We economists do primarily work for our peers’ esteem, which figures in our own self-esteem. When post-Depression Roosevelt’s New Deal provided exciting job opportunities, first the junior academic faculties moved leftward. To get back ahead of their followers, subsequently the senior academic faculties shoved ahead of them. As post-Reagan, post-Thatcher electorates turned rightward, follow the money pointed, alas, in only one direction. So to speak, we eat our own cooking. We economists love to quote Keynes’s final lines in his 1936 General Theory—for the reason that they cater so well to our vanity and self-importance. But to admit the truth, madmen in authority can self-generate their own frenzies without needing help from either defunct or avant-garde economists. What establishment economists brew up is as often what the Prince and the Public are already wanting to imbibe. We guys don’t stay in the best club by proffering the views of some past academic crank or academic sage.--Paul A. Samuelson Reflections on How Biographies of Individual Scholars Can Relate to a Science’s Biography
In this issue:
Phisix 7,700: Philippine Peso Tumbles, Why Manipulation Matters, The Philippine Competition Act: Same Dog Different Collar?
-The Principal Role of Stock Markets; Effects and Market Responses to Manipulations
-Phisix 7,700: Manipulations Amplify Imbalances; Pump for SONA?
-Stock Markets as Political Tools
-Selling Hedges and NOT Snake Oil Nostrums
-Tumbling Philippine Peso: More Cracks Appear on the Headlines!
-The Establishment’s Massive Denial on the Impact of a Faltering Peso
-More Myths on the Slumping Peso
-The Philippine Competition Act: Game Changing or Same Dog with Different Collar?,
-Will Cabotage Law Introduce Competition?
Phisix 7,700: Philippine Peso Tumbles, Why Manipulation Matters, The Philippine Competition Act: Same Dog Different Collar?
The Principal Role of Stock Markets; Effects and Market Responses to Manipulations
Stock markets originated out of financing requirements, that’s whether one traces its genesis to the Roman Republic, the Venetians, Antwerp Belgium (1531) or the Dutch East India Company (1600s)[1].
As a key part of the capital market, the stock exchange mainly served the following functions
-It is a platform to mobilize, channel and or utilize the public’s savings into investment via the raising of capital for companies through public offering,
-It provides market pricing mechanism on corporate equities. This enables market values of listed firms to be exhibited real time.
-It rewards or punishes managers or majority stockholders of publicly listed issues.
-Through a wider shareholder base, stock ownership meant wider base of profit sharing
-It offers alternative investment options for retail savers
-It confers increased exchangeability or liquidity to investors, traders and shareholders. Such liquidity also presents an exit mechanism for major shareholders
-It has expanded to include other forms financial vehicles such as preferred shares, warrants, options and more…
-It encourages real economy deals
-And since equities are titles to capital goods, they are a substitute store of value.
-The stock exchange has also functioned as barometer of economic conditions.
In short, the stock exchange plays an important role in a society’s capital formation.
Yet fundamentally or in day to day operations, stocks markets clears the demand and supply of equity securities through the pricing mechanism. Said differently, demand and supply of securities should reflect on the price discovery set by markets.
But what happens when the stock market pricing mechanism has been tampered with by non-market forces directly or indirectly? The simple answer is that the price discovery function becomes contorted and dysfunctional.
Where stock markets do NOT reflect on free market based valuations, brazen mispricing, excessive overvaluations, gambling free for all manic attitude and huge debt exposures are symptoms of such disorder.
These actions destroy or mutilate the capital formation essence of stock markets.
And when stock markets or even other financial markets become obscenely deformed, they become vulnerable to shocks from the violent unwinding of such accrued imbalances.
Importantly, because twisted markets betray the role they have been bequeathed with, natural laws of economics will force them to recoil back to basics
So when I write about direct manipulations, like the frequent “marking the close” and other machinations employed by index managers in the Philippine context, I write to exhibit on the risk reward balance from such activities.
Phisix 7,700: Manipulations Amplify Imbalances; Pump for SONA?
While such manipulations can go on for a while, the imbalances accumulated from these, ensures of a reversal in a not so distant future.
For the PSEi, what are the signs of imbalances?
Perhaps one quarter of last week’s .64% gains have been due to marking the close. (charts from technistock.net) Perhaps a third of the hallmark 8,127 April record of the Phisix stems from the same supposedly illicit activity.
Yet record PSEi represents the second most expensive stock market index in the world[2]!! And media’s boilerplate spin on every recent rally has been ‘bargain hunting’! Paradoxically, bargain hunting of the second most expensive stock market index in the world???!!!!
