The Political Pretense called Currency War

A geneticist recently claimed that human intelligence has been on a gradual decline due to the extensive use of fluorides in the water supply, pesticides, high fructose corn syrup and processed foods. 

I have a different opinion. If true, then I would say that the main culprit has been the public’s worship of state, from which untruths, as conveyed by media, politicians and their apologists, envelops its essence. Blind belief in political falsehood makes people lose their intellectual bearings.

Just recently the Japanese government has been blamed by her counterparts as Russia, South Korea and the Bundesbank for inciting, if not escalating, a “currency war” via open ended bond buying program to devalue the yen. The implication is that Japan’s “currency manipulation” polices signifies as “beggar thy neighbor” policies that have been implicitly designed to hurt other nations.

A “currency war” is another term for competitive devaluation which according to Wikipedia.org represents “a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency” where “states engaging in competitive devaluation since 2010 have used a mix of policy tools, including direct government intervention, the imposition of capital controls, and, indirectly, quantitative easing.”

Yet one would notice that the balance sheets of major central banks, all of which have been skyrocketing, and which allegedly reflects on “direct government intervention, the imposition of capital controls, and, indirectly, quantitative easing”, currency wars in the light of competitive devaluation has been an ongoing event since 2008 as shown in the chart above. 

In short, neither has this been an exclusive Japan event nor has been a fresh development.

And this has also not been limited to major central banks but extends all the way to emerging Asia and to China as well, the Philippines included. (chart from the Bank of International Settlements)

In short, global central banks have been in a state of “currency war” or “currency manipulation” since 2008.

This article is not meant to absolve Japan's policies but to expose on what seems as political canard.

In reality “currency war” or “currency manipulation” or competitive devaluation is simply nothing more than inflationism. The great Ludwig von Mises defined inflation as

if the quantity of money is increased, the purchasing power of the monetary unit decreases, and the quantity of goods that can be obtained for one unit of this money decreases also.

While there may be technical difference on what a central bank buys to expand her assets through a corresponding expansion of currency liabilities, the fact is that “quantity of money is increased”.

The assets of Swiss National Bank have mostly been in foreign currency reserves (as of November 2012) while the Bank of Japan has mostly been in JGBs (as of September 30, 2012). Table from (SNBCHF.com)

American neo-mercantilists have labeled “currency manipulation” on nations, who allegedly use of accumulation of currency reserves as exchange rate policy, from which they call their government to impose protectionist countermeasures such as China.

As I wrote previously this represents naïve thinking.

While the technical reasons why countries accumulate foreign currency reserves are mainly for self-insurance (for instance Asia reserve accumulation has partly been due to the stigma of the Asian Crisis) and from trade, financial and capital flows (NY FED), the real “behind the curtain” reason has been the US dollar standard system. Such system allows for a “deficit without tears”, or unsustainable free lunch by the use of the US dollar seingorage to acquire global goods and services that results to seemingly perpetual trade deficits. 

Deficit without tears, as the late French economist and adviser to the French government Jacques Rueff wrote in the Monetary Sin of the West (p.23), “allowed the countries in possession of a currency benefiting from international prestige to give without taking, to lend without borrowing, and to acquire without paying.” 

And this has been the main reason for America’s “financialization” and the recurring policy induced boom bust cycles around the world, which essentially has been transmitted via the Triffin dilemma or “the conflict of interest between short-term domestic and long-term international economic objectives” of an international reserve currency

Thus blaming China or even the Philippines for reserve currency accumulation seems plain preposterous and only represents political lobotomy.

Currency war or currency manipulations serves no less than to “cloak the plea for inflation and credit expansion in the sophisticated terminology of mathematical economics”, to quote anew the great professor Ludwig von Mises from which “to advance plausible arguments in favor of the policy of reckless spending; they simply could not find a case against the economic theorem concerning institutional unemployment.”

And may I add that pretentious public censures account for as ploys to divert public’s attention or serve as smokescreens from homegrown government “inflationist” policy failures.

Since major central bank represented by the G-20 knows that by labeling Japan as instigator of currency wars would be similar to the proverbial pot calling the kettle black, they went about fudging with semantics to exonerate Japan’s political authorities.

From Bloomberg,

Global finance chiefs signaled Japan has scope to keep stimulating its stagnant economy as long as policy makers cease publicly advocating a sliding yen.

