludwig von Mises 5. Logical Catallactics Versus Mathematical Catallactics XVI. PRICES Human Action p.348

[2] Friedrich A von Hayek "The Use of Knowledge in Society", Library of Economics and Liberty econlib.org

[3] See Phisix: 2Q GDP Outperforms at 6.4% as Investments Plummets! September 1, 2014

[4] See Phisix: 2Q GDP Outperforms at 6.4% as Investments Plummets! September 1, 2014

[5] National Statistics Office Construction Materials Wholesale Price Index in the National Capital Region (2000=100) : December 2014 Philippine Statistics Authority January 13, 2015

[6] Manila Standard Cement sales climb 9.6% to 20.2m tons January 27, 2015

[7] See Phisix: The Showbiz Political Economy and the Showbiz Financial Markets April 28, 2014

[8] See Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima? December 15, 2015

[9] Bangko Sentral ng Pilipinas Bank Lending Growth Decelerates in December January 30, 2015

[10] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Slightly Faster in December January 30, 2015

Greece’s Alex Tsipras to Germans: Greece will End the Brussels Extend and Pretend Policies

In desperation, the average Greeks has turned to the radical left party Syriza for economic salvation. The Syriza handily won almost a majority of the parliamentary seat in the recently concluded elections.

As I have noted here: The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy.

Syriza’s, whose party represents a coalition of “just one step away from full communism” rode on coattail to electoral victory via this message: “Screw Germany” according to Jared Dillian of the 10th Man

 

Well party’s designated leader Alex Tsipiras, the new Prime Minister, writes to “reach out” on the Germans

From the Syriza (ht: Stockman’s contra corner/bold mine)

Alexis Tsipras' "open letter" to German citizens published on Jan.13 in Handelsblatt, a leading German language business newspaper

Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds biggotry, nationalism, even violence

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.

Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.

Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-covery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!

Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.

Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans.

Dear readers, I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways. I acknowledge this anxiety. However, let me say that it was not SYRIZA that incubated the cleptocracy which today pretends to strive for 'reforms', as long as these 'reforms' do not affect their ill-gotten privileges. We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.

Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity.

A great opportunity for Europe is about to be born in Greece on 25th January. An opportunity Europe can ill afford to miss.

Well given the socialist backdrop of the new government, if pushed through, Greece’s great opportunity seems one of the path to a debt default which risks unraveling the EU. Measures to rollback “anti-austerity” have been announced.

In addition, political extremism has been surging in the Eurozone.

As Austrian economist Frank Hollenbeck recently wrote:

Europe saved Greece to bail out its bankers. Without the bailout, Greece would have defaulted and returned to the drachma. It would have been forced to drastically slash government salaries and payrolls. It would have had to cut the wage increases that got it into debt trouble in the first place. Instead, the bankers walked away, with private debt replaced by public debt. Now, Greece could sink all of Europe, with the European taxpayer and citizen unaware of the hardship he will shortly endure: all of this to transfer wealth from the have-nots to the haves.

Unfortunately, the economic platform of the left-leaning Syriza will make the economic situation much worse. You cannot repeal the law of scarcity. The same is true of the economic platforms of Podemos in Spain and the National Front in France. Hold on to your hats since we are in for a turbulent future in Europe. It did not have to be this way.

Greece’s equity benchmark crashed right after the election but rallied yesterday as measured by the ATG (stockcharts.com)

Greece’s 5 year bond yield spirals…

…as well as Greece’s 3 year bond yields (note of the inversion or higher yields of the 3 year vis-à-vis the 5 year)

Will Draghi's QE offset political developments in the Eurozone?

 

Quote of the Day: Why the Welfare State Grows

The welfare state grows because there is no clear line (and there can be no clear line) between those who are supposedly “entitled” to benefits and those who are not. There will always be those who fall just fractionally outside the needs-based entitlement. So the entitlement line gradually gets moved to include more and more recipients. The real issue is how state welfare can be justified in a society based on the rule of law that ensures individual liberty. Welfare entitlements are a “taking” from Peter to give to Paul at the point of a supposedly legal gun. But how is state confiscation any different or more just than private robbery? That amorphous entity called the state decides that it will shirk its duty to protect our property and do exactly the opposite. No majority can make such an unjust act legal through the legislative process.