And even more signs of more maladies.
The widening chasm between the general market performance and the index. Those daily index pumps by manipulators have failed to sustain last week’s broad market gains. Winning issues have only edged out losing issues by a single digit margin. This seems to validate my view that the huge margin from last week signified a bounce from severely oversold levels. That momentum may be subsiding.
Despite the recent rallies, even WITHIN the PSEi basket, internal disparity has been broadening.
There are now more than a THIRD of PSEi issues on bear market!
While the inclusion of parent holding firm DMC and its mining subsidiary SCC into the bear’s camp may be attributed to the latter’s mining accident that occurred two weeks back*, DMC has already been a bear market candidate down by 17.56% from the record high even prior to this week’s meltdown. So this week’s 6.67% carnage only cemented the firm’s entry to the bear market camp. Meanwhile, DMC subsidiary SCC was down 12.66% prior to this week, and the staggering 16.08% selloff also forced the issue into the bear’s camp.
*The deplorable mining disaster claimed lives of 9 employees of the mining firm. Given the populist nature of the Philippine politics, the politically correct stereotyped response has been to immediately suspend the company’s operations. Philippine politics evolve around three conventional reactions to a given controversy: replace any politically incorrect official, throw money at the perceived problems from scarcity, and regulate or prohibit or suspend or incarcerate or tax entities whose actions have been discerned as politically incorrect. Political actions have almost always been predicted on the short term with hardly ever the thought of the long term effects.
Additionally, while this week’s peso trading volume marginally improved at an average of Php 8 billion per day from last week’s Php 6.5 billion and the other week’s Php 7.124 billion, such increases has mostly been due to the BDO cross sale worth more than Php 6 billion on Monday July 20. The cross sale was executed at the board instead of being declared as special block sales. So the board sale artificially bloated the board transactions.
Outside the cross trade, the managed pumps remain pillared on diminishing volume.
Meanwhile, index managers have apparently heeded my advice of pumping key issues within the top 15 biggest market cap.
For instance, they managed to push SMPH to set a technical NEW record high at 21.5 per share last Wednesday July 22nd, from the previous 21.25 set during 2013 May 24th. SMPH has reached a curious position. It will either breakout or could suffer what chart technicians call as ‘double top’. Anyway, in today’s markets, trends have deliberately been shaped from manipulated pumps rather than the handy work of the markets. This makes chart reading even less effective.
Interestingly, 14 PSEi issues scored gains for the week as against 15 which suffered losses. A single security (GLO) closed neutral.
Index manipulators have increasingly been operating on a narrowing window for their pumps. At the same time, the dwindling number of issues being pushed has only been driving valuations of the same issues to the celestial sphere or to insane levels.
Curiously these pumps have been occurring as headlines have been turning LESS optimistic.
Nevertheless, the continued media and consensus spin to promote HOPE of a turnaround.
The implication of the current actions has been that these select issues with overstretched valuations due to the rotational pumps have now become increasingly vulnerable to extreme volatilities similar to the DMC-SCC episode. All it takes is for one bad headline to send such artificial highs into a stampede for exits.
Of course, index manipulations are driven by incentives. Political underpinnings could be a major influence.
I would even suspect that last week’s activities may have been part of props for the Philippine president’s State of the Nation’s Address on Monday July 27.
If the president mentions record stocks as part of his final year accomplishment, then last week’s stock market pump, which has defied global market trends, must have been part of this political fandangle.
Stock Markets as Political Tools
Stock markets have been transformed into policy instruments or even political tools ever since former Fed Chair Ben Bernanke (when yet a Princeton Professor) introduced the notion that saving the stock market equates to saving the economy, “History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.”
So Mr. Bernanke’s recipe has been to constantly blow bubbles which extrapolate to the mutation of stock market into a quintessential casino instead of a platform for capital accumulation.
And such has become the de facto global standard
For instance, I presented last week that the Chinese government has allocated more than $483 billion to stanch the market rout
The news agency the Reuters tabulated to include the Chinese government’s hand wringing of the private sector. They discover that the resources used by both the government and private sector, that had been channeled to support the stock market, may have reached a whopping $800 billion! Truly awesome!
Moreover, the Chinese government has effectively partially nationalized the stock market by becoming one of the top 10 largest shareholders in many publicly listed companies, according to the China Daily. So far, eight firms has confirmed on this.
Yet after hurling everything but the kitchen sink, the SSEC has only manages to muster a 16.07% recovery! Yet what happens if all the resources have already been committed?
Also remember, the Bank of Japan has 80 trillion yen stock market buying program.
