Phisix at Record 7,400: Be Fearful When Others Are Greedy

True heroism is remarkably sober, very undramatic. It is not the urge to surpass all others at whatever cost, but the urge to serve others, at whatever cost. –Arthur Ashe (1943-1993)

In this issue

Phisix at Record 7,400: Be Fearful When Others Are Greedy

-Phisix at Record 7,400 Defies the BSP Chief’s Warnings

-Despite the $ 2 billion Bond Offering, Strains in Bond Markets Remain

-Deflationary Forces Have Landed: Crashing M3, Negative CPI, Spike in CDS, Falling Peso

-Record Phisix 7,400 on Record Index Pump!

-Record Phisix as Domestic Casino Stocks Crash!

-Phisix 7,400: Déjà vu 1997?

-2015: Real Time Crashes Will Spread and Intensify

Phisix at Record 7,400: Be Fearful When Others Are Greedy

The Philippine Stock Exchange celebrates the New Year with a run to a record high.

Phisix at Record 7,400 Defies the BSP Chief’s Warnings

In August of 2014, the Philippine central bank, Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr. issued an Alan Greenspan like “irrational exuberance” warning in a speech. Then, I quoted him[1]:

What can you control? Certainly your risk appetite. Controlling this when greed gets the better of you is very difficult. So in a period of low volatility such as what we have been experiencing, practice the discipline of setting limits. This discipline will not only help you to avoid the pitfalls of “chasing the market”.

In a follow up speech in October, the BSP chief elaborated on this[2]:

While we have not seen broad-based asset mis-valuations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield.

“Mis-appreciation of risks” from the “pitfalls of chasing the market” simply entails overvaluation from excessive speculation. And the primary target for flagrant speculation has been specified as the “real estate sector and the stock market”

Mr. Tetangco’s commented on how this euphoria can unravel

Right now because of excess liquidity in the system, the industry doesn’t seem to mind much that real interest rates are negative. But ladies and gentlemen, when the tide turns, those projects that you may have “approved” based on a specific expected value may not provide you the “return” you anticipated. With this in mind, our policy actions have been aimed at helping you manage your own risk appetites.

Let me first point to the paradox, contradictions or the cognitive dissonance in the statements.

Of course, since real interest rates represents an invisible subsidy (transfer) to borrowers, specifically to the real estate and ancillary sectors, these sectors love the free lunches served to them on a silver platter as they gorge on debt, rationalized on statistical G-R-O-W-T-H which has actually been shouldered or paid for by the currency holders.

And by stating that “keeping rates low for too long could result in mis-appreciation of risks” which has prompted for “the pitfalls of chasing the market” in “the real estate sector and the stock market” the BSP unintentionally had been caught in a contradiction.

Why has there been a low interest rate regime low in the first place? Hasn’t this been because of the BSP’s actions?

In 2009, the BSP embraced the US Federal Reserve zero bound policy. The BSP chief then promulgated that “Maintaining an expansionary monetary policy stance to the extent that the inflation outlook allows, could support market confidence and assure households and businesses that risks to macro-stability are being addressed decisively”[3].

In short, the yield chasing mania from incumbent easy money regime signified by “a period of low volatility” has been a product of “keeping rates low for too long” policies.

But the BSP pins the blame on market participants even as the former recognizes that the latter has only been responding to the central bank’s policies.

Yet even with an implicit attribution that their policies have been the cause to chasing the markets, the BSP offers their position as market saviors “our policy actions have been aimed at helping you manage your own risk appetites.”

Well, Phisix at 7,400 apparently has not been a sign that the BSP has been helping the public manage their risk appetitive. To the contrary Phisix 7,400 have been representative of the intensifying “mis-appreciation of risks”

And considering that bank credit expansion continues to swell at a blazing rate of 18.6% in November, perhaps much of the newly issued money has been funneled towards “chasing the markets”.

But interestingly, the BSP chief’s pointed of how things can go haywire from his October spiel: “when the tide turns, those projects that you may have “approved” based on a specific expected value may not provide you the “return” you anticipated.”

What’s the difference between the essence of the BSP chief’s comments and the following quote?

The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan for the execution of which the means at his disposal are not sufficient. He oversizes the groundwork and the foundations and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure. It is obvious that our master builder's fault was not overinvestment, but an inappropriate employment of the means at his disposal.

The BSP chief’s warnings simply reverberate on what the great Austrian economist Ludwig von Mises calls as malinvestments[4].

Unfeasible projects that had been made feasible via interest rate subsidies eventually discover that there is no such thing as a free lunch: the mismatch between the structure of investments and production activities with that of the supply of capital goods will lead to what the BSP chief says as “projects that you may have “approved” based on a specific expected value may not provide you the “return” you anticipated”—or with reference to the gem of a Warren Buffett axiom from the 2001 Berkshire annual report, “After all, you only find out who is swimming naked when the tide goes out”.

Despite the $ 2 billion Bond Offering, Strains in Bond Markets Remain

The Philippine bond markets have already been expressing signs of these.

Even as Philippine stock markets levitated from last December’s shakeout which incensed bulls that inspired this ‘managed’ run-up, Philippine bonds massively sold off going into the close of the year to materially flatten the yield curve.

And instead of being a seasonal variable, the December selloff in the domestic bond markets accounted for an ongoing trend since 2011. This can be seen via the 2011-13 December yield spreads of the 10 year and 20 year minus 1 and 2 year and 3 months and 6 months

I noted that a rally was to be expected considering that the Philippine government would be offering dollar based bonds at the year’s start. The tightly controlled bond markets had to express “confidence” to attract financiers. So it was. This week, the Philippine government raised $2 billion bonds in the international debt market at 3.95% from the initial offering coupon rate of 4.25% which means privileged access to credit from “real interest rates are negative” around the world.

See what a stock market boom (plus yield fixing by banking-government cabal and Moody’s upgrade) can give to the government? 

I expected a major rally. The rally did come, but for now, such has hardly has been ‘major’. 

Short term yields (1 year and below) slid but remains above or at June 2013 taper tantrum highs. Yields of 4 and 5 year treasuries have inverted again! (although a minor inversion)

Yield spreads widened only for 20 year minus 6 months and 1 year but remained steady for the rest. 10 year minus 2 year has even flattened amidst the rally.

As I recently noted[5]:

Instead of an anomaly, the flattening of the yield curve is an indication of the business cycle in progress.

It has been a sign of monetary produced imbalances that has prompted credit markets to arbitrage on the asset liability mismatches via the spread differentials—whose windows have now been closing. It has been a sign of how credit expansion has engendered massive pricing distortions in the economy that has been demonstrated by inflationary pressures which have now been reflected on the bond markets. And it has also been a sign that such credit expansion fueled boom has been backed by a lack of savings.

From an academic viewpoint, Austrian economists Philipp Bagus and David Howden notes of the significance of flattening yield curve as an expression of the business cycle[6].

Lacking adequate savings for the terms of the projects, these malinvestments must be liquidated. But when exactly will the recession set in? Two cases may be distinguished. In the first, the disturbance directly affects productive ventures. In the second case, financial intermediates first enter distress and only later affect productive enterprises. 

In the first case, companies finance additional long-term investments with short-term loans. This is the case of Crusoe getting a short-term loan from Friday. Once savers fail to roll over the short-term loans and commence consuming, the company is illiquid (assuming other savers also curtail their lending activities). It cannot continue its operations to complete the project. More projects were undertaken than could be completed with the finally available savings. Projects are liquidated and the term structure of investments readapts itself to the term structure of savings.

In the second case, companies finance their long-term projects with long-term loans via a financial intermediary. This financial intermediary borrows short and grants long-term loans. The upper-turning point of the cycle comes as a credit crunch when it is revealed that the amount of savings at that point in time is insufficient to cover all of the in-progress investments. There will be no immediate financial problems for the production companies when the rollover stops, as they are financed by long-term loans. The financial intermediaries will absorb the brunt of the pain as they will no longer be able to repay their short-term debts, as their savings are locked-up in long-term loans. The bust in this case will reverberate backward from the financial sector to the productive sector. As financial intermediaries go bankrupt, interest rates will increase, especially at the long end of the yield curve, lacking the previous high-degree of maturity mismatching driving them lower. Short-term rates will also increase due to a scramble for funds by entrepreneurs who try to complete their projects. This will place a strain on those production companies that did not secure longer-term funding, or rule out new investment projects that were previously viable under the lower interest rates. Committed investments will not be renewed at the higher rates

Importantly, if stock markets are about credit and liquidity, and its corollary, ‘confidence’, then the flattening of the yield curve means indications of diminishing liquidity conditions. So record stocks come in the face of declining liquidity extrapolates to heightened risks!

