Banking System Woes: BSP’s RRR and Policy Rate Cuts To the Rescue?! 1Q 2019: Bank Profit, Bank Borrowing Boomed as Deposit Growth Tumbled

The reserve requirement, which was once intended to give liquidity, has largely lost its original significance but has grown in importance as the only, if feeble, check on indefinite currency expansion. It has prevented commercial banks from rushing with our economy down a steep place into the sea, but it has been far from exorcising the evil spirit of inflation. As time has gone on, a steady reduction of reserves has proved feasible, without invoking immediate disaster, and the denial of a roving license to the banks has thus been compensated by the gift of privateers' letters of marque—Frank D. Graham

In this issue

Banking System Woes: BSP’s RRR and Policy Rate Cuts To the Rescue?! 1Q 2019: Bank Profit, Bank Borrowing Boomed as Deposit Growth Tumbled

-RRR and Policy Cuts: BSP’s Launches Rescue of the Banking System!

-What’s the Source of the Interest Income Boom?

-Answer: Bond Boom Spiked Financial Asset Investments!

-Booming Bonds Plus T-Bill Yields at Multi-Year Highs Equals Inverted Treasury Curve

-Bank Panic Borrowing and Stumbling Deposit Liabilities Persists!

-Will RRR and Interest Rate Cuts Boost Shares of Listed Banks?

Banking System Woes: BSP’s RRR and Policy Rate Cuts To the Rescue?! 1Q 2019: Bank Profit, Bank Borrowing Boomed as Deposit Growth Tumbled

RRR and Policy Cuts: BSP’s Launches Rescue of the Banking System!

The newly appointed BSP Chief barely warmed his seat, last March, when he called for the central bank to immediately ease monetary conditions by cutting the overnight lending rates and by reducing the Banking system’s reserve requirement ratio (RRR) up to 400 basis points (4%). The issue was about “timing”, the Chief said.

And perhaps the right “timing” has arrived. It took two events, the unexpected decline of the GDP, which prompted a cut in official policy rates, and perhaps last week’s stock market meltdown led by Banks that incited the BSP’s “bold move” of chopping RRRs aggressively, which were both cheered by bank officials.  At the PSE, the financial index rallied 2.25% on Friday, a likely response to the RRR cuts. 

The 2019 RRR cuts will be implemented in 3-months on a staggered basis on ‘reservable liabilities of universal and commercial banks’ only.

The first adjustment, a 100 basis point (1%) reduction, will apply on May 31, the next 50 basis point (.5%) decrease on June 28th, and the last 50 basis point (.5%) cut on July 26th.

The stated objectives of the RRR cuts, according to the BSP are “to help mitigate any tightness in domestic liquidityconditions due to limited public expenditure following the budget impasse in the first quarter of the year” and “to promote a more efficient financial system by lowering financial intermediation costs”. (bold added)

To recall, the BSP cut RRRs in March, “to help mobilize liquidity in support of economic activity as well as capital market development over the medium term” and in June “to promote a more efficient financial system by lowering intermediation costs”. The BSP noted then that RRR cuts were not intended to signal changes in policy: “the calibrated reductions in reserve requirement ratios are not intended to signal any change in the prevailing monetary policy stance, as the BSP continues to have the scope to offset their potential liquidity impact via an expansion in auction-based monetary operations. Shifts in the monetary policy stance will continue to be signaled through adjustments in the policy rate, which will in turn continue to depend primarily on the BSP’s outlook for inflation as informed by economic data”.

In sum, RRR cuts were intended to primarily ease liquidity conditions, which consequently, would translate to the lowering of intermediation costs. And these are not meant to signal changes in policy?

Of course, the May 9 cut in the BSP’s official policy rates render this moot and academic. And the reason for this, from the BSP: “In deciding on the stance of monetary policy, the Monetary Board noted the impact of the budget delays on near-term economic activity, but took the view that the prospects for domestic demand remain firm, to be supported by a projected recovery in household spending and the continued implementation of the government’s infrastructure program. In addition, the Monetary Board observed that the global economic growth momentum has slowed down in 2019. Meanwhile, indications of slower growth in domestic liquidity and credit require careful monitoring.”