Global central banks and governments have reportedly infused some $29 trillion in global stocks since 2009. And these are the direct interventions.
And how about those interventions indirectly from negative real rates or financial repression?
The earlier years were ripe for surfing. Not today when manipulations have already shown signs of backfiring or losing traction.
All these cumulative preemptive crisis resolution measures used seem to have already been caught up by the law of diminishing returns. Central bank magic seems to be fading. But they will never give up trying.
This week alone, central banks of New Zealand, Hungary and Paraguay cut rates. The US Fed may suspend or stop at a single rate raise, but I suspect that they will speedily resort to QE 4.0 once things deteriorate.
Growing risks have been staunchly dismissed especially by those with vested interest on these bubbles. And since such groups control most of mainstream communications, they are able to brainwash many to their cause.
And most people think in terms of what they see or "Weak eyes are fondest of glittering objects" a quote attributed to Scottish philosopher Thomas Carlyle.
Such recency bias or ticker tape thinking lures them to believe in the linearity of price actions in the financial and the stock markets. But any serious stock market investor knows that such has never been the case.
Importantly, these short-term oriented people fail to realize that paper/floating profits are not similar to booked profits. Additionally, paper profits can morph into real losses. Yet many comport their actions based on such fatuous premises.
It’s why they are called Greater Fools in stocks or Useful idiots in politics. They are sacrificial lambs of such vested interest groups.
Selling Hedges and NOT Snake Oil Nostrums
I have been facetiously harangued that I should play the role as stock market salesman.
Well, I am (implicitly) a salesman. To be candid, my analysis has been intended to sell or to persuade, or if not at least presented to be shared. But I do NOT force people to tow or adhere to my line of thinking. I sell through EDUCATION.
And besides, unlike the Samuelson heading quote I posted, I am NOT here to “primarily work for our peers’ esteem”. I write in the quest for truth.
Eventually, though, I believe, I will be proven right as I have been many times.
UNLILKE the industry shills who peddle snake oil nostrum predicated on misleading statistics, I also offer money management under the regimen of prudence and discipline. Such have been based on my perceived tradeoff between risks and rewards.
I am a student of history. And in the realization of the cyclicality of stock markets, history tells me that when the tide goes out, to paraphrase Warren Buffett, most issues will be discovered as swimming naked.
That’s been the case in 2007-8 where the Phisix scuttled by a stunning 54%. The index collapse back then, weighed on almost every listed issue I know of! There was hardly any survivor.
This came even when the Philippines had relatively clean balance sheets, and even when earnings growth remained positive but fell 20% from the record high in 2009! Philippine GDP also sharply fell but escaped recession when the BSP embraced the US Fed’s tools.
So why can’t history repeat? Because authorities and their sycophants say so? Because this time is different?
Yet the coming developments will most likely be a lot worse than 2008 given that the domestic stock market’s basic functions today has been savagely mangled. Earnings for many firms in the near future will contract. Some may even be shut.
And here I will ‘sell’ three themes. Be risk averse and hedge. This means reduce general stock market exposure in order to build cash. Lost opportunities offer a better alternative than risking capital to chase puny returns. It’s NOT about the return ON investment which we should be concerned today, but about the return OF investment.
For residents, don’t just stop at holding peso denominated cash. Hedge, partially, via the US dollar.
Finally, some exposure on gold or if not gold backed assets should be expedient.
I know, gold got clobbered this week (left chart). The gold slam may not be done yet. But current market actions look like signs of ‘capitulation’.
Gold should serve as insurance against policy based confiscations through indirect (inflation) and or direct (bank deposit haircuts, war on cash) means.
Yet gold’s crash has important implications. There have been three instances over the past decade where gold prices suffered from a severe drubbing, viz. 2008, 2012 and over the past month which accelerated last week.
But crashing gold, commodities, emerging market currencies and the soaring US dollar (DXY right) were not present in 2012. They were all present in 2008, prior to the Lehman bankruptcy. They are all present anew today.
So crashing gold may simply mean that the entire edifice of the global asset bubble blowing complex could have run its course. The intensifying stresses have likely been manifestations that the reversion to the mean or a disorderly market clearing process will be the road ahead.
Besides, why join the thinning throng to buy extremely overvalued stocks? So that one can brag and look good at the parties?
Current developments tell us that it is better safe than sorry.
As for general stock market salesmanship, there will be a time for that.
Tumbling Philippine Peso: More Cracks Appear on the Headlines!
Last May I wrote[3]:
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.
