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

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

In this issue

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

I. US Election Narrative: Fear the Trump Trade!

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

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

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

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

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

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

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

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

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

I. US Election Narrative: Fear the Trump Trade!

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

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

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

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

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

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

Let us examine what led to this perspective. 

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

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

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

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

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

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

Figure 1 

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

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

Figure 2

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

Figure 3

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

Incredible. 

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

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

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

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

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

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

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

Figure 4

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

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

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

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

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

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

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

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

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

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

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

Figure 5

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

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

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

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

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

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

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

In a word, propaganda. 

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

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

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

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

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

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

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

Notably, these ongoing and emerging conflicts are interconnected.

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

Figure 6

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As investor Doug Noland astutely wrote 

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

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

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

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

As Professor William Anderson noted, 

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

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

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

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

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

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

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

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

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

Things have been turning a whole lot crazy. 

___

References 

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

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

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

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

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

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

Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages

There is no escape from debt. Paying for the government’s fictitious promises in paper money will result in a constantly depreciating currency, thereby impoverishing those who earn a wage or have savings. Inflation is the hidden tax, and it is very convenient for governments because they always blame shops or businesses and present themselves as the solution by printing even more currency. Governments want more inflation to reduce the impact of the enormous debt and unfunded liabilities in real terms. They know they can’t tax you more, so they will tax you indirectly by destroying the purchasing power of the currency they issue—Daniel Lacalle

 In this issue

Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages

I. Unveiling the Likely Hidden Messages Behind the Declaration of Victory Over Inflation

II. Treasury Curve was Spot On about Inflation, Short-Term Treasury Yields Plunge! Will the BSP Cut by 50 bps?

III. Supply-Side Disinflation? Despite Strong Credit Growth, Manufacturing Remains in the Doldrums, as Reflected by PPI Deflation and Output Sluggishness

IV. Supply-Side Disinflation? Lethargic Consumer Imports and July FDI Reflect Frail Capital Goods Imports

V. Demand-Side Disinflation? September CPI Plunged Despite Vigorous August Consumer Bank Lending, Liquidity Growth Dived

VI. Disinflation with Employment at Near Historic Highs Backed by a Credit Boom? Slower Deficit Spending Puts Pressure on Liquidity Strains

VII. SWS’s Self-Rated Poverty Survey versus the Government’s CPI 

Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees: Unveiling Its Hidden Messages

A Philippine media outlet proclaimed that the Philippine government won its battle against inflation, while a private survey contradicted this view. Who's right?

I. Unveiling the Likely Hidden Messages Behind the Declaration of Victory Over Inflation

Figure 1 

Two interesting headlines that hallmark this week’s conflicting message on inflation. 

Inquirer.net, October 7, 2024: The Philippines may now declare victory in its long and painful fight against inflation after price growth last month eased to a four-year low, helping create the perfect economic condition for gradual interest rate cuts…The BSP is now at a point where it has to undo its most forceful tightening actions in two decades, which had sent the benchmark rate to its highest level in 17 years to tame stubbornly high inflation. Cutting borrowing costs is necessary amid market predictions that the economy may grow below the government’s target for this year after consumption showed signs of weakening…Moving forward, Governor Eli Remolona Jr. said the central bank would take “baby steps” until the key rate falls to 4.5 percent by the end of 2025, suggesting that monetary authorities would unlikely resort to jumbo cuts that may stir up market fears that the economy is headed for a hard landing. (bold mine)

SWS.org.ph, October 9, 2024: The national Social Weather Survey of September 14-23, 2024, found 59% of Filipino families rating themselves as Mahirap or Poor, 13% rating themselves as Borderline (by placing themselves on a line dividing Poor and Not Poor), and 28% rating themselves as Hindi Mahirap or Not Poor. The September 2024 percentage of Self-Rated Poor families rose by 1 point from 58% in June 2024, following a significant 12-point rise from 46% in March 2024. This was the highest percentage of Self-Rated Poor families since June 2008. The estimated numbers of Self-Rated Poor families were 16.3 million in September 2024 and 16.0 million in June 2024. The percentage of respondent households rating themselves as poor was applied to the Philippine Statistics Authority medium-population projections for 2024 to arrive at the estimated numbers of Self-Rated Poor families… The September 2024 survey found the percentage of Borderline families at 13%, up by 1 point from the record low 12% in June 2024 following an 18-point decline from 30% in March 2024… As of September 2024, the percentage of Not Poor families was at 28%, 2 points below the record high 30% in June 2024. (bold mine)

First and foremost, what does "declare victory in its long and painful fight against inflation" mean? (Figure 1, upper tweet)

The Philippine CPI posted two straight months of DEFLATION (statistical price decreases) in September (-0.37%) and October (-0.19%) 2015; yet, the media and establishment experts barely made such a brazen pronouncement until now.