Wasn’t household spending the savior of 1Q GDP?

The BSP has, once again, launched a massive rescue of the Banking System sugarcoated as liquidity management, economic support and reducing bank intermediation costs.

What’s the Source of the Interest Income Boom?

But if the BSP had indeed been data-dependent, the banking system’s 1Q stand out performance requires hardly any support from the BSP.

Figure 1

The Philippine banking system reported a phenomenal surge 28.5% surge in profits in the 1Q, the best showing since the 3Q of 2013! (Figure 1, lowest window)

Interest income boomed by an astounding 48% but interest expenses almost doubled by 96.2%! With non-interest income also soaring by 20.2%, mainly from the 26.05% surge in fees and commissions, the banking system’s operating income rocketed by 29.2%! (figure 1, upper window)

Say what? Such splendid headline data is a sign of tight liquidity conditions??? Why then did the BSP ease monetary conditions and rescue the industry when ‘tightness’ did them a favor???

What component/s of the banking system’s asset-base has delivered a majestic boom in interest income?

Bank Loans? Cant’ Be. The downshift in the banking system’s loan portfolio seems to be accelerating. March’s Total Loan Portfolio (TLP) growth inclusive of InterBank Lending (IBL) and Reverse Repurchase (RRPs) stumbled to 11.28% in March, the lowest since July 2013, from 12.6% in February, 12.62% in January and 13.9% in December 2018. (figure 1, middle window)

Gross Interest Margins have been crashing too. With the fantastic surge in interest expense, interest margins have tumbled to 2011 levels. Gross Interest Margins in March was at 67.38%, materially down from 73.01% in February and 74.42% in January. (figure 1, lowest window)

Answer: Bond Boom Spiked Financial Asset Investments!

Figure 2

One of the world’s best performing bonds, Philippine treasury bonds, which blew away its peers in Q1 2019, may have been the key.

Accumulated gains of the Banking System’s Financial Assets (portfolio investments) more than doubled up 275% in March to Php 8.5 billion, the first profit since January 2018 and was higher by 79.73% in February but was down 145.8% in January 2019. (figure 2, upper window)

If banks were generating an explosion of profits from the bond boom, then the incentive to hide losses to Held to Maturity (HTM) assets must have been reduced. Banks would then trade their surging assets to generate income and liquidity.

But this scenario has barely been unfolding.

While it may be true that the growth in HTM assets have somewhat slowed (+27.37% in March, +26.52% in February and +32.73% in January compared to the 50%+ growth during the last four months of 2018), its pace of growth has still been commanding. Nevertheless, its share of gross Financial Assets slid to 67.17% from the high of 70.94% in September 2018. In its stead had been the increase in the share weights of Held for Trading Assets (HFT) and Available for Sale (AFS). (figure 2, lower pane)

Booming Bonds Plus T-Bill Yields at Multi-Year Highs Equals Inverted Treasury Curve

With bond yields falling, financial liquidity should have been easing. But it hasn’t. That’s because T-Bill rates have been stubbornly loitering at multi-year highs despite the announced RRR and policy rate cuts. (figure 3 upper window)

Figure 3

The ramification of which has been to crash the Treasury yield curve which caused an inversion. The 10-year/3-month and 6-month curves have flattened in April, from an inversion in March, the first ever since at least 2001! (figure 3, middle window)

Meanwhile, the Financial Asset boom has spiked the BSP’s liquidity ratios. Liquid assets to deposits ratio soared even as the banking system’s cash reserve to deposits ratio generated only marginal gains.

After falling to a three-year growth low of 9.9% in February, cash and due banks increased by 10.99% in March. (figure 3, lowest window)

Bank Panic Borrowing and Stumbling Deposit Liabilities Persists!

Figure 4

You see, should banks continue to rely on bonds and LTNCDs for its funding the objective of the lowering of intermediation costs won’t be attained.