The left image represented Friday’s headline in the finance section of one of the major business broadsheets and online news provider, the Businessworld Online.
That day the Philippine peso closed at 44.38. Friday July 24th, the peso wilted more to close Php 45.49 to a USD. Over the week, the US dollar peso (USD-Php) rose by .53%, year to date, the US dollar has been up by 1.72%.
Headlines now sport a ‘crash’.
The breakout of the USD-php from January 2014 highs possibly signals an acceleration of the USD’s rise against the domestic currency the peso.
In the same article last May, I wrote that the peso has been vulnerable from three fronts, in particular, internal, regional and global dynamics.
I noted that from the domestic settings, “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”
I would add here that should the BSP decide to slash interest rates, while this might temporarily boost the peso, (perhaps like New Zealand’s dollar’s initial reaction to the rate cut this week) this will prompt the peso to nosedive or a spike in the USD overtime.
On the regional aspect, “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 continuing and spreading meltdown in the region’s currency should be a cause of concern.
Finally on a global context, “any 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.”
Mainstream media have latched to the idea that the peso’s weakness has been about the Fed’s prospective interest rate marginal increase.
But as I also pointed out at the end of June[4], there has been scanty evidence on this. Domestic bond yields have hardly shown any significant rise in rates across the curve. This applies to Thailand and Malaysia as well. However, if there has been any ‘Fed equals weak domestic currency’, it has been Indonesia’s bonds that can construed as responding to Fed’s policies. It’s only in Indonesia that has seen a yield increase in the broad spectrum.
But I dread that Indonesia’s dilemma may not be about the Fed, but about an ongoing silent systemic run on the rupiah.
Even as of last week the same dynamic holds, the Philippine predicament has been about a flattening yield curve. Those repeated yield curve steepening manipulations have hardly altered the structural trend.
Based on Bloomberg data, which includes US trading hours (or after the close of the Philippine trading time), the USD has been rising across not only ASEAN but through most of Asia. This week’s sharp moves (left) have contributed to the year to date gains of the USD vis-Ã -vis Asia (right).
That’s with the exception of China.
China’s remimbi has been static because the Chinese government has been using its forex reserve to support the currency, as well as, to counterbalance what has been a swelling account of capital outflows (euphemism for capital flight).
Some stats: Bloomberg reports that China’s former $4 trillion of foreign exchange reserves have diminished by $299 billion from the start of the year through June. BNP Paribas on China’s Q2 capital flight[5] (bold mine): “Without major (and highly unlikely) swings in the so-far unreported elements of the current account, capital flight from China probably picked up again in Q2, potentially to a USD 1trn annualised rate.”
So the Chinese government has been fighting domestic financial-economic battles on multiple fronts: the stock market, the property market, capital flight and the yuan.
Up to what extent can the Chinese government maintain the façade of normality? Up to what extent before the unravelling?
The Establishment’s Massive Denial on the Impact of a Faltering Peso
Local experts seem confounded and appear to suffer from a big denial over the effects of a swooning peso.
For instance, one expert was quoted by mainstream media as admitting that there “won’t be decoupling” in Asia but added that for the Philippines due to strong macroeconomic fundamentals investors will continue “differentiate”. Huh?
No decoupling means high correlation in the directional moves across assets (or in this case currency). This means that while there could be relative differences in the degree of changes, this hardly implies that investors will “differentiate”. High correlations means near uniformity of actions. This is called the contagion effect.
Yet such “it won’t happen to us” explanations accounts for rationalization or reasoning from price changes.
Besides, last week’s actions, may herald the start of a big or major move by the USD against Asian currencies. Just look at the charts of the peso, baht and the weekly performance of those East Asian and ASEAN currencies
The reason I placed USD Thailand’s baht (USD-THB) at the lower window has been because the Thai currency outperformed the peso in the 1Q and partly in the 2Q. Unfortunately, one third of the year to date losses of the baht (USD gains) has emanated from last week’s meltdown. The baht was this week’s worst performer. From outperformance to a laggard. That's how things can change.
One major factor for the baht’s weakness? The Bank of Thailand cut rates twice this year, the last at the end of April. The baht began to lose ground since.
The Taiwan dollar also fumbled against the USD this week but remains one of the top performers year to date. Why? Most likely because Taiwan’s interest rate has remained unchanged since 2011.
Why the seeming Philippine outperformance for now? Most likely because the BSP raised rates TWICE in 2014!
Current currency movements have most likely been influenced by incumbent monetary policies.
Yet in jumping on the current bandwagon, the mainstream even projects the peso to weaken significantly! Ironically they see ‘strong’ Philippine growth even with a weak peso.