Yes, Q3 2024 statistical inflation of 3.2% has dropped to its 9-year support level, but this doesn’t mean that the inflation cycle has been broken.

Figure 2 

In Q3 2015, the CPI slipped into deflation at -0.1%, which prompted banks to accelerate their net claims on central government (NCoCG) or indirect QE. Ironically, this germinated the current inflation cycle, which is now on its ninth-year.  (Figure 2 upper image)

Despite its recent decline, given that the CPI has remained on an uptrend since 2015 and appears to have settled at the support levels, what assurances does the establishment hold that it won’t be subject to a third wave?

Second, the September CPI of 1.9% doesn’t translate to the evisceration of inflation; it only means that GENERAL prices have risen at REDUCED rates (or have dropped to within the BSP’s target), but they are still RISING!

In fact, BSP data tell us that even in the context of the understated inflation rate, over 99% of the purchasing power of the peso has been eroded since 1957! How is that for "declaring victory over inflation"? (Figure 2, lower chart)

On the other hand, while authorities and media bask in this pretentious statistical feat, a private sector survey tell us a different story: slower inflation has exposed the persistent and growing burden of a lower standard of living! (More on this below.) (Figure 1, lower tweet)

Third, "declaring victory over inflation" was NEVER a goal of the BSP’s monetary policy anchored on inflation targeting.

From the BSP: The primary objective of the BSP's monetary policy is “to promote price stability conducive to a balanced and sustainable growth of the economy” (Republic Act 7653). The adoption of inflation targeting framework of monetary policy in January 2002 is aimed at achieving this objective. Inflation targeting is focused mainly on achieving a low and stable inflation, supportive of the economy’s growth objective. This approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period. (bold mine)

There is no defined quantification or qualification of "low and stable inflation" because statistical inflation has always been a subjective measure, arbitrarily defined by the BSP.

That said, the goal of the politics behind inflation targeting has been to keep the inflation "genie" confined within the boundaries of the BSP’s proverbial "lamp."

That’s because inflation, as a hidden tax, benefits the government most.

However, the inflation genie has been set loose, or has gone beyond its bounds, marking the difference between the previous era and today.

In this way, the BSP can be conservatively said to have been "asleep at the wheel."

At worst, and unbeknownst to the public, the BSP’s policies have unleashed the inflation genie!

Or, although authorities continue to push the narrative of supply-side-driven inflation to shift the blame onto the private sector, the current inflation cycle signify an unintended consequence of their policies!

Yet, has anyone among the array of establishment experts, including those in government, been correct in predicting the incumbent inflation cycle? 

Fourth, the CPI is just a statistic. While its intent is to approximate changes in general prices, it neither reveals the full accuracy nor explains the causes of those changes. 

The fact is that inflation statistics are misleading.

My inflation rate and yours are different.  This is because of dynamic individual spending habits and ever-changing preferences that vary not only over time but also differs across individuals. 

Is it not the averaging a Netflix subscription and rice an exercise of apples-to-oranges comparison?  If so, would this not be applied to the CPI? 

Or, not only is the weighted averaging of goods and services across different groups of people a flawed metric, but people’s spending preferences are constantly changing! 

How accurate is an inflation rate derived from averaging the spending patterns of billionaires with those of the bottom 30%? 

Even on a personal level, my preferences are always changing. If I prefer sautéed prawns with bread this moment, adobo with rice later, and only sinigang for tomorrow, how could the inputs used to create these meals be accurately averaged? How would this apply to a population of 110 million people? 

Furthermore, because the CPI is a politically sensitive statistic—created and calculated by politically sensitive institutions—it is prone not only to errors (in assumptions, inputs, etc.) but also to political biases. 

For instance, changing the base year of the CPI can lead to different outcomes. If I’m not mistaken, using the now-defunct 2006 base would produce a much higher CPI today than the current 2018 base. 