Deflationary Forces Have Landed: Crashing M3, Negative CPI, Spike in CDS, Falling Peso

I noted above the BSP reported November bank credit expansion at a blistering rate 18.6%. This comes in the light of collapsing money supply growth rate last pegged at 9% in November.

Let me quote the BSP on this[7]: Preliminary data show that domestic liquidity (M3) grew by 9.0 percent year-on-year in November to reach P7.3 trillion. M3 growth decelerated from the 15.4-percent expansion recorded in October. On a month-on-month seasonally-adjusted basis, M3 contracted by 1.2 percent. Money supply continued to increase due largely to the sustained demand for credit. (bold mine)

Claims on the private sector and secondarily claims on other financial institutions account for about 73% of November M3.

Did you notice? Money supply on a month-on-month basis has CONTRACTED. So the Philippines now have been experiencing seminal episodes of DEFLATION in monetary terms!

The yield curve and the money supply growth rates seem as in a chorus to suggest of ongoing liquidity strains!

And notice further of the collapse in statistical consumer price inflation from the above data as of November (data from NSCB)

The BSP reported December CPI at 2.7% (bold mine)[8]: Year-on-year headline inflation for the whole year of 2014 averaged 4.1 percent, within the Government’s inflation target range of 4.0 percent ± 1.0 percentage point for the year. This was the sixth consecutive year that the average inflation rate has been within the government target. Inflation in December eased further to 2.7 percent from 3.7 percent in November, and was likewise within the BSP’s forecast range of 2.4-3.2 percent for the month.  Similarly, core inflation—which excludes certain food and energy items to better capture underlying price pressures—slowed down to 2.3 percent in December from 2.7 percent in the previous month. On a month-on-month seasonally-adjusted basis, inflation was unchanged at -0.1 percent in December.

Although there seems to be a discrepancy between the reported -.01% (BSP) and tradingeconomics data (perhaps owing to seasonality adjustments; see left window), the statistical fact is that Philippine consumer price inflation has SHRANK for two successive months!

Monetary deflation has ushered in CPI deflation that appears to have been ventilated at the bond markets through higher short term yields and a significant flattening of the yield curve!

Folks, forces of deflation appear to have landed on Philippine shores!

While CPI deflation may have partly been influenced by crashing oil and commodity prices abroad, the strains on household spending activities has already been evident as shown by the declining growth rates since the 3Q of 2013 through 3Q of 2014 based on the 3Q statistical GDP as I previously pointed out.

The supply side can’t be said to be overproducing, industrial production while up in November over the previous months has been below 2013 levels both in growth rates and in nominal terms based on data from National Statistics Office. Nor has this been the case for imports. While imports has supposedly grown 7.5% in October, based on nominal terms October imports have been down compared to each of the three months of the 3Q 2014.

As a side note, exports reportedly leapt 19.2% in November following a paltry 2.5% growth in October based on NSO data. But a glimpse of nominal levels indicates that there have been only marginal changes on a monthly basis based on October and November, from tradingeconomics data. Said differently, based on US dollar quotes, both October and November export performance has been materially lower than the monthly performance during the past 5 months.

In short, the decline in statistical CPI has largely been a function of eroding consumer demand.

Whatever happened to the vaunted Philippine consumer boom story whose capacity to consume has been perceived by the consensus as interminable?

The New York Times recently featured a slideshow of the “death spiral” of US shopping malls. The growth imbalances between the supply side relative to demand that had led to the sorry fate of US “dead malls” serve as a blueprint for the Philippine equivalent.

Together with casinos and other property related projects, this serves as a wonderful example of the blatant mismatch between the structure of investments and production activities with that of the supply of capital goods

And once demand continues to fall, these imbalances will be exposed as excess capacity, financial losses and magnified credit risks.

Yet the irony has been that the huge leap in bank credit growth rates hasn’t translated to money circulation in the economic stream suggests that current loan growth has been about debt rollover (Debt IN Debt OUT) than of capital expenditures.

And notice too that despite the $2 billion international issuance at lower coupon rates, the price to insure Philippine debt via Credit Default Swaps (based on Deutsche Bank data) has hardly improved from the recent spike (see right window).

What this implies is that underneath all those rose colored glasses statistics and record stock markets, credit risks have been on the rise!

The falling peso should add to the current pressures. The peso closed down .5% to Php 44.95 this week. The falling peso simply means more peso for every dollar imports which should affect CPI through prices of imported goods and services. Importantly, this also means more pesos for every US dollar based debt.

Unless hedged, domestic companies exposed to the “short dollar” loan portfolio would need more peso based growth to offset bigger dollar requirements for debt service. The Wall Street Journal estimates that Philippine firms have borrowed $12.16 billion since 2008. While this signifies a drop in the bucket for the $ 4 trillion emerging market US dollar loan portfolio to non-banks out of the overall $9 trillion exposure, a major seizure in one of the major borrowers (say Brazil or China) can ripple across the world as falling dominoes via an emerging market “margin call”.

The central bank of central banks or the Bank for International Settlements via Hyun Song Shin have warned on this as previously noted[9].

Yet the current statistical monetary and CPI data and actions in the bond markets pose as a significant challenge to 4Q 2014 statistical GDP. The current developments are likely to serve as more negative surprises for the consensus sporting a one way G-R-O-W-T-H mindset where RISK have been priced out of existence. Of course the caveat is that since government makes the data they can show anything.

Bottom line: There has been a widening divergence developing in the Philippine financial system and the economy.

Forces of deflation (bubble bust) have emerged. Such has been revealed by cratering money supply growth rate, crashing CPI, pressures on the bond via elevated short term yields and tightening yield spreads and a surge in Credit Default Swaps (CDS) in the face of ballooning credit growth rates. The falling peso adds to the pressure in the real economy via CPI inflation and credit risks from external liabilities.

All these adverse forces have been occurring in the face of record highs stock markets.

Also Phisix 7,400 essentially defies the warnings made by the BSP chief. Given that the BSP has stopped tightening, perhaps out of political pressures from the natural beneficiaries of the boom has been the government, the banking system and their clients (bubble sectors and the stock market), Phisix 7,400 signifies how the BSP has lost control over the mania.

So the BSP has been trapped from their own policies.

Record Phisix 7,400 on Record Index Pump!

The next question is how has the Phisix reached the record highs?

My answer is simple. It has been massaged to the current levels.

Managing the index has been coursed through three ways. 

One, index managers go into a maniacal bidding spree of select grotesquely overpriced securities as global stock markets suffered from a meltdown.

The likely intent has been to reduce the possibility of bearish sentiment from developing. The other possible objective is to depict to the world how Philippine stocks have developed invincibility to become immune from any contagion. Corrections have become impermissible. Philippine stocks can only go up. Valuations hardly matters.

The operations begin after a few minutes from the opening bell. Big declines at the open are either totally erased or reversed to show gains by the closing bell. This has been the case in 3 instances October 16 2014 and December 15 2014 and last Tuesday January 6 2015 since the rally that began in early 2014.

Last Monday, when US-European markets convulsed, panic buying operations went into action even as most of Asia had suffered significant losses. The Phisix ended up unchanged at the close.

Such all-day operations have used only during global market pressures.

The second way has been what I call the ‘afternoon delight pump’. Morning sessions are usually left for the markets to determine their levels. After the lunch recess, index managers go to work, they frantically push up prices of 3-4 issues with a combined market cap of 20% until the session’s close.

The third way has been “marking the close” or the manic pumping of key index issues at the last minute prior to the pre-run off period. By the way, marking the close is considered a violation of the Philippine Security Exchange Commission’s Security Regulations Code. But for as long as violations benefit the establishment, who cares?