Banks continue to panic borrow in March, with bills payable growing at a sizzling pace of 49.92%, 31.96% and 26.06% in March, February and January 2019. Bonds payable surged 134.97%, 163.1%, and 142.1%, over the same period. [figure 4, upper window]

As such, bank funding costs have spiked to March 2013 levels! [figure 4, middle window]

That bond boom has provided leeway for the Banks to report a drop in published NPLs. [figure 4, lower window]

Figure 5

The BSP Chief, an economist, cannot seem to fathom that his pet project aimed at hitting record deficits from massive surges in public spending through “build, build and build” will force banks to compete with National Government for access to savings.  

Aside from undeclared NPLs, competition for access to public savings, which should sop up liquidity, continues to crash the rate of growth of deposit liabilities.

Deposit liabilities growth fell to 6.11% in March, the lowest rate since November 2012, from 6.25% in February and from 6.91% in January. That’s mainly because peso deposits tumbled to 6.37%, a September 2012 low from 6.89% and 7.74%, over the same period. Meanwhile, foreign currency deposits recovered 4.87% from 3.21% and 3.01% over the last 3-months as the peso rallied. (figure 5, upper window)

Total bank loans, total deposit liabilities, and M3 have been in chorus. That’s the liquidity tightness the BSP has been talking about vaguely. (figure 5, middle window)

Please remember, the dramatic tightening occurred even as the BSP cut RRR rates in 2018. The difference today has been that RRR cuts come along with policy rate cuts compared to increases last year.

In short, published objectives of RRR cuts of easing liquidity and the lowering costs have NOT been attained so far.Perhaps, the dosage has been too light, so a doubling down is required.

If the markets respond to the BSP’s easing by recharging growth of the banking system’s loan portfolio, an energized CPI should likewise lift bond yields, thereby wiping off the bond boom that brought upon 1Q profits and whatever liquidity it generated then!

RRR cuts free up resources or financing of the banking system from regulatory shackles. (figure 5 lowest window)

The BSP has admitted to what I have been saying all along; these are designed to plug the liquidity vortex plaguing the banking system.

Unfortunately, these signify a critical issue on the health of the banking system that hardly any establishment expert has ever spoken about or dealt with.

Also, it hasn’t been about the stimulus previously peddled by media.

The BSP’s policy rate cuts involve forcing down of interest rates which have been hoped to spur lending and reduce debt servicing costs, thereby reinvigorate the statistical economy, the GDP and subsequently, boost tax revenues.

Regrettably, the BSP hasn’t learned the lessons of its contemporaries. If balance sheets of both lenders and borrowers have been stuffed with burdensome amounts of debt or leveraging, there should be lesser demand for credit. Haven’t the BSP heard of Negative Interest Rates, like that of our neighbor Japan?

And if these BSP rescues won’t perk up lending, not even ‘build, build and build’ will have ample access to cheap financing. That’s unless the BSP accelerates its nuclear option of printing money that should smatter the peso aground.

Will RRR and Interest Rate Cuts Boost Shares of Listed Banks?

Figure 6

Despite tight monetary conditions, listed banks had a field day in terms of net income growth in the 1Q 2019. (figure 6 upper window)

Net income for all banks rose 19.36% or by Php 6.0 billion.

The Financial index registered an increase of 19.29% or a Php 5.6 billion marginal net income growth. PSEi banks posted 24.08% or higher by Php 5.016 billion.

The biggest beneficiary of the 1Q 2019 financial asset boom was no other than BDO. BDO net income growth jumped 66.1% or was higher by Php 3.9 billion constituting 64.6% of the marginal net income growth of all banks, 69.8% of the Financial index and 77.34% of PSEi Banks.

The right column shows the gross interest rate margins of banks. China Bank (25.9%), PBC (24%), UnionBank (-21.4%), and Philippine Trust (22.94%) as the banks that registered the most significant interest margin declines in 1Q 2019.

Not even the massive pumping of the index has elevