Phisix 7,600: 5.2% 1Q GDP Another Data Pump! DBP Accused of Market Manipulation; Scapegoating The US Dollar

It always ends this way. If you go back and you look at Rome. You look at the Ming Dynasty or you look at Zimbabwe - it always, always, always ends this way. And the question is how can you delay it… The end game we’re all talking about here is a very unpleasant one. It means that the financial arrangement that the state has created is no longer sustainable by society. And that’s how overly indebted societies end and they move on to a new type of arrangement. So it isn’t going to be a pretty change - if we get there. And that’s why it is so urgent that we act now. It is not just a matter of numbers. It’s a matter really of political liberty. Because the government will not voluntarily let itself go out of business. It will use all of its powers - I’m not talking about just our government but any government - will use all of its powers in order to fund itself –Lawrence B. Lindsey, former Member of the Board of Governors of the Federal Reserve System in a panel discussion with Richard Fisher, Alan Greenspan and moderated by Bloomberg’s Betty Liu, Paying for the Past: How Will Rising Interest Costs Affect Economic Growth?

In this issue

Phisix 7,600: 5.2% 1Q GDP Another Data Pump! DBP Accused of Market Manipulation; Scapegoating The US Dollar

-Market Forces Upstage Index Managers

-Market Manipulation Exposé: State Bank DBP Used ‘Wash Sales’ to Conceal Losses from Bond Yield Spikes!

-GDP Announcement Frontrunning; Broad market Selloffs Spills Over to the Phisix basket

-Blaming the US dollar for the Wrong Reasons; Why The Peso will Weaken

-1Q 2015 GDP: Questionable Data Quality and Contradictory Figures and Logic!

Phisix 7,600: 5.2% 1Q GDP Another Data Pump! DBP Accused of Market Manipulation; Scapegoating The US Dollar

Market Forces Upstage Index Managers

Last week, I mentioned that four stock market forces, particularly the rapidly deteriorating market breadth, dramatically shrinking volume, the highly skewed distribution of trading activities towards the top 15 heavy biggest market cap issues and the bearish chart head and shoulders formation have converged to bring about a possible conclusion to the divergence between headline performance and broad market developments

In conclusion, I wrote[1]: 

The divergent forces reveals of a stark conflict between the headline and the general sentiment that will have to be resolved. A healthy trend (on either direction) will depend on its resolution. 

So with this week’s selloff at the Philippine Stock Exchange, it would appear that these forces have exercised ascendancy over those manipulating the headline indices. With market forces gaining the upperhand, my predictions would now look prophetic.

 

Yet to add a major fundamental factor to the current stock market pressures, parallel developments at the bond markets characterized by rapidly flattening yield spreads, incipient signs of yield curve inversions and increased incidences of interventions to calm the treasury markets highlight signs of increased strains, to wit: Shriveling market driven liquidity and emergent signs of funding pressures at the banking system

 

For the month of April, the Philippine central bank, the Bangko Sentral ng Pilipinas revealed that in the context of credit and liquidity, while money supply inched higher to 9% from a revised 8.7% in March, growth in the banking system’s portfolio continues to dwindle; production loans, which account for 80% share of total loans, grew by 15.1% compared to 15.9% last March. Bank loan growth to the supply side peaked in July 2014 at 20.92% and has declined almost in succession through April. Nonetheless, consumer loans regained some momentum up by 20.1% from 19.8% last March. 

 

So with statistical GDP sharply falling below expectations and with stalling credit activities, it’s easy extrapolate that portfolios of financial institutions would likely see increased signs of pressures from the mismatches between bank client’s debt servicing capabilities and the still growing loan portfolio levels

Yet the Philippine central bank, the Bangko Sentral ng Pilipinas, continues to assuage the public that everything’s fine, so everyone should just move along because there is nothing to see. This week bank capitalization has been used as the talisman effect to ward off all sins of omission.

Back to local stocks, the Philippine benchmark fell by 2.94% over the week to trim year to date gains to 4.84%. The Phisix has now been down 6.7% from the pinnacle at 8,127.48

Last Thursday, selling pressures sent the Phisix probing into the mid-7,400 levels before another last minute pump which brought the index back to 7,500. The marking the close pump again saved the day!

Also Friday’s spectacular 2.2% ramp from the day’s opening through the midday session ended with a nerve racking ‘marking the close’ dump where almost half of the last minute gains had been erased! Friday’s pump and dump resulted to just a 1.01% gain by the Phisix!

 

While index management activities continue to bustle, they seem as losing efficacy to provide support for the headline number.

 

Market Manipulation Exposé: State Bank DBP Used ‘Wash Sales’ to Conceal Losses from Bond Yield Spikes!

If I am not mistaken, a germinal exposé on banking strains and market manipulations have already surfaced in media.

Remarkably yet, the source of losses and unscrupulous activities has emanated not from the stock market but from the Philippine treasury markets!

Last week, the Philippine state audit firm, the Commission on Audit (COA) unearthed what they allegedly claim as “unsound banking practice” resorted to by a Philippine state owned bank, the Development Bank of the Philippines (DBP). The bank supposedly engaged in a series of “wash sales” with a domestic privately owned financial company in order to minimize losses to only Php 717 million from the bank imposed allowable loss quota of only Php 800 million.

With a go signal from the bank’s highest authorities expressly stated via a corporate resolution, the wash sale transactions had been conducted from January to March of 2014 with the goal of shifting the bank’s “long-dated ‘available-for-sale’ peso government securities worth P20 billion” to a ‘hold-to-maturity’ portfolio in order “to avoid increasing the mark-to-market losses and preserve the accrual income” according to the Inquirer[2]. (italics mine)

Some background required here. Growth in money supply ripped by a prodigious 30++% for 10 successive months, i.e. from July 2013 to April 2014. So during the time period of January to March 2014, this window signified as the last inning—or the seventh to the ninth months—of such outrageous rate of money supply growth. The streak o f30++% money supply growth rate eventually led to rising yields, and of course subsequently, 8 quasi tightening moves by the BSP.

 

In terms of yield changes, allow me to use the 10 year treasury as example. The duration bid as consequence from the BSP’s financial repression (negative real rates) policies sent its yield to a record low to 3.042% in May 2013. I called this the convergence trade—where the gap between US counterpart and domestic yields has undeservingly narrowed. 

 

The spike in money supply growth, which was exacerbated by changes in BSP’s SDA policies, sent the same yield higher—by March 2014, the 10 year yield hit 4.571%. That’s only 153 bps spread from bottom to peak. As of Friday, the same yield has been at 4.347% (data from investing.com). 

 

And so, a change of spread by 150 bps or less has been enough to bleed DBP by more than Php 717 million for them to employ “wash sales” to conceal and curb their losses.

150 bps is peanuts compared to the coming yield hikes!

Notice that despite all the interventions 10 year yields have not meaningfully retrenched. Yet what more if, say, treasury yields rises by 200 bps & above from current levels? 

Not possible? 

In the week ending May 15, yield of one month bill skyrocketed to 3.638% from May 8’s 2.05% which means that in ONE week, the yield of one month bills flew by 159 bps! Of course, expected interventions have materialized to temporarily contain the tensions at the treasury markets. As of Friday,  the one month yield fell back to 2.193%

And given today’s mercurial yield activities particularly at the short end of the treasury markets, to what extent of losses has the banking system been exposed to? 

Take notice of the slowing loan growth despite a still monetary stimulative (negative real rates) environment? My guess is that balance sheets stress could have been forcing banks to restrict loans on a broad based basis. This is contrary to claims by the BSP that slowing loan growth have been from supposed BSP macro policies.