The message was delivered at weekend talks of finance ministers and central bankers from the Group of 20 in Moscow. While they pledged not “to target our exchange rates for competitive purposes,” Japan wasn’t singled out for allowing the yen to drop and won backing for its push to beat deflation.

This doesn’t look like a “war”, does it?

At the end of the day, currency war, or perhaps, stealth collaborative currency devaluation (perhaps a modern day Plaza-Louvre Accord) maneuvering means that central bank shindig will go on; publicity sensationalism notwithstanding.

Quote of the Day: The Benefits of Population Growth

The benefits of population growth come from the fact that the more people there are in the world, the more people you have to interact with, the more potential friends you have, the more potential mates, the more potential business partners, customers, employers, employees. But even more than any of that is the fact that we all free ride on each other’s ideas. Virtually all of our prosperity comes from the fact that each generation free rides on the ideas of the previous generation, and improves on them — not just uses those ideas in and of themselves, but uses them to inspire the next generation of ideas. We use them to build on and to make the world a more prosperous place. A lot of that is invisible. You have all this technology around you and you tend to forget the fact that had there been half as many people, there would have  been half as many ideas — probably fewer than half, in fact, because  ventures actually inspire each other, so there’s a more than linear buildup of ideas as the  population grows.

I like to say that when you’re stuck in traffic on a hot summer night, it’s very easy to remember that the guy in front of you is imposing the costs, and, unfortunately, you also easily forget that the guy who invented air conditioning has conferred on you quite a benefit. You remember that if the guy in front of you had never been born, your life would be a little easier right now — but it’s also easy to forget that if one less person had been born it might very well have been the guy who would’ve invented air conditioning, not the guy who’s in front of you. So, the real way in which people get this wrong, I think, is that the mind immediately goes to the fact that there is such a thing as too large a population. And there is such a thing as a population so large that the earth cannot support it — we all know that. But that does not address the question of whether the current population is too large or too small. And somehow people often confuse one of those questions with the other. I’m not sure why, but I’m out to unconfuse them.

(bold mine)

This excerpt is from the interview of author, blogger and professor Steven Landsburg by the Richmond Federal Reserve (hat tip Bob Murphy)

What’s Wrong with Gold?

Gold priced in the US dollar have broken below technical levels. And some gold bears have been shouting at the top of their lungs declaring that this may be the end of the gold bull market.

They resort to appealing to authority by citing the reduced holdings of popular investors as George Soros, as example.

The real reason behind the calls for the end of the gold bullmarket is that such gold bears have been desiring to demonstrate, that in the face of massive money printing by global central banks, price inflation hasn’t been a threat. 

And since gold serves as hedge of savings against the loss of purchasing power of paper money, such lack of price inflation thereby justifies the actions of political authorities to engage in more expansionist monetary policies.

Yet citing the actions of George Soros doesn’t mean the end of the gold bullmarket. Mr. Soros has previously flipped flopped on gold. 

Considering that Mr. Soros reportedly made a huge killing ($1 billion) in shorting the Japanese yen, what may have happened was that Mr. Soros may have redeployed part of his gold holdings into the short yen position.

Mr. Soros has reduced his holdings of gold SPDRs during the 4^th quarter by 55% but this also means that he still holds 45%.

The current massive interventions by policymakers suggest that the yield chasing phenomenon has only shifted focus by big players to the currency markets.

Analyst Doug Noland at the Prudent Bear writes,

This highly unsettled backdrop forced the big macro hedge funds – and traders/speculators more generally – to keep trades on short leashes (risk control measures that chipped away at performance).  We now see indications that the big players have been unleashed, at least as far as taking – and winning – huge bets against the yen.

Given the current direction of social policies, people's orientation has been reduced to simply profiting from short term yield chasing arbitrages.

It is true that falling gold prices has not just been a US dollar affair, but through a broad spectrum of currencies such as Euro, British Pound, Canadian Loonie, Australian Dollar, Chinese Yuan and the Euro as shown in the chart below from gold.org

It is also equally true is that the latest fixation on the yen has led to record high gold prices in yen...

So does record yen prices of gold mark the end of gold bullmarket? 

Well, again reference point matters.

The concurrent yen carry trade has been a partial fulfillment of my March 2012 prediction. The next phase is to see capital flight from Japan into ASEAN.

