Global Risk ON: PBOC Unleashed a Historic Credit Tsunami in January! ECB and BOJ Jumpstarts Balance Sheet Expansions!

Global Risk ON: PBOC Unleashed a Historic Credit Tsunami in January! ECB and BOJ Jumpstarts Balance Sheet Expansions!

Wonder why Global Stocks supposedly had the best returns since 1987 in January 2019?

Chart from Bloomberg

From Reuters: China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, hit a record 4.64 trillion yuan ($685.01 billion) in January, far more than expectated, data from the central bank showed on Friday…The rise in financing levels should allay some of the anxiety about weakening credit growth as China’s economy slows. TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. The People’s Bank of China has revised the way it calculates TSF by adding financial institutions’ asset-backed securities and loan write-offs. It has also added local government special bonds issuance into the TSF calculation from September. TSF is used as a barometer of fundraising trends and can provide some clues on activity in China’s vast and unregulated shadow banking sector.

Chart from Yardeni.com

More…

From Reuters: China’s banks made the most new loans on record in January - totaling 3.23 trillion yuan ($477 billion) - as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy. Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share. But they have also faced months of pressure from regulators to step up lending, particularly to cash-starved smaller firms. Net new yuan lending last month was far more than expected, and eclipsed the last high of 2.9 trillion yuan in January 2018.

The same article on corporate credit…

Demand for credit picked up sharply in the corporate sector, followed by the household sector, according to data released by the People’s Bank of China (PBOC) on Friday. Corporate loans jumped to 2.58 trillion yuan from 473.3 billion yuan in December, while household loans rose to 989.8 billion yuan from 450.4 billion yuan, according to Reuters calculations based on the PBOC data. Corporate loans accounted for 80 percent of new loans in January, up sharply from 44 percent in December.

China bank lending expanded by a gigantic USD 2.5 trillion year on year on January 2019 while Total Social Financing exploded by USD 3.1 trillion!

China’s estimated GDP in USD is at 13.457 trillion, which means 2018 bank lending growth signified an 18.6% share while TSF growth accounted for 23.06% share of the GDP.

In other words, in the face of snowballing defaults, the Chinese Government PANICKED!

It’s not just China.

From Reuters: Cheap bank loans, a form of stimulus first launched by the ECB during the global financial crisis, look set to make a comeback in coming months and investors anticipate shorter term loans with a variable rate to allow the central bank flexibility. It’s just two months since the European Central Bank wrapped up its 2.6 trillion euro (2.3 trillion pounds) bond-buying scheme, but with euro zone growth at four-year lows and other global central banks already backtracking on policy tightening, bond market expectations of ECB action are on the rise. That’s expected to take the shape of a loan package for banks — known as Long Term Refinancing Operations (LTROs) or the more targeted TLTROs. Details could come in March or June at ECB meetings that would coincide with updates of the central bank’s economic forecasts. LTROs or TLTROs — which ECB sources say are a priority over other measures — should lower funding costs for businesses and households and offset the effect of negative interest rates on banks, investors argue.

From Reuters: Bank of Japan Governor Haruhiko Kuroda said on Wednesday that it was his responsibility to achieve the central bank’s 2 percent inflation target by persistently continuing its stimulus policy. Speaking to a lower house budget committee, Kuroda also said he would closely examine the central bank’s stimulus policy so that it would not cause side effects.

From Reuters: The U.S. Federal Reserve should stop paring its balance sheet by the end of this year, Governor Lael Brainard said on Thursday, suggesting the Fed could wind up with a permanently bigger balance sheet than had been expected even a few months ago. The Fed’s “balance sheet normalization process has really done the work it was intended to do,” Brainard said in an interview on CNBC, adding that she would not want this policy tool, which is tightening financial conditions, to run counter to interest-rate policy. At its January meeting, the Fed put further rate hikes on hold.

All of a sudden central banks have been talking about easing!

Unfortunately, at 2.25 to 2.5 for the FED, ZERO rates for the ECB, and -.1 for the Bank of Japan, leveraging monetary policy through interest rate channel has been limited.