The “afternoon delight” pump and the “marking the close” has usually been used as combination and has become a regular feature since the start of 2014, although its frequency has increased during the last quarter of 2014. This reveals of the desperation to attain 7,400. Why?

During the first attempt at 7,400 in 2013, these index massaging has been rare.

But today, index managers have become increasingly frantic. They have most likely been infuriated by the recent reemergence of downside volatility particularly when domestic casino stocks came under the limelight of global contagion.

In one occasion particularly 18th of December, the Phisix encountered a startling wild rollercoaster ride session marked by two round trips—an early sharp 1.6% upside at the open that had been more than erased. By the lunch recess, the Phisix was stunningly down 1.2%. After lunch, the fantastic afternoon pumping scheme basically eviscerated the 1.2% intraday loss. The closing was even grander, a whopping 92.5% of the day’s .91% gains attained by marking the close!

Overall, the Phisix gyrated by an astounding 6.5% intraday—from gains to losses and back to gains mostly based on index massaging! This could mark a record of sorts.

From then, the index managers never looked back. Last week’s global stock market meltdown, as mentioned above, the Phisix was cushioned by the January 6th index massaging operations. When global stock markets strongly recoiled from losses due to the Fed Evans who said that tightening soon would be catastrophic and the ECB’s jawboning, such rally provided tailwinds to the domestic mania. Thus, the Phisix at 7,400.

Peso volume speaks loudly of the quality of the record high.

In May 15^th 2013, when the Phisix first reached 7,403, Peso volume was at a marvelous Php 21.4 billion. In the September 2014 chapter, peso volume was at a measly Php 9.5 billion as I showed here.

Friday January 9th edition posted a better than September feat at Php 11.2 billion, but still almost a half way shy of the 2013 failed attempt.

The weekly averaged daily peso volume (left) reveals of the relatively low volume ramp to record highs. What has distinguished 2014 from 2013 has been the delirious rate of turnovers (right) which has been about 35% higher today.

Stock market pumping means to acquire specific equity securities at higher than the market rates. Marking the close is a wonderful example.

Yet the increasing frequency of the stock market pump means that these index managers have been heavily accumulating equity positions at record high levels.

Looking at the charts of the 30 Phisix composite members, 15 or half have closed above 2013 highs. 2 are at 2013 highs while the rest or 13 are below their respective 2013 watermark levels. So the record high hasn’t reflected a broad based run.

Curiously of the half that has been above the 2013 levels, some have soared in a parabolic or near vertical fashion. Wow. Total Mania.

And of course with PE ratios at 30, 40, 50 and PBV at 4,5,6,7 this has NOT been about G-R-O-W-T-H, but the incantations of G-R-O-W-T-H to justify mindless bidding up of mispriced securities.

When stock market returns outpace earnings or book value growth, the result is price multiple expansions. This is why current levels of PE ratios are at 30, 40, 50 and PBVs are at 4,5,6,7. This is NOT about G-R-O-W-T-H but about high roller gambling which relies on the greater fool theory or of fools buying overpriced securities in the hope to pass on to an even greater fool at even higher prices—all in the name of G-R-O-W-T-H!

Going back to the index massaging, this only implies that in order to generate a bandwagon effect, index managers have mostly been piling on the most popular issues.

So in order to finance the next series of managing or to reload, they would need to sell at least at breakeven levels. So has the furious rate of turnovers been symptoms of the manipulation of index rather than of retail speculation gone berserk?

Otherwise, index managers have been stashing boatloads of overvalued securities such that a market crash would expose on their balance sheet problems (whether they are private or public firms). This explains the intolerance for any correction. So the continuous pump to keep façade of their balance sheets.

Yet what more if such heavy accumulation of key popular index stocks at record prices has been financed through credit? Perhaps another reason why stocks can’t be allowed to go down.

Record Phisix as Domestic Casino Stocks Crash!

This week’s record run has mostly been bannered by the holdings and property sector. The financial sector even posted losses for the week. Why the loss in the financial sector? Have these been about the emergent recognition of the effect of tightening spreads on bank balance sheets?

Interestingly, domestic casino stocks have been in serious trouble—crashing in the face of record Phisix 7,400!

Large integrated resorts have mainly been about shopping malls and hotels with casinos as come-ons or attractions. Yet the heavily leverage casino stocks translates to magnified credit risks to lenders. As I have previously explained, there are about Php 45-50 billion of debt that are at risks if Chinese gamblers don’t appear soon enough and or if the domestic economy fumbles and or if domestic political and financial elites will hardly patronize them to profitability.

Considering that about 3 of 10 residents are “banked”, then this means that leverage circulates among a small segment of banked people and institutions. Let me add that the reason the Philippines has low gearing ratio per capita is because of the mostly unbanked population. But if we should measure gearing in terms of the population of only banked entities, the leverage levels should soar.

In short, casino stocks are just part of the concentration risks from systemic overleverage which obviously the record Phisix 7,400 chooses to ignore.

Phisix 7,400: Déjà vu 1997?

I am not a fan of pattern seeking in charts, if patterns serve as a standalone metric. But I consider patterns, if they account for the whereabouts of the business cycle especially when backed by fundamentals.

Today’s record Phisix (top) which has been part of the 2013-2014 volatility seems like a miniature replica of the 1994-1997 topping process.

The remarkable rally of 1993 which delivered an astonishing 154% returns peaked in early 1994. What followed was an exceptional periods of volatility. From 1994-1995 there had been three accounts where the Phisix fell by about 20% but rallied back. This I call as bear market strikes.

By the end of 1995, the bulls eventually regained the upper hand and pushed the Phisix back to marginally top the 1994 highs by February of 2007 before the Asian crisis collapse.

The current episode had the Phisix climax in May of 2013. The bull run had been disrupted by the Bernanke taper talk and by the volatility from BoJ’s QE 1.0. What followed next was three occasions where the Phisix had attempted a touchdown on bear market levels.

Nonetheless the bulls recovered momentum from the start of 2014 mainly due to the index managers through today’s record high. The Phisix returned 22.76% in 2014. This week’s record run has generated 2.38%.

Aside from chart patterns of 1997 and today, there are many other similarities.

-Current stock market valuations have already topped the 1995-96 levels.

-Credit to GDP has mostly like substantially eclipsed the 1997 highs of 62.2%.

As I wrote last July[10]

In a speech last year, the BSP chief cited the credit to GDP at 50.4% as of Q4 2012. Allow me a back of the envelop calculation using current data to establish 2013 debt levels.

The average BSP’s measure of the banking system loan growth in 2013 has been at 13.5%. The average annualized growth per quarter in 2012 has been at 7.225%. So this implies a credit-to-gdp ratio now at around 56.7%

Such level outstrips the 1984 high at 51.59%. This is the same period or in particular in 1983, where the Philippines faced a balance of payment crisis and an eventual inflationary recession in 1984 which I previously discussed here, chart from Wikipedia.org. Notice high inflation, high interest rates (T-bills). Rings a bell? (I know the bulls will assert we can’t have a balance of payment crisis because of foreign reserves! But shouting foreign reserves! foreign reserves! foreign reserves! are not free passes to bubbles)

Current credit-to-gdp levels have also surpassed the 1996 high at 54.85% and have been just shy away from the 1996 high of 62.22% in 1997. If the pace of current credit growth is sustained through the year at current economic growth levels, the 1997 acme will be easily reached or exceeded by the yearend.

At any rate, the Philippines economy has now reached critical levels—where if the past will rhyme—points to severe economic turbulence ahead.

The average banking system loans to the productive economy rates growth rates for the past 11 months has been at 18.53%. Let me wear the hat of the mainstream to assume that statistical GDP for 2014 will be optimistically at 6%. This extrapolates to a net credit growth of 12.53%. If my 2013 estimates at 54.85% has been anywhere accurate, then 2014’s credit to gdp ratio would total 67.38%! Yet if the statistical GDP falls below 6%, the larger the gains of net credit growth, the higher credit to gdp ratio!

-In 1997, Japan raised sales taxes and suffered a recession. Japan raised sales taxes in April 2014 and has been in a recession. If Japan’s recession deepens then there will likely be a feedback transmission to her trading partners and vice versa.

-ASEAN nations have been acquiring more debt than the pre-1997 days.