Also to what degree of market manipulations have banks and financial institutions engaged for them to pad up their balance sheets or camouflage financial losses? 

 

Likewise how many public and private financial institutions have cloaked their losses by the use of the accounting mirage of designating losing assets as ‘hold-to-maturity’? 

 

Does the BSP know?

 

For all the banking statistical façade, the DBP affair reveals that bank losses have emerged! 

 

And not only that, if DBP’s actions have been representative of the industry, then a lot of those published ‘solid’ statistical numbers may have been a charade.

And why shouldn’t the DBP’s actions be illustrative of the many activities engaged by both public and private institutions?

Just look at the brazen frequency of the manipulation of the PSE’s benchmark indices. This has hardly seem as a single entity affair. This looks likely a handiwork of many participants in seeming complicity. 

 

Didn’t I previously warn that losses will eventually arise from the shadows, but applied to the stock market?

 

Also I previously quoted (from the fifth edition of his classic Manias, Crashes and Panics), historian Charles Kindleberger’s[3] observations that unethical behavior snowballs during market inflection points.

Below is from the third edition. (bold mine)

The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut, induce still more to cheat in order to save themselves. And the signal for panic is often a revelation of some swindle, theft, embezzlement, or fraud

“To avoid increasing the mark-to-market losses and preserve the accrual income” which has represented the official DBP goal seem to resonate with the venal actions of sauve qui peut or save himself who can. 

 

DBP, as a government agency, seems the first. How many more have been hidden? How many has the BSP identified and contained?

Yet there are many vulnerable spots that plague the BSP: knowledge problem, the gaming of the system by the banking system and regulatory capture.

 

Do you recall who said this?

There are no absolutes in dealing with these issues.  There are many ifs and buts. And, a number of factors and variables, including concerns related to technology and geopolitics, would need to be considered.

Friends, there is no crystal ball for these things. So, as we continue to navigate a challenging economic landscape this year, it is imperative that the intent of policies from central banks and other authorities is clearly understood by the public.

Well the admission of the knowledge problem comes from no less than from the BSP governor in a speech that I have quoted last March[4]

Signs of times?

GDP Announcement Frontrunning; Broad market Selloffs Spills Over to the Phisix basket

Candidly, I hardly expected a significant move given last week’s GDP week.

My impression for the convergence of the bearish forces has been one of a medium to long term process.

Recall that, despite the furious rally to record highs by the index which began from the start of 2014 until April 10 2015, MORE THAN HALF or the MAJORITY of the population of listed stocks remains embroiled in bear markets—technically down 20% from the highs of mostly 2013.

The SILENT majority, which never recovered from their respective zeniths in May 2013 whose momentum had been foiled by Bernanke’s taper tantrum, endured aborted run ups or has traded sideways or continues to plumb new depths, through this period (2014-5).

So the record headline in the Philippine Stock Exchange had basically been a rotational pump on 15-20 issues from the major basket of the key bellwether

Thus, in spite of all the barrage of flowery statistical reports issued by government, by the establishment, and by mainstream media, the record benchmark last April which hallmarked the President’s visit at the PSE, which has engrossed the gullible, little has been known or aired that in the sphere of stock market activities, the silent majority been parting ways with popular wisdom!

And such divergence became even more conspicuous specifically this year or in the face of the string of record setting highs.

This week’s below expectations GDP report contributed to the intensified selling pressure.

As I have recently noted, I suspect of frontrunning activities by some politically connected parties whom may have learned of the below par report before its publication and this may have aggravated the selloffs.

Current developments have been unlike the 3Q GDP 2014 pre announcement activities. The pre 3Q GDP 2014 announcement revealed of sustained upside momentum going to the day of the report. 

 

When the 3Q report was announced on November 27 where GROWTH was at 5.3%, which has been almost been similar today, the Phisix tumbled 1.2% (red arrow left). However, the one day decline was fully recovered 3 days after, thanks to the index managers.  Although global selling pressures, largely unrelated to GDP, eventually dragged local stocks lower last December.

In 2015, pumps and dumps presaged GDP announcements.

Sharp pumps anteceded the 4Q GDP official broadcast. The PSEi index soared by 3.3% in 4 days prior to the report (blue arrow center). 

 

In contrast, huge dumps preceded the 1Q GDP report which had been aggravated by the day of revelation. Four day losses tallied 3.59% before the report (red arrow right).

 

Due to marking the close sessions, this week’s index losses have been substantially mitigated. However, the broad market’s market’s violent response last week highlights the continuing stark divergence between the headlines and the broadmarket.

In the perspective of market internals, here is the daily scoreboard denoting of the difference between advancing and declining issues from Monday to Friday: (Monday) 53 to 115, (Tuesday) 31 to 161 (!), (Wednesday) 54 to 132, (Thursday) 60 to 105, and (Friday’s gain) 106 to 68.

In total, losers crushed gainers by a mammoth margin of 277, the biggest since December 2013! Bear markets WITHIN the PSE have only DEEPENED!

Broad market tensions have spilled over to the Phisix basket.

The noose on the bulls, in particular, the index managers appears to be tightening.

Previously I have noted of 7 index issues that have been entangled by their respective bear markets, namely, AGI, BLOOM, EMP, LTG, MPI, PCOR and SMC.

This week, DMC’s 10.98% week on week astounding crash forced the issue to join the ranks of the bears.

Meanwhile, PLDT (-2.8%), Megaworld (-8.48%) and shockingly former highflyer and one of the previous best performers of the year, URC (-5.05%) have either knocked on the bear market’s doors or have found themselves at the doorsteps of the bear’s dominion!

Yet if there should be no improvement on their respective price actions, and if a test of the 7,400 will occur soon with these issues as part of the sustained downside momentum, then ONE THIRD of the Phisix issues may fall under the bear market’s trance!

So unless the index managers expand their effort to buoy issues at the PSEi basket, the room from which index managers to operate on will likely narrow.

And any further compression of issues on the uptrend or at record levels will squeeze index managers that will eventually force their capitulation to the bears!

Hasn’t it been an interesting coincidence that the BSP issued a report stating that business confidence “was more bullish for Q2 2015” last Friday (May 29th) in the light of intense selling spree? Has this been a part of their signaling channel or communication tools used by the central bank to influence public’s expectations?

 

Perhaps signs of desperation to save a scuttling ship?

 

Blaming the US dollar for the Wrong Reasons; Why The Peso will Weaken

The mainstream brayed that most of the recent selling have been due to exogenous factors, particularly they pinned the blame on the firming US dollar as having caused the latest stock market selloff.

That’s because for them nothing can go wrong in the Philippines. They take the 1Q GDP’s underperformance as another anomaly.

Let us look at some facts on the supposed link between the US dollar and cratering stocks.

1) The US dollar index (DXY) seems to have bottomed only last May 15, from where it reversed course to move higher and regain about half of the lost ground from its March highs.

2) ASEAN currencies have weakened ahead of the DXY.

The USD rupiah rebounded from April 19, the USD ringgit rallied from the recent low of April 28. The USD baht has bounced back from the low of May 22. So far, the USD peso which has been rangebound (see green trend line at Phisix chart) has started an ascent in April 28.

3) How have this influenced their respective stocks? A quick answer, falling stocks foreshadowed the rally in the USD.