For instance, media’s favorite experts foresee the Peso to depreciate to Php 46.5 to a US dollar at the end of the year. Curiously, they expect GDP to grow by 6.5% this year. From the date of publication of the news article up to the yearend, this means that the same experts believe that peso will fall considerably by 3%.
This is an example where G-R-O-W-T-H jumps out of the computer monitor screens and why prices seem irrelevant in the world of mainstream economics.
Why a falling peso?
A falling peso isn’t legislated. A falling peso also doesn’t emerge out of metaphysical or supernatural causes. Instead, a falling peso is a product of human action. A basic explanation: demand for the USD is GREATER than the demand for the peso.
A greater demand for the USD means that there will be LESS incentive to HOLD onto Philippine peso assets (whether bonds, currency, stocks or property). There will also be LESS incentive to invest in peso. This applies to whether demand emanates from resident, nonresident or currency speculators. (For the latter, there are only a few currency platforms that currency the USD-PHP pair. In the Philippines I know of only one. I doubt currency speculators will hold a major sway on the pesos’ weakness)
So would it be a surprise to see a slump in FDI flows which reportedly raised the concerns of foreign business organizations as American Chamber of Commerce of the Philippines and the European Chamber of Commerce of the Philippines Inc?
From the Inquirer[6]: According to latest data from the Bangko Sentral ng Pilipinas, net FDI inflows plunged by 48.3 percent to $1.2 billion in the first four months of the year from $2.38 billion in the same period last year. In April alone, FDIs fell by 43 percent to $382 million.
Of course, the article rightly sees the lack of trade openness as a key reason. But a weakening peso should underscore the shift in sentiment of investors. Remember, a weak peso translates to more demand for USD which implies people shifting towards US dollar denominated assets.
So if there will be LESS incentive to HOLD peso assets which also implies REDUCED likelihood of investments, then where will G-R-O-W-T-H come from? How will these rosy GDP numbers occur? By mere wish?
Furthermore, given the sharp volatility in the currency, how will this impact the entrepreneur’s economic calculation? Falling peso means more pesos required to buy foreign goods or higher local prices of foreign goods.
If the pesos’ fall has been gradual or can be anticipated, then importers may have some leeway to assess if they can pass the price increases to consumers, or if they will merely shoulder the profit squeeze.
But what of the sharp volatility in the exchange rate? How will importers determine the profit and losses and the market’s ability to absorb imported supply? So what does the importer do? Here’s a guess. They will likely try to secure currency forwards from banks to hedge their imports or they could REDUCE imports.
Let us look at the current import data.
Philippine imports in May crashed again. This marks the fourth in five months of sharp contraction in import growth rates.
The Philippine Statistical Authority says that import decline were broad based (bold mine)[7]: The total imported goods by the country for the month of May 2015 amounted to $4.391 billion, a decrease of 13.4 percent from $5.069 billion recorded during the same period a year ago. This decline was due to the negative performance of eight out of the top ten major imported commodities for the month. These were: Transport Equipment; Mineral Fuels, Lubricants and Related Materials; Iron and Steel; Plastics in Primary and Non-Primary Forms; Miscellaneous Manufactured Articles; Electronic Products; Other Food & Live Animals; and Telecommunication Equipment and Electrical Machinery. Combined imports for the first five months of 2015 amounted to $24.804 billion, a 7.4 percent decrease compared with $26.782 billion in the same period of last year. The balance of trade in goods (BOT-G) for the Philippines in May 2015 registered a surplus of $508.86 million compared to the $862.71 million surplus in the same period last year.
Imports have been sluggish even during the 2H of 2014. It’s just gotten worse in 2015. Nominal imports have fallen to 2010 levels (see right). This has been happening even when the peso’s decline has been benign.
What more during a freefall of the peso?
The successive collapses in the growth rate of imports (or even the nominal trade figures) suggests that the supply side should be exhausting inventories which should lead to higher prices. But this has not been happening based on government data. Even the government’s construction wholesale prices released last week reveals of SEVEN successive months of DEFLATION (price contraction)! Credit boom featuring price deflation? Has the world turned on its head?
This leaves us with the smuggling option and depressed demand.
So far I doubt that the currency factor plays a big role in the present import slump. This must have been about a growing slack in internal demand. Yet where has all the double digit credit growth been flowing to?
Nonetheless, the collection data from the Bureau of Customs posits of a rebound in imports this June. Collections jumped 14.3% in June, notes the ABS-CBN[8], founded mostly on volume of imports which spiked by 19.3% and value of imports which eked a 1.6% growth.