As example, syndicated loans from M&A are at record levels. From Nikkei Asia[11] (bold mine): The volume of syndicated loans in Southeast Asia was at its largest ever in 2014 with Singapore leading the pack, according to a report by a financial research firm Dealogic. As merger-and-acquisition activity rises in Southeast Asia, more companies are using syndicated loans for funding.  Loans hit a record high of $119.5 billion in the region, up from $86.6 billion the previous year. The number of syndicated loan deals totaled 247, compared to 294 in 2013. Singapore is the largest generator of syndicated loans in the region. The city-state's volume expanded 71% to $60.5 billion in 2014, recording the largest year-on-year increase in Southeast Asia. Indonesia and Malaysia followed, with $21.4 billion and $18.3 billion of syndicated loans in 2014, respectively

I have noted in September of the S&P warning of top ASEAN firms whose growth has increasingly relied on debt.

As a refresher, from theNationMultiMedia.com[12]: "Asean companies are increasingly using debt to finance growth and are likely to continue doing that over the next two years," said Standard & Poor’s credit analyst Xavier Jean. Standard & Poor’s estimates that internal cash flows and cash balances could fund only about half of almost US$300 billion Asean’s largest companies spent on expansion and acquisitions between 2008 and the first quarter of 2014. At the same time, these companies issued about $150 billion of additional debt to bridge the gap. The result of ongoing investment by Asean companies has weakened their credit profiles since 2011, when growth in revenues and cash flows started to wane.

-Indonesia’s currency the rupiah has already exceeded the 1997 lows or the USD rupiah topped 1997 highs at 12,600.

Like the Philippines, the Indonesian government successfully raised $4 billion in the international bond markets last week according to a report from Bloomberg. But unlike the Philippines, the Indonesian government had to pay for higher rates: 5.95% for 10 year and 6.85% for 30 years compared to the previous 5.684% and 6.85%, respectively.

The $ 4 billion signifies a parcel of the targeted $ 29.2 billion financing requirements for 2015 to be raised at domestic and international markets. The Indonesian government reportedly failed to meet its financing requirement last November but generated a warmer reception last week.

Curiously the Indonesian government has been tapping foreign currency loans as her currency continues to struggle.

Nevertheless like the Philippines, Indonesian stocks have been drifting at record highs in the face of emerging financing strains.

Anyway unless one has used heavy leverage to bet on the stock market or has been part of the institutions that has become totally addicted to perpetually rising asset prices, the break of 7,400 has really been meaningless to any prudent investor.

The past secular tops show that record highs have hardly been accompanied by lasting or sustainable upside moves.

For instance, the nominal gains from the February 3 1997 high over the previous Jan 6 1994 highs has only been 4.68%. If we apply this to the 7,400 would translate 7,746.

During my dad’s stock market cycle, the secular high of January 1979 from its previous high in 1969 was 10.14%. This equates to 8,150 in current terms.

The recent Lehman contagion saw the Phisix rally above the July 5, 2007 highs by only 2.168% in October 2007. In today’s equivalent, this would represent 7,540.

Yet all these tops preceded a collapse.

This implies that at 7,400 the risk reward balance has been heavily tilted towards risk. Betting on a 10% gain in the face of a potential loss of at least 50% will signify a gamble than investments.

Fund manager Dr John Hussman has a pertinent rule for today’s market participants. He calls this the “Exit Rule for Bubbles” or the assumption that “you only get out if you panic before everyone else does” (bold mine): you have to decide whether to look like an idiot before the crash or an idiot after it.[13]

It’s really not just about social desirability bias; one can be seen being an idiot but preserve capital, but the other can be both an idiot and at the same time lose money!

2015: Real Time Crashes Will Spread and Intensify

At the start of 2014 I wrote of potential black swans[14]:

The potential trigger for a black swan event for 2014 may come from various sources, in no pecking order; China, ASEAN, the US, EU (France and the PIGs), Japan and other emerging markets (India, Brazil, Turkey, South Africa). Possibly a trigger will enough to provoke a domino effect.

The black swans have arrived. Crashes have become real time events. But so far they appear as fragmented series of events than a global systemic issue. 2015 will most likely see the spreading and acceleration of this process.

Oil and commodities have been collapsing. Macau’s casino stocks have also been in a tailspin. Casino stocks in Singapore and even the US have also been on a meltdown. US gambling stocks have diverged from her record peers. So applies with US energy stocks which has also been cracking.

Interestingly the common denominator of oil, commodities and casinos has been China.

While Chinese stocks have been melting UP partly on the government’s massaging of the stock markets via the price controlled IPOs and by stimulus, the real economy has been lumbering. Just last week, a Hong Kong listed Shenzhen based property and shopping mall (!) developer, Kaisa Group Holdings Ltd, missed interest payments that could herald the first overseas bond default.

This bombshell from Wall Street Journal[15] (bold added): A default, if confirmed, would be the more shocking because it was so unexpected, investors say. Kaisa was seen as in good financial shape, with a healthy portfolio of commercial and residential projects, strong sales and solid cash flow that had made its bonds popular with investors. Kaisa’s net profit in the first half of 2014—the latest figures available—rose 30% versus the previous year to 1.33 billion yuan ($214 million), with revenue of 6.79 billion yuan. As of June 30, the 16-year-old company, which is listed on the Hong Kong exchange, had cash of 9.38 billion yuan versus short-term debt of 6 billion yuan.

Healthy portfolio, strong sales, solid cash flow and rising net profits all vanished in the face of a missed payment on interest from a $500 million of debt. As I have been saying here, when debt deflation (bubble bust) comes knocking, the illusions of strength from a credit boom can evaporate in an instant. What you see isn’t what really is. To quote the sage of Omaha Warren Buffett again, you only find out who is swimming naked when the tide goes out.

As a refresher, despite so-called statistical growth of the Chinese economy, the government has undertaken many forms of stimulus. As I recently wrote[16],

The drastically slowing highly levered Chinese real (and not statistical) economy has compelled the People’s Bank of China (PBoC) to do a series of easing measures.  As I recently pointed out the Chinese government has launched “targeted easing” last June, has resorted to selective bailouts of firms which almost defaulted last July, imposed price controls on stock market IPOs last August, injected $125 billion over the last two months.

The much ballyhooed China-Hong Kong connect also went onstream November 17 where the Chinese government also liberalized fund flows on IPOs conducted overseas to ensure money overseas can be repatriated with ease.

The Chinese government via the PBoC has also refrained from sterilizing funds injected to system.

Add to this recent action that allows banks to lend more from their deposits.

Recently the Chinese government announced they would be “accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion)”, although the Chinese government denies that this represents new stimulus. Whether this has been about fast tracking of projects in the pipeline or stealth injection of new projects, it’s all about frontloading of spending today. 

Yet the rudimentary problems would be the funding and implementation of government sponsored spending. Will these be funded by more debt? In the same way soaring stocks have been energized by an explosion of margin debt? Debt problems to be solved by acquiring more debts?

How will all these projects be implemented in the wake of the so-called anti-corruption campaign?

Nonetheless collapsing oil prices along with a strong US dollar has prompted for Middle East stocks to suffer from a series of sharp volatility dominated by crashes.

Many emerging market currencies have been under tremendous currency strains, stock markets of emerging market economies as Russia, Brazil, Nigeria and more have suddenly fallen into in bear markets.

In Southeast Asia, while stock markets of Philippines and Indonesia are at record highs, Thailand SET has been under pressure, punctuated by an intraday 9% collapse last December 15th, which it mostly recovered during the session. The Malaysian ringgit and Malaysian (KLSE) stocks have been seriously weakening. The USD-MYR has reached 2008 levels! Vietnam’s stocks recently landed on the door steps of the bear market before bouncing back to recover some of the recent losses.

In Europe, Greece’s stocks and bonds appear to be in a freefall from domestic politics.

Stock markets of developed nations have also began to exhibit increasing signs of stress only to be repeatedly rescued by promises of support by their respective central banks.

Yet Bank for International Settlement warned on this during their Quarterly review last December, from Claudio Borio, Head of the Monetary and Economic Department:

Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed

Increasing pressures on risk assets can’t qualify as black swans anymore. That’s because the element of surprise has been taken away.