Central banks thus would have to deal with negative interest rates and balance sheet expansion through Large Scale Asset Purchases or Quantitative Easing.

Chart from Yardeni.com

And last week’s public statements weren’t just talks, the BoJ and the ECB backed the PBOC by expanding their balance sheets in January.

So to support the stock markets, central banks would have to keep expanding their balance sheets thus feeding on the global debt pile which is at USD 244 trillion as of the 1Q 2018 or 318% of the GDP (government debt at USD 66 trillion or 80% of theglobal GDP)

The BSP will be next. But it will first cut reserves.

Global central banks panic, stock markets love them.

We are at uncharted territory.

Anyway, it’s the year of the PIG.

[Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947! February 3]

...

Vista Land’s Amazing Friday’s Magic! A January Pullback in Build, Build, Build?! Blame Foreigners for Retail Underperformance!

But the evils of paper money have no end. Its uncertain and fluctuating value is continually awakening or creating new schemes of deceit. Every principle of justice is put to the rack, and the bond of society dissolved: the suppression, therefore, of paper money might very properly have been put into the act for preventing vice and immorality.—Thomas Paine

In this issue

Vista Land’s Amazing Friday’s Magic! A January Pullback in Build, Build, Build?! Blame Foreigners for Retail Underperformance!

1. Vista Lands’ Amazing Friday’s Magic!

2. Have Liquidity Strains and Unsustainable Fiscal Deficits Triggered a Pullback in January’s Build, Build, and Build?

3. Cracks on PSEi Facade? Should Foreigners Be Blamed for the Retail Portfolio’s Underperformance?

-What Bull Market? Skimpy Annual Returns

-PhiSYx is NOT the Market, The Concentrated PUMPS on the Top Six!

-The Foreign Money Scarecrow, Maximum Pain on Maximum Participants

Vista Land’s Amazing Friday’s Magic! A January Pullback in Build, Build, Build?! Blame Foreigners for Retail Underperformance!

1. Vista Lands’ Amazing Friday’s Magic!

AT the PSE’s trading floor last Wednesday, some floor traders openly talked about an alleged ‘big’ close for former presidential aspirant and real estate magnate Manny Villar’s Vista Land & Lifescapes, Inc. [PSE: VLL] near the session’s end.

It didn’t happen. Not on Wednesday.

Figure 1

On Friday, February 15th, VLL ended the regular session lower by .47%. Then the shift to the 6-minute market intervention phase commenced. When the bell rang to signal the run-off period, VLL closed magically and majestically higher by 26.98%! (upper and middle window)

VLL zoomed by an astronomic 27.5% within the transition process of the matching of bids and asks invisibly and furtively!   

Because of the closing transition pump, VLL’s prices have been booted up to a 2015 year high!

If such price actions have been the character that has driven firms of the elite, such as the Sys and Ayalas, why not the real estate firm of the possible anointed successor?

As historian Charles P. Kindleberger wrote "Commercial and financial crises are intimately bound up with transactions that overstep the confines of law and morality, shadowy though those confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom." (p.66)… “The forms of financial felony are legion. In addition to outright stealing, misrepresentation, and lying, there are many practices close to the line: diversion of funds from stated use to another, paying dividends out of capital or borrowing, dealing in company stock on inside knowledge, selling securities without full disclosure of new knowledge, using company funds for noncompetitive purchases from or loans to insider interests, taking orders but not executing them, altering the company’s books…one could go on.” (p.76)

Financial shenanigans are getting bolder!

2. Have Liquidity Strains and Unsustainable Fiscal Deficits Triggered a Pullback in January’s Build, Build, and Build?

Figure 2

Half of February has passed but the Bureau of Treasury has YET to publish 2018’s fiscal conditions and debt servicing data.

Why?

In the face of overly aggressive spending and a shortfall in revenue, has 2018's deficit exploded beyond its targets? 

And as a result, has the plunge in Construction Wholesale Material Prices in January signified a substantial pullback by the National Government (NG) on its build, build and build programs in January?

Construction Material Wholesale Price Index (CMWPI) growth plummeted to 4.86% in January from 7.81% a month back. That’s an enormous 38% plunge in the growth rate.

