Some in international media get it, at least part of it. Intervening in the stock market creates unintended consequences.
Here’s Nikkei Asia on China’s National Team (China’s SOE’s openly intervenes in the stock market and have been labeled as the National Team) [bold mine]
However, the excessive effort put into controlling the stock market is rather baffling. Such intervention effectively deprives the market of its ability to perform core functions…
But this policy has also produced unwanted side effects. The market has lost its ability to put pressure on corporate management, generating moral hazard among Chinese companies.
China's corporate debt swelled to 166% of GDP at the end of September last year, more than 70 points higher than the average of 20 major countries, according to the Bank for International Settlements. The figure rose nearly 50 points in five years, meaning that corporate borrowing grew at a faster rate than the economy.
Chinese companies have spent borrowed money on excessive capital investment, turning many of them into zombies.
Yet the more I come across the financial statements of domestic buy side institutions, the clearer I see how vulnerable the financial industry is to a crash in the domestic equity markets. And the ongoing deliberate price distortions have somewhat resonated with conditions in China. In particular, elevated stock prices have motivated the race to build the supply side financed by a tsunami of debt.
And because the Philippine equity markets have hardly been about retail activities but about institutions (both buy and sell side as well as banks), which has grown accustomed to the asset and income windfalls from stock market inflation, these factors provide the latter the likely incentive to keep the party going. Since easy money is addicting, some appeared to have ‘doubled down’ or put in a larger exposure in the equity market in hope that free money would last forever.
So, along with some public institutions, perhaps some of these firms could have been part of the syndicate that has assumed the role similar to China’s national team. And part of that added equity expansion could be about end session pumps or the price fixing mechanism.
Yet it is sad to see that the establishment seem to have little understanding of the basic functions of the stock market.
For many, stock market prices are akin to prices seen in casino gambling halls. So if prices can be controlled, then just game the system. Damned the consequence.
Yet others try to rationalize the market’s mispricing in the intellectual garb of statistical G-R-O-W-T-H to further their and the public’s misperceptions.
Unfortunately, they have nary an understanding of qualitative conditions of the markets and the economy. But for as long as such serves their commercial interest, the game must be played. Whatever it takes.
Yet the stock market is a mechanism for capital formation. Prices serve as signals to manifest on capital conditions. Higher prices are, in theory, designed to reflect on the reward for the efficientuse of capital. Lower prices are supposed to show of the opposite; penalty for inefficient use. And integral to the price mechanism, stock markets function also as the platform to raise capital. It’s why IPOs, stock rights, secondary and other hybrid offerings are made. The public’s savings are thus, channeled to firms in need of capital through the stock market. And the public is thus rewarded or penalized for risk taking based on the performance of the issuer of equity.
But all these changed when central banks made the stock market as a policy tool. See Ben Bernanke’s A Crash Course for Central Bankers.
For instance, I recently wrote about the war against equity bears in Indonesia. [See -The Indonesian Government Wages War on Stock Market Bears and Interest Rates! Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2017]
Governments worldwide have earnestly defended or subsidized the stock market in the hope that rising stocks would enhance Keynesian concept of demand based economic growth model through consumption. Governments hoped that the “consumption” derived from the “wealth effect” would “trickle down” to help smooth out the government’s onus from the welfare state, as well as, to assist in financing of their snowballing debt burden.
And thus the thrust to inflate the stock market has now morphed into a monster global bubble.
And this has little been different with the Philippines. The BSP’s “trickle down” policies have been the prime mover of the domestic stock market bubble.
As I wrote in the recent past, [See email Signs of Historic Times? Online Broker Warns on Wild Speculative Punts! February 19, 2017]
Monetary policies, which has effectively been reducing people’s time horizons (or increases time preferences), have impelled for such febrile speculations, which redound to gambling, as well as, to employ market manipulations.
People’s actions do not exist out of a vacuum. Instead they have been subtly or indirectly induced to do so from social policies.
Or when the cost to speculate, to gamble and to price fix or game the system have been lowered due to the BSP's negative real rates policies and backed by sleeping at the wheels by the market regulatory agencies, then there will be more of rabid speculation, gambling and price fixing!
So addiction from easy money policies has likewise transmogrified a functioning market to a dysfunctional market anchored on the price fixing platform.
And because part of the means to inflate the stock market bubble, requires participation from the public, aside from direct participation, the stock market has been packaged into many forms of securities or investment vehicles, UITF, equity linked funds, mutual funds, exchange traded funds, and more.
And because the establishment outfits are main beneficiaries of central bank subsidies, these are promoted and pushed into the public particularly to the unwitting retail, aided by media and industry experts. The result is not only to spread risk, but also conflict of interests (agency problem).
Here is a wonderful example. Employees from several Canadian banks have surfaced to spill the beans on their employers.
From CBC News Canada. [GO PUBLIC 'We are all doing it': Employees at Canada's 5 big banks speak out about pressure to dupe customers, March 15, 2017]
Employees from all five of Canada's big banks have flooded Go Public with stories of how they feel pressured to upsell, trick and even lie to customers to meet unrealistic sales targets and keep their jobs…
A financial services manager who left BMO in Calgary two months ago said he quit after having a full-blown panic attack in his branch manager's office as she threatened to stifle his banking career because he hadn't met sales targets.
"It was like the only thing they cared about at BMO," he said. "If you weren't selling, you weren't worth having around."
He claims his manager once told him not to tell clients who wanted to invest more than $40,000 that the markets were down, because putting their money into GICs wouldn't earn the branch as much sales revenue.
He said she also told him to attach high interest rates on mortgages and lines of credit and to not tell clients those interest rates are negotiable.
He said he was "pressured to lie and cheat customers," but refused to do it.
The revelations about other banks came pouring in after Go Public revealed last week that front-line staff at TD were under pressure to sell customers products and services they may not need and that some employees were breaking the law to hit their sales revenue targets.
Well, that’s historian Charles Kindleberger’s fraud, swindle and defalcation at bubble tops in action!
I believe that this wouldn’t be different anywhere else. And this includes the Philippines.