Since the CPI is used as a primary benchmark for the market’s pricing of interest rates, wouldn’t the government—as the biggest borrowers—have the incentive or motivation to suppress it to influence the cost of borrowing? 

Fifth, what happened to journalism? 

Isn’t journalism about "seeking truth and providing a fair and comprehensive account of events and issues"? 

When media outlets use ambiguous qualifications like " declare victory against inflation" to describe the "perfect economic condition for gradual interest rate cuts" intended to support "consumption (which) showed signs of weakening," could this not signify cheerleading or an advocacy for a biased policy stance? For whose benefit? 

Might this be seen as advancing the interests of vested groups, particularly the primary beneficiary, the government and the politically connected elites? How is this different from propaganda, misinformation, or disinformation? 

Importantly, if an alleged news article makes an economic generalization, why would it lack narratives supported by economic logic? 

Or, are low rates a GUARANTEE of an INCREASE in consumption? How so, and based on what theory and evidence? 

Why cite partisan and non-sequitur explanations from "establishment experts" whose principal-agent problems have hardly been laid bare to the public? 

Have media outlets distilled such insights or selected statements for print that only promote their biases? I’ve seen this happen (personally) before, which is why I refuse interviews. 

Sixth, if media pronouncements reflect exuded marketplace confidence, could such article/s signify a manifestation of the magazine/headline cover indicator or express an extreme state of sentiment? 

Or have the media’s declarations echoed the "overconfidence" stemming from recent euphoria over the price spikes in Philippine assets (stocks, bonds, and the peso)? 

Seventh and lastly, could this be related to the upcoming elections? 

Will declaring 'victory in its long and painful fight against inflation' be part of the campaign to promote the electoral chances of the administration’s national slate in the 2025 midterm elections? 

Ultimately, the establishment's obsession has been to promote a regime of easy money, using the declaration of triumph over inflation as justification. 

As the great Austrian economist Ludwig von Mises once explained 

The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last (Mises, 2019)  

II. Treasury Curve was Spot On about Inflation, Short-Term Treasury Yields Plunge! Will the BSP Cut by 50 bps? 

While the headline CPI plummeted from 3.3% in August to 1.9% in September—its lowest monthly rate since May 2020—excluding food and energy, the core CPI slipped to 2.4%, signifying 17 of 18 months of decline (one unchanged) since peaking at 8% in March 2023. 

Before that, we showed how changes in the Philippine yield curve have accurately predicted the CPI slump. 

despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Prudent Investor, August 2024) 

… 

Moreover, the curious take is that despite all the massive stimulus, the belly’s inversion in the Philippine treasury market has only deepened at the close of August.  

This does not suggest a build-up of price pressures or a strong rebound in the private sector. On the other hand, rising short-term rates indicate intensifying liquidity issues.   

In the end, while Marcos-nomics stimulus seems to have reaccelerated liquidity, a resurgence of inflation is likely to exacerbate "stagflationary" pressures and increase the likelihood of a bust in the Philippines’ credit bubble. (Prudent Investor, September 2024) 

Volatility has crescendoed in the Philippine treasury curve.

Figure 3

The present slope exhibits an astounding collapse in short-term rates (STIR), manifesting institutional market expectations of substantial cuts in BSP rates. Will the BSP cut by 50 bps this October? (Figure 3, upper graph) 

Yet, the curve’s magnified volatility has been incredible: following the gradual transition from flat to an inverted curve, then swiftly to a bullish steepening, and next to the current abrupt regression to a partial belly inversion—even with the plunge in STIR—how could this not be conducive to the rising risks of stagflation?

III. Supply-Side Disinflation? Despite Strong Credit Growth, Manufacturing Remains in the Doldrums, as Reflected by PPI Deflation and Output Sluggishness 

While we perceive government statistics with cynicism, we still use them because almost every financial market participant does.

Instead of focusing on the potential factors for the drop, the mainstream fixates on the prospective policy easing by the BSP.

Could the plunge in inflation have been a supply-side phenomenon marked by a glut?

In a word: Barely.

Manufacturing value grew by 2.9% in June, 6.45% in July, and 1.78% in August, while volume was up by 3.2%, 6.9%, and 2.8% over the same period.