The Philippine Statistics Authority’s (PSA) primer on the CMWPI states of its function: “It is used for the computation of price escalation of construction materials for various government projects as indicated in the Presidential Decree (PD) 1594.”

The crash in the CMWPI has also aligned with the recent cascade of the CPI. (figure 2, middle window)

Or has the rapidly dwindling money supply growth siphoned money in circulation enough to curb public construction? But M3 bounced in December. Will this be sustained? If so, then build, build and build will recover. Otherwise, with the GDP anchored on sustained NG’s spending binge, a persistent slowdown of public works would slam statistical growth!

If prices involving build, build, and build has dived, that’s not true for private construction. The PSA’s data on Construction Material Retail Price Index (CMRPI) accelerated upwards to 2.46% in January 2019 from 2.35% a month back. (figure 2, upper window)

So the crony-based private sector components of the Private Public Partnership (PPP) projects may have filled up some of the gaps as ramification to a likely slowdown in public works.

Why has the ‘build, build and build’ prices plunged?

Has there been a deluge of supply to have underwhelmed demand? That is not likely. Industrial production has stagnated since the 2H of 2018 and collapsed in December. Imports have also crashed in December.  [see last week’s GDP: 6.1% 4Q and 6.2% 2018? Exports and Imports (Domestic Demand) Crashed in December! How was the Record USD 41.44 Billion Trade Deficit Financed? February 12, 2019]

If supply hasn't been the issue, a shortfall in demand must be the principal reason.  The question is WHY?

Could this be related to the possible record blowout of 2018’s fiscal deficit? Could tight competition with the banks for access to the public’s savings been another pivotal force?

Treasury yields have dropped materially, which means the cost of servicing must have partially eased. But could surging debt volume have also offset interest rate declines?

And part of the slack from ‘build, build and build’ must have been taken over by the private sector’s PPPs, hence the uptick in retail prices.

One can sense the desperation for funding of the NG’s spending spree from this anecdote.

From the Inquirer (February 16): [bold added] “To support the Duterte administration’s ambitious “Build, Build, Build” program, the Insurance Commission (IC) has issued rules to guide insurance firms when investing in big-ticket infrastructure projects. Circular Letter No. 2018-74 issued by Insurance Commissioner Dennis B. Funa late last year said insurance and reinsurance companies could invest either in debt or equity instruments for projects covered by the Philippine Development Plan (PDP), the country’s medium-term socioeconomic blueprint.”

So more of the private sector’s savings will be drawn away for use from the private (market-based productive) sector and funneled, instead, into the government (consumption-based) which should be a classic example of crowding out syndrome.

Since 'build, build and build' has all been about politics rather than financial and economic viability, investing in them will beset further an industry already pressured by liquidity and credit constraints. (figure 2 lower window) The insurance industry is part of the BSP’s nomenclature of Non-Bank Financials.

The consequence from such would be to further the erosion of capital than its productive accumulation.

The good news is that with the pullback in build, build and build, more resources and financing should be free for use to the private sector. BSP’s funding of deficits should ease, thereby softening inflation (not the CPI) in the general economy, and reducing risk pressures for a run on the peso.

The bad news is that credit flows to institutions latched into the ‘build, build and build’ institutions and industries could be compromised and undermined from which may incite tighter liquidity conditions that lead to a substantial decline in the statistical economy, the GDP.

In short, the real economy wins, the phony economy loses.

3. Cracks on PSEi Facade? Should Foreigners Be Blamed for the Retail Portfolio’s Underperformance?

What Bull Market? Skimpy Annual Returns

To what degree have retail participants suffered portfolio underperformance from investing in the PSE in the last six years?

Figure 3

Over unfulfilled promises promoted to clients, the establishment has been rather getting jumpy in defending their tenuous positions.

How can they not be?

In nominal peso terms, since 2013, volatile returns have plagued the PhiSYx. There were three years of positive and negative returns.

The average nominal return has been 5.16% per year. To incorporate the average annual CPI with it, 2.45% per year represents the average real return for the period!