Moreover, real demand for gold has remained vibrant, as I recently pointed out.

Furthermore, despite the seeming underperformance of the price of gold, which I believe has been actively suppressed, this time through the US Federal Reserve communications strategy in portraying the tilting of balance towards the ‘hawks’, the string of record breaking activities as evidenced by record buying of physical gold and silver in the US (first 2 weeks of 2013), record ETF holdings of gold (as of November 2012) and record gold imports of India and China (fourth quarter 2012), aside from milestone third quarter rate of growth in the gold buying of emerging market central banks (third quarter of 2012), suggests of the blatant disconnect between gold prices and real economic activities underpinning the gold markets. Yes some Fed officials have openly been chattering about risks of price inflation!

From US Global Funds

Although there may have been some slight weakness in the demand for gold in India, these may have been due to the Indian government’s relentless “war against gold” via series of hikes in import taxes and other bank regulations.

Statistics alone cannot capture gold’s real dynamics since countries like India and Vietnam have adapted restrictive policies on gold ownership that has brought the gold market underground.

This also imply that activities in the real economy and the financial markets have, like other financial markets, been operating in a parallel universe.

It’s also important to realize that prices of gold haven’t been isolated from the broader dimension of the commodity markets.

Since 1970, while there are may be differences in the degree and in the timing of short term fluctuations, the trend of commodity markets run in a general direction (black arrows).

Commodity markets rose during the stagflationary decade of the 1970 until the early 1980s, whereas globalization coincided with declining prices of commodities through two decades or until the outset of the new millennium 

The US Federal Reserve’s attempt to reflate the US economy in response to the dot.com bubble bust has generally lifted the commodity markets since 2003. Same commodities also went into a tailspin in 2008.

The above chart includes energy, industrials, precious metals, soft agriculture and the CRB Reuters index.

Are we seeing a broad based decline in prices of commodities today?

Hardly.

While Agriculture has recently been down (GKX) following an earlier spike, Energy (GJX) has been on the rise, along with the Industrial metals (GYX).

So there is little evidence to say that gold’s bull market may be at a close.

But there is one thing we can be sure of, there has been a massive build up of gold and silver shorts by US banks.

Albeit, gold shorts has been reduced along with declining prices.  But this runs opposite to silver where declining prices has led to increasing position on silver shorts.

Are the silver shorts sustainable?

Supply-demand imbalance will prove devastating to shorts, that’s according to Goldmoney’s Alasdair Macleod

We can be sure that the massive short position in silver is causing difficulties for the banks concerned, because of the lack of physical supply. Therefore, the bullion banks have an exposure which appears to be out of control. While they frequently conduct bear raids (which are more successful in gold) they face the risk in silver of themselves becoming victims of a bear squeeze. Unusually, they have got themselves into this mess on a low silver price, and it is roughly double the short position than when the silver price was over $40. This being the case, when silver turns up the banks are likely to be very badly squeezed, throwing up enormous losses. Meanwhile, the non-bank commercials have kept a level head and reduced their net short position by 2,268 contracts to 3,616.

I think this is right. But the collaborative heavy manipulation of the various aspects of the markets by global government could also imply that to paraphrase the deity of economic interventionism, JMKeynes, adulterated markets may remain intoxicated and irrational a lot longer than we can remain solvent. Nevertheless, eventually the fundamental laws of economics will prevail.

 

For me, gold’s recent weakness has been simply a revelation of the “reversion to the mean” or of the market truism where "no trend goes in a straight line".

Gold has been in a bullmarket for One, two, three, four, five , six, seven, eight nine, ten, eleven and TWELVE straight years, so a reprieve or profit taking should be natural reaction.

 

As I wrote at the year’s opening,

Although, so far, with the exception of gold, no trend has moved in a straight line, so it would be natural for gold to undergo a year of negative returns.

Nonetheless all these will also depend on the actions of monetary authorities.

Instead of merely chattering, it would be best for the gold bears to profit from their predictions by putting their money where their mouths are via shorting gold.

Phisix Amidst the Global Pandemic of Bubbles

7 consecutive weeks on the upside and 12.2% returns local currency returns. Make that 13.2% in US dollar returns. Absolutely fantastic.

Will the Phisix Go Vertical?

What you see depends on where you stand. Reference point matters.

