Is This Time Different for the Phisix? What ‘Surprise’ Will Be Announced in the President Duterte’s 3rd SONA?

Is This Time Different for the Phisix? What ‘Surprise’ Will Be Announced in the President Duterte’s 3rd SONA?

What Surprise Will Be Announced in the President Duterte’s 3rd SONA? Expect A Forthcoming Seismic Change In The Political Environment

Domestic political events have been unfolding rather speedily.

The war on drugs has now spread to envelop the acceleration of the war on religion, the intensifying ‘purification’ of local government officials and the ramrodding of a legislative draft to usher a constitutional change.

The ongoing ‘purge’ of local officials has included several assassinations of the highest (mayors and vice mayors) to the lowest ranked (councilor, barangay official and etc.), the neutralization of police powers of select local officials and the reduction of police security services of a leading critic of the administration.  

Anchored mainly on political ideology, these events, to my analysis, could have all been entwined. But I won’t elaborate further.

And it has been a curiosity to see political morbidity spiral heading towards the third State of the Nation’s Address SONA on July 23. A “surprise” awaits the public during President Duterte’s 2018 SONA says a public official.  Have these events been tied to such surprise announcement/s?

Though these may be unrelated to the SONA, the direction of the current series of events indicates a forthcoming seismic change in the political environment.

Interesting times, ain’t it?

The Only Phsix Chart that Matters: Phisix in the Face of Rising Rates

Last week, I exhibited the only CPI chart that mattered.

Figure 1

This week I offer another the only Phisix chart that matters.

From 2006 to 2016, the Phisix rallied on the backdrop of falling yields of the benchmark 10-year peso or Local Currency Unit (LCU) bonds.

As yields of the 10-year peso bonds hit 2011 levels, the Phisix hit its recent apogee in January 2018.

That is to say, an era of easy money has propelled Philippine stocks to reach its present highs.  

And the previous bear market episodes of 2013, 2015 and 2016 were overrun by the dynamo of too much money chasing too few assets.

Of course, serial manipulation of the PSEi emerged in late 2014 which had been responsible for the considerable portion of the advances of the headline index.

Yet, the last time benchmark yields spiked was in 2006 which was followed by a stock market crash in 2007-2008. A selloff in both domestic bonds and the peso accompanied the Great Recession stock market crash (-56%) of 2007-8. But the bear market of 2007-2008 represented a counter cycle within a secular cycle.

And the eon of easy money can be seen in the explosion of systemic leverage (bank and government credit) which has nearly tripled in 11 years. (lower pane)

Nevertheless, yields of the 10-year benchmark have been in decline from the 1990s. However, systemic leverage took off only in 2011 or two to three years after the BSP embraced global central banks proactivist stance into easing money conditions to support the domestic economy.

Is This Time Different for the Phisix?

“This time is different” for the Philippine Stock Exchange for several reasons.

One, domestic politics have been radically transfiguring the economic landscape. The transition to the reconfigured government led political economy will translate to substantial dislocations which would not only aggravate previous imbalances but accelerate its exposure.

Conventional analysis, pillared fundamentally on statistics, will barely comprehend the underlying structural shift in the political economy.

That said, not only will the economy shift, the earnings profile of listed firms should see a significant departure from its past.

Two, it is the twilight days for free money economics. Buttressed by the transition towards a government-driven economic structure, competition for access to resources and finances with the private sector have only been intensifying. Previously, the bubble sectors in the private economy were the sole competitors. Today, the National Government has tipped the scale of competition in its favor and has taken the role of the critical mass in the economy.

As evidence, debt monetization or direct financing of the NG liabilities by the BSP have become a principal instrument in financing the NG’s deficit spending in 2016 and 2018. The inflationary impact from the overissuance of money has fated the peso to further attenuation and reinforces the price instability in the domestic ecosystem

Forcibly sustaining easy money policies on a resource-constrained economy should lead to a stagflationary environment.  

