China Stocks Crash over 7% Friday, Tests Bear Market Levels!

Easy come, easy go

Almost everywhere, the public appears to think that there will be no end to credit inflated asset booms. So they may have forgotten what bear markets look like at all.

Well, recent developments at China’s stock markets may have come to remind them that there is such as a thing called boom-bust cycles, where bear markets have not been merely figments of imagination. 

Following last week’s 13+% (weekly) crash, today’s broad based over 7% rout virtually erased marginal gains eked out during the early week where Chinese stocks have become a vertiginous rollercoaster ride.

Yet, two successive weeks of meltdowns has brought Chinese stocks at the threshold of the bear markets.

The Shanghai Composite knocks at the bear's door...

...while the Nasdaq version the ChiNext has clearly entered the bear's lair. Charts and table above from Bloomberg.

From  Marketwatch: (bold mine)

China’s stock markets plunged toward bear territory Friday, a sharp turnaround after a year of strong gains.

The Shanghai market SHCOMP, -7.40% , China’s largest, was off almost 20% from its recent peak, while the second-largest Shenzhen market 399106, -7.87% was off more than 20%, entering bear-market territory. The country’s startup stocks 399006, -8.91% have lost a quarter of their value since hitting a record high earlier in the month.

The Shanghai Composite Index became one of the best-performing markets globally last year after years of dismal performance. This year, it has been up as much as 60%, as local investors--cheered by a series of stimulus measures introduced by China’s central bank last November--have borrowed a flood of cash from their brokerages to invest in the stock market. The benchmark hit its highest level since the global financial crisis on June 12.

But investors have started to question the longevity of that stimulus-driven rally, and analysts are sounding louder warnings that China’s market has reached unsustainable levels. A selloff over the past two weeks has taken a big bite out of earlier gains.

The Shanghai Composite Index was on track Friday for its sharpest daily percentage loss since 2007. The move down follows a 13% loss last week.

The smaller Shenzhen Composite Index is now down more than 20% from a recent peak. The benchmark was last down 8.1% at 2,496.3 Friday, well off its record high of 3,140.66 earlier this month.

The selling has been particularly dramatic among riskier startup stocks. The ChiNext Price Index has tumbled from its record close of 3,982.25 on June 3.

Selling frenzy spilled over to Hong Kong...

The Hang Seng Index HSI, -1.78% , off by 2.2% on Friday, has been steadier as volatility spikes in the mainland. Hong Kong is up around 13% this year, compared with Shanghai’s more-than-30% rise.

Chinese government's intervention seemed to have failed to prevent the meltdown...

To be sure, China’s central bank has introduced new easing measures in the past couple of days: removing a cap on banks’ loan-to-deposit ratio and injecting cash into the financial system. Still, some investors fret that those steps don’t go far enough, and limit the likelihood of more potent measures, such as another cut to the amount of reserves banks are required to hold.

Just a reminder of what I wrote last week

...vertical price actions of stock markets are likely symptomatic of both Ponzi dynamics and the Greater fool theory in action.

Ponzi dynamics require fresh money to bid prices aggressively higher from existing shareholders (mostly insiders) at current levels. Since vertical price actions have manifested sustained manic bidding up of stocks, which are likewise indications of pyramiding, then more fresh funds are required to sustain this manic trend. Otherwise, given the stratospheric state of stock prices, this would mean an avalanche of profit taking sellers.

Meanwhile the greater fool is when “an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip them quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.” (Investopedia)

In short, manias are manifestation of one way trade crowd dynamics whose actions are premised from Greater Fool expectations backed by mostly credit financed (Ponzi) manic bidding of securities.

The credit crackdown or the reaching of credit limits (given record margin trades) could partly be responsible for the dearth of fresh speculative money to push prices at current levels.

I'm quite certain that the Chinese government will not only continue to intervene but will likely escalate the degree of rescue efforts to avert bears from taking command of her equity markets.

The stock market boom has inflated balance sheets of debt laden corporations, has served as an alternative channel for firms to access public's funds via equity, has provided short term profits and "confidence" to the speculative public, which bear markets threaten to reverse. 

And bear market in stocks will not only negate these temporary benefits, but will also expose on the vulnerabilities of the Chinese economy, particularly, the fragility of the the hissing credit financed property bubble and of the excess capacity in the industrial sector. Thus a bear market in stocks will likely trigger a financial crisis in China.

And a China crisis will have worldwide repercussion.

Hence, the Chinese government can be expected to move mountains to prevent two bubbles from imploding.

So huge volatility in Chinese stocks (in both directions, this week should be an example) can be expected.