The central bank of central banks, the Bank for International Settlements (BIS), the IMF and the OECD has jumped on the bandwagon to sternly warn of risks of a global financial crisis. Many other central banks has also joined the warning chorus but in different degrees most of them sanitized.

Admiringly, the BIS have been the most persistent. They have used every opportunity of late to air concerns of the debt financed mania griping financial markets everywhere.

Markets are a process. The periphery to core that I have been warning about has been spreading. The spreading process will likely intensify in 2015. If the developed markets succumb to forces of asset deflation, the periphery would fall harder. The feedback loop will accelerate.

Like in Middle East or Casino stocks, record highs suddenly transmogrified into bear markets.

Greed will metastasize into fear.

The Phisix bear market in 2007-8 came as a contagion even without systemic problems. Today internal imbalances as revealed by inchoate signs of deflation will mean not just a financial asset meltdown but economic turmoil as well.

My all time favorite quote from the Sage of Omaha has become very relevant:

I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

---

[1] See Phisix: As Mania Rages, BSP Chief Warns on “Complacency” and “Chasing the Market”!! August 24, 2014

[2] See Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is October 6, 2014

[3] See Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy April 14, 2014

[4] Ludwig von Mises Malinvestment, Not Overinvestment, Causes Booms May 24 2010

[5] See Philippine Bonds Close the Year with a Rally; Flattening Yield Curve as Business Cycle Indicator December 29, 2014

[6] Philipp Bagus and David Howden The Term Structure of Savings, the Yield Curve, and Maturity Mismatching The Quarterly Journal of Austrian Economics 2010

[7] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Decelerates in November December 29, 2014

[8] Bangko Sentral ng Pilipinas 2014 Average Inflation Within Government Target January 6, 2015

[9] See Phisix: The October Syndrome is Back! Philippine Casinos as the Causa Proxima? December 15, 2014

[10] See Phisix Breaks 6,900 as Inflation Risk Becomes a HOT Political Issue! July 6, 2014

[11] Nikkei Asia M&A activity has Southeast Asia lending record amounts January 5, 2015

[12] theNationMultiMedia.com Asean companies' growth hinges on rising debt and credit availability September 11, 2014

[13] John P Hussman Losing Velocity: QE and the Massive Speculative Carry Trade November 3, 2014 Hussman Funds

[14] See Phisix: Will a Black Swan Event Occur in 2014? January 13, 2014

[15] Wall Street Journal Chinese Developer Appears to Default January 8, 2015

[16] See Phisix: Tremors Rock Philippine Casino Stocks, Malaysian Financial Markets December 8 2014

Doug Casey on US government debt

Some juicy excerpts from the legendary investor Doug Casey at his International Man website: (bold mine)

The only way a society (or an individual) can grow in wealth is by producing more than it consumes; the difference is called “saving.” It creates capital, making possible future investments or future consumption. Conversely, “borrowing” involves consuming more than is produced; it’s the process of living out of capital or mortgaging future production. Saving increases one’s future standard of living; debt reduces it.

If you were to borrow a million dollars today, you could artificially enhance your standard of living for the next decade. But, when you have to repay that money, you will sustain a very real decline in your standard of living. Even worse, since the interest clock continues ticking, the decline will be greater than the earlier gain. If you don’t repay your debt, your creditor (and possibly his creditors, and theirs in turn) will suffer a similar drop. Until that moment comes, debt can look like the key to prosperity, even though it’s more commonly the forerunner of disaster.

Of course, debt is not in itself necessarily a bad thing. Not all debt is for consumption; it can be used to finance capital goods, intended to produce further wealth. But most US debt today finances consumption—home mortgages, car loans, student loans, and credit card debt among other things.

Government Debt

It took the US government from 1791 to 1916 (125 years) to accumulate $1 billion in debt. World War I took it to $24 billion in 1920; World War II raised it to $270 billion in 1946. Another 24 years were needed to add another $100 billion, for a total of $370 billion in 1970. The debt almost tripled in the following decade, with debt crossing the trillion-dollar mark in October 1981. Only four and half years later the debt had doubled to $2 trillion in April 1986; four years more added another trillion by 1990; and then in only 34 months it reached $4.2 trillion in February 1993. The exponential growth continued unabated. US government debt stood at $18 trillion in early 2015. Off-balance-sheet borrowing and the buildup of massive contingent liabilities aren’t included. That may add another $50 trillion or so.

In 1964—the year Lyndon Johnson was elected—US federal debt stood at $316 billion, and interest on it was $10.7 billion, which was equal to 14.8% of personal and corporate tax revenues. When Reagan left office in 1989, the debt stood at $3.2 trillion, and interest was $214 billion, taking 43% of tax revenues. When Bush left office in 1993, the debt stood at $4.2 trillion and interest at $293 billion, consuming 52% of personal and corporate income taxes.

As of fiscal-year 2013, there was $16.8 trillion in federal debt and $416 billion in interest payments, which consumed about 15% of tax revenues. When interest rates rise again, even to their historical average, the US government will find most of its tax revenue is going just to pay interest. There will be little left over for the military and domestic transfer payments.

When the government borrows just to pay interest, a tipping point will be reached. It will have no flexibility at all, and that will be the end of the game.

In principle, an unsustainable amount of government debt should be a matter of concern only to the government (which is not at all the same thing as society at large) and to those who foolishly lent them money. But the government is in a position to extract tax revenues from its subjects, or to inflate the currency to keep the ball rolling. Its debt indirectly, therefore, becomes everyone’s burden.

The consequences of all this are grim, but the timing is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will look for repayment. Either the creditors are going to walk away unhappy (in the case of default), or the holders of all dollars are going to be stuck with worthless paper (in the case of hyperinflation), or the taxpayers’ pockets will be looted (the longer things muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few of us.

Ron Paul’s Prediction for 2015

Former US Congressman Ron Paul’s crystal ball for 2015 as published at the Ron Paul Institute. 

Mr. Paul’s forecast has been extracted from a lengthy treatise  which also covers the numerous topics including welfare-warfare state, inequality, war on drugs, cronyism  and US empire and its blowback 

(bold mine)

What to expect in 2015?

Foreign Affairs

More American troops will be sent overseas to places like Iraq, Afghanistan, Syria, and Ukraine. There will be no military victories to brag about. More American military personnel will be killed in 2015 than in 2014. Military contractors will be used in growing numbers and their casualties will not be counted as military casualties.

The Ukraine civil war will not end, and the United States will be further bogged down in this conflict. Relations with Russia will continue to deteriorate. The neocons in Congress will gain even more influence over our foreign policy. Punishing sanctions will continue to be made more severe and push Russia further into China’s sphere of influence. Gold will gain credibility as we isolate the Russians from the financial markets.

Sanctions on Russia will alienate Europe against the United States. The British oil industry will suffer from the “conspiracy” of the US and Saudi Arabia to drive oil prices down to punish Russia.

The military-industrial complex will continue to thrive and make even more money with the greater influence of the neocons in the new Congress. Supplemental budgets for the military should be expected, along with covert assistance and additional foreign aid to finance the management of our Empire.

Our enemies’ strength will grow and prompt even more abuse of American citizens’ privacy and free expression. We should not be surprised if there is a reigniting of the conflict in the Balkans. The first of the color revolutions in 2000 in Serbia can hardly be claimed a permanent victory. Generally, bombs from outsiders don’t solve internal problems. Those problems must eventually be solved from within a country rather than from outside interference.

The US and NATO announced that the 13 year war in Afghanistan has ended. There has been neither the pretense of "Mission Accomplished" nor an admission of outright failure, along with an exodus. In reality the war has not ended and instead will continue for a long time. No victory for US policy is possible. The conflict will actually spread and increase in intensity since our goals are undefinable and therefore the war is un-winnable.

Sanity will not return to US leaders until our financial system collapses — an event for which they are feverishly working

Domestic issues

An honest assessment of the economy will not reveal any significant improvement in 2015. Inflation will continue to plague us, possibly even with the government-rigged CPI figures showing an increase. But the true inflation of the Fed’s credit creation, as well as the subsequent mal- investment and the various bubbles bursting will accelerate. Debt in all categories will continue to increase at unsustainable rates. The Fed will not permit interest rates to rise — at least on purpose. Eventually the market will demand that rates do rise, however.