 

Indonesia’s JKSE appears to have inflected on April 7 a week before the USD rupiah’s rally. Malaysia’s KLSE has a colossal head and shoulder formation where the right shoulders’ seeming reversal occurred last April 21 a week prior to the USD ringgit’s rebound. Thailand’s SET’s recent run looks to have climaxed last February, about three months earlier than the USD-baht’s recovery in May.

The Phisix’s record bullrun seems to have culminated last April 10 or 18 days before the USD php reversal.

What the facts tell us has been that since stocks fell antecedent to their corresponding currencies then the establishment’s causal flow runs backward: deteriorating stocks incited the fall of their respective currencies!

This, of course, represents oversimplistic accounts of rationalization of market activities based on available bias or the rush to associate easy to recall current events with market actions. 

 

Yet the refusal to impute domestic developments represents a sign of self-attribution bias—the attribution of success to one’s skills, abilities and efforts but imputation of failures to either bad luck or to external factors. It's also a sign of denial.

Having suffered the least loss during the week, the peso even bested Asian currencies. Paradoxically, Philippine stocks have been the worst performer in Asia week-on-week.

So how is it that weak domestic stocks have signified a consequence of a strong dollar when peso outperformed?

Said differently, the pesos’ regional outperformance doesn’t square with the stock market losses to validate the mainstream’s impression that the strong US dollar caused last week’s stock market losses.

 

But this is NOT to deny of the role of the US dollar in relation to the current developments though. I just do not subscribe to the arrant incomprehension of the market process.

Things do not happen just because, or mostly out of perceived random actions, but rather, events are essentially shaped by people’s incentives expressed as actions and reactions in the aggregate. 

 

So as I have been stating here, current events have represented only a sequential chain of action–reaction developments that has been triggered by the May 2013’s Ben Bernanke’s taper tantrum. Current events signify a continuing or unfolding process from the 2013 episode.

In other words, the opening of the proverbial global bubble’s Pandora box has unleashed what I call as the periphery to the core dynamics or the feedback loop of hissing bubbles from emerging markets to developed economies and vice versa.

This feedback mechanism has been progressing from which weakening currencies, crashing oil and commodities, amplified stock and bond volatilities have only signified as symptoms…symptoms which will likely be magnified soon.

A sharply slowing global economy, as exhibited by a downturn in global trade and world industrial production and the spate of interest cuts by global central banks have also signified as real economy symptoms.

A further exhibit has been the discernible slowdown of the US economy. The US 1Q GDP 2015 has been revised to down to -.7% or a contraction! Yet Federal Reserve of Atlanta’s real time forecast for the 2Q GDP has been at a measly .8% as of last week! So the slowdown continues.

 

And a remarkable recent development has been record corporate profits crumbling back to reality (charts from Gavekal)

So if anything goes wrong, where the US falls into a recession, this will likely unleash a liquidity crunch that will lead to multiple economic blowups on heavily indebted nations around the world.

The above events are not bullish for the peso or for peso assets.

I believe that peso will substantially weaken overtime.

Like stocks, the peso’s current strength has been artificially buoyed by statistical props and by market interventions

The peso seems vulnerable from three dimensions—internal, regional and global.

1) Internal—any pronounced weakness in the domestic economy or in the local financial sphere will spur acceleration in capital outflows that will not be limited to foreign money but may as well induce resident capital flight

There have already been inchoate signs of resident capital flight. I have pointed out that in the BSP’s Balance of Payment report for 4Q 2014 and for the entire 2014, the financial accounts registered net outflows largely on local residents’ increased purchases of foreign assets, capital or deposit placements or outflows due to credit activities abroad[5].

2) Regional—any major blowups in one of our neighbors will likely cause a domino effect and spillover to the domestic assets. Such contagion will impact internal dynamics that will reinforce outflows that will be vented on the peso. 

 

Geopolitics, like a military event at South China Sea can likewise serve as a trigger.

The establishment loves to think that the Philippines can ‘decouple’ from the world, yet last week’s Asian stock market rout debunks such an idea as utter fantasies

3) Global—changes in monetary policies by the US Federal Reserve may force the domestic treasury markets to align domestic rates with that of the US. Changes in domestic treasury markets may then compel the BSP to accommodate these via formal policies.

In addition, any reversal of monetary policies by other major economies as Europe or Japan may incite volatility which again may be transmitted to the region and to domestic assets as contagion.

Moreover, contagion may not only be due to changes in monetary policies but from precipitate alterations in marketplace conditions that can incite the contagion mechanism. Geopolitical events, aside from economic deterioration, can also ignite such a contagion.

As for the talisman statistics of foreign exchange reserves, recent history tells us that when the peso has been under duress, like during the 2013 taper tantrum, the BSP will use these reserves as defensive wall against speculative outflows.

So far this has worked. It has temporarily worked because the outflows have been moderate and wasn’t sustained as the liquidity effects from other central banks (ECB and BOJ) replaced the FED’s actual QE3 tapering.

Philippine forex reserves dropped by 6.9% from the peak in January 2013 until January 2014 but has recovered only 1.8% from the January 2014 lows.

But it’s a totally different scenario when crunch time arrives. That’s because the outflows will signify a tsunami and not just high tide.

 

People hardly appreciate of the changes of the psychological character of the marketplace during major inflection points.

The reason why the Philippine assets remain relatively sturdy has been because sellers have NOT yet been aggressive since the HEADLINES tell them so. The establishment believes that the boom can still be maintained even when the core has been eroding.  They are relying on HOPE. And this is the reason behind the headline management. They manage statistics and the markets to keep intact what they see as ‘animal spirits’. The exposé on DBP’s wash sale should be a wonderful example.

Besides, headlines shows of no crunch time yet, here or overseas. But no one can guarantee how long this endures.

But when reality eventually filters into the headline; perhaps as in the form of economic numbers or a surprise missed interest payment by a major company, or the appearance of a major global event risk, then bids will evaporate. 

From the domestic stock market perspective, the low volume record run suggested that bids have already been weakening. But the aggressive the push by index managers on bids particularly at the closing bell allowed some sellers to be able to take advantage to sell at higher prices. But the volumes had not been enough to accommodate all those who wanted out, so selling pressures mounted. Those cumulative pressures were eventually ventilated during the last two weeks. And those selling activities had been justified based on headline events (dollar, GDP). But market actions already pointed at this direction.

Thus a panic is when bids have all but vanished at current levels, and where the next level of bids can be found on the floor or at vastly lower levels

So essentially when liquidity dissipates panic sets in.

Hence, almost all of global central bank actions, namely those serial slashing of rates and various forms of easing and market interventions, have been intended to keep panic away by repeated injections of liquidity.

Unfortunately since liquidity represents no free lunch, the consequence has been to inflate larger bubbles.

1Q 2015 GDP: Questionable Data Quality and Contradictory Figures and Logic!

Statistics is not economics.

Statistics can show supposed growth in economic activities but they cannot put food on the table.

The public has been easily mesmerized by the acceptance of headline data.

Meanwhile experts interpret these numbers mean rather than opening the hood for investigation.

The 1Q GDP 2015 report seems even worse than the 4Q 2014 contemporary. 

 

I am not talking of performance. I am referring to the qualitative content of the GDP.

In particular, the mishmash of the government’s questionable data, and most importantly, the glaring contradiction between the government’s own numbers and on economic logic.

In the 4Q 2014 I raised the issue of the big revision of the mining industry. Well, that’s small beer now.

I marvel at the massive data revisions made by the National Statistical Coordination Board which I expected to be applied only on the last quarter. But instead I find that current revisions, which apply to many sectors, extend way back to early 2014 or to even to 2013! 