This is from Austrian economist Patrick Barron at the Mises Canada

Breaking: Philippine 4Q GDP 6.9%, 6.1% 2014

From the NSCB:

For the Fourth Quarter of 2014, the country’s Gross Domestic Product (GDP) accelerated to 6.9 percent from 6.3 percent in the same period of last year.  This followed three consecutive quarters of decelerated growth. The robust performance of Industry sector particularly by Manufacturing and Construction and supported by the Trade, Real Estate, Renting & Business Activities, and Transport, Storage & Communication, boosted the fourth quarter performance and paved the way for the annual GDP to post a growth of 6.1 percent.

Government statistics is a puzzle. 

For instance, the government recently reported of plummeting prices of construction materials. Yet statistical gdp shows of a big jump in construction growth (21%)!  So based on the logic of government statistics, supply side growth have been relatively significantly larger than the demand growth, thus the dramatic drop in prices. Yet a glimpse at manufacturing, growth rate has been at only 10.5% while imports grew by only 5.3%. Those numbers just don't square.

Since government makes the data they can show whatever they want.

So all these pumping and pushing of financial assets will be fueled more by government statistical GDP.

I’ll wait for the BSP’s disclosure on banking loans and liquidity metrics to see how banking sector contributed to the GDP pump.

Ron Paul: Lessons to Be Learned from Failed Central Bank Policies

The great Ron Paul tackles on the failure of central banking in the lens of the US Federal Reserve.

Mr. Paul’s article is entitled “Two Percent Inflation and the Fed’s Current Mandate” is published at his website the Ron Paul Institute

 

(bold mine)

Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the United States. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency.

As Fed Chairman Ben Bernanke explained to me, the once profoundly successful world currency – gold – was no longer money. This meant that he believed, and the world has accepted, the fiat dollar as the most important currency of the world, and the US has the privilege and responsibility for managing it. He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come. I remain unconvinced.

At its inception the Fed got its marching orders: to become the ultimate lender of last resort to banks and business interests. And to do that it needed an “elastic” currency.  The supporters of the new central bank in 1913 were well aware that commodity money did not “stretch” enough to satisfy the politician’s appetite for welfare and war spending. A printing press and computer, along with the removal of the gold standard, would eventually provide the tools for a worldwide fiat currency. We’ve been there since 1971 and the results are not good.

Many modifications of policy mandates occurred between 1913 and 1971, and the Fed continues today in a desperate effort to prevent the total unwinding and collapse of a monetary system built on sand. A storm is brewing and when it hits, it will reveal the fragility of the entire world financial system. 

The Fed and its friends in the financial industry are frantically hoping their next mandate or strategy for managing the system will continue to bail them out of each new crisis.

The seeds were sown with the passage of the Federal Reserve Act in December 1913. The lender of last resort would target special beneficiaries with its ability to create unlimited credit. It was granted power to channel credit in a special way. Average citizens, struggling with a mortgage or a small business about to go under, were not the Fed’s concern. Commercial, agricultural, and industrial paper was to be bought when the Fed's friends were in trouble and the economy needed to be propped up. At its inception the Fed was given no permission to buy speculative financial debt or U.S. Treasury debt.

It didn’t take long for Congress to amend the Federal Reserve Act to allow the purchase of US debt to finance World War I and subsequently all the many wars to follow. These changes eventually led to trillions of dollars being used in the current crisis to bail out banks and mortgage companies in over their heads with derivative speculations and worthless mortgage-backed securities.

It took a while to go from a gold standard in 1913 to the unbelievable paper bailouts that occurred during the crash of 2008 and 2009.

In 1979 the dual mandate was proposed by Congress to solve the problem of high inflation and high unemployment, which defied the conventional wisdom of the Phillips curve that supported the idea that inflation could be a trade-off for decreasing unemployment. The stagflation of the 1970s was an eye-opener for all the establishment and government economists. None of them had anticipated the serious financial and banking problems in the 1970s that concluded with very high interest rates.

That’s when the Congress instructed the Fed to follow a “dual mandate” to achieve, through monetary manipulation, a policy of “stable prices” and “maximum employment.” The goal was to have Congress wave a wand and presto the problem would be solved, without the Fed giving up power to create money out of thin air that allows it to guarantee a bailout for its Wall Street friends and the financial markets when needed. 

The dual mandate was really a triple mandate. The Fed was also instructed to maintain “moderate long-term interest rates.” “Moderate” was not defined. I now have personally witnessed nominal interest rates as high as 21% and rates below 1%. Real interest rates today are actually below zero.

The dual, or the triple mandate, has only compounded the problems we face today. Temporary relief was achieved in the 1980s and confidence in the dollar was restored after Volcker raised interest rates up to 21%, but structural problems remained.