Also the Chinese government will likely exploit geopolitical and regional tensions to deflect the attention of her constituency from internal economic and financial troubles, as well as, to rally nationalist fervor in support of the incumbent government. 

But finally I foresee all interventions to prevent her bubble from bursting to ultimately fail in a not so distant future.

Quote of the Day: From The Capitalist as the Ultimate Philanthropist

At the end of the day, there are only four things you can do with your money: You can spend it, pay it to the IRS, give it away or reinvest it. Consumption is on the receiving end of productivity—furthering personal instead of public welfare. Government spending is by definition not productive, as you realize every time you step into a DMV. Same goes for charitable giving—no profit means no measure of value or productivity.

And so the most productive thing someone can do with his money—the only thing that will increase living standards—is invest. If the Ford or Clinton foundations really wanted to help society, they’d work on lowering barriers to business formation and cutting the regulatory chains that inhibit productive hiring in the U.S. and globally. But what fun is that? Better to boast about reducing inequality, public welfare be damned.

This quote is from former hedge fund manager and author of "Eat People" Andy Kessler at the Wall Street Journal (a recommended read)

OECD Joins Warning Club: Yield-starved investors driving asset prices to dangerous levels

The OECD joins the warning club again. They have done so September 2014  and this March.

Mainstream institutions, like the OECD, IMF and the ADB used to be blind to such scenarios. But apparently, as I previously noted, global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore, so their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality

From Reuters: 

Encouraged by years of central bank easing, investors are ploughing too much cash into unproductive and increasingly speculative investments while shunning businesses building economic growth, the OECD warned on Wednesday.

In its first Business and Finance Outlook, the Organisation for Economic Cooperation and Development highlighted a growing divergence between investors rushing into ever riskier assets while companies remain too risk-averse to make investments.

It urged regulators to keep a close eye on investors as they piled into leveraged hedge funds and private equity and poured cash into illiquid assets like high-yield corporate bonds.

Meanwhile, judging by stock market returns, investors were rewarding corporate managers focused on share-buybacks, dividends, mergers and acquisitions rather than those CEOS betting on long-term investment in research and development.

"Stock markets in advanced economies are punishing firms that invest," OECD secretary general Angel Gurria said in a presentation of the report. "The incentives are skewed."

According to the OECD's research, over the 2009-2014 period buying US shares in companies with a low investment spending while selling those with high capital expenditure would have added 50 percent to an investor's portfolio.

ADB Joins 'Warning' Chorus: Emerging East Asia’s Bond Markets Face Rising Risks

It's supposed to be a bull market, but then why the barrage of warnings?

This time the ADB sounds the alarm bells.

From the ADB's News Release: (bold mine)

Emerging East Asia’s bond markets were volatile due to rising global concerns over the unresolved Greek debt crisis and the possibility of an interest rate hike in the United States, the Asian Development Bank’s (ADB) latest Asia Bond Monitor said.

“Low liquidity in the region’s bond markets could worsen the impact of an outflow of funds leading to more volatile price swings,” said ADB Chief Economist Shang-Jin Wei. “Undertaking policies to improve efficiency and transparency of financial markets, coupled with some appropriate prudential regulation, can help countries strengthen resilience against external shocks.”

The report notes that while emerging East Asian countries have made strides in broadening bond markets, global risks have the potential to put further strain on markets that lack liquidity. The prospect of higher US interest rates could further strengthen the dollar, hurting issuers of foreign currency bonds and increasing debt servicing costs in local currency terms on existing US dollar bonds.

If the region's system has been 'sound', then there should hardly be any material worries on the potential impact from US interest rates or Greece debt crisis. 

But is it?

Wow. Some Major Bond Managers Brace for Financial Storm! Advices Public to Hold Cash!

Well some bond managers haven’t been buying the Goldilocks scenario being portrayed by record stocks. Instead they are bracing for a financial storm.

One of Britain’s biggest bond managers, Fidelity, says it’s time to hold cash and gold

From the Telegraph: (bold mine) 

The manager of one of Britain’s biggest bond funds has urged investors to keep cash under the mattress.

Ian Spreadbury, who invests more than £4bn of investors’ money across a handful of bond funds for Fidelity, including the flagship Moneybuilder Income fund, is concerned that a “systemic event” could rock markets, possibly similar in magnitude to the financial crisis of 2008, which began in Britain with a run on Northern Rock.

“Systemic risk is in the system and as an investor you have to be aware of that,” he told Telegraph Money.

The best strategy to deal with this, he said, was for investors to spread their money widely into different assets, including gold and silver, as well as cash in savings accounts. But he went further, suggesting it was wise to hold some “physical cash”, an unusual suggestion from a mainstream fund manager.