 

The above represents big examples of the significant variances between current revised growth rates (blue) and the original (red) growth rates in the mining, utilities and construction sector 

 

Because my initial impression was that revisions occur only during the last quarter, to my regret, I didn’t save the previous files.

Data quality is important because they serve as pillars to the GDP construct.

Here is the 1Q 2015 GDP by industry (in 2000 constant peso prices) in comparison with 1Q 2014

 

I break the data down to show the % change (left most), the gdp share as well as the changes in GDP share. 

 

I highlight in red what popular opinion says as the current slowdown as having been due to the lack of government spending.

Government spending I classify here as public administration, public construction, education, health and sewage. However, given that there has been no categorization between and public and private education, my inclusion of education implies all education is public. So if I add them up the share of government spending to 1Q GDP amounts 13.97%. Again this assumes all education has been public.

My point: Based on proportionality alone, the emphasis on the lack of government spending clearly misses the forest for the trees.

It’s no different when look at the expenditure segment of the GDP. The governments’ final consumption accounts for only 10.08% of GDP. 

 

While government spending contributes to statistical growth, such growth will not bringing about food on the average citizen’s table.

Government spending is political spending. They are hardly geared to satisfy the consumers but designed to promote the interests of those in charge and their cronies

Additionally, government spending are not free lunches. These are resources forcibly extracted from the productive agents of the economy. Thus to substitute real economic spending with political spending undermines productive activities, leads to imbalances and to capital consumption.

The impression that governments know how to spend resources efficiently signifies as another myth. Despite all the headlines about rampant corruption, pork barrels, wastages, junkets and boondoggles, the public remains enthralled with the so called magic of government spending. The public cannot reconcile nirvana fallacy from real events.

As Arthur Seldon joint founder president, of the Institute of Economic Affairs, wrote in Capitalism[6] 

Wherever it is used, government is so disappointing or worse—inefficient, unaccountable and corrupt—that it is best not to use it at all except for functions where all its faults have to be tolerated to obtain the services required…In short, the price of government is so high that it should be avoided wherever possible. 

Back to the GDP, just look at the fantastic revisions on durable equipment and on retail activities.

For durable equipment, Q1 2014 GDP which was originally at 22.7% suddenly just grew by a puny 4% on the current data. That’s essentially a remarkable 82.3% collapse which should equally have a big change in the headline GDP for 1Q 2014. But why the unchanged headline? 

 

Could it be that 1Q durable goods growth of 14.3% have been borrowed from 1Q 2014? The NSCB seems as engaged in Dagdag bawas (add-substract) which I thought was an election trick.

Government statisticians can just alter public data with impunity to suit their ends?

Also look at retail activities.

Remember this?[7] 

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

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

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

Well that 4Q 2014 number just got lower!

At the bottom section of the above chart I highlight the NSCB trade data.

It showed that for the 4Q 2014 GDP, the revised retail trade data reveals that growth CRASHED by 72%! So I am right about the statistical padding!

 

And by forcing down 4Q to 1.9% they then exhibit that current 1Q 2015 grew by 3.3%, this would represent a 73.7% improvement, NICE!

This supposedly backs the ‘growth’ in HFCE.

And if one looks at their revision disclosure; for durables equipment there hasn’t been any. For trade, it just says QSPBI (Quarterly Survey of Philippine Business and Industry) Updates and additional Financial Statements

Fickle surveys? Or surveys designed to show what the government wants to show?

 

Just look at how bizarre, if not comical, the growth charts are for the trade industry which constitutes the retail, wholesale and repair sectors (left).

 

For 1Q GDP, trade grew by 5.41%. Since trade has the second largest share of the GDP, at 15.2% next to manufacturing at 24%, then the industry’s 1Q growth at 5.41% materially contributed to the 5.2% GDP. 

 

But retail activities, which contributed 77.4% of the sector’s spending output, grew by only 3.3%! So the bulk of the growth has been borne by wholesale trade at 13.1%. Wholesale trade accounts for 18.63% share of the sector.

As a side note, I plotted the nominal figures of retail and HFCE (right).

In nominal terms, from peak to peak basis, retail activities have only inched higher compared to the highs of 2013! This is against zooming HFCE.

Yet how are HFCE being financed? Jobs and wages? Hardly (as shown in 2014). Remittances showed a late March spike. Business profits, dividends, rents, interest income, inheritance, speculation in stocks or properties? Or has it been from credit? Or manna from heaven? Or from pulling rabbit out of the statistical hat?

So where are households spending their money outside the retail? Next to food which has the largest share in the spending basket with 39.1% is miscellaneous goods and services at 13.2%. The miscellaneous category[8] consist of Personal care, prostitution (This is no joke, see section 12-2), personal effects, social protection (e.g. retirement homes, rehabilitation), insurance, financial services and other services (legal representation, burial fees and etc.), most of which are sourced from retail outlets. As for financial intermediation, this segment grew by only 4.33%. But the BSP chief lately noted in a speech that insurance has a penetration rate of only 1.8%. So this really represents an iota to household spending.

The next is housing and utilities with 11.9% share. Utilities (electricity steam and water) grew by only 4.1% in 1Q. It’s only real estate that exceeds HFCE at 6.48%. Transport is next with 10.3% share. Transport grew by 8.58% 1Q this is due to fare hikes in MRT and LRT???

Overall the HFCE numbers DO NOT add up!

Back to wholesale trade. So how the heck can wholesale trade consistently outgrow languishing retail trade?

 

As I wrote last week, Wholesale activities function as intermediaries for retail activities. These enterprises are likely to be traders for local manufacturers or for importers, or they may be importers themselves. Since wholesalers generally depend on retailers (with the exception of supply shocks), the health of the retail activities should resonate generally with wholesale activities.

So who has been buying their products, if retail sales have been underperforming? Or have wholesalers given up their role as traders and embarked on altruism by distributing goods for free? Or have they been preparing for the storm to hoard massive amounts of inventory? Or do they just burn what they buy?

It’s no wonder too why wholesale prices on a national scale have been contracting for 5 straight months!

Yet for wholesalers to continuously stash on inventory would seem preposterous.

And where have wholesalers been sourcing their goods?

While manufacturing supposedly grew by 5.88%, such growth must have emerged only from March! 

 

That’s because Philippine Statistical Authority figures show that manufacturing (industrial production see left chart from tradingeconomics) had been NEGATIVE in January and February but spiked only in March!

I questioned the motives of the March statistical pump[9]

Also, the Philippine industrial production amazingly leapt by 7.4% in March. Ironically too, such gains have been preceded by two months of negative growth.

Has the recent slumps in OFW remittances and Industrial production been a product of statistical quirks from which current gains has smoothened out?

Or has the current data been another statistical pump to justify the end of May release of 1Q 2015 GDP of 6+% and above?

How about imports?

Based on GDP data imports grew by only 4.6%. 

 

But PSA data shows that imports have not only been very volatile but imports year on year may even shrunk! There has been a huge negative growth rate for January -13.1% (!) as well as in March (-6.8%)!

I doubt if February’s amazing 10.8% jump was enough to recover the twin losses.

On a nominal dollar based perspective, PSA twin negative growth for 1Q has brought imports down to mid-2013 levels!

So the wholesale numbers does NOT add up with either manufacturing or imports!

 

Even import data from NSCB and the PSA don’t seem to square.

How about agriculture? Based on government GDP this sector underperformed and grew by just 3.53%.

So the wholesale numbers does NOT add up with agriculture too!

This leaves smuggling and bootleg producers as the only sources for such incredible pace of wholesale growth!