Meanwhile, despite strong Universal Commercial Bank (UCB) loan growth to this sector—rising by 8.9%, 9.5%, and 9.8%—the Producer Price Index (PPI) deflated by -0.2%, -0.4%, and -1%. (Figure 3, lower chart)

Here’s the question: Why has robust credit growth not been reflected in output performance?

Worse yet, why is the deflation in the PPI escalating? PPI defined by the Philippine Statistics Authority, "measures the average change over time in the prices of products or commodities produced by domestic manufactures and sold at factory gate prices."

Where has all the credit money generated gone?

Has it been diverted to real estate or other undeclared allocations? Or has it been used for refinancing existing liabilities?

IV. Supply-Side Disinflation? Lethargic Consumer Imports and July FDI Reflect Frail Capital Goods Imports

If manufacturing growth has been unimpressive or sluggish, the situation is even worse for imports.

Imports in USD posted a 7.3% YoY contraction in June, then rose by 7.3% in July and 1.8% in August.

Converted to average pesos, imports were down by 2.63% YoY in June, surged by 14.3% in July, and grew by 4.6% in August, with the last month’s growth reflecting revaluation effects from a strong peso.

Figure 4

Here’s the thing: Consumer goods USD imports contracted by 7.3% in June, increased by 3.1% in July, and remained unchanged in August. (Figure 4, topmost pane)

Meanwhile, capital goods imports shrank by 8.8% in June but surged by 9.5% and 9.6% in the next two months. A substantial segment of the YoY changes reflects base effects. (Figure 4, middle diagram)

Nonetheless, the growth in capital goods imports partly reflected foreign direct investment (FDI).

The prosaic July FDI growth of 5.5% YoY (7.5% year-to-date) resonated with mediocre import growth. (Figure 4, lowest graph)

Yet, debt accounted for 74.3% of total FDI inflows and 63.5% of year-to-date FDI inflows. How much of this represent actual investments?

Still, why is the growth rate of FDIs declining?

Importantly, where are the investment pledges from the US-NATO allies?

V. Demand-Side Disinflation? September CPI Plunged Despite Vigorous August Consumer Bank Lending, Liquidity Growth Dived

Was the CPI slump a function of demand?

In short, yes!

We should put into context the seismic transformation of the Philippine banking system, with its recent focus on consumer loans coming at the expense of the supply side.

Figure 5

Universal Commercial (UC) bank consumer lending slowed from 24.3% year-over-year (YoY) in July to 23.7% in August, marking its slowest pace since November 2023. (Figure 5, topmost chart)

Consumer loan growth was strong across all segments in August: credit cards +27.44%, auto loans +19.3%, salary loans +16.4%, and others +26.8%.

Meanwhile, production loans continue to accelerate, expanding from 8.8% in July to 9.4% YoY in August, primarily in the real estate and trade sectors.

Overall, UC bank lending grew from 10.4% to 10.9% in August (Figure 4, second to the highest graph)

Despite mainstream claims of "restrictiveness" or "tightness" due to elevated rates, UC Bank's loan growth has been on an uptrend. Still, the CPI continues its downward trajectory!

Worse yet, despite this, financial liquidity plummeted in August.

M3 growth, which was 7.3% in July, dived to 5.5% in August. Incredible.

Incidentally, the yield curve inversion reflected this!

Once again, what happened to all the record money creation by the banking system and the BSP? Why the black hole?

VI. Disinflation with Employment at Near Historic Highs Backed by a Credit Boom? Slower Deficit Spending Puts Pressure on Liquidity Strains

Why could this be happening when employment rates are near all-time highs?

It was 96% last August, only a smidgen lower than the 96.9% record set last December 2023. (Figure 5, second to the lowest window)

Could it be that, aside from trade, government jobs were the primary source of growth in August? (Figure 5, lowest image)

Or could it also have been that employment growth has been mostly about low-quality labor? Alternatively, could the employment data also have been embellished?

Figure 6

Moreover, as we previously noted, because Philippine public spending has slowed, the fiscal deficit slightly "narrowed" year-to-date (YTD) as of August. Public spending has tracked the CPI over the long-term. (Figure 6, topmost diagram) 

As a result, aided by the strong peso, public debt marginally weakened in August.

Moreover, has the stalling growth in system leverage (UC bank credit + public debt) contributed to the demand pressures reflected in the CPI? (Figure 6, second to the highest graph)

Consequently, net claims on the central government (NCoCG) by banks and the BSP plateaued or consolidated. (Figure 6, second to the lowest chart)

Or, aside from the BSP, liquidity injections channeled through banks have slowed slightly.