Tax revenues will continue to rise, aiding the policy of the government spending the people’s money rather than those who earned it. Regulations, even with (or maybe especially with) a Republican Congress will continue to increase and make the Federal Register more incomprehensible. Friction between the middle class and the one percent, many of whom are living off government privileges, will escalate further and be reflected in confrontations especially in the large cities. Financial currency controls will continue to expand especially with cross-border transactions.

Blowback and unintended consequences from our sanctions and foreign policy in general will continue to threaten our domestic security and our economy, as well as our liberties.

Relations with Cuba will be improved with the president’s effort to resume diplomatic relations, but the radicals and isolationists who oppose free trade will place roadblocks in the way and slow the process.

A major geopolitical or economic event, greater than the crisis of 2008, is fast approaching. The precipitating event will be a surprise to the majority of politicians and economists. There are many “next shoe to drop” possibilities, and one could happen any time or any place.

Wall Street will be protected, and the trillions of dollars of big banks derivatives will be absorbed by the Fed, the FDIC, and ultimately by the American taxpayers in the next financial crisis. There’s no doubt the poor will get poorer and the rich richer until the spirit of revolution in the people calls a halt to the systematic destruction of freedom in America.

Conclusion: Toward a Peaceful Revolution

Authoritarianism has overtaken our economic system as the welfare mentality takes over at every level of government. Once the initiation of force by government is accepted by the people, even minimally, it escalates and involves every aspect of society. The only question that remains is just who gets to wield the power to distribute the largess to their friends and chosen beneficiaries. It’s a recipe for steady growth of the government at the expense of liberties, even if official documents and laws written to limit government power are in place. Planting even small seeds of monopoly power in the hands of a few people in government, whether democratically elected or not, will always metastasize like a cancer. This was Jefferson’s concern when he advised that “[t]he tree of liberty must be refreshed from time to time.” He believed the people must warn the rulers that taking up arms against the government is legitimate if the government fails to protect the people’s liberty.

This should be a consideration. But if the spirit of liberty is not alive and well in the hearts and minds of the people, violence alone against the government will not be a solution. History has shown that, more often than not, people who rebel against abusive governments, whether run by kings or modern day dictators, do not gain much — overthrowing one dictator and replacing him with another just as bad.

A clear understanding of the nature and source of liberty is required for revolutions to be beneficial. Restraining the few who thrive on the use of force to rule over us is the challenge. Fortunately they are outnumbered by those who would choose liberty yet lack the will to challenge the humanitarian monsters who gain support from naive and apathetic citizens. All positive revolutions must be philosophic in nature to make a difference. Violence alone achieves nothing.

Before we can actually restore our liberties, we most likely will have to become a lot less free and much poorer. This is sad since correct and workable answers are available to us if only the people understood them and demanded liberty and honesty, rather than being dependent on excessive government power and believing the false promises of politicians.

Even with the problems we face today and the bleak outlook for the coming year there’s much to encourage us. During this next year there will be the continuation of many more people recognizing the failure of government to create peace and prosperity. More widespread understanding of this truth is required in order to bring about a successful revolution.

The freedom movement, especially with many young people involved, will grow in numbers and influence.

Current monetary policy and the Federal Reserve will continue to lose credibility, especially with the next bailout. Although “too big to fail” will stay in place, it will further alienate Main Street America causing it to rebel against the system.

The real problem of course is that too many “stupid people” are IN our government and have high visibility on the major TV networks. There will be plenty of people, not officially associated with government, who will rebel against various governments around the world. The sentiments supporting secession, jury nullification, nullification of federal laws by state legislatures, and a drive for more independence from larger governments will continue.

We should not be discouraged. Enlightenment is not nearly as difficult to achieve as it was before the breakthrough with Internet communications occurred.  Besides we must remember that “an idea whose time has come” cannot be stopped by armies, demagogues, politicians, or even Fox News or MSNBC. The time has come for the ideas of liberty to prevail. I smell progress. Let’s make 2015 a fun year for LIBERTY.

Read the entire article here.

ECB and Fed Easing Promises Prompts for a Global Stock Market Melt-UP

All it takes to reverse the mood has been promises of more monetary steroids by central banks to steroid addicted financial markets…

First the European stock market melt-UP, from Bloomberg:

European stocks climbed the most in three weeks, erasing their losses for 2015, amid optimism monetary policies by central banks will support the economy.

The Stoxx Europe 600 Index rallied 2.8 percent to 342.35 at the close of trading, extending gains as ECB President Mario Draghi said the central bank’s measures may include buying sovereign bonds. A report today showed German factory orders in November fell more than projected, adding to yesterday’s weak inflation data in boosting speculation the ECB will begin quantitative easing at its next meeting on Jan. 22.

See bad economic data extrapolates to good news—a justification for more bailouts.

Image from stockcharts.com

Next the US version, from another Bloomberg article: (bold mine)

U.S. stocks climbed, with the Standard & Poor’s 500 Index erasing its 2015 declines after the Federal Reserve signaled caution on interest rates even as growth shows signs of accelerating. The euro sank on speculation policy makers in the region will need to bolster stimulus…

Most Fed officials agreed their new policy guidance means they are unlikely to raise rates before late April, according to the minutes released yesterday. A number also expressed concern inflation could remain below target. Some policy makers are concerned over the risks posed by overseas economies. Policy actions by foreign central banks may help, the minutes said.

Those sentiments were echoed in comments by Fed Bank of Chicago President Charles Evans.

Rate ‘Catastrophe’

“I don’t think we should be in a hurry to increase interest rates,” Evans said during a discussion yesterday with Lars Peter Hansen, a Nobel prize-winning economist at the University of Chicago. Later in the presentation, Evans said such a move to tighten too soon would be a “catastrophe.”

Each time US stock markets suffer a tantrum, the FED bails them out. The result has been dramatic bouts of short squeezes. This would mark the “2nd biggest 2-day short-squeeze in 14 months... 2nd only to the one that occurred on the December FOMC meeting” according to the Zero Hedge.

Claudio Borio, Head of the Monetary and Economic Department of the Bank for International Settlement warned on this during their Quarterly review last December:

Once again, on the heels of the turbulence, major central banks made soothing statements, suggesting that they might delay normalisation in light of evolving macroeconomic conditions. Recent events, if anything, have highlighted once more the degree to which markets are relying on central banks: the markets' buoyancy hinges on central banks' every word and deed

The only thing  “easing” means has been to tolerate conditions for more debt acquisition to bid up financial assets.

Stock markets are about G-R-O-W-T-H or about liquidity credit and confidence? 

For the Phisix: Will team OPLAN 7,400, with their fantastic manipulation of the index, see their wish fulfilled for a new historic high today?

Voluntary Exchange vs. Government Mandates: Why State ownership is not real ownership

At the Mises Institute, Austrian economist Patrick Barron eloquently explains the difference between individual (voluntary) transactions and government interventions or mandates: (italics original; bold mine)

The basic unit of all economic activity is the uncoerced, free exchange of one economic good for another. Moreover, the decision to engage in exchange is based upon the ordinally ranked subjective preferences of each party to the exchange. To achieve maximum satisfaction from the exchange, each party must have full ownership and control of the good that he wishes to exchange and may dispose of his property without interference from a third party, such as government.

The exchange will take place when each party values the good to be received more than the good that he gives up. The expected — but by no means guaranteed — result is a total higher satisfaction for both parties. Any subsequent satisfaction or dissatisfaction with the exchange must accrue completely to the parties involved. The expected higher satisfaction that one or each expects may not be dependent upon harming a third party in the process. 

Third Parties Cannot Create Value by Forcing Exchange 

Several observations can be deduced from the above explanation. It is not possible for a third party to direct this exchange in order to create a more satisfactory outcome. No third party has ownership of the goods to be exchanged; therefore, no third party can hold a legitimate subjective preference upon which to base an evaluation as to the higher satisfaction to be gained. Furthermore, the higher satisfaction of any exchange cannot be quantified in any cardinal way, for each party's subjective preference is ordinal only. 