Nevertheless, the stock market crashed in 1987 and the Fed needed more help. President Reagan’s Executive Order 12631 created the President’s Working Group on Financial Markets, also known as the Plunge Protection Team. This Executive Order gave more power to the Federal Reserve, Treasury, Commodity Futures Trading Commission, and the Securities and Exchange Commission to come to the rescue of Wall Street if market declines got out of hand. Though their friends on Wall Street were bailed out in the 2000 and 2008 panics, this new power obviously did not create a sound economy. Secrecy was of the utmost importance to prevent the public from seeing just how this “mandate” operated and exactly who was benefiting. 

Since 2008 real economic growth has not returned. From the viewpoint of the central economic planners, wages aren’t going up fast enough, which is like saying the currency is not being debased rapidly enough. That’s the same explanation they give for prices not rising fast enough as measured by the government-rigged Consumer Price Index. In essence it seems like they believe that making the cost of living go up for average people is a solution to the economic crisis. Rather bizarre!

The obsession now is to get price inflation up to at least a 2% level per year. The assumption is that if the Fed can get prices to rise, the economy will rebound. This too is monetary policy nonsense.

If the result of a congressional mandate placed on the Fed for moderate and stable interest rates results in interest rates ranging from 0% to 21%, then believing the Fed can achieve a healthy economy by getting consumer prices to increase by 2% per year is a pie-in-the-sky dream. Money managers CAN’T do it and if they could it would achieve nothing except compounding the errors that have been driving monetary policy for a hundred years.

A mandate for 2% price inflation is not only a goal for the  central planners in the United States but for most central bankers worldwide. 

It’s interesting to note that the idea of a 2% inflation rate was conceived 25 years ago in New Zealand to curtail double-digit price inflation. The claim was made that since conditions improved in New Zealand after they lowered their inflation rate to 2% that there was something magical about it. And from this they assumed that anything lower than 2% must be a detriment and the inflation rate must be raised. Of course, the only tool central bankers have to achieve this rate is to print money and hope it flows in the direction of raising the particular prices that the Fed wants to raise.

One problem is that although newly created money by central banks does inflate prices, the central planners can’t control which prices will increase or when it will happen. Instead of consumer prices rising, the price inflation may go into other areas, as determined by millions of individuals making their own choices. Today we can find very high prices for stocks, bonds, educational costs, medical care and food, yet the CPI stays under 2%.

The CPI, though the Fed currently wants it to be even higher, is misreported on the low side. The Fed’s real goal is to make sure there is no opposition to the money printing press they need to run at full speed to keep the financial markets afloat. This is for the purpose of propping up in particular stock prices, debt derivatives, and bonds in order to take care of their friends on Wall Street.

This “mandate” that the Fed follows, unlike others, is of their own creation. No questions are asked by the legislators, who are always in need of monetary inflation to paper over the debt run up by welfare/warfare spending. There will be a day when the obsession with the goal of zero interest rates and 2% price inflation will be laughed at by future economic historians. It will be seen as just as silly as John Law’s inflationary scheme in the 18th century for perpetual wealth for France by creating the Mississippi bubble – which ended in disaster. After a mere two years, 1719 to 1720, of runaway inflation Law was forced to leave France in disgrace. The current scenario will not be precisely the same as with this giant bubble but the consequences will very likely be much greater than that which occurred with the bursting of the Mississippi bubble.

The fiat dollar standard is worldwide and nothing similar to this has ever existed before. The Fed and all the world central banks now endorse the monetary principles that motivated John Law in his goal of a new paradigm for French prosperity. His thesis was simple: first increase paper notes in order to increase the money supply in circulation. This he claimed would revitalize the finances of the French government and the French economy. His theory was no more complicated than that. 

This is exactly what the Federal Reserve has been attempting to do for the past six years. It has created $4 trillion of new money, and used it to buy government Treasury bills and $1.7 trillion of worthless home mortgages. Real growth and a high standard of living for a large majority of Americans have not occurred, whereas the Wall Street elite have done quite well. This has resulted in aggravating the persistent class warfare that has been going on for quite some time.

The Fed has failed at following its many mandates, whether legislatively directed or spontaneously decided upon by the Fed itself – like the 2% price inflation rate. But in addition, to compound the mischief caused by distorting the much-needed market rate of interest, the Fed is much more involved than just running the printing presses. It regulates and manages the inflation tax. The Fed was the chief architect of the bailouts in 2008. It facilitates the accumulation of government debt, whether it’s to finance wars or the welfare transfer programs directed at both rich and poor. The Fed provides a backstop for the speculative derivatives dealings of the banks considered too big to fail. Together with the FDIC's insurance for bank accounts, these programs generate a huge moral hazard while the Fed obfuscates monetary and economic reality.