Last week, I exhibited the chart of the Phisix in a transition to a parabolic phase.

From the longer term perspective or from the trough of post Lehman bankruptcy in March of 2009, the nearly four year chart reveals of the three stages of acceleration, represented by the steepening angle or slope of the evolving trend lines.

At the current rate of growth, the Phisix could go vertical.

I am NOT saying it will, but we simply can’t rule out such possibility.

The local benchmark yielded about 7.4% last January. At 7% a month, the Phisix at 10,000 will be reached in about 8 months. As of Friday’s close, February’s gains have accrued to about 4.4%, with 9 trading sessions to go for the month. Will February deliver another 7%?

And a Phisix 10,000 by the yearend translates to 72% returns for 2013. Of course, this would represent another fulfilment of my decade long prediction.

Again the narrative above signifies an extrapolation of the current trend into the future. Yet past performance should not be relied on as an airtight measure of the future.

Nevertheless, the intensifying boom can be seen as partly playing into the “regression to the mean” trade.

I wrote at the start of the year[1],

Average returns from 1985 to 2012 or over 27 years is about 26% based on the annual nominal local currency. The first cycle (1985-1996) generated 50% nominal returns yearly. This cycle (2003-2012) has yielded only 23.61%, still distant from the 27 year average or from the post martial law first cycle.

This is NOT to suggest that the Phisix will need to repeat the returns of the first cycle boom, whose environment has been immensely distinct from today’s cycle. The Philippines then emerged from economic stagnation, high inflation, a debt moratorium and from the clutches of the two decades of dictatorship.

But if the 27-year average should come into play, then this means that the Phisix will need to deliver far greater returns than 2012, particularly 47.45% for 2013, just to reach the mean. This assumes that the Phisix boom ends next year, which I doubt.

47% gains would translate to Phisix 8,500. This makes 10,000 not far off the radar screen.

BSP Data Reveals of the Deepening Credit Driven Mania

The real reason behind the possibility of the reinforcement of the current boom has been the evolving manic phase in the local financial markets and major parts of the real economy in response to incumbent domestic social policies, as well as, to the influences of the external equivalent.

Mania, in my definition, is the phase of the bubble cycle characterized by the acceleration of the yield chasing phenomenon, which have been rationalized by vogue themes or by popular but flawed perception of reality, enabled and facilitated by credit expansion.

Last week, I wrote[2],

Bubble cycles are not just about irrational pricing of securities, but rather bubble cycles represent the market process in response to social policies where irrationalities are fueled or shaped by credit expansion accompanied or supported by faddish themes.

The fundamental risk that underlies the cycle of manias, panic and crashes is that of the massive build-up of debt founded on malinvestments and speculative excesses that becomes a systemic issue that eventually has to unravel.

The Philippine central bank, the Bangko Sentral ng Pilipinas (BSP), recently released its loans outstanding data from the banking sector for 2012. This gave me the opportunity to do a back search on the previous years[3] from which I used to construct the chart below. 

On the surface, over the past 7 years the compounded average credit growth for the overall economy or for “Production by Economic Activity” has been at about 7.7%. 

This would seem just about normal and or in harmony with the statistical economic growth data. Nothing to see here move along.

But as they say, the devil is in the details.

Over the last 3 years, bank loan data reveals that “Aquinonomics” has been about the inflation of a) Financial Intermediation[4] (blue bar)--which represents the banking, non-bank financials (pension and provident funds), insurance and Auxiliary activities—b) Real Estate, renting and other Business Activities (maroon bar)—which covers property, ownership dwelling and rents, and lastly c) wholesale and retail trade[5] (green bar).

Notice that rate of growth for these industries have spiked to the 25% levels and above in 2012. 

I would suspect that the astounding loan growth in financial intermediation may have partly been channeled to the stock market. Thus the growth rate of this sector would seem like good proxy or bellwether for net margin debt in the stock market.

Also the stupendous growth of the wholesale and retail trade sector reinforces my concerns over the increasing risks of a shopping mall bubble[6].

Compounded annual growth rate for the 6 year period (2007-2012) for wholesale and retail trade is at 16.83%, financial intermediation 10.86%, and real estate 16.099%. However, a caveat with CAGRs is that such metric doesn’t accurately capture the inflection points or the major turns in trend dynamics. When people begin to lever up to chase for yields, CAGRs will then only manifest on such changes ex-post.