This rules out all utilitarian measurements of satisfaction upon which interventions may be based. Each exchange is an economic world unto itself. Compiling statistics of the number and dollar amounts of many exchanges is meaningless for other than historical purposes, both because the dollars involved are not representative of the preferences and satisfactions of others not involved in the exchange, and because the volume and dollar amounts of future exchanges are independent of past exchanges. 

One Example: The Case of Ethanol 

Let us examine a recent, typical exchange that violates our definition of a true exchange yet is justified by government interventionists today: subsidized, protected, and mandated use of ethanol.

The use of ethanol is coerced; i.e., the government requires its mixture into gasoline. Government does not own the ethanol, so it cannot possibly hold a valid subjective preference. The parties forced to buy ethanol actually receive some dissatisfaction. Had they desired to purchase ethanol, no mandate would have been required.

Because those engaging in the forced exchange did not desire the ethanol in the first place, including the dollar value of ethanol sales in statistics purporting to measure the societal value of goods exchanged in our economy is meaningless. Yet the government includes all mandated exchanges as a source of “value” in its own calculations.

This is just one egregious example of many such measurements that are included in our GDP statistics purporting to convince us that we have "never had it so good." 

Another Example: The Soviet Economy 

Our flawed view that governments can improve satisfaction caused us to misjudge the military threat of the Soviet Union for decades. Our CIA placed western dollar values on Soviet production data to arrive at the conclusion that its economy was growing faster than that of the US and would surpass US GDP at some point in the not too distant future. Except for very small exceptions, all economic production resources in the Soviet Union were owned by the state. This does not necessarily mean that it was possible for the state to hold valid subjective preferences, for those who occupied important offices in the state held them at the sufferance of what can only be described as gang lords, who themselves held office very tentatively. 

State ownership is not real ownership. Those in positions of power with responsibility over resources hold their offices for a given period of time and have little or no ability to pass their office on to their heirs. Thus, the resources eventually succumb to the law of the tragedy of the commons and are plundered to extinction. Nevertheless the squandering of the Soviet Union's commonly held resources was tallied by our CIA as meeting legitimate demand.

Professor Yuri Maltsev saw first-hand the total destruction of the Soviet economy. In Requiem for Marx he gives a heartbreaking portrayal of the suffering of the Russian populace through state directed, irrational central planning that did not come close to meeting the people's legitimate needs, while our CIA continued to crank out bogus statistics of the supposed strength of the Soviet economy upon which the Reagan administration based its unprecedented peacetime military expansion. 

Peaceful Exchange Allowed, Violent Exchange Redressed

With the proviso that no exchange may harm another, as explained so well in Dr. Thomas Patrick Burke's book No Harm: Ethical Principles for a Free Market, we are led to the conclusion that no outside agency can create greater economic satisfaction than can a free and uncoerced exchange. The statistics that support such interventions are meaningless, because they cannot reflect the satisfaction obtained from true ordinally held subjective preferences. Once this understanding is acknowledged and embraced, the consequences for the improvement of our total satisfaction are tremendous. Our economy can be unshackled from government directed economic exchanges and regulations. 

Even the individual's preferences are fickle or may change across time. So aggregating numbers can provide a misleading picture of actual conditions.

 

This represents a teleological reason to doubt those government ‘aggregate’ numbers.

Thailand’s Parallel Universe: Record Stock Market Volume in the face of a Stagnating Economy

The consensus holds that stock markets have been about G-R-O-W-T-H.

Let us see how this applies to Thailand’s case.

From Nikkei Asia: (bold mine)

Despite political unrest and other woes, the Stock Exchange of Thailand (SET) in 2014 recorded the highest average daily trading value among ASEAN bourses for a third consecutive year.

Trading rallied on the SET and its benchmark index shot up after the military staged a coup d'etat on May 22, bolstering hopes that the economy would revive. However, some analysts believe the market may have overheated…

In 2014, average daily trading value was 45.47 billion baht ($1.38 billion), down 9% from the previous year. Although second place Singapore closed in at $1.3 billion, the SET managed to retain its top slot in ASEAN. The benchmark index gained 15% over the year.

The country had been in a political deadlock since late 2013 when anti-government protesters took to the streets in Bangkok. The economy shrank in the first quarter of 2014 sending the SET index to an 18-month low.

Thailand’s SET has indeed ballooned by 15% in 2014. This would have been much higher except for the December shakeout highlighted by an intraday 9% crash in the middle of that month as shown in the chart from stockcharts.com

Despite recent signs of recovery, the SET appears to remain under pressure.

The article suggest of a cognitive dissonance, a rally based on hope (of an economic recovery) and a denial (Thailand’s statistical economy hardly recovered through the 3Q).

The SET has risen 15% in  the face of stagnating economic performance which could have even been negative in real terms. 

Since government makes the statistics, so they can show whatever they want.

The important question is how has the stock market rally been funded?

The most likely answer has been by credit.

Loans to the private sector soared to a record before the third quarter slowdown. Consumer loans has also bulged to a record last September 2014. 

Ironically record consumer loans hasn’t translated to retail spending which on a year on year basis has remained negative in 2014 through October (albeit signs of improvements from the previous rates of deep declines).

Those issued loans haven’t been circulating to bid up consumer prices either, statistical inflation rate slumped to .6% last December! The oil price collapse may have compounded on this trend.

Yet on a month to month basis, December marks the largest contraction of consumer spending.  So even if we  go by the September-October data where consumer spending was last  reported, the same story can be derived: Thai consumers withheld spending. 

But those record loans has ballooned Thai’s banking system balance sheet and money supply M3. The latter possibly from the 364 billion baht stimulus announced last October.

Yet this coincides with the reports of swelling of non-performing loans.

So where has all these money issued been funneled to? 

The most likely answer is on the speculative markets.

Even as the economy stagnates, Thailand’s property markets has sizzled. As of the 3Q 2014 housing y-o-y gains has increased to 3.29% according to Global Property Guide. In nominal terms based 2009 baht, housing prices have been spiraling to the upside (right)!

It looks as if the average citizenry has been borrowing money to speculate on stocks and real estate based on a rationalized “hope” rather than engage in productive investments.

And the increasing use of leverage for speculation has hardly even spilled over to retail consumption.

Such developments seems like deepening signs of a massive accretion of malinvestments where more and more resources have been channeled into unproductive activities. Incipient signs of rising NPLs have been symptoms of these.

And the surge in the US dollar-Thai baht has only been exposing on the vulnerabilities of the system which recently has been vented through strains in the speculative markets.

As one can see from Thai example, it has been liquidity and credit and the subsequent confidence that drives pricing of financial markets rather than real economy. 

Take away credit and liquidity, so goes fickle confidence.  

And it would seem that the identical twins in the form of chart pattern between the Philippine Phisix and the Thai SET has diverged: temporary or new trend?

Phisix: Another Panic Buying Day amidst Global Stock Market Meltdown January 6th Edition

Well, this would mark the third time where, in the face of a global stock market meltdown, team OPLAN 7,400 or the index managers have pumped the index to close the trading day unchanged. 

The first was in October 16 and the second in December 15th. The operations come with the same features, pumping of select issues to buoy the index as global markets fizzled.

Across East Asia (table from Bloomberg), except for bourses of China, Vietnam and the Philippines, the region had mostly been bloodied from a contagion by the sharp selloff in Europe and in Wall Street. 

The Phisix opened today with modest losses which accrued early in the session. But apparently corrections are considered impermissible for the establishment who sees domestic stocks as a one way street. So the cabal of index manipulators went into action. They pumped up or engaged in manic bidding up of prices of exceedingly overpriced key index issues in order to ensure that confidence in the Philippine stock exchange will be maintained. 

The pumping actions lifted the index to erase about more than half of the early day’s losses going through the lunch recess. (charts from technistock.net and colfinancial) 

The ‘afternoon delight’ scheme went into operations but apparently wasn’t successful enough to lift the index significantly into positive territory as momentum faded during the near close as in the previous days. 

Nonetheless index managers secured the day with a “marking the close” for an unchanged Phisix.

Today’s pump had been centered on mainly three sectors, finance (left), commercial industrial  (middle) and holding (right). The most apparent use of the marking the close can be seen in the holding sector.