This, combined with a stealth rise in bank non-performing loans (NPLs) and elevated levels of held-to-maturity assets (HTMs), has contributed to the liquidity squeeze.

And this has occurred despite the record nominal bank credit expansion and historically high employment rates. The plunge in September’s CPI might reflect a downturn in public and private demand, possibly worsened by mounting signs of a liquidity shortfall.

VII. SWS’s Self-Rated Poverty Survey versus the Government’s CPI 

Things don’t happen in a vacuum.

The BSP suddenly announced a massive reduction of the banking system’s reserve requirement ratio (RRR) on September 20th, obviously in response to such developments. The adjustment takes effect on October 25.

The PSA’s September CPI data exhibits a broad-based decline in price growth. While food prices had the biggest influence on the CPI’s significant downside volatility, slowing aggregate demand reflected the diminishing pace of price increases across most sectors. (Figure 6, lowest image)

All these factors point to the SWS Q3 data indicating an increase in self-rated poverty, which not only highlights the decline in living standards for a significant majority of families but also emphasizes the widening gap between the haves and the have-nots.

As a caveat, survey-based statistics are vulnerable to errors and biases; the SWS is no exception.

Though the proclivity to massage data for political goals is higher for the government, we can’t discount its influence on private sector pollsters either.

In any case, we suspect that a phone call from the office of the political higher-ups may compel conflicting surveys to align as one.

____

References 

Ludwig von Mises, The Boom Is Worse than the Bust, November 30, 2018 Mises.org 

Prudent Investor, The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk August 12, 2024

 

Prudent Investor, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing September 1, 2024

  

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

 

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong—George Soros 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

The ABS headline bannered, “PSEI back to 6,800 as investors cheer BSP rate cut.”

Figure 1

Well, the entire Asian equity market seems to have celebrated the rising expectations of rate cuts by the US Federal Reserve. In particular, 15 of the 19 national bourses closed 1.96% higher over the week. (Figure 1, upper chart)

The wonders of financial easing have also been manifested in strong rallies in the region’s bonds (falling yields) and firming currencies. The Thai baht, Indonesian rupiah and the South Korean won were this week’s strongest Asian FX. (Figure 1, lower image) 

Essentially, bad economic news is good news for the Overton Window anchored on speculative narratives. From their perspective, “MOAR” credit and leverage drive prosperity, hence the revival of various forms of leveraged speculation, such as the carry trade. 

Put differently, Main Street woes accrue to the benefit of the Wall Street class around the world. 

Has the Marcos-nomics Liquidity Driven Rally Broken the SONA Cycle?

Back home, while the BSP rate cut(s) has been worshipped by the establishment as the path to economic nirvana, the rallying PSE instead reflects the full rollout of “Marcos-nomics”—including the BSP’s easing—manifested through liquidity growth.

Figure 2

The PSEi 30 rallied by 3% for its second-best weekly showing of the year, mainly due to Friday’s 2.31% spike.

Sharp changes in liquidity conditions have influenced the PSEi 30 in a time-lag. (figure 2, upper graph) 

The liquidity-driven PSE may have broken the SONA cycle. (Figure 2) 

However, was the PSEi 30’s rally really about rate cuts? The devil is always in the details. 

PSEi 6,850: Targeted Heavy Pumps on ICT, ALI and a Select Few

Figure 3

This week’s rally was widespread across the PSEi 30, with 18 stocks rising, 11 declining, and one remaining unchanged. (Figure 3, topmost visual) 

However, it was ICTSI’s [PSE: ICT] massive 10.4% weekly surge that contributed significantly to the index’s performance. (Figure 3 middle chart) 

ICT's share of the free float-adjusted market cap of the PSEi 30 soared by 7.7% from 10.06% to an all-time high of 10.84%. It is closing in fast on the largest firm, SM, with a free float cap of 14.44%. 

Ayala Land's [PSE: ALI] 10.33% gain provided flanking support. Ayala Land's free float market cap also surged by 7.6% from 5.75% to 6.19%. 

The substantial rebounds of Jollibee (9.2%) [PSE: JFC] and Meralco (8.53%) [PSE: MER] helped too. Up 19%, Converge [PSE: CNVRG] was this week's best performer. However, from the free float market cap standpoint, their contribution remained negligible. (Figure 3 lowest graph)

Understanding the distribution of price changes in the PSEi 30's market cap provides significant insight into the price dynamics of the index.