You see why the futility in reading government data as an accurate representative of growth? From the origination of numbers to the economic logic, they seem as self-contradictory!

5.2% growth, that’s what the government wants the public to see.

But that's not the real score.

---

[1] See Phisix 7,800: Bearish Signals Converge; Yield Curve Inversions Incite Interventions! May 24, 2015

[2] Inquirer.net ‘Wash sales’ had DBP brass’ blessing May 29, 2015

[3] Charles Kindleberger, The Emergence of Swindles Manias, Crashes and Panics, Third Edition, p.66

[4] See Phisix 7,800: Record Phisix as the BSP Continues with Deflation Spiel! March 9, 2015

[5] See Phisix 7,800: Peso Smashed, January Remittance Growth Rates Plunges, Short Term Treasury Yields Spike! March 22, 2015

[6] Arthur Seldon, Capitalism Celebrating a Life for Liberty, Gary Galles Mises.org May 28, 2015

[7] See Phisix: Philippine 4Q 6.9% GDP: A Story of Government Pump and Mounting Excesses February 2, 2015

[8] Bangko Sentral ng Pilipinas Philippine Classification of Individual Consumption Expenditure According to Purpose 2009 2009 bsp.gov.ph

[9] See The Philippine Potemkin Stock Market: Record Highs Outside, Bear Markets Inside! May 17, 2015

Phisix: Another Fantastic PUMP...and DUMP (May 29) Session!

Philippine stocks increasingly look like a sick joke. The reason I make such a harsh assertion has been because Philippine stocks have become a wretched playground for market manipulators. 

And it has not just been a playground, it has also become a tool for political propaganda: Record stocks—as consequence of manipulated pump on select index sensitive issues—intended to show “prosperity” via G-R-O-W-T-H supposedly due to political actions, even when the core or about half of the population of Philippine stocks have been in bear markets! As side note, due to this week selloff there have been many new bear market recruits!
 

Today marks another grand showcase day of PUMP and DUMP!

Given the sharply oversold conditions, it would be natural for the domestic stocks to experience a rebound.

So domestic stocks started the day with an upside move gradually. But then, it seemed that this oversold bounce has provided index managers with the opportunity to conduct their tactical 'panic buying day' stratagem.

So panic buying day it would be! Panic buying momentum picked up going through the lunch break with the major bellwether grabbing gains of about a stunning 2.2+% which marks the day's zenith.
 

Unfortunately, post lunch, the momentum seems to have faded with four issues in the top 20 actively traded board as suffering some signs of selling pressures. The four issues were GTCAP, MBT, JFC and AGI.

These four issues sharply fluctuated from significant losses to marginal gains. The heavy volatility in them looked like repeated attempts to paint the 20 most traded issues as part of an all green (or positive) screen.

Additionally, given that the Phisix has materially shed its gains to about 1.55%, by the late afternoon session, the afternoon delight pump went into action with the key property issues ALI and SMPH as main thrusters to lift the index.

I suspected then, that sellers may just be pandering with index managers for the latter to set the day’s highs before they unload at the close.  This perspective I acquired from the same pump and dump experience last March.
 

Well my suspicions apparently were validated. Sellers must have used the same measures as the index managers in the pumping of the index!

Sellers massively dumped stocks in all major sectors led by banks (lower left)!

Of course, it could also have been that some pumpers broke ranks with the cabal to unleash their last moment selling….that’s perhaps in recognition of signs of intraday weakness in maintaining the gains! I do not lean to this thought though.
 

The Phisix was up 1.9% until the last minute before the ending dump which erased 46.8% of the day’s gains. The domestic benchmark closed up by ONLY 1.01%!

As example of major dumps; just see how the BPI’s gains suddenly transformed into a big loss (-1.01% for the day) while BDO’s huge margins had substantially been sliced (BDO up by 1.89% for the day from 3.44% a minute prior to the run off session)

Curiously today’s fantastic early rip has hardly been convincing even as winners outclassed losers by 106 to 68! Today's 38 margin by the winners pales in contrast to the daily margins dominated by losing issues from Monday through Thursday.

But the Peso volume was huge at Php 23.52 billion due to a cross sale at GTCAP. GTCAP’s volume was at Php 9.2 billion with Php 2.6 billion of net foreign buy.

Even without the GTCAP cross trade and the Php .9 billion block sales I estimate today’s board volume at around Php 11 billion

Finally there’s hardly any session without some signs of rigging.

Yesterday after the GDP announcement DUMP, there had been another spectacular last minute pump.

The marking the close pump erased 38% of the day’s losses. The Phisix closed down at 1.23% from 1.8% with just a minute of difference.

And a lot of those index pumps had been due to EDC and Globe.

In the run up to May 2013, there had been very few instances of gaming of the system as broad markets supported the record ramp.

Today, in view of the lack of market  breadth, rigging of the marketplace has become so rampant, which is actually the reason behind the glaring disparity between the performance of index and the broader market.

And these are happening right under the noses of regulators.

Market manipulation distorts the price discovery function of markets. The consequence of which has been the massive deformation of prices, valuations and trading activities. And such distortions eventually will lead to violent adjustments.

This week’s bloody -2.94% loss represents an appetizer of what will happen when the market clearing process takes over.

Quote of the Day: This Time is Different: Sovereign Debt Crisis will Wipe Out Pensions

Why is this Sovereign Debt Crisis collapse different from 1931? When the governments of the world defaulted on their debts in 1931, there were no pension funds. Government has exempted itself from all prudent reason for you take the state operated pension funds, like Social Security in the USA, where 100% of the money is in government bonds. They may have no intention of defaulting, but very few government have ever paid off their debts in the end. 

Then there are states who regulate pension funds requiring more than 80% to be in government bonds. A Sovereign Debt Default this time around will wipe out socialism, yet the bulk of the people are clueless not merely about the risk, but the ramifications. Younger generations do not save to support their parents for that was government’s job post-Great Depression. Socialism has altered thousands of years of family structure following the ranting of Karl Marx. This has been one giant lab experiment that ended badly in China and Russia and is coming to a local government near you. 

So this time it is SUBSTANTIALLY DIFFERENT. Government is now on the hook, which is part of the reason why they are moving to eliminate cash to prevent bank runs and to force society to comply with their demands. This is why we have people like Gordon Brown, who sold Britain’s gold reserves in 1999 making the low, claiming now that eliminating cash will eliminate the boom and bust of the business cycle. Let’s face it, Gordon Brown has NEVER been right when it comes to politics, not even once, and he has been the worst manager of finance that Britain has ever known. He sold the low in gold and now he presumes he can fulfill Marxism by eliminating cash. He postulates ideas that are theory without any support whatsoever. We cannot afford more arrogant people like this in politics who believe they have a right to experiment with society. 

This time it is very different. They have wiped out society placing the entire scheme of socialism as a terrible nightmare that will end badly, and they have ruined the social family structure disarming people that for thousands of years was our very means of self-sufficient survival. These clown have set the tone for wiping out the dreams they sold the elderly, all while hunting taxes and causing job creation to implode as the youth has been converted into the lost generation. All this with pretend good intentions. Can you imagine the damage to society if they had actually intended this mess? They have lied to themselves and to the people. We have to crash and burn – that part is inevitable. Only when the economy turns down will we then argue over solutions.

(italics mine)

This is from economist Martin Armstrong from his website.

Related to  this, for all the economic 'boom' projected by record stocks, the Bloomberg recently reported that 32 out of 50 or 64% of US states have been faced with budget gaps and thus have been making cuts, tapping reserves or face higher budget shortfalls. And the same report says that state governments have only about half of reserves compared to the pre recession era.