As a side note, I didn’t include the 2005-2006 data for two reasons: one categorization of financials has been lumped together with real estate, and second, household credit has been excluded. The BSP has still way much room to improve in showing to the public the necessary economic and financial information. 

Yet the cumulative loans by the booming trio, the financial intermediaries-property-retail sector, accounts for 44.32% share of the total loans issued by the banking sector on “production on economic activity” in 2012.

Independently, the share of real estate sector loans represents 18.82%, wholesale and retail trade 15.78% and financial intermediation 9.73%.

Manufacturing has the largest share at 19.42%. But one fundamental thing that makes me think that manufacturing hasn’t been a bubble is the lack of popular appeal.

Of course unlike the more concentrated property sector, manufacturing even according to national statistics has been more diversified[7]. And due to this bias and to time constraints I haven’t been able to include this in my recent calculations.

The widening disparity between the rapid growth in the abovementioned supply side sectors bankrolled by credit have likewise been reflected on the growth rate on consumer loans.

Since 2009, total household consumption credit (blue bars) has grown from 9.12% to 16.12%. 

The growth in auto loans has been in decline from a peak of 30.62% over the same period, but still at significant levels of 18.62%. Credit card, which accounts for 57% of the consumer loans, rose from single digits to a modest 12% in 2012.

The “other” category which accounts for 10% share of the consumer loans, that are likely about personal and salary loans[8] have likewise been on a sharp upswing.

I am confused with the BSP’s statistics, though.

The publicized tables on household consumption don’t include residential real estate loans. However in a first semester 2011 publication[9], residential loans have accounted for the biggest portion of consumer loans (left window). I suspect that residential real estate loans may have been incorporated as part of the supply side segment of the Real Estate classification.

Consumer spending will be determined mainly by productivity growth, by savings, and or by debt acquisition. The lopsided rate of credit growth responsible for the rapid expansion of the financial-property-shopping industries has been conspicuously disproportionate with consumption growth even seen through the lens of consumer loans (right window).

Eventually such imbalances will be vented on the marketplace. 

Don’t Underestimate the Risks from a Surge of Systemic Credit

Domestic credit provided by the banking sector as share of GDP was last reported at 51.84% according to tradingeconomics.com[10] based on World Bank’s published report in 2012.

Banking sector credit was over 80% of GDP at the onset of the Asian Financial crisis. While such data may seem distant from the pinnacle of the boom, it pays not to underestimate the possible scaling up of the pace of loan that can occur during a mania

So far, bank loans have been “bottoming out” and have only began to show marginal improvements by going above the “mean”.

And given the recent substantial rate of increase of overall banking loans relative to statistical economic growth, I expect such figures to increase to around 60% in 2012. 

During onset of the last mania in 1993 where the Phisix returned 154% in local currency terms, the share of banking loans relative to the GDP was even less than today’s level! But bank loans skyrocketed (red ellipse) as the boom progressed through the year and the succeeding years until Asian crisis.

It’s simply the same strain of crowd feeding frenzy that should be expected if loose monetary conditions remain in place. And while I am not sure when exactly this should happen, I suspect that this sooner rather than later, perhaps this year or next. Again all this will depend on feedback mechanism between social policies and the marketplace.

The boom in financial-property sector can also be seen in the other credit markets particularly corporate bonds.

While the Philippine bond market growth has been modest in 2012 and mostly directed towards government securities, by the third quarter of the same year, corporate bonds mainly from banking-financials, real estate and holding companies had been the top issuers, according to the Asian Bond Monitor[11]. And most of the corporate bond issuers have been publicly listed companies. 

This only means that many publicly listed companies have diversified in gaining access to credit through the bond markets.

Such boom continues to resonate in the Phisix.

The recent leader, the mining sector had been bogged down by another environmental headline hugging controversy of an unfortunate landslide that claimed 5 lives of workers[12] sent heavyweight Semirara [PSE:SCC] into funk, which significantly weighed on the index. So price rotation meant a shift in attention back to the finance-property companies.

The property sector now has widened its lead, as the financial sector closes the gap with mines. One possible additional interim blackeye will likely be from the recent drop of precious metal prices which I think is in a shakeout mode.

Myth of Money Flows in the PSE, Redux; Financial Investing is an Art

I recently heard people talk about how money has been flowing into domestic stocks.