And rising rates from stagflation magnifies the fragility of a debt-dependent economy (see lower pane)

Even the chart of the 10-year yields benchmark reveals of a 2012-level resistance breakout from its rounded bottom formation. If the pattern would hold, the benchmark yield can be expected to spike to 9% in the fullness of time!

 

Figure 2

Three, the Phisix reached a bear market in 2018 in spite of an UNPRECEDENTED monetary and fiscal stimulus as evidenced by RECORD low rates (upmost pane) and LANDMARK high in systemic loans, UNPARALLELED QE (mid window) and ALL-TIME high fiscal deficits (lowest pane).

If the economy fumbles what tools would be left for the National Government and the BSP to use for stabilization goals?

Fourth, yes the Phisix has soared to a new record in 2018. But this milestone has been a function of three factors.

One, MONUMENTAL end-session pumping or UNMATCHED price manipulation.

34% of this week’s 2.96% gains came from end session pumping.

Two, the incredible transcendental accretion of market cap share by fundamentally two groups, the Sys and the Ayalas.

With this week’s 2.96% rally, the cumulative market cap weightings of the top 5 issues hit a NEW RECORD of 45.31%. Including BPI, the Sy-Ayala group of companies control a staggering 51.23% of market cap share of the PSYEi. Six firms determine the fate of the PSYEi! Remarkable!

Wouldn’t these be paradoxical, a MONUMENTAL capture of the headline index as it struggles to emancipate itself from a bear market?

The vastly skewed weighting towards six issues, with a particular mention on the SM group, highlights the growing concentration risks within the PSYEi benchmark itself.

Figure 3

And three, the record breakout in the headline index came in the face of unequaled divergence in the context of an incredible deterioration in market internals and an astonishing decline in the average output.

When April 10, 2015’s high of 8,127.48 was taken out on September 14, 2017, what followed was a shocking broad market selloff as indicated by the negative advance-decline spread. (middle window)

And another stunning contradictory development: as the PhiSYx ascended to new heights, the average peso output (average daily volume divided by average daily trades) plumbed to new lows! 

Put this way, the broad markets did not participate or even diverged from the performance of the headline index.

Or this serves as circumstantial proof that the headline index had been manipulated upwards which came at the expense of the broader market.

Finally, if the salad days of easy money could be over and out here, it may be the same overseas.

The US Federal Reserve has spearheaded the raising of policy rates and the withdrawal of the previous excesses from its balance sheet expansion. Other major central banks have either followed or have expressed willingness to follow the Fed’s path.

Additionally, increasing accounts of protectionism or “trade war” should extrapolate to reduced global trade, diminished cross-border flows in investments and speculative arbitrages.  

And with shunted or reduced access to external liquidity flows, the PSE’s sensitivity to domestic liquidity gets amplified.

Domestic stocks and its underlying economics, thus, become vulnerable to the risks of inflation, currency, interest rates and political uncertainties.

As such, a stagflationary environment could induce liquidations and capital flight which would pressure interest rates higher, and bring to the surface credit risks and the malinvestments in the terms of excess capacity.

This time is different when compared to recent history.

However, this time won’t be different when compared to the previous cycles.

June’s CPI Spike Upends PhiSYx’s Oversold Rally, The Only CPI Chart that Matters, Why Inflation’s Trajectory Will Persist

The principal methods by which governments inflate are: (1) huge governmental spending, particularly deficit spending; (2) monetizing the public debt; (3) pegging or forcing down interest rates; (4) ordering wage boosts; and (5) encouraging private credit expansion. The Truman caliphate has resorted to all these methods. The principal methods by which governments pretend to “fight” inflation are by price fixing and wage fixing, usually accompanied by allocations, rationing, and subsidies.—Henry Hazlitt

In this issue

June’s CPI Spike Upends PhiSYx’s Oversold Rally, The Only CPI Chart that Matters, Why Inflation’s Trajectory Will Persist

-The Only CPI Chart That Matters: BSP Debt Monetization vis-à-vis CPI

-Why Inflation’s Trajectory Will Persist

-Price Fixing Pumps Sends SM Group Share of the PhiSYx to a Record 30.43%!