And due to pension concerns Moody's recently downgraded Chicago. 

Puerto Rico which is categorized as Unincorporated territory of the US has  currently been enduring a debt crisis, that has put to risk social services provided by socialism.

Data on US State fiscal and debt conditions can be found here.

Additionally the pension warning doesn't just apply to the US but to many other developed economies as well (OECD data as % of GDP  here).

Philippine 1Q 2015 GDP Falls to 5.2% Year on Year, .3% Quarter on Quarter

Last night I wrote: 

Yet, why all the seeming panic selling on pre-GDP day?  

Has it been because government insiders may have tipped off tomorrow’s numbers to the connected few (since last week)? 

Will tomorrow’s numbers be vastly lower than mainstream expectations?

Well the numbers are in. They have indeed been far below mainstream expectations. 

From Bloomberg: 

Philippine economic growth slowed to a three-year low last quarter, missing most analyst estimates, as government spending and exports fell at the start of the year.

Gross domestic product increased 5.2 percent in the three months through March from a year earlier, the Philippine Statistics Authority said in Manila Thursday. That compares with a 6.6 percent median estimate in a Bloomberg survey of 19 economists.

Mainstream thinking HARDLY employs reversion to the mean, or investigates the economic picture by looking at prices and how prices affect production and trading patterns and vice versa, or assess on the effects of debt and monetary inflation on G-R-O-W-T-H. The fundamental assumption has been that most of these have neutral effects on economic activities.  

So what they do is to read statistics and project them into the future.

 

And yet whatever happened to the popular rationalization "low" oil and energy prices equals SPENDING G-R-O-W-T-H???

 

Nonetheless here are the 1Q GDP charts

   
1Q year on year GDP was at 5.2%

 

1Q month on month GDP was at  .3%

 

Well these numbers for me, like headline stocks, remain vastly overstated or puffed up--again for political reasons.

 

As for my front running suspicions, the stock market’s pre-GDP announcement reaction seems to have indeed manifested insider tips. So in the prism of market manipulation, what else is new?

Phisix: Why the PRE-1Q 2015 GDP Announcement Stock Market Dumps?

It’s supposed to GDP week. In fact, tomorrow is GDP day!

 

By GDP week, I mean the domestic stock market should at least be evincing signs of buoyancy in the expectation of another blowout in statistical G-R-O-W-T-H.

It’s true that I have pointed out that several indicators, namely market breadth, vastly diminishing volume, activities concentrated to a limited issues and chart formation, has conspired to exhibit the material deterioration in the foundations of Philippine stocks. 

 

But this should have been a medium to long term process. I hardly expected a swift deterioration, most especially during GDP week.

 

You see, if the consensus expects a GDP boom, then at least the headline index should echo such expectations even when the general market maybe in doubt (as had been the case in the past).

 

Yet we seem to be witnessing a sharply contrasting development from the behavior of the stock market going to the pre-GDP announcement in January (4Q 2014) vis-à-vis today (1Q 2015). 

 

Four days until the actual GDP 4Q 2014 January 29 announcement—where the statistical GDP showed a 6.9% G-R-O-W-T-H, a number which for me constitutes nothing but a statistical embellishment—the Phisix was pumped by 3.3%.

In sharp contrast, an accumulated a 3.59% DUMP has been the result of four days prior to tomorrow's announcement!

Why???!!!

(as a side note: index managers has failed to stop the fulfillment of head and shoulder’s pattern)

I know the mainstream will rationalize this as being US dollar influenced or reverberations from last night’s US stock market’s 1+% decline.

 

While the US dollar may be factor, it is likely an aggravating factor rather than the main driver. 

In the last four days the USD peso (USDPHP) rose by only a  .44%, specifically from 44.69 to 44.49. During the four days going to the 1Q pre-GDP announcement the USD peso fell by .5%.

Today, the USDPHP even fell by a margin to 44.69 from last night’s 44.705.

 

Also today Asian currencies based on the latest Bloomberg quote has had mixed showing. This should demonstrate of the minor effects from currency influences on domestic stock market performance.

 

Next, “experts” will justify global actions as contributing current events. This is the available bias—to look for an event or events that is/are easily recalled, which gets associated with market actions.

 

Again this likely serves as a superficial factor than the main cause.

 

While it is true that most (ex Japan China) Asian markets endured losses today, as shown in the Bloomberg table, some markets like India (SENSEX), Taiwan and even Thailand’s SET defied the sentiment to post marginal gains. Besides losses were relative: the biggest losers had been the Philippines, Korea and Indonesia.

 

Importantly, in the recent past (from 4Q 2014 until lately) every big selloff at Wall Street had been met by 'panic buying day'. Panic buying days are days where index managers bolster the index by starting their panic buying pumps as early as half an hour or an hour from the opening bell. The objective seem as to create an impression of 'decoupling' or less susceptibility by local stocks on foreign developments. Here are some examples

Curiously today, those early pumps were apparently absent.

The index managers were not totally absent, though

They embarked on their regular tactical post lunch “afternoon delight” pump right on schedule. But ostensibly again, they were repulsed!

 

Today’s selloff came with a relatively big volume of Php 10 billion with Php 1.4 of block sales to tally Php 11.449 billion. Selling had been broadbased: ALL sectoral indices had been down by at least 1% and decliners trounced advancers by 132 to 54 or a ratio of 2.44 to 1!

Foreigners were net sellers to the tune of Php 1.274 billion (PSE Quote)

Index managers were particularly active yesterday.

The major benchmark fell by only .43% but this masks the actions in the general market.

 

The index loss was moderate because of a massive 'marking the close' pump which essentially erased an astounding 51% of yesterday’s losses at the last minute! 

Index managers secured the containment of losses from 4 sectors, mainly from the property sector.

 

Last minute pumps narrowed the PSEi losses from the fantastic interventions on ALI and SM.

 

A stunning 1.7% last minute push on ALI's stock prices expunged losses. The major property firm even managed to close the session significantly up!

Meanwhile SM’s 1% pump also help halved the index losses for the day.

As a side note, given today’s heavy losses in ALI, yesterday’s manipulators must be bleeding.

Even more spectacular, underneath the modest decline in the headline index, market breadth was remarkably bearish! Losers walloped gainers 161 to 31 or by shocking margin of 5.19 losers for every gainer!!! (PSE Quote)

 

In other words, total losses could have been more had it not been for the Phisix pump.

 

If the markets continue to decline, lots and lots of resources by index managers will not only get tied up to stocks at very lofty levels, they will profusely hemorrhage!  

Yet, why all the seeming panic selling on pre-GDP day?  

Has it been because government insiders may have tipped off tomorrow’s numbers to the connected few (since last week)? 

 

Will tomorrow’s numbers be vastly lower than mainstream expectations?

 

(all above chart courtesy of colfinancial)

 

Oh by the way, I have been saying that interventions at the Philippine treasury markets have caused a whack a mole effect—interventions in one maturity have led to yield surges elsewhere.

 

Today should be a great example.

Yesterday, market manipulators pumped 1 month bills in order to contain its yield from running berserk.

 

But, but, but…

…they forgot about the 6 month contemporary!

Well there it is, the yield of 6 month bill at an amazing 3 year highs! (investing.com)

More volatility, more yield curve flattening and more signs of short term funding pressures!

So for the Phisix, will tomorrow be a (post-sell the rumor) buy on news??? 

Should be very interesting.