This rebound most likely signifies a temporary recovery given the sustained deep contractions which could have led to reduced inventories.
And here’s more, how will a sustained fall in the peso affect domestic interest rates, foreign debt and debt servicing? This is something I discussed last week.
More Myths on the Slumping Peso
Yet I expect more rationalization to explain deteriorating conditions
For those who believe that weak peso equals strong exports.
Be reminded that the Philippine peso collapsed from Php 2 to a USD in 1960s to current rates. Yet has the Philippines been transformed into an export giant? What the Philippines exported instead has been a TENTH of labor force due to LACK OF EMPLOYMENT OPPORTUNITIES! The OFWs are a symptom of sustained domestic economic policy failures!
Be reminded too that all of Asia, with the exception China, has seen a plunging currency. So all of them should benefit from exports?
Hasn’t it been ironic that with the US dollar strengthening against most currencies, especially against emerging markets, the May 2015 global merchandise trade data reveals that world trade has begun to shrink!
Here is the CPB Netherlands on the world trade and industrial production[9] (bold mine): -May 2015: world trade down 1.2% month on month, following a 0.2% decrease in April. -May 2015: world industrial production down 0.2% month on month, following a 0.1% rise in April.
Yet decline in imports and exports have been borne by emerging markets -4.2% and -1.7% as developed economies posted mixed data, +1.4% imports and -.7% exports
If the above momentum picks up speed then recession will be in the cards for the global economy soon.
Lastly, for those who believe OFWs and BPOs will continue to flourish, don’t forget who pays for the wages OFWs and who are the clients of BPOs?
This means that if the global economy contracts so will these areas.
Somebody recently asked me what should be the earnings multiple of the current environment? My reply: What will earnings be under the exchange rate of Php 50 to a USD and or 300 bps of interest rates above current rates?
One might ask why Php 50 to a USD? Well, in November 20 2008, the peso fell to a trough of 49.99 to a USD in the wake of the Lehman crisis. The Philippines was a lot more resilient then having much less systemic leverage. It happened then so why can’t it happen now?
One might also inquire: Why the additional 300 bps of interest rates? Well, that was the interest rate regime prior to the zero bound rate subsidies provided by the BSP to the government and to the politically connected financial elites. Currently policy rate is at 4%.
Zero bound isn’t a free lunch that will last forever. Those subsidies will either be lifted forcibly by the markets or by the government in response to the markets. It’s not only inflation that can drive back rates, credit events (whether domestic or regional) can be a major influence too.
So if the 7% could represent what Swedish economist Knut Wicksell calls as the “natural rate” of interest or “the rate of interest without the interference of bank credit expansion[10]” relative to current bank loan rates, then for interest rates to revert to such levels would extrapolate to a painful adjustment process for entities (mostly oligopolies) that have become heavily dependent on debt to finance expansions and operations
From this perspective, it would be easy to see why these firms will see a contraction of earnings and why the economy will fall into a recession before bouncing back.
So before being misled by populist denials, remember last week’s lessons[11]: exchange ratios have not just been a number. They are prices. And as prices, they reflect on the demand and supply conditions of the currency which has been underpinned by developments in the domestic political economy, as well as, the global economy in the relation with the former.
The skidding peso thus will have real economic consequences which will directly impact both consumer and producers prices that have been sourced abroad. The impact on prices will likewise transmit pressures on interest rates. Also an infirm peso will also amplify outstanding foreign denominated liabilities
The Philippine Competition Act: Game Changing or Same Dog with Different Collar?
“Game changers” in the country’s economy.
That’s how the business section of the Philippine Inquirer lavished praised on last week’s signing of two economic laws—Republic Act No. 10667 (the Philippine Competition Act) and Republic Act No. 10668 (the Liberalized Cabotage Law)—by the Philippine President.
The Philippine Competition Act has reportedly been intended to “curb cartels, price fixing and other forms of anticompetitive practices, and the other aimed at drastically lowering shipping costs”[12].
The article goes to highlight on the Philippine president’s delight: “Let me emphasize: If we will allow the old system to persist where there is no competition, we will be allowing our countrymen to suffer from paltry benefits. It will also be allowing ourselves to be content with a system where only a few will thrive.”
To be fair since I have not read the entire law, so I will be commenting based on the government and media’s presentation.
The above quote by the President on the Competition Act seems correct: There has been limited competition based on the old legal regime on trade where only a few have benefited.
Unfortunately, neither the nation’s political leader nor media exerted an effort to explain why this has been so or why the constraint on competition.