-US-China “Trade War” is ON

The Only CPI Chart That Matters: BSP Debt Monetization vis-à-vis CPI

 

The oversold rally in the Phisix had been upended virtually by the National Government’s report on June’s CPI. 

And practically absent in all of the media's narrative has been the most critical factor in driving up CPI. And that is what makes everything fun!

The financing of demand, an elementary ingredient of economics, has been ignored or dismissed in popular discussions purportedly about the economy.

Yet, a tight correlation has developed between the BSP’s debt monetization and CPI since 2015. A record BSP’s net claims on National Government has coincided with multi-year high CPI.

Everything but the kitchen sink, yes, save for BSP’s financing of the NG’s spending, has been mentioned. Oil, excise taxes, and mostly supply-side factors. Though these factors contribute to or aggravate the present conditions, supply will have to function concomitantly with demand.

Take the sugar industry.  Because of magnified demand and higher compensations, many of the sector's workers have migrated or transferred to the public sector’s “build, build and build industries”. [See Bullseye! Crowding Out Effect in Motion: Sugar Farmers Move to the Construction Industry! Excise Taxes: Will Sardine Manufacturing Be the Next Coca-Cola? March 5, 2018]

The depletion of labor or manpower in the sugar industry has contributed significantly to the reduction of the sector’s output.  [See Wow. Partly Through the Crowding Out, 9 Of 12 Sugar Refineries Stop Operations June 27, 2018]

So while demand for materials, equipment, and other auxiliary inputs increase for the “build, build and build” industries, which have consequently raised their prices, the reduction in output in the sugar industry, have also caused price pressures due to supply constraints.

The question is: how has demand for the build, build and build projects been financed? The most important chart of inflation provides the answer.

Prices thus rise in sectors affiliated with and within the “build, build and build industries” and in the sugar industry. And price increases in these sectors spread to the other parts of the economy for virtually the same phenomena: the distortive impacts of the crowding out syndrome. And such compounds on the contortions brought about by the credit-financed race to build supply in the bubble areas of the domestic economy

Cause and effect.

That said, because inflation bashing has become chic, a confused politician has thus called for an investigation of sugar prices.

Why Inflation’s Trajectory Will Persist

And intensification of price pressures should be expected soon.

There were numerous price increases announced last week: LPG prices, fuel prices, Meralco’s July electricity bills, and minimum fares for Jeepneys (+12.5%)

And that’s not all. Throwing gasoline into the inflation fire measures had also been declared.

To alleviate poverty, various welfare safety nets were activated. The government ratified a feeding program for undernourished kids. The Department of Social Welfare and Development (DSWD) launched a mobile crisis intervention unit designed to “bring crisis services” “within the reach of poverty-stricken families”.

Since these measures will contribute to the expansion of the National Government’s fiscal deficits, it would need to be financed by higher taxes, debt or more BSP’s monetization. Guess, among these alternatives, which will be preferred?

Calls for increases in minimum wages have amplified. A nationwide minimum wage hike could probably be announced, sometime soon, if not during the President’s Duterte’s SONA

The ruckus over street inflation has taken hold as one of the de rigueur political issues.

The political opposition has used inflation as a staging point to assail the administration. Various political personalities have likewise demanded solutions from the National Government like suspending the TRAIN law, increasing interest rates or any measures to curtail advancing price pressures.

The government’s CPI numbers of 5.2% and 5.7% appear to be understated substantially for political denunciation of inflation to crescendo or to garner media's front page treatment. 

And as the National Government becomes more desperate to solve its inflation dilemma, I spelled out a fifth option: manipulate statistics [See Why Interest Rates Will Rise: 1Q Fiscal Deficit Blowout Financed by BSP’s Debt Monetization (QE) and Spiking Public Debt!  May 6, 2018]

From Reuters: “Finance Secretary Carlos Dominguez said he would consider removing tobacco from the basket of commodities used in calculating inflation, which has a weighting of 0.9 percent in the consumer price index versus food’s 35.5 percent.  The proposal needs to be discussed as it involves a change in methodology, Philippine Statistics Authority head Lisa Grace Bersales told Reuters.