His concern is that global debt – particularly mortgage debt – has been pumped up to record levels, made possible by exceptionally low interest rates that could soon end, and he is unsure how well banks could cope with the shocks that may await.

He pointed out that a saver was covered only up to £85,000 per bank under the Financial Services Compensation Scheme – which is effectively unfunded – and that the Government has said it will not rescue banks in future, hence his suggestion that some money should be held in physical cash.

He declined to predict the exact trigger but said it was more likely to happen in the next five years rather than 10. The current woes of Greece, which may crash out of the euro, already has many market watchers concerned.

The recommendation has been to hold not just cash but physical cash!

Perhaps Fidelity hasn't been aware that the establishment wants to ban cash transaction and hoarding.

Oh and it’s not just Fidelity, some US bond funds have also been talking and doing the same contingent measures. 

From Bloomberg: (bold mine)

TCW Group Inc. is taking the possibility of a bond-market selloff seriously. 

So seriously that the Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt, has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis.

“We never realize what the tipping point is until after it happens,” said Jerry Cudzil, TCW Group’s head of U.S. credit trading. “We’re as defensive as we’ve been since pre-crisis.” 

TCW isn’t alone: Bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999, according to FTN Financial, citing Investment Company Institute data.

Cudzil’s reasoning is that the Federal Reserve is moving toward its first interest-rate increase since 2006, and the end of record monetary stimulus will rattle the herds of investors who poured cash into risky debt to try and get some yield.

The shift in policy comes amid a global backdrop that’s not exactly rosy. The Chinese economy is slowing, the outlook for developing nations has grown cloudy, and the tone of Greece’s bailout talks changes daily.

Well it’s more than just the Fed, China and Greece,  bond managers have been antsy because they perceive markets as having been distorted…

Of course, U.S. central bankers are aiming to gently wean markets and companies off zero interest-rate policies. In their ideal scenario, borrowing costs would rise slowly and steadily, debt investors would calmly absorb losses and corporate America would easily adjust to debt that’s a little less cheap amid an improving economy.

That outcome seems less and less likely to Cudzil, as volatility in the bond market climbs.

“If you distort markets for long periods of time and then you remove those distortions, you’re subject to unanticipated volatility,” said Cudzil, who traded high-yield bonds at Morgan Stanley and Deutsche Bank AG before joining TCW in 2012. He declined to specify the exact amount of cash he’s holding in the funds he runs.

Price swings will also likely be magnified by investors’ inability to quickly trade bonds, he said. New regulations have made it less profitable for banks to grease the wheels of markets that are traded over the counter and, as a result, they’re devoting fewer traders and money to the operations.

To boot, record-low yields have prompted investors to pile into the same types of risky investors -- so it may be even more painful to get out with few potential buyers able to absorb mass selling.

Record stocks in the face of record imbalances at the precipice!

Phisix 7,600: Shrinking Market Liquidity and Media’s Demand for More Stimulus!

If you react to that by piling more intervention on intervention, you encourage more untoward risk taking and you end up with even greater amount of mispriced risk, you end up with a never-ending cycle that is harder and harder to get out of- Ashley Alder, chief executive officer of Hong Kong's Securities and Futures Commission on central banks as market makers of last resort

In this issue

Phisix 7,600: Shrinking Market Liquidity and Media’s Demand for More Stimulus!

-Record Phisix in the Face of Shrinking Market Liquidity

-Divergences Even Among Key Phisix Issues

-Philippine Stocks: SECOND MOST Expensive in the World!

-More Signs of Shrinking Liquidity at the Treasury Markets

-Bureau of Customs April’s 8.5% Deficit: It’s Not About Oil, It’s About the Economy

-Media Downscales on G-R-O-W-T-H! Pressures Government for More Stimulus!

Phisix 7,600: Shrinking Market Liquidity and Media’s Demand for More Stimulus!

So finally the Philippine equity benchmark finally broke the recent losing streak.

With a sizeable 1.3% advance, the Phisix posted its first weekly gain in four. This week’s gains have added some cushion to protect the record levels from the incursion of the bears.

To recall, just the other week, the bears launched a blitzkrieg which easily smashed through the lines of record 7,400 Phisix, as well as, the 7,350 support levels before the selling momentum faded.

So far, the Phisix has recovered 3.79% from its closing low last June 9th at below record 7,323.44. But the headline index remains 6.48% off the April 10th record of 8,127.48.

The benchmark’s resistance can be seen at 7,728. On the other hand, the support, which was also encroached the other week, remains at 7,350.

The chart above also shows of the peso which partially recovered this week at 45.11 to a US dollar from the other week’s 45.15.

Incidentally, the current ‘peak’ in the USD-php has almost coincided with trough of the Phisix. Should history repeat where the peso’s performance will resonate with the equity benchmark—then a weak peso will suffuse onto a lackluster Phisix and vice versa.