In truth, there is no money flows into stocks. For every buyer of a particular security is an equivalent counterparty—a seller of the same security. The transaction or exchange only means that money shifts from the buyer to the seller of a specific security. There is no money flows.

This applies whether we reckon about board transactions, odd lots or about IPOs, secondary offerings or other forms financial securities.

I previously dwelt with this in length[13]

So when people speak of foreign money “flowing” into stocks, what they are really saying is a change in the composition of ownership. For instance when foreigners (whether individual or institution) buy, they buy from selling locals (individual or institution).

What drives prices up or down are people’s subjective valuation of specific securities. Rising prices means buyers are more aggressive. Falling prices means sellers are more forceful. Unchanged prices mean that neither buyer nor seller have been dominant, or that prices are momentarily at relative equilibrium levels.

In terms of foreign participation, any buying or selling of foreigners at the Philippine Stock Exchange will not necessarily correspond to an assumed relative corresponding rise or fall in securities as many people think.

Simply said, the presence foreign buyers don’t necessarily extrapolate to higher prices. This would depend on the valuation of every participant, whether the foreigner acts for himself or in behalf of a fiduciary fund from which his/her valuations and preferences would translate into action.

If the foreigner is aggressive then he/she may bid up prices. But again since people’s valuations differ, the scale of establishing parameters for each action varies individually.

A foreign participant can also be conservative, who may rather patiently accumulate, than bid up prices.

If an investment fund is managed by a team, then the team’s priorities, that prompts for subsequent actions, will be set according to agreement/s from the value scales of team members or from the team leader.

Such examples deal with the misimpression that the presence of foreigners imply mechanically positive for the markets or of the implicit inferiority complex where we see foreign participants as having superior force in shaping prices.

The bottom line is that every individual whether foreign or local will have their own technique or preferred means of dealing with the financial markets which are based on their subjective valuations, preferences and opinions that gets translated via actions (buy, sell or wait).

In other words, people, not nationalities, acting on individual priorities establish prices.

And this is also why financial investing is an art more than it is a science.

Global Pandemic of Bubbles

I have wanted to show you this last week but was comprised by time and space.

The general idea which I wanted to impart is that today has immensely been different than the era which culminated with a crisis represented by the 2008 Lehman bankruptcy. 

First, political authorities were reactive to the bubble bust then. Today, political authorities can be considered as having been pro-active, pre-emptive or activists, such that any incipient signs of sap in economic strength has led political authorities to utilize increasingly powerful shock therapy responses. 

However, drastic policies which results to short term equally commanding market response only dissipates over the long run. Such dynamic can be described as the Risk ON Risk OFF volatility.

Second, during the last crisis, emerging markets (China and ASEAN) and similarly developed economies as Canada, Australia or New Zealand filled some of the slack left by economies slammed hard by the crisis.

Today, what I call as the “periphery” nations appear to be enduring the same malaise or risks of fragility from the bubble pathology, even as the hangover from the crisis lingers

In short bubble cycles have become a global pandemic.

Canada, having been known to have withstood previous economic dislocations, may not seem invincible at all. Home prices in Canada may have reached bubble proportions[14]. And this has been undergirded by Bank of Canada’s (BoC) stealth balance sheet expansion which according to Zero Hedge[15] has grown by 21% year on year—the most since 2009 through 46% growth in purchases of Canadian government bonds.

And it’s not just Canada. Another commodity currency may be in trouble.

Australian banks may be in the process of seguing into a bubble bust which the BCA Research[16] euphemistically calls as “deleveraging”. The Canadian research outfit discerns that the unsustainable growth in household liabilities in both countries will impair their respective banking system soon.

My point is that there are limits to the powerful potion or shock therapy, which are seen as elixirs, applied by central banks. And once the bursting bubbles ripples and overwhelms significant parts of the world, parading or shooting policy bazookas will not guarantee the revival of the risk ON risk OFF environment.

But I am certain that such policy bazookas will be boldly and loosely used as they are today.

So I’d stick by the hedges against such repercussions.

Black Swans Around the Corner, Conclusion

For the Philippine markets, I expect the Phisix as well as local assets, bonds and the Peso to remain strong until at least the end of the first quarter. But we should expect a much needed short term reprieve to occur anytime soon.