Combined these four issues from the aforementioned sectors constitute 18.63% of the Phisix market cap as of today’s closing. As I have been pointing out here, all it takes has been to move 3-4 issues with about 20% of market cap to manage the index.

Peso volume was moderate at Php 9.95 billion which with special block sales totaled Php 10.431 billion. Decliners led advancers 98 to 84 as foreign selling hit Php 1.144 billion (PSE Quote) partly revealing of the profit taking mode divergent from the index outcome.

It’s interesting to see the need for an artificial prop in order to achieve its bullmarket stature. Yet this has been more of a sign of desperation. 

Nevertheless, the obverse side of every mania is a crash.

Growing Number of US Dead Malls a Blueprint for the Philippines

The New York Times presents America’s growing number of “Dead Malls”.

Sample pictures from their slideshow:

From the New York Times: (bold mine)

Inside the gleaming mall here on the Sunday before Christmas, just one thing was missing: shoppers.

The upbeat music of “Jingle Bell Rock” bounced off the tiles, and the smell of teriyaki chicken drifted from the food court, but only a handful of stores were open at the sprawling enclosed shopping center. A few visitors walked down the long hallways and peered through locked metal gates into vacant spaces once home to retailers like H&M, Wet Seal and Kay Jewelers.

“It’s depressing,” Jill Kalata, 46, said as she tried on a few of the last sneakers for sale at the Athlete’s Foot, scheduled to close in a few weeks. “This place used to be packed. And Christmas, the lines were out the door. Now I’m surprised anything is still open.”

The Owings Mills Mall is poised to join a growing number of what real estate professionals, architects, urban planners and Internet enthusiasts term “dead malls.” Since 2010, more than two dozen enclosed shopping malls have been closed, and an additional 60 are on the brink, according to Green Street Advisors, which tracks the mall industry.

Premature obituaries for the shopping mall have been appearing since the late 1990s, but the reality today is more nuanced, reflecting broader trends remaking the American economy. With income inequality continuing to widen, high-end malls are thriving, even as stolid retail chains like Sears, Kmart and J. C. Penney falter, taking the middle- and working-class malls they anchored with them.

“It is very much a haves and have-nots situation,” said D. J. Busch, a senior analyst at Green Street. Affluent Americans “will keep going to Short Hills Mall in New Jersey or other properties aimed at the top 5 or 10 percent of consumers. But there’s been very little income growth in the belly of the economy.”

Excess capacity as main culprit…

One factor many shoppers blame for the decline of malls — online shopping — is having only a small effect, experts say. Less than 10 percent of retail sales take place online, and those sales tend to hit big-box stores harder, rather than the fashion chains and other specialty retailers in enclosed malls.

Instead, the fundamental problem for malls is a glut of stores in many parts of the country, the result of a long boom in building retail space of all kinds.

“We are extremely over-retailed,” said Christopher Zahas, a real estate economist and urban planner in Portland, Ore. “Filling a million square feet is a tall order.”

Like beached whales, dead malls draw fascination as well as dismay. There is a popular website devoted to the phenomenon — deadmalls.com — and it has also become something of a cultural meme, with one particularly spooky scene in the movie “Gone Girl” set in a dead mall.

The numbers…

About 80 percent of the country’s 1,200 malls are considered healthy, reporting vacancy rates of 10 percent or less. But that compares with 94 percent in 2006, according to CoStar Group, a leading provider of data for the real estate industry. 

Nearly 15 percent are 10 to 40 percent vacant, up from 5 percent in 2006. And 3.4 percent — representing more than 30 million square feet — are more than 40 percent empty, a threshold that signals the beginning of what Mr. Busch of Green Street calls “the death spiral.”

Industry executives freely admit that the mall business has undergone a profound bifurcation since the recession.

See the slideshow and the complete article here.

The Philippine counterpart has been been in a frenetic race to build all sorts of malls (major malls, strip malls, integrated resorts) to become possibly the shopping mecca of the world.

For a country that has a per capita GDP of $6,597 (IMF, 2013), the industry has been erecting capacity more than the US whose per capita is $53,001 as I wrote back of the Philippine shopping mall bubble in 2013.

It is as if Philippine consumers have limitless pockets to spend, for the mainstream to lavishly speculate and channel enormous amount of resources on them.

Yet the feverish race to build capacity comes in the face of declining statistical household consumption growth (based on 3Q 2014 NSCB data).

The decline in household spending comes even before the surge in statistical inflation rates in the first half of 2014. 

Interestingly, inflation rates have been down 2.7% in December with month on month changes at –.2% based on tradingeconomics data; NEDA data

Consumer prices even declined 0.2 percent in December from 0.1 percent drop in November notes the Tradingeconomics Blog. CPI Deflation! Spending by domestic consumers have been contracting!!! Why???

Yet the recent mall spending may have become reliant on the few that has access to the banking system where consumer loan growth rate continues to balloon (based on BSP November data).

Meanwhile, the growth contribution of the industry to the statistical economy has flat-lined, with a likely seasonal spike in wholesale trade in 2Q that petered out in the 3Q 2014. (data from NSCB) 

Curiously the frantic supply side build up has been financed by surging growth of bank loans.

And interestingly too, soaring systemic banking loan growth rates comes in the face of collapsing money supply growth (data from BSP)! This has been consistent with the output of the December statistical consumer inflation data.

Where has all the money from credit growth been funneled to? Debt IN-debt OUT? What happened to the Philippine consumption boom story?!

So slowing consumption by Philippine households in the face of sustained bank financed shopping mall capacity buildup translates to excess capacity.

When the economic slowdown becomes pronounced or when the recession arrives (it will), the US version of “dead malls” will also emerge in the Philippines. 

People hardly learn from either history or from developments in other nations.

As Oil Prices Collapse Anew, Tremors Hit Global Stock Markets

Financial market crashes have become real time.

Well, last night oil prices plummeted again. The European Brent crashed 5.87% to 53.11 per bbl while the US counterpart the WTIC dived 5.42% to close BELOW $50 or $49.95 a bbl.

The chart above from chartrus.com reveals that the present levels of US WTIC have reached 2009 post Lehman crisis levels.

Then, oil prices responded to deteriorating economic and financial conditions. Today, oil prices seem to lead the way.

Collapsing oil prices hit key stock markets of major oil producers, such as the Gulf Cooperation Council, quite hard.

The recent sharp bounce that partly negated losses from the harrowing crash that began last September seem to have been truncated as Dubai Financial, Saudi’s Tadawul, and Qatar’s DSM suffered 3.35%, 2.99% and 1.91% respectively (charts from Asmainfo.com) last night.

In short, bear market forces seem as reinforcing its presence in these stock markets.

Yesterday’s oil price meltdown affected least Oman’s Muscat and Bahrain Bourse. Nonetheless, again bear markets have become a dominant feature for GCC bourses.

A prolonged below cost of production oil prices will translate to heavy economic losses for Arab oil producing states. Such will also entail political repercussions as welfare programs of these nations depend on elevated oil prices as discussed here.  This will also have geopolitical ramifications.

Incidentally, as I previously pointed these nations play host to a majority of Philippine OFWs. 

More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds.

So a financial-economic collapse (possibly compounded by political mayhem) in GCC nations may impede any remittance growth that could compound on the travails of the Philippine bubble economy.

It’s not just in emerging markets, though, last night Europe’s stock markets likewise convulsed.

Part of the concerns had not only been about oil but about a GREXIT or Greek default from tumultuous Greek politics based on the failure to muster majority support for a presidential candidate.

Incredibly German’s DAX was slammed 3% (table above from Bloomberg).

Crashing Greek stocks lost another 5.63% yesterday.

Apparently broad based selling also buffetted near record US stock markets.

The XLE Energy Sector endured another tailspin down by 4.19%. Yesterday’s clobbering only fortified the bear market forces affecting the US energy sector which has diverged from her peers.

I propounded that the slumping energy sector will eventually impact the rest of the markets. Divergence will become convergence; periphery to the core.

Remember, the reemergence of heightened financial volatility comes in the face of October’s stock market bailout via stimulus implemented by ECB, BoJ-GPIF, and the PBOC.

This implies that the soothing or opiate effects, which had a 3 month window, has been losing traction. 

Will Ms. Yellen come to the rescue???