Both have served as primary indicators to herald the 1997 Asian Crisis.

Record Phisix in the Face of Shrinking Market Liquidity

Last week, I noted that developments at the general marketplace should CONFORM with the actions of the index for a trend to be reckoned as sustainable[1]

Little has been appreciated that the headline index DEPENDS on the OVERALL health conditions of the entire population of listed stocks.

So watching the underlying actions of the bids (or the buyers) will be crucial in establishing whether last week’s activities represented an oversold bounce or a resumption of a secular trend.

For a week where the Phisix scored a substantial 1.3% headline advance, the considerable degree of gains should have filtered into the general market.

Additionally, considering the sustained dominance of bears at the broader market—or bears as the overriding force behind the scenes—it would have been natural to expect some reprieve in favor of the bulls.

But reprieve seems nowhere been in sight yet. 

This week’s headline improvement came with attenuated peso trading volume. 

The daily peso average of Php 7.78 billion per day ranks the FIFTH lowest for the year (left)! Moreover, it’s been four out of the five weeks where peso volume has traded below the Php 8 billion even as the Phisix drifts at record territory!

While sellers haven’t been aggressive, the bulls led by index managers can only do so much. Sellers have only taken advantage of aggressive buyers to sell at higher levels. So unless bulls can muster more volume, the task to regain the old high will signify an arduous challenge.

Importantly, whatever trading volume generated has increasingly been directed to the top 15 issues of the headline index. And the dearth of volume on the general market reveals of the increasing concentration of trading activities and risks on headline sensitive issues.

Aside from volume, this week’s frenetic push of the benchmark has seen little participation from the broad market in the context of market breadth or the advance decline spread.

So what else has been new?

With index’s 1.3% gain, one would at least expect SOME improvements. Yet as a continuing trend for the year, losers still edged out gainers 413 to 391 for the week. (right window)

The distribution of days has been in favor of losers: 3 against 2. The tally board: June 15: 72 advancers 91 decliners, June 16: 77 to 85, June 17: 77 to 90. The single day in favor of winners Thursday June 17: 89 to 71. Friday June 19 was dead even at 76 all.

So seller’s still rule the market despite the 1.3% headline.

And low volume coupled with the dominance of sellers seems to have NOW been accompanied by rapidly shrinking trading activities.

This week’s average daily trades have dwindled to the lowest level since December 2014, or accounts for the lowest number for the year! 

Meanwhile, average total daily traded issues have collapsed to 1Q 2014 lows!

Both daily trades and total traded issues can serve as a measure of market sentiment.

Although both have surged to records in 2014, it appears that these sentiment gauges has hardly helped market breadth. Instead, they seem to indicate of rotational actions: partial selling of broad market, partial pushing of select or a few non-Phisix and the key thrust has been to power headline issues via significant accounts of churning (as possibly seen in average daily trades).

While the collapse in average total traded issues may translate to the easing of selling pressures at the broad market, it is also telling sign of the massive contraction of trading activities.

All these suggest of a materially withering market liquidity now being ventilated as immensely reduced trading activities!

And again, the only thing that has kept the Phisix at record levels has been the tenacious concentration of rotational pumping of big ticket headline sensitive issues!

And current market activities hardly seem about reflecting price discovery, but about the propping of headline stocks.

When price discovery has been rendered dysfunctional, then the vast distortions of said security prices will be subject to the risk of an eventual violent market clearing process.

The obverse side of every artificial boom is a bust.

Divergences Even Among Key Phisix Issues

Stunningly, not even the 15 largest heavyweights had been unanimous. 

Seen from the perspective of the sectoral indices, the property and service sectors have defied the selective pumps in the Industrial, Holding and Financial sectors.

And interestingly, the index outperformers had largely been products of huge price pops by JUST five companies: URC (+7.03%), JG Summit (+5.15%), Security Bank (+7.84%), Ayala Corp (+4.24%) and EDC (+3.98%).

And remarkably, four of these five issues are members of the PSEi indices. Furthermore, three of the four issues belong to the elite 8 largest market cap. As of Friday, the market cap share of these issues as follows: URC 5.66%, JG Summit 5.33%, Ayala Corp 5.9% and EDC 2.11%. In total, the combined weights of the four accounts for 19% share of the basket. Thus the huge gains by these issues embellished the sectoral advances, and more importantly, the headline index.

Additionally only 21 of the 30 issues (or two thirds) closed the week in green while one third or 9 ended the week with a loss. So divergences exist even within the headline index basket.

The bottom line is that only four issues have been responsible for the gist of this week’s 1.3% advance!