After the first quarter, again the fate of the Phisix will be shaped by the expected direction of interest rates which mostly will be determined by domestic factors but will also be sensitive to external influences. This will depend, of course, on the feedback loop or the ping pong relationship between social policies and market responses.

Yet we are seeing more and more signs of the transition towards a credit fueled mania. If the current pace of expansion of systemic debt intensifies, then we shouldn’t discount that the hunt for yield may lead to a blowoff phase for the Phisix or for other Philippine asset markets.

In short, I wouldn’t rule out a Phisix 10,000 soon, in as much as I wouldn’t rule out a 10% correction.

But I don’t expect an inflection point to a bear market yet, perhaps not in 2013.

I also expect the hunt for yield to also generate interests from foreign investors mostly in response to the coordinated easing policies.

These intensifying yield chasing phenomenon are really about capital flight and equally natural responses to social policies that have been designed to undermine short sellers, to depreciate the purchasing power of respective national currencies, to manipulate short term booms in order to support the largely insolvent political institutions, as well as, to coax and force the public through the moral hazard “Central Banking Puts” ala the Bernanke Put and via negative real interest rates, into speculative orgies in order to support the asset markets which underpins the balance sheets of the politically privileged banking system, who are financiers of the government.

Nevertheless in the Philippine Stock Exchange, there are no money flows as buyers and sellers balance out each trade. Individuals, not nationalities, determine prices.

As we are seeing signs of bubbles in the Philippines, China and in Thailand, we are also seeing signs of bubbles in Canada and Australia. The consequence of the global pandemic of bursting bubbles will probably not be what the consensus or the mainstream expects. Since systemic fragility has only been heightening through aggressive risk taking, which has been bolstered by equally aggressive policy responses, one cannot discount huge market dislocations to abruptly occur. Black Swans are just around the corner.

Finally my advice for readers, especially to the tyros, is to avoid chasing prices.

Instead, since price level rotations has been a natural phenomenon in an inflationary boom, a less risky proposition is to position into issues that haven’t significantly moved up and hope that the rising tide eventually lifts all boats.

Of course, there is NO guarantee for anything. Many choices we make could end up as the exception rather than the rule. We live in a world where we think we can predict the effects of passing meteors/asteroids when really can’t[17].

---

[1] See What to Expect in 2013 January 7, 2013

[2] See Phisix and Global Asset Markets: More Signs of Mania, February 11, 2013

[3] Bangko Sentral ng Pilipinas LOANS OUTSTANDING OF UNIVERSAL AND COMMERCIAL BANKS (monthly) 2012, 2011, 2009-2010, 2008-2009, 2007-2008, 2006, 2005

[4] National Statistics Coordination Board Glossary Financing, Insurance, Real Estate and Business Services

[5] National Statistics Coordination Board Glossary Wholesale and Retail Trade

[6] See Philippine Economy’s Achilles Heels: Shopping Mall Bubble (Redux) January 13, 2013

[7] National Statistics Coordination Board Glossary Manufacturing

[8] Bangko Sentral ng Pilipinas, Bank Lending Standards Eased Slightly for Firms and Households in Q4 2012, February 8, 2013

[9] Bangko Sentral ng Piilpinas Status Report on the Philippine Financial System First Semester 2011 Philippine Banking System

[10] Tradingeconomics.com DOMESTIC CREDIT PROVIDED BY BANKING SECTOR (% OF GDP) IN PHILIPPINES The Domestic credit provided by banking sector (% of GDP) in Philippines was last reported at 51.84 in 2011, according to a World Bank report published in 2012. Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. The banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits). Examples of other banking institutions are savings and mortgage loan institutions and building and loan associations.

[11] Asianbondsonline.org Asian Bond Monitor November 2012

[12] Philstar.com Bodies of 5 Semirara workers located February 16,2013

[13] See The Myth Of Money Flows Into The Stock Markets April 3, 2009

[14] Mark Perry Does Canada have an unsustainable housing bubble and is it headed for a major 30% price correction like the US? Carpe Diem AEI, January 30, 2013

[15] Zero Hedge, Mark Carney Leaves Canada With 'Stealth QE' Rising At Fastest Pace Since 2009 January 28, 2013

[16] BCA Research Fixed Income Strategy: Relative Value In Dollar Bloc Financials February 5, 2013

[17] See Chart of the Day: Odds of Death February 15, 2013