You see, it is happening!

In the meantime, BSP Governor Nestor Espenilla Jr. has admitted that the surge in the CPI signified a “setback”. Thus, the BSP has “hinted at a more aggressive action to contain the accelerating pace of domestic price increases”.

Having been dependent on the elixir of easy money, the BSP won’t make any aggressive action unless forced to by the markets.

And it has even been worst today, given the economy’s growing dependence on the acceleration of public expenditures which will have to be funded by debt or by the BSP. A real tightening will vacuum liquidity off the financial system which would starve credit finance to the spend, spend and spend and to the race to build supply bubbles.

That ain’t gonna happen.

Any act of tightening by the BSP will be a pantomime.

And you know why current developments have been fun? Because with the absence of public discussion of the BSP’s debt monetization, such eludes scrutiny.

More of its usage will occur in the absence of scrutiny.

Ergo, whatever superficial tightening measures imposed, a corresponding easing will be applied. At the day’s end, there can be no weaning away, unless current sting will accelerate to push interest rates significantly higher and the peso substantially lower.

A tightening would mean to end the economy’s chronic addiction to inflation. The pangs from a withdrawal syndrome from such policy reversal would not be permitted. 

Until the markets and the economy pushes back, the path dependence on the unsustainable policy of inflation will persist.

Price Fixing Pumps Sends SM Group Share of the PhiSYx to a Record 30.43%!

These dynamics have been evident in the stock markets.

The stock market has been used as a prop to signal developmental progress and prosperity. However, instead of allowing the markets to function as an efficient resource allocator, engineered pumps and price fixing has caused tremendous imbalances within the capital sector.

Mark the close pumps were responsible for 106.49 points or +1.48%. The PSYEi 30 closed the week down by a measly .1%. Without those pumps, the index would have been lower.

For the week, because the SM group (SMPH +1.95%, SM +.46% and BDO +2.39%) pushed essentially the index higher, while the top Ayala Group (ALI -3.17%, AC -2.39% and BPI -1.13%) members pulled it lower. As such, the market cap share of the SM Group soared to a fresh record of 30.43%.

So yes, the PhiSYx continues to become captured by the SM group and juxtaposed to it, mounting concentration risks.

It is fun until isn’t.

US-China “Trade War” is ON

As a final thought, the US-China “trade war” officially started at noon of July 6th Friday.

The “trade war” (“the biggest trade war in economic history”-China) involves the imposition of 25% tariff on US$ 34 billion worth of each other’s goods and is likely to spur considerable disruptions on the global supply and distribution chain networks. And as the leading source of various supply inputs, the impact of the trade walls won’t be limited to China but would instead spillover to the region.  Even more, such economic stalemate would magnify the fragility from China’s debt financed economy.

And such economic spat won’t be confined to trade, cross-border investments and capital flows will most likely be directly or indirectly affected which should exacerbate on the region’s offshore dollar liquidity strains.

That said, it would be interesting to see if the ongoing economic impasse would likewise affect global central banking’s collaborative efforts. If so, the region’s monetary policies could become more fragmented thereby exacerbating the region's financial fragility.  

And an escalation of an economic standoff amplifies the risk of spillovers to the geopolitical arena.

As the 19th century American author Henry George (1839-1897) magnificently described,

Free trade consists simply in letting people buy and sell as they want to buy and sell. It is protection that requires force, for it consists in preventing people from doing what they want to do. Protective tariffs are asmuch applications of force as are blockading squadrons, and their object is the same—to prevent trade. The difference between the two is that blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.

Can the stock market price fixing and sustained inflation remedy the dislocations in the production structure caused by protectionism?

We are living in interesting times indeed.