And essentially the same dynamics has underscored record Phisix of 2015: a manipulated pump!

Yet the deepening corrosion of foundations undergirds record Phisix!

Philippine Stocks: SECOND MOST Expensive in the World!

And as increasing signs of the pricing system contortions, it’s becoming a lot obvious even to foreign investors that Philippine equity prices has become massively overvalued!

Well, the prestigious rank of the SECOND most EXPENSIVE stock market in the world belongs to the Philippines! Indonesia has been in close THIRD.

The prolific Gavekal team commented[2] (bold mine)

To put that in more perspective, only 9 out of 46 countries currently have price to cash flow below 10x and five countries (Switzerland, Singapore, Indonesia, Philippines, and India) have a price to cash ratio above 20x. The US is currently trading at 16.9x cash flow.

Just awesome!

Of course, the reason for the artificially “lower” P/E ratio has been because some of the non-participating issues in the making of the headline record, which have been in bear markets, have weighed on the overall P/E or has offset the overvaluations of the others. Fundamentally, the biggest mispricing have mostly been in the top 15 headline stocks.

Current price levels should be seen instead as manifestations of wanton speculative PUMPs rather than from stocks as a function of discounted stream of expected cash flows

Thus, popular claims that paying for 28.8 price per cash flow represents ‘fundamentals’ or G-R-O-W-T-H should be seen instead as unalloyed hokum.

G-R-O-W-T-H has been transformed into a catchphrase or a shibboleth used by the establishment to unduly seduce the gullible public to jump into the speculative bandwagon and become part of the invisible transfer process as sources of funds/savings from which the establishment taps (aside from equity pumps, think equity and bond offerings, placements and etc..; inflated tax revenues financing government budgets)

This invisible transfer process, or stimulus in favor of the government and the oligarchy, that has been enabled and facilitated by financial repression policies through negative real rates, has only penalized the average person’s savings, incomes and of the currency holders with little or no assets. Negative real rates nudge via implied coercion the susceptible and unsuspecting public to join the transfer process. Yet unknowingly, the public carries with them the burden of various risks from such transfers (market, credit, currency and interest rate risks). Bizarrely, the BSP calls this reverse Robin Hood policy as ‘responsible’

Yet any signs of downturn on headline G-R-O-W-T-H numbers will only send valuations even higher (if prices don’t adjust ahead). Also any sustained PUMP will likewise do the same.

Hence the valuations or earnings trap means buying at present levels specifically on headline issues, which provides ZERO margin of safety, should be a recipe for prospective massive losses overtime.

More Signs of Shrinking Liquidity at the Treasury Markets

Yet more signs of shrinking liquidity? 

Look no further than the rapidly flattening yield curve at the Philippine treasury markets

Since March 2015, yields of Philippine government papers have become extremely volatile.

But let noise not be an obstacle in establishing signals.

Since December, the flattening of the yield curve has been intensifying. Such dynamic appears to have accelerated in March where the volatility emerged.

Since March to date, there have been repeated attempts to forcibly steepen the curve.

Yields of 1 month bills relative to 5, 7 and 10 year maturities epitomize on the current state of volatility (left).

The spread of the 1 month yield continued to narrow relative to her longer curve equivalents from November to March. However in April the spread just collapsed. Then intervention occurred to abruptly widen the spread!

In May, the spread not only collapsed but part of the curve even INVERTED! The response has been the same, force a widening. Then again last week, the curve precipitately narrowed again.

Part of the same volatility can be seen from the other spreads (6 months, 1 year, 2 year relative to 10 and 20 year). But overall, the volatility (most likely from interventions) has emerged primarily to prevent the yield curve from substantially narrowing.

As you can see, those headline numbers (whether the Phisix or economic statistics) have been decaying from the inside. And the rotting core has begun to affect the surface.

And all these have been unseen, ignored, denied or whitewashed by the establishment and their allies.

Manipulations can only do so much, economic reality will ultimately prevail.

Bureau of Customs April’s 8.5% Deficit: It’s Not About Oil, It’s About the Economy

Oh if you haven’t noticed…headlines today have become LESS and LESS optimistic. 

Or let me frame it from a different angle, if you haven’t noticed, headlines today seem to have been designed to program or to condition the public to expect LESS from published economic performance statistics or G-R-O-W-T-H

It’s like central banking “forward guidance” only that they have been channeled implicitly to influence the public outlook through media.

Thursday June 18th headline reports that the collection of revenues by Philippines Bureau of Customs (BOC) have fallen 8.5% below the agency’s target.