Also, the same media outfit quoted the House Speaker who, during the signing occasion, reportedly acclaimed that the legislation which was aimed at dismantling cartels, monopolies and “unfair trade practices” were “anathema to inclusive growth.”
It would seem that based on the official’s statement cartels, monopolies and “unfair trade practices” have been outcomes of the free market.
Well, monopoly can hardly be a permanent feature under a free market system.
The basic reason for this is that competition will always find various ways to nibble at the market share of parties holding so-called monopoly privilege/s. Such could come in the form of product obsolescence in behalf of the monopolist. Competitors could also deploy deft marketing strategies as they could be more attuned to consumer desires and or offer higher quality or innovative products or lower prices or bundle products which offers more benefits…among the many other factors that could make them snag market shares from such monopolist/s.
In reality, monopoly can only be enshrined through politics. Said differently, monopoly is purely a political phenomenon.
As George Mason University economics professor Donald Boudreaux wrote in an essay[13]
Genuine monopoly—that is, a market condition genuinely worthy of that ominous name—involves government erecting barriers to entry. Only governmentally created and enforced barriers can stop innovative entrepreneurs from vying with each other to tempt consumers with lower prices and better, or even completely different, products.
Electricity distributor Meralco should be a noteworthy example.
Cartels have mostly been the same. They have usually been fruits of existing anticompetitive policies that spawn imbalances in the system from which a few players collude to exploit.
For instance, when “the government tries to isolate the domestic market from the world market”, the great Austrian economist Ludwig von Mises explained[14], “It introduces tariffs which raise the domestic price of a commodity above the world market price, making it possible for domestic producers to form cartels. The cartels are then attacked by the government declaring, "Under these conditions, anti-cartel legislation is necessary."
Rings a bell?
Haven’t we heard of the so-called oil cartel and the Binondo rice cartel? Well if the so-called cartels exist, then that’s because these industries have been heavily regulated.
Have there been cartels at the restaurant or retail clothing industry?
To reemphasize: anticompetitive practices of cartels, monopolies and “unfair trade practices” have all been products of politicization of the marketplace through interventionist policies.
So how does the Competition Act intend to promote competition?
Back to the Inquirer (bold mine): The Competition Act would provide a level playing field that will ultimately lead to quality goods and services at competitive prices for the people, he said. The Competition Act will create a Philippine Competition Commission (PCC) under the Office of the President that will monitor, among other things, illegal methods that would kill market competition. The PCC can impose administrative fines of P100 million for the first offense and P250 million for the second offense for abuse of dominant position and prohibited merger. The amounts will be adjusted for inflation every five years. Offenders may also face up to seven years in prison.
So what has changed?
Based on the article, the monitoring and supervision of ‘market competition’ will be centralized under the office of the President (OP). The Executive office will then delegate to a committee of bureaucrats who will determine, evaluate and endorse on what practices by business entities are considered legitimate market competition and what is not.
So has the new statute repealed the politicization of the marketplace? Or liberalized the markets?
The answer is clearly a NO.
There will be no free market competition. Competition will instead be arbitrarily defined based on the designated parameters established by politicians on what they perceive as ‘LEVEL’ playing field.
Thus, decisions will be predicated on subjective interpretations of such legalistic technicalities. In short, ‘market competition’ is what the office of the President says. Or stated differently, market competition will be at the mercy of the OP!
Yet in reality, the new edict essentially SHIFTs the politics of trade from the other bureaucracies to the Office of the President. The Philippine Competition Commission (PCC) will function, like the main regulator of Meralco, the Energy Regulatory Commission (ERC). Some competition no?
So under the acclaimed ‘game changing’ legislation, to become a legitimate market practitioner means that one has to pander to these bureaucrats, and most especially cajole to the president. The president will serve as judge, jury and executioner of so-called allowable market competition.
And the bad news is that for anyone to take the opposite fence in the realm of politics, this would extrapolate to the risks of having one’s business/es tainted as a member of the morally obnoxious cartel or as ‘unfair trade practitioner’.
Think of it, an apolitical economic entity runs the risks of being penalized tens of millions of pesos if their business acquisition or mergers will be seen unfavorable by the administration. So what should the entity do? They may do two things: They can hire lawyers or lobby groups to persuade these political masters for the latter to give a green light on the former’s projects. These may include direct or indirect forms of bribery or horse trading or other under the table deals.
The second option is for these economic agents to just drop the planned projects altogether.
So will the new game changing edict promote market investments or market competition? Most unlikely.