An investment made in the headline index delivered only 2.45% returns (not including dividends), so why would this satisfy the crowd of retail long-term participants? 

On a nominal basis, CAGR has only been 4.26% (not inflation adjusted)! Since the CAGR of the CPI 2012 was 2.77%, real CAGR would be a puny 1.49%!

A foreign investor would even be more frustrated. That’s because the average USD php return would amount to only 1.25% per year in six years! The CAGR? Hold your breath — a shocking .05% per year!

Because of innumeracy and selective perception, the headlines make feel good numbers. But reality strips these illusions away.

Pumping up returns is easy. By pushing the reference point back to 2009, which is at the bottom of the cyclical bear of 2007-9, such would magnify returns. And that’s what some institutions do. In psychology, such framing is called the Contrast Effect or pivot the reference base from which creates the desired effect.

Nota Bene: I’m using the 2013 base because this was the reference point used.

And the reference is on the headline index which assumes representativeness of the general market.

PhiSYx is NOT the Market, The Concentrated PUMPS on the Top Six!

No one will dare say the following.

Let me repeat: the headline index IS NOT the market.

Figure 4

How can six issues carrying HALF of the share market cap weight be representative of the market? (figure 4, upper window)

And this asymmetric distribution didn’t happen overnight. The market weight of these elite issues climbed from less than 40% at the close of 2014 to a whopping slightly over 50% today!

The paltry returns of the Phisyx had been shouldered mostly by just SIX issues! As such, the outperformance of these issues translated to the UNDERPERFORMANCE of the majority of PSEi components!

When the PhySYx ascended to hit its milestone high of 9,058 in January 29th 2018, paradoxically, the broader market had been serially sold off. That the general market didn’t participate shows how skewed gains were to the big six.

And SY owned issues, have dominated the big six, which is why I write of the PSYei or Phisyx rather than the PSEi/Phisix.

And these issues have been major beneficiaries of VLL type end-session pumps (but much milder though frequent)!

Since actions have consequences, the most expensive of the issues in the PSYEi 30 has been the most crowded trades or the big six and their flanking support members within the top 10!

The mainstream always publishes about the net income growth or eps of the PSYei, but that’s apples to oranges. Those are aggregate, and not market weight distributed numbers. The PSYEi 30 is market cap share distributed.

And because there is no free lunch, concentrated pumping has led to concentration risks. Anytime bad news should hound the big six, which incidentally are among the most leveraged issues, these are going to drag not only the index but the PSE universe with them.

Fun times, right? Yet, ironically, the long-term sub-performance of retail investors.

The Foreign Money Scarecrow, Maximum Pain on Maximum Participants

And must foreign policies, thereby, foreign money be blamed for such marketplace volatility and subsequently, underperformance?

Figure 5

In reality, foreign money has neither been correlated nor causally related to the direction of the PhiSYx and its subsequent returns.

For instance, foreign money bought into local equities (USD 1.204 billion) in 2018, but returns were negative (-12.76%)! Foreign money sold (USD 205.03 million) domestic equities in 2017, but the PhiSYx rocketed (25.11%)! So what happened to the supposed influence of foreign money on the index?

The fate of the index was determined by local (mainly government) money in the past two years. 

In 2015, foreigners sold (USD 600.3 million) as the PhiSYx contracted (-3.85%).

2015 was the only recent year where actions of foreign money coincided with the returns of the PSYEi.

Bill Blain of the Morning Porridge writes…

The Market has but one objective: To inflict the maximum amount of pain on the maximum number of participants.

If at 8,000, retail participants are already showing signs of pain, what more when the crash happens?!

Won’t happen?

Don’t take it from me. From the BSP-led Financial Stability Coordinating Council’s Financial Stability Report: (p 47)

Stock market price-to-earnings ratios, on the other hand, have been persistently well past their textbook warning thresholds but there seems no evidence that investors believe the stock market to be overvalued. Whether this is aMinsky moment waiting to happen is certainly an important thought but the absence of clear-cut valuation measures for the market as a whole leaves the issue without an empirical resolution

Minsky moment.

The Market has but one objective: To inflict the maximum amount of pain on the maximum number of participants.

...