Well, curiously, the BOC doesn’t seem to share the establishment’s romance with falling oil prices as equivalent to consumer spending growth. Instead, media as mouthpiece of the BOC bannered a secondary headline: “Cheaper oil imports blamed for decline in collection”[3]

The article goes on to say that last April, BOC collection “slid by 8.5 percent to P28.1 billion, as the take from imported oil fell by more than half year-on-year.” Collections from oil “skidded by a hefty 40.5 percent year-on-year to P5.4 billion last April from P9.1 billion a year ago” that has reduced oil’s share of tax and duties collection “to 19 percent in April from 30 percent in the same month last year”

So while “non-oil imports rose 5 percent”, the gains hardly offset the losses in oil revenues! Thus media concludes, low oil prices accounted for as the notorious culprit for the collection shortfall!

Wonderful.

Perhaps the establishment should send a memo to the BOC to remind them of the meme ‘low oil prices equals consumer spending growth’!

Never mind the economics of spending as MAINLY a derivative of INCOME growth—secondarily the reduction of savings and the use of credit—and NOT from the changes in spending patterns or the redistribution of spending from static income.

And never mind too, the fact that non-oil imports have basically FAILED to offset deficits arising from oil tax and duty collections.

In other words, ceteris paribus*, consumer or even capital spending has been unsuccessful to neutralize the deficit from a “supposed” low oil price dynamic.

Therefore, contra the article which labors to explain BOC collection shortfall as a product of oil, it’s really NOT about oil.

“Cheaper” oil imports depend on the frame of reference. Compared to when? What would be the basis for the use of such adjective?

Based on April’s oil data, it’s NOT about oil.

The Philippines imports 70% of its oil requirements from the Middle East. Based on Department of Energy 2012 data, oil imports from Saudi Arabia and the UAE accounted for 45.9% and 25.18% share. This means Philippine oil have been mostly sensitive to the Dubai-Oman crude as benchmark. 

Since I don’t have access to Dubai-Oman data, I’m going to use US benchmark WTI only as reference for this analysis.

In April, WTI prices leapt 23.47% from $47.72 (end March) to $58.92 (end April).

So the claim of oil prices as being responsible for the BOC’s collection gap may have been based on other periods, because if April was the source of reference then the article misleads.

In this period, the USD php hardly budged.

So to extrapolate oil prices in peso, which also jumped by 23.36% over the same period, oil prices virtually reflected mainly changes in USD oil prices alone outside the foreign currency translation effect! (see right)

We can see how changes in domestic prices of oil via its byproducts affect the real economy.

In April, the first two weeks (April 7 and April 14) resulted to a rollback as announced by the DoE in response to falling oil prices in March. However, the next two weeks, (April 21 and April 28), the DoE announced price increases to exhibit the jump in world oil prices!

From April to June 16, there had been three rollbacks vis-à-vis SEVEN price increases. The last increase as stated by the DOE: “Year-to-date total adjustment rose to net increases of P5.69/liter for gasoline and P1.06/liter for diesel. LPG remained with net decrease of P6.60/kg”

So gasoline and diesel prices have gone up as LPG prices have gone down year to date as of June 16. Part of this must be due to the weak peso.

So the headline should have been rephrased as: Expensive Cheaper oil imports blamed for decline in collection

*And speaking of ceteris paribus, collection deficiency can also be a function of smuggling, or domestic production. The former looks plausible, but the latter doesn’t seem as to satisfy current conditions.

It’s interesting to note of the fabulous emergence of volatility in BOC’s collections (left). 

Based on the data from Bureau of Treasury, year on year changes in the Bureau of Customs revenues turned NEGATIVE in THREE of the last five months. On the other hand, December posted a HUGE 85% spike. Yet, April’s significant negative 8.5% data would mean FOUR negatives in the last 6 months. The most likely implication from the substantial decrease in collections data by the government agency must be that Philippine imports continue to underperform in April. Except for February 2015, import growth have been quite sluggish since November 2014

If this turns out correct, then again it’s not about oil.

Instead, to borrow James Carville’s election slogan for ex-US president Bill Clinton, “It’s the economy stupid”

Media Downscales on G-R-O-W-T-H! Pressures Government for More Stimulus!

Mood changes have become apparent.

As I noted above and as I have previously pointed out, there seems to be an orchestrated publicity campaign to gradually dampen the public’s heavy optimistic expectations on G-R-O-W-T-H!

Media communications seem as painting a soft landing in order to avoid a panic.