Instead, economic rent from such ‘regulated’ competition means that like the antecedent, these will be distributed to the administration’s lapdogs.
Thus, such anticompetitive statute will most likely produce the opposite effect of what has been announced; it will only embed a business environment “where only a few will thrive”.
Plus ça change, plus c'est la même chose (The more things change, the more they stay the same)
Yet how should this impact the economy and stocks. Well, in the knowledge that property rights are dependent on fickle ties with the government, crony capitalism will unlikely draw in a lot of foreign investors. For local investors it means just more of the same thing.
Nevertheless, companies of oligarchs and plutocrats will definitely benefit from the political moat erected by the new legislation.
And like negative real rates, most of current legislations have implicitly been crafted to favor of the entrenched vested interest groups but have been propagandized to the clueless public that they have been intended for general welfare.
Will Cabotage Law Introduce Competition?
But I would view the second ‘game changer’ the Liberalized Cabotage Law more charitably.
Media says that the amended Cabotage Law will ease the high cost of domestic shipping. Since domestic shipping costs have been exorbitant where it has been cheaper to transport cargo to another country’s port than from one local port to another, giving access to foreign operators would bring down the cost.
Yet they never say why the cost of domestic shipping has been excessive and onerous.
Unless there have been major changes, I wrote in 2013 that the “domestic shipping industry has been one of the most heavily regulated industry which has been mainly under 5 government agencies and 26 other supplemental agencies.[15]”
Huge compliance costs from a labyrinth of regulations alone must have driven up the industry’s costs which consequently have been passed on to consumers.
In addition, since such heavily regulated environment has fostered oligopolies, these entities would rather spend to satisfy again their political masters than the consumers.
Hence, the sacrifice of quality and safety for a politically endowed economic privilege has resulted to endless maritime accidents. An interisland ferry sank early this month to sadly claim another 59 lives.
But who cares. Once such controversies fade, these entities will back to plying the same trade—trade predicated on politics—which up to the Cabotage Law ensured their survival.
The previous regulatory regime protected their turf from competition in exchange for stranglehold or tight control by authorities.
Will the Cabotage Law introduce competition?
Well it depends.
While the intent of the new law has been to liberalize access of foreign ships to various shipping ports in the country, the key question is how will the other maze of regulations of shipping regulations apply to foreign vessels?
If the ‘Cabotage Law’ will include not only liberalization of port access but also of shipping regulations then consumers should vastly benefit from new entrants who are likely to bring about lower costs, better quality services and more safety.
This also means more trade (thereby real economic “food on the table” growth)
The bad news is that inefficient domestic operators will suffer.
However if liberalization will be limited to merely the access of ports then perhaps the benefits could be muted. If such conditions will be the case, then the effects of this statute will hardly be any different from the Philippine Competition Act.
Free market competition should be welcomed. Not pseudo competition in the guise of choosing of winners and losers by political leaders.
[1] Investopedia.com The Birth Of Stock Exchanges, History Stock exchange Wikipedia.org
[2] See Phisix 7,600: Shrinking Market Liquidity and Media’s Demand for More Stimulus! June 21, 2015
[3] See Phisix 7,600: 5.2% 1Q GDP Another Data Pump! DBP Accused of Market Manipulation; Scapegoating The US Dollar May 31, 2015
[4] See Phisix 7,600: China’s Stock Market Crash; Crashing Casino Stocks Influence Changes in Headlines and Opinions; PSE Revenues Expose Smaller 1Q GDP! June 28, 2015
[5] FT Alphaville The greatest sustained EM reserve slump in 20 years July 24, 2015
[6] Inquirer.net Investment slump worries trade groups July 19, 2015
[7] The Philippine Statistical Authority: External Trade Performance: May 2015 July 24, 2015
[8] ABS-CBNNews.com Customs bureau exceeds June collection goal July 14, 2015
[9] CPB Netherlands Bureau for Economic Policy Analysis CPB World Trade Monitor May 2015 Developments in international trade and industrial production 22 July 2015
[10] Murray N. Rothbard Mises’s Contribution to Understanding Business Cycles Mises.org September 29, 2014
[11] See Phisix 7,600, Falling Peso and The $483 Billion Xi Jinping Put July 19, 2015
[12] Inquirer.net Aquino signs into law 2 economic game changers July 22, 2015
[13] Donald J. Boudreaux A Grand Confusion of Language and of Understanding September 22, 2014
[14] Ludwig von Mises Interventionism November 26, 2012 Mises.org
[15] See 2013 PNOY’s SONA: A Political Economic Minefield July 29, 2013