Update on Fed Atlanta’s GDPNOW: US 2Q 2015 GDP .8%; More Central Banks Ease as Global Trade Sputters!

Well how about that, the US statistical 2Q economy reportedly improved. 

Based on US Federal Reserve of Atlanta’s real time forecasting GDPNOW, based on May 26th, 2Q GDP improved by a puny .1% to .8%! (bold mine) 

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2015 was 0.8 percent on May 26, up slightly from 0.7 percent on May 19. Following this morning's advance durable manufacturing report from the U.S. Census Bureau, the forecast for second-quarter real equipment investment growth increased from 3.5 percent to 5.1 percent while the forecast for the change in inventory investment in 2009 dollars increased from -$22 billion to -$19 billion.

Still, the incredible gulf between the consensus and Fed Atlanta’s estimates. So who will be right?

 

Moreover, this week Central Bank News reported that this week’s rate cut by Hungary and Kyrgyzstan marks the 36th interest rate cut since the start of the year

 

Here is CBNews:  

A total of 36 central banks and monetary authorities worldwide have eased their policy stance so far in 2015 while 14 have tightened their policy, with the National Bank of the Kyrgyz Republic joining the rate-cutting spree on May 25 by cutting its policy rate by 150 basis points.

 

From July 2014 through January this year, the central bank of Kyrgyzstan raised its policy rate by a total of 500 basis points to curb inflationary pressures from a depreciation of the som currency. But since late April the som's exchange rate has bounced back and inflation has eased steadily after hitting 11.6 percent in January.

 

Central Bank News, which already tracks the policy rates of 90 central banks 

So from Central Bank News' tally board from the 90 central banks, rate cutters outpace rate hikers by 2.6 to 1.

 

And yet that’s just based on the 90 central banks and from the perspective of rate cuts.

But there are more. As previously pointed out, there have been other (frontier market) central banks which rate cuts haven’t been included. 

In addition, there have been non interest rate credit easing measures such as Singapore via changes in her currency basket and QE. 

There have also been regulatory based easing such as in Indonesia where the government “will loosen its loan-to-deposit ratio (LDR-RR) and the loan-to-value policy on mortgage loans and down payments on auto loans to "keep the economic growth momentum", again from Central Bank News, even as the central bank maintained current policy stance.

For global central banks to increasingly use crisis resolution measures indicates that they have been panicking!

 

Panicking on what? Here is a clue.

Based on CPB Netherlands Bureau for Economic Policy Analysis, global trade for March seems to have reversed and have increasingly shown signs of weakening. 

Based on preliminary data, the volume of world trade fell 0.1% in March from the previous month, following a revised 0.6% decline in February (initial estimate: -0.9%). Monthly import and export volumes showed considerable volatility at the region and country level, showing up in opposite movements in the initial estimates of global import and export volumes. A positive turnaround occurred in both import and export growth in advanced economies. Imports bounced back strongly in the United States. They contracted deeply in Japan however. In emerging economies, import growth accelerated, but export growth became heavily negative on account of a deep fall in emerging Asia’s exports.

And trade deterioration has likewise been manifested via Industrial activities

According to preliminary data, world industrial production was stagnant in March, following a revised 0.1% increase in February (initial estimate: 0.2%). Production continued to contract in advanced economies, but kept growing in emerging economies. Of the major advanced economic blocks, the group Other advanced economies was the only one where production expanded. Results in emerging economies were more mixed. Global production momentum was 0.3% in March (non-annualised), down from 0.6% in February. Momentum declined in both advanced and emerging economies, the decline being more pronounced in the latter group than in the former. The only increase in momentum occurred in Africa and Middle East, where it became less negative.

Well, for me this represents the periphery to the core phenomenon or the feedback loop of hissing global bubbles in progress.

 

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

Christopher Casey: GDP is Designed to Advance the Keynesian Interventionist Agenda

My third and last post on 'GDP week'.

At the Mises Institute, Christopher Casey writes that GDP (statistical G-R-O-W-T-H) has represented an economic tool (designed by Keynesians) to justify political interventionism (bold mine; footnote omitted)

GDP purports to measure economic activity while largely divorcing itself from the quality, profitability, depth, breadth, improvement, advancement, and rationalization of goods and services provided.

For example, even if a ship — built at great expense — cruised without passengers, fished without success, or ferried without cargo; it nevertheless contributed to GDP. Profitable for investors or stranded in the sand; it added to GDP. Plying the seas or rusting into an orange honeycomb shell; the nation’s GDP grew.

Stated alternatively, GDP fails to accurately assess the value of goods and services provided or estimate a society’s standard of living. It is a ruler with irregular hash marks and a clock with erratic ticks.

As proof, observe this absurdity: in 1990, Soviet GDP equaled half of US GDP, according to the 1991 CIA Factbook. No one visiting the Soviet Union in 1990 would believe their economy came close to 50 percent of the quality and quantity of the goods and services produced in America. GDP-defined production may have been strong, but laying roads to nowhere, smelting unusable steel, and baking barely edible breads stretches the definition of “production.” And this describes the goods which were actually produced. There is no accounting for the opportunity cost of forfeited essential goods and services.

How can this be? Why does GDP poorly reflect economic size and vitality? The blame largely resides with three fallacious concepts embedded within GDP “measurements”:

(1) intermediate goods (e.g., steel) must be eliminated to avoid “double counting”;

(2) government expenditures consist of viable economic activities; and

(3) imports should be netted against exports.

The Overstatement of Consumption

Which transactions should be included within GDP? Since most products consist of other products, GDP architects attempt to avoid “double counting” transactions by largely including only final goods and services produced. By their methods, the production of a car is counted (as an increase in inventory), but the metal, rubber, and plastic purchased in its creation is not. But the rules behind what makes a transaction “final” are arbitrary. The logic could just as easily justify including the sale of an automobile to a consumer and disregarding its previous production. In addition, any “final” transaction during a given time period does not necessarily include intermediate goods produced in that same time period: metal, rubber, and plastic purchased today will likely be for a different car produced or sold in a different (future) time period.

Regardless as to the arbitrary nature of determining final sales and notwithstanding the problem of temporally matching intermediate goods with their associated final sales, the exclusion of certain “intermediate” transactions simply excludes massive volumes of economic activity. Thus, GDP understates the economy as a whole while grossly overstating its consumption component relative to business investment. A better measure of overall production was created in 2014 when the US Commerce Department began publishing Gross Output which incorporates intermediate transactions. Using Gross Output, the commonly cited statistic of consumption accounting for 70 percent of all economic activity quickly falls to a mere 40 percent. 

The Treatment of Government Expenditures as Productive

If GDP purports to measure economic activity which benefits society, the inclusion of government expenditures is dubious. GDP “produced” in the Soviet Union is no different than GDP “produced” by any government — the difference is but one of scale. All government spending is to some degree malinvestment, for as Murray Rothbard noted:

Spending only measures value of output in the private economy because that spending is voluntary for services rendered. In government, the situation is entirely different ... its spending has no necessary relation to the services that it might be providing to the private sector. There is no way, in fact, to gauge these services.

The absence of voluntary action renders prices impotent, and without true price discovery, benefits cannot be ascertained. This does not mean all goods and services provided by government would cease to exist; rather, some production (e.g., hospitals, schools, roads, etc.) would revert to the private sector. To the extent government expenditures for goods and services would be produced by the free market, the true government contribution to GDP may be positive but overstated (it currently approximates 20 percent of US GDP). A more accurate depiction of economic activity would reduce if not eliminate the contribution of government expenditures. Or perhaps, as Rothbard argued, the higher of government receipts or expenditures should actually be deducted from GDP since “all government spending is a clear depredation upon, rather than an addition” to the economy.