Wednesday’s (June 17) business headlines came with “PH faces economic headwinds, gov’t warned”[4] where the subsidiary headline revealed of the alleged reason: WEAK FISCAL SPENDING, SLOWING OFW REMITTANCES NOTED

Saturday’s (June 20) business headlines seem to reiterate the point “Underspending threat to growth”[5], except that this article came with an appeal to authority: MOODY’S URGES EFFECTIVE BUDGET EXECUTION

Ironically the BSP recently cheered April’s OFW remittances data to state of “sustained” G-R-O-W-T-H. Personal remittances grew by a modest 4.9% while year to date remittances increased 5.1%. Meanwhile cash remittances rose 5.1% on an annual basis ad 5.1% for the first four months.

The BSP released this data on June 15 (Monday).

It’s a curiosity to see how establishment experts have discounted on what the BSP has just lauded on.

Two days after, through media they declared “SLOWING remittances and weakness in the country’s manufacturing sector may be early signs of a cycle that may lead to the further moderation of economic growth”. And for G-R-O-W-T-H to remain, experts have pushed the government “to pick up the slack and get out of its spending rut to provide stimulus to the economy by rolling out projects at a faster pace”

Three days after, the pressure on government to act has been applied by media again this time through the recommendations of the credit rating agency Moodys which claimed G-R-O-W-T-H will remain strong this year, but at the same time slashed their projections to 6% from 6.2%

I suspect that the reason the establishment raised “slowing remittances” as an obstacle to G-R-O-W-T-H has been because, as the chart above shows, the trend already shows the way.

I truly doubt if they understand or appreciate that remittances are subject to the forces of diminishing returns and the limits from the law of compounding given its size and scale of contribution to the economy.

And I suspect too that there has been little appreciation for insights involving world developments that influences remittance dynamics. For instance, how would a calamitous Grexit or a sustained collapse in Chinese stocks affect the world economy that could filter into remittance dynamics?

For the mainstream, statistics equals economics. It’s why growth numbers just jumps out from their computer screens!

It is even ridiculous to suggest that government spending will produce growth. It will produce statistical G-R-O-W-T-H, but not food on the table growth.

The fact that government competes with private sector for resources means that resources government will use, will come at the expense of the private sector.

Those who make such a claim, which presupposes governments makes more efficient of resources, should look what happened to USSR, Mao’s China and or North Korea where all spending have been by governments.

Second, government use of resources means taxes on the public.

As the great Ludwig von Mises explained[6]

However, the means which a government needs in order to run a plant at a loss or to subsidize an unprofitable project must be withdrawn either from the taxpayers' spending and investing power or from the loan market. The government has no more ability than individuals to create something out of nothing. What the government spends more, the public spends less. Public works are not accomplished by the miraculous power of a magic wand. They are paid for by funds taken away from the citizens. If the government had not interfered, the citizens would have employed them for the realization of profit promising projects the realization of which they must omit because their means have been curtailed by the government. For every unprofitable project that is realized by the aid of the government there is a corresponding project the realization of which is neglected merely on account of the government's intervention. Yet this nonrealized project would have been profitable, i.e., it would have employed the scarce means of production in accordance with the most urgent needs of the consumers. From the point of view of the consumers the employment of these means of production for the realization of an unprofitable project is wasteful. It deprives them of satisfactions which they prefer to those which the government-sponsored project can furnish them.

Yet all those controversies, corruption, pork barrel scams, wasteful expenditures (boondoggles, junkets and etc…) do nothing to demolish the myth from a widely embraced popular belief.

Third, the orthodoxy treats GDP as some homogenized factors at work.

I have quoted economic professor and blogger Arnold Kling[7]

In macroeconomics, the conventional misrepresentation treats the economy as one big GDP factory. Macroeconomists look at total output, as measured by GDP, and they think of it as produced by homogeneous labor and homogeneous capital. Again, this is camping-trip economics, with value assumed to be embedded in the endowment of labor and capital, rather than in the coordination required to create patterns of specialization, production methods, trade, and innovation.

The orthodoxy sees humans as unthinking automatons that are beyond the influence of incentives. The orthodoxy also seem to see people as knobs that can be closed or opened, put in high or mid or low gear.

Homogeneous labor simply means interchangeability; a doctor can be an engineer or versa. Homogeneous capital means that capital used for fishing and manufacturing are non-specific or the same. Everything signifies a one size fits all dimension.

From the above news account, just think of how government spending will substitute the slack from OFWs.

Let us make public works as example. 

The major beneficiaries of public works will be the bureaucracy (national or local) who will oversee and supervise such projects. The secondary beneficiaries will be the private sector contractor/s who will be awarded to execute or implement on such projects. The succeeding beneficiaries will be the employees of the private sector contractor/s, the sub-contractors, as well as, suppliers of the said contractor/s or the government. 

The next set of beneficiaries will be the ancillary industries from the public works project, and lastly, the industries which benefit from the spending of the above economic agents. 

Since government projects represent a monopoly and are centralized, the spending will flow from top to bottom or the trickle-down effect.