For instance, while most people call the PSEi 30 the "market," an index with 5 issues driving it skews this holistic principle. As of August 16, the top 5 issues in the PSEi 30 carry a free float weight of 50%, while the top 10 account for 72.9%.

The fact that a few issues comprise the weightings of the PSEi 30 deforms the index's representation, making its price directional movements vulnerable to manipulation.

As a Global Company, ICT is Sensitive to Fed Actions; Debt Outgrows Income

Why would the investing public panic-bid on ICT shares when its revenues are principally derived from international sources? ICT is more exposed to the Fed's actions than the BSP's.

Figure 4

And why the parabolic price action when ICT’s debt is growing faster than its income? In H1 2024, ICT’s debt grew by USD 630.6 million against a net income expansion of USD 113.87 million, meaning that for every USD increase in net income, it drew USD 4.5 of credit. Consequently, interest payments have also surged. How sustainable is this? (Figure 4, topmost window)

Besides, ICT looks susceptible to adverse global events like a hard landing or a recession, as well as bellicose geopolitical developments.

Rate Cuts Driven Rally? Why the Divergence Between the Real Estate and Financials?

Interestingly, while banks and real estate are supposedly the prime beneficiaries of the BSP’s easing, BDO declined by 1.6%, and the relatively modest increases in Bank of the Philippine Islands [PSE: BPI] by 2.12% and Metrobank [PSE: MBT] by 3.7% led to a reduction in their share of the free float index.

On the other hand, ALI’s 10.33% spike, backed by SM Prime Holdings [PSE: SMPH] with a 3.4% gain, increased their index weight. The result is a divergence in the performance of interest-sensitive industries. (Figure 4, middle chart)

It’s not just the PSEi 30; members of the financial index (ex-PSE) and the property index also exhibit the same skew. Gains were seen in most constituents of the Property index (67%, average +1.47%) compared to the Financial index (42%, average all -.43%, average index -2.6%).  (Figure 4, lowest table)

Interestingly, the two PSEi 30 property firms account for 73.7% of the industry’s index, while the three banks comprise 90% of the 8-member Financial index (ex-PSE).

Distortions in Volume: Mounting Concentration Risks

Figure 5

The distortions are even apparent in trading volume. The rising share of ICT and the telcos (PLDT, Globe Telecoms, and Converge) in the mainboard volume has been accelerating, indicating intensifying speculative interest. Their share of the mainboard volume reached 22.25% in the week of August 16th, higher than their 2024 seven-month aggregate of 21.9%. (Figure 5, upper graph) 

Interestingly, despite the PSEi 30 at 6,850, weekly volume remained lackluster. That is to say, volume remained concentrated in PSEi 30 firms. The top 20 most active issues accounted for 84% of the main board volume. (Figure 5, lower chart)

Mixed Breadth, Foreign Inflows and More Signs of Concentrated Activities

Figure 6

And while the positive advance-decline prevailed at the PSEi 30 over the week, even with Friday's 134-68 differentials, breadth was barely positive (495-476) in favor of the buyers this week. (Figure 6, upper pane)

And yes, "foreign buying" indeed helped. PHP 1.44 billion of foreign inflows was reported for the week, while foreign participation accounted for 38.8% of the overall main board turnover.

The top 10 brokers also constituted 54.74% of the weekly mainboard volume.

All of this suggests that trades were hardly dispersed but rather concentrated, mainly among institutional brokers (domestic OFCs and foreign).

Or, the positive headlines may have misled the public to believe in whatever increases in the PSEi 30 means relative to the underlying activities.

Which History will Rate cut(s) Rhyme? 2011 or (2016) or the 2018 Episode?

Finally, as previously mentioned, unlike in 2011 and 2016, where rate cuts led the PSEi 30 to soar, 2018 saw the reverse—rate cuts led to a decline in the PSEi 30. Balance sheet conditions (public and private) played an important role in this difference. So far, the PSEi 30 appears to be following the 2016 pattern in its current run. Of course, Marcos-nomics stimulus could be the defining nuance.  (Figure 6, lowest chart)

Yet it will be interesting to see how lasting such low-volume parabolic pumps last.

Be careful out there.