The Problems of Subtracting Imports from Exports

As Robert Murphy has noted several times, the netting of imports against exports in determining GDP seriously understates the contribution of trade to overall economic activity. To wit, an economy which exports $1 and imports $1 will have the same GDP contribution (zero) as one which exports $100 billion and imports $100 billion. Obviously, the latter economy would be far worse off with the sudden cessation of trade.

A fixture of GDP is the mercantilist mentality of treating exports positively and imports negatively. Why are exports additive to GDP while imports are deductive? If the goal of GDP is to measure the goods and services provided to people within a geographic region, imports — not exports — are the benefit. Exports are but payment for imports. The problem and confusion arises because the GDP calculation unrealistically excludes other forms of payment: it should make a difference if imports are funded with increasing debt levels or if funds are accumulated from previous years of compensated exports. If China converted over $1 trillion in US debt instruments into imports of American goods and services, its people benefit today, but under GDP accounting, the negative impact of imports would offset greater consumption and/or government spending (the increase in GDP was previously realized in the years during which exports created a trade surplus).

GDP is Designed to Advance the Keynesian Agenda

Simon Kuznets (1901–1985) revolutionized econometrics and standardized measurements of GDP, with his research culminating in his 1941 book, National Income and Its Composition, 1919–1938. While not a Keynesian per se, the nature and timing of his research fueled the Keynesian revolution since central planning requires economic statistics. As Murray Rothbard noted:

Statistics are the eyes and ears of the bureaucrat, the politician, the socialistic reformer. Only by statistics can they know, or at least have any idea about, what is going on in the economy. Only by statistics can they find out ... who “needs” what throughout the economy, and how much federal money should be channeled in what directions.

GDP’s faulty theoretical underpinnings and politically motivated acceptance distort the performance and nature of an economy while failing to satisfactorily estimate a society’s standard of living. In fact, Kuznets partially understood this. In his very first report to the US Congress in 1934, Kuznets said “the welfare of a nation [can] scarcely be inferred from a measure of national income.” Yet the blind usage of GDP persists. That its permanence and persistence only serves the Keynesian policies of greater consumer spending, increased government expenditures, and larger exports through currency debasement should not be considered coincidental. Unfortunately, the resulting economic stagnation, debt accumulation, and price inflation are as inevitable as they are predictable.

I wrote about the GDP here.

Regardless of statistical mirages, eventually economic reality prevails. This means that for the Philippines, the obverse side of every politically induced credit inflated BOOM is a BUST.

On the headlong belief on the accuracy of the GDP, this quote largely attributed to Plato seems very relevant

The worst of all deceptions is self-deception 

Arnold Kling: The Economy is Not ONE Big GDP Factory

More on the GDP Week.

Blogger and Adjunct Scholar for the Cato Institute, Arnold Kling, writing at the Econolog (Library for Economics and for Liberty) distinguishes camping trip economics (macroeconomics) with woolen coat economics (complex patterns of specialization, production methods, trade, and innovation.) to arrive at the GDP myth. (bold mine)

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

Conventional economists use the term "potential GDP," and they will say that the economy is operating "below potential" during a recession. From a coordination point of view, the meaning of such concepts is in doubt.

A conventional economist would say that the U.S. economy was operating at its potential in early 2007, prior to the onset of recession. Subsequently, it was operating far below potential.

From the coordination perspective, one might ask what this "potential GDP" means. If the United States in 2009 had produced exactly the set of goods and services that it produced in 2007, would this have meant that it was operating at its potential? In particular, that would mean going back to building the same number of houses, creating the same number of mortgage securities backed by sub-prime loans, discarding any post-2007 innovations in health care or computer technology, and so on.

It certainly is true that there are fluctuations in the proportions of employed and unemployed workers. Thinking of the economy as a GDP factory leads to a very limited view of the causes of such fluctuations. If there is only one good produced, then the only meaningful choice that people can make is an intertemporal one. They can decide when to work more and consume more, and, conversely, when to work less and consume less. In fact, this stunted theory of economic fluctuations is what macroeconomics degenerated into in the 1980s, particularly at the "freshwater" schools of the University of Chicago and the University of Minnesota. Meanwhile, the "saltwater" schools of MIT and Berkeley retained the GDP factory with intertemporal choice issues while adding some relatively arbitrary rigidities in nominal wages or prices, to arrive at what was called New Keynesian economics.

Instead, thinking of the economy in terms of coordination, there are myriad reasons for employment to fluctuate. Consider all of the adjustments that would have to take place in order for the economy to shift some resources from woolen-coat production to the development of smart-phone apps. In fact, the U.S. government's data on JOLTS (job openings and labor turnover statistics) shows that millions of jobs are created and destroyed each month, compared to which the aggregate net gains and losses of 200,000 or so per month seem relatively minor.

Read the start here.
 
In my view, macroeconomics is heuristics (mental shortcuts) clothed by mathematical formalism.

Martin Feldstein: GDP Doesn’t Measure Quality

For the Philippines, this week marks 'GDP week'. The Philippine government will issue its estimate of statistical economic condition for the 1Q 2015. 

The consensus opinion sees the Philippine economy as undergoing something sort of a perpetual magical boom. They hardly realize that this has been an inflationary credit boom, which implies boom-bust cycles.

Yet, last quarter’s nitty gritty from supposedly 6.9% growth, plus recent data hold deep contradictions relative to popular wisdom. Even more, headline numbers contradict economic reasoning. For instance, according to government data, prices have been slumping broadly from both supply side and demand side. This comes even as credit continues to swell, despite having fallen from its peak at the 2H last year. Yet the consensus believes that the establishment will report a boom! A likely boom from statistical pumps!

Nonetheless, the following post (and series of posts for today) has been intended to show why the romanticization of statistical growth has been severely misplaced.

Harvard economist and the president emeritus of the National Bureau of Economic Research (NBER) and former chairman of the Council of Economic Advisers and as chief economic advisor to President Ronald Reagan Martin Feldstein, writing at the Wall Street Journal talks of the difference between quality and quantity. (bold mine)

Government statisticians are supposed to measure price inflation and real growth. Which means that, with millions of new and rapidly changing products and services, they are supposed to assess whether $1,000 spent on the goods and services available today provides more “value” or “satisfaction” to American consumers than $1,000 spent a year ago. Even more difficult, they are tasked with estimating exactly how much it costs now to buy the same quantity of “value” or “satisfaction” that $1,000 could buy a year ago.

These tasks are virtually impossible, and the problem begins at the beginning—when an army of shoppers go around the country at the government’s behest to sample the prices of different goods and services. Does a restaurant meal with a higher price tag than a year ago reflect a higher cost for buying the same food and service, or does the higher price reflect better food and better service? Or what combination of the two? Or consider the higher price of a day of hospital care. How much of that higher price reflects improved diagnosis and more effective treatment? And what about valuing all the improved electronic forms of communication and entertainment that fill the daily lives of most people?

In short, there is no way to know how much of each measured price increase reflects quality improvements and how much is a pure price increase. Yet the answers that come out of this process are reflected in the consumer-price index and in the government’s measures of real growth.

This is why we shouldn’t place much weight on the official measures of real GDP growth. It is relatively easy to add up the total dollars that are spent in the economy—the amount labeled nominal GDP. Calculating the growth of real GDP requires comparing the increase of nominal GDP to the increase in the price level. That is impossibly difficult.

Read the rest here.