BUT since public works are location specific projects, then the popularly “seen” benefits will be limited largely to the areas involved.

So if all the public works projects nationwide will be added up, this will account for only a minor share of the national economy, despite the peso amount involved.

And considering the trickle-down nature of government spending then such spending will be tilted largely on what the highest hierarchy spends on with limited amount of multiplier from the bottom.

Yet how about remittances? The population of OFW has been estimated at 10.5 to 13.5 million people. That’s about 10% or more of the local population. So it’s easy to deduce that most households depend on an OFW relative as source of financing.

And given that remittances also constitute about 10% (9.8% World Bank data 2013, which has been down from 13.3% in 2005) of the statistical GDP, or perhaps even more due to the shadow/informal remittances, this implies that the impact of OFW have been national.

Besides since remittances have hardly been about top-bottom political spending they are relatively more decentralized in nature. Thus, the decentralization dynamics limits the impact of global shocks on them. But they aren’t immune to such shocks.

Such intense fixation on the sustained benefits from OFW remittances has been the reason for the frenetic nationwide race to build shopping malls, housing, condos, hotels and resorts and other consumer spending related industries. Yet most of these projects have been built predicated on the linear growth rate trend for OFW remittances. SM’s Ms Coson’s projections for her projects seem as having been anchored on these.

Yet just how can limited specific local projects replace a nationwide slack from a remittance slowdown?

What will happen to the supply side chain—which has been desperately competing to gain market share through a race to build capacity mostly funded by debt—when OFW remittances fall?

How will the current capacity plus prospective capacity remain commercially feasible under such circumstances?

Of course, contra mainstream hyped expectations over the scale of OFW remittance contributions; it has been the leveraging of the supply side that has been delivering the meat of G-R-O-W-T-H growth. But much of these projects have been focused on remittances.

Yet what happens if an expected slowdown in OFW filters into supply side capex plans?

Will a double whammy occur that will self-reinforce the downturn? If it does, then how will these affect outstanding loan portfolios of banks, bonds and other creditors? 

Will all leveraged companies still have the capability to pay existing liabilities under such circumstances?

The establishment makes a lot of defective assumptions which they really don’t know about. All they do has been to conduct tea leaf reading in the context of statistics and equate them as economic reasoning.

Here is another example. Moody’s say that the Philippines “has demonstrated resilience to global shocks, which limits the possibility that improvements in fiscal or economic performance would be significantly undermined.”

Has Moody’s ever heard of the popular Wall Street mantra “Past performance does not guarantee future results?” The US agency the Security of Exchange mandates mutual funds to indicate this.

Does Moodys know of the changes in debt dynamics the Philippines has in the past relative to today and how these impact balance sheets?

Does Moody’s know that current fiscal regime has been almost entirely dependent on negative real rates stimulus such that once the stimulus will be lifted the entire façade will most likely crumble? So instead of fiscal discipline one would see massive deficits and soaring debt levels?

Yet Moodys, like all the rest, clamor for more stimulus even when the Philippine economy has been thriving on a 2009 stimulus. And BSP has only patronized them by refusing to do away with it.

Why?

Substance addiction has become so chronic such that a withdrawal syndrome can’t be tolerated?

A genuinely strong economy will not require dependence on invisible transfers or stimulus charged at the expense of the average citizenry. So how strong is strong?

Nonetheless media’s downshift in the reporting of economic developments has been quite revealing. 

And why shouldn’t they when the writing has been on the wall

The Philippine Statistics Authority (PSA) reported of price DEFLATION in the construction industry for the month of May, as seen in wholesale price index (top) and retail price index (bottom).

Based on prices, construction boom, where?

Oh don’t worry, in the realm of the orthodoxy, real economy prices don’t seem to matter. Prices only matter if they are something to cheer or rally at, like surging stocks and properties.

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[1] See Record Phisix in Big Jeopardy! BSP 2Q Survey Reveals Bearish Consumers! More Cracks on Fundamental Headlines! June 14, 2015

[2] Eric Bush Gavekal Capital Blog Who would have guessed? Russia is the best performing, and cheapest, country index YTD Gavekal Capital Blog June 18, 2015

[3] Inquirer.net BOC tax take down 8.5% in April June 18, 2015

[4] Inquirer.net PH faces economic headwinds, gov’t warned June 17, 2015

[5] Inquirer.net Underspending threat to growth June 20, 2015

[6] Ludwig von Mises 6. The Limits of Property Rights and the Problems of External Costs and External Economies XXIII. THE DATA OF THE MARKET (Human Action, p.655)

[7] See Arnold Kling: The Economy is Not ONE Big GDP Factory May 26, 2015