The Federal Reserve reports that it has over 300 PhD’s on its payroll. There are hundreds more in the Federal Reserve’s District Banks and many more associated scholars under contract at many universities. The exact cost to get all this wonderful advice is unknown. The Federal Reserve on its website assures the American public that these economists “represent an exceptional diverse range of interest in specific area of expertise.” Of course this is with the exception that gold is of no interest to them in their hundreds and thousands of papers written for the Fed.

This academic effort by subsidized learned professors ensures that our college graduates are well-indoctrinated in the ways of inflation and economic planning. As a consequence too, essentially all members of Congress have learned these same lessons.

Fed policy is a hodgepodge of monetary mismanagement and economic interference in the marketplace. Sadly, little effort is being made to seriously consider real monetary reform, which is what we need. That will only come after a major currency crisis.

I have quite frequently made the point about the error of central banks assuming that they know exactly what interest rates best serve the economy and at what rate price inflation should be. Currently the obsession with a 2% increase in the CPI per year and a zero rate of interest is rather silly. 

In spite of all the mandates, flip-flopping on policy, and irrational regulatory exuberance, there’s an overwhelming fear that is shared by all central bankers, on which they dwell day and night. That is the dreaded possibility of DEFLATION. 

A major problem is that of defining the terms commonly used. It’s hard to explain a policy dealing with deflation when Keynesians claim a falling average price level – something hard to measure – is deflation, when the Austrian free-market school describes deflation as a decrease in the money supply. 

The hysterical fear of deflation is because deflation is equated with the 1930s Great Depression and all central banks now are doing everything conceivable to prevent that from happening again through massive monetary inflation. Though the money supply is rapidly rising and some prices like oil are falling, we are NOT experiencing deflation.

Under today’s conditions, fighting the deflation phantom only prevents the needed correction and liquidation from decades of an inflationary/mal-investment bubble economy.

It is true that even though there is lots of monetary inflation being generated, much of it is not going where the planners would like it to go. Economic growth is stagnant and lots of bubbles are being formed, like in stocks, student debt, oil drilling, and others. Our economic planners don’t realize it but they are having trouble with centrally controlling individual “human action.” 

Real economic growth is being hindered by a rational and justified loss of confidence in planning business expansions. This is a consequence of the chaos caused by the Fed’s encouragement of over-taxation, excessive regulations, and diverting wealth away from domestic investments and instead using it in wealth-consuming and dangerous unnecessary wars overseas. Without the Fed monetizing debt, these excesses would not occur.

Lessons yet to be learned:

1. Increasing money and credit by the Fed is not the same as increasing wealth. It in fact does the opposite.

2. More government spending is not equivalent to increasing wealth.

3. Liquidation of debt and correction in wages, salaries, and consumer prices is not the monster that many fear. 

4. Corrections, allowed to run their course, are beneficial and should not be prolonged by bailouts with massive monetary inflation.

5. The people spending their own money is far superior to the government spending it for them.

6. Propping up stock and bond prices, the current Fed goal, is not a road to economic recovery.

7. Though bailouts help the insiders and the elite 1%, they hinder the economic recovery.

8. Production and savings should be the source of capital needed for economic growth.

9. Monetary expansion can never substitute for savings but guarantees mal–investment.

10. Market rates of interest are required to provide for the economic calculation necessary for growth and reversing an economic downturn.

11. Wars provide no solution to a recession/depression. Wars only make a country poorer while war profiteers benefit.

12. Bits of paper with ink on them or computer entries are not money – gold is.

13. Higher consumer prices per se have nothing to do with a healthy economy.

14. Lower consumer prices should be expected in a healthy economy as we experienced with computers, TVs, and cell phones. 

All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed. 

It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases.

A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested. A gold dollar will always outperform a paper dollar in duration and economic performance while holding government growth in check. This is the only monetary system that protects liberty while enhancing the opportunity for peace and prosperity.

Singapore’s Central Bank Panics! Goes on an Easing Mode

Last November, Singapore’s central bank the Monetary Authority of Singapore, raised alarm bells by citing the financial system's record levels of corporate debt to gdp, aside from household debt to income ratio.

In the second week of this year, mainstream media has raised anew concerns over cracks in the city state’s debt financed housing bubble expressed in terms of declining property prices in the light of still ballooning debt, rising rates, falling currency, signs of capital flight and growing incidences of loan defaults.

Well I guess all these has led to today’s ‘emergency’ action.

From Bloomberg: (bold mine)

Singapore unexpectedly eased monetary policy, sending the currency to the weakest since 2010 against the U.S. dollar as the country joined global central banks in shoring up growth amid dwindling inflation.

The Monetary Authority of Singapore, which uses the exchange rate as its main policy tool, said in an unscheduled statement Wednesday it will seek a slower pace of appreciation against a basket of currencies. It cut the inflation forecast for 2015, predicting prices may fall as much as 0.5 percent.

The move was the first emergency policy change since one following the Sept. 11, 2001 attacks for the MAS -- which only has two scheduled policy announcements a year -- reflecting how the plunge in oil has changed the outlook in recent months. Singapore becomes at least the ninth nation to ease policy this month, as officials from Europe to Canada and India contend with escalating disinflation and faltering global growth…

The European Central Bank announced quantitative easing plans this month while Canada, Denmark and India cut interest rates. More may come -- the Bank of Japan chief said the country may need to get creative in any further monetary stimulus and Thai policy makers face growing pressure to lower borrowing costs.

In view of the previous events, in Singapore’s case, the MAS’ emergency action today has hardly been about “shoring up growth amid dwindling inflation” but rather about the mitigation of the growing burden of debt to an increasingly debt constrained society.

But of course, while easing may lower rates, which temporarily may alleviate the debt onus, easing also allows levered companies heavily dependent on debt to rollover debt. In short, monetary easing entails solving debt problem through MORE debt buildup.

Thus the MAS’ actions have been intended to buy time from a painful reckoning from previous speculative excesses financed by debt. But the kick-the-can-down-the-road policies simply means accretion of more imbalances.

The USD-Singapore dollar currently trades at 2010 highs. Yet Singapore’s stock market as measured by the STI nears record highs (stockcharts.com).

Perhaps debt constrained entities have pumping up stocks (by using leverage too?) in order to generate a bandwagon effect. And because rising stocks may bring about trading profits, cash flows from speculative stock punts may allow debt constrained entities to rollover existing debt.

So Singapore’s bubble dynamics spreads from property to the stock market.

And once again we seem to be seeing a divergence between the real economy (increased signs of economic stress)-monetary policies (panicking central bank) and the stock market: Singapore edition

Finally, the article notes that 9 nations have undertaken easing measures. If everything has been salutary as manifested by record stocks, and as what media has been saying, then why the need to ease?

Or has these been symptoms of the inability to wean away from overdependence on debt?

Periphery to Core Transmission? Earnings Growth Estimates in North America and Europe Plummets!

In February of last year, I proposed that the volatility incited by the Bernanke "Taper Talk" would have a feedback loop transmission mechanism to developed economies: (bold original)

if the adverse impact of emerging markets to the US and developed economies won’t be offset by growth (exports, bank assets and corporate profits) in developed nations or in frontier nations, then there will be a drag on the growth of developed economies, which would hardly be inconsequential. Why? Because the feedback loop from the sizeable developed economies will magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth. Such feedback mechanism is the essence of periphery-to-core dynamics which shows how economic and financial pathologies, like biological contemporaries, operate at the margins or by stages.

Let us see how this may have been applied anent earnings growth.

First 12 forward EPS growth estimates for MSCI Emerging markets and Pacific…

EPS growth has declined in 2013, rallied in the 1Q of 2014 (green trend line) and has cascaded through the yearend. There seems to be innate signs of recovery. But recoveries look as if it has been driven by seasonal yearend forces (green boxes)

Nonetheless the general trend looks headed south interspersed with gains.

Now here is the more interesting part.

The same EPS estimates for MSCI North America and Europe has collapsed.

Notes the prolific Gavekal Team (charts theirs too)

Without delving into the multitude of reasons for the drop, we just point out that EPS estimates for next twelve months are falling like a stone in North America and Europe and for these two regions the bottom line estimates point to the lowest growth rate since late 2009. It doesn't matter whether we look at average EPS growth estimates or median, as the fall in both series is becoming concerning.

Thankfully, the estimated EPS growth rate for developed Asia and EMs has remained stable.

Will the feedback loop from the developed economies magnify on the downside trajectory of emerging market growth which again will ricochet back to developed economies and so forth?

Also record stocks in the face of collapsing EPS!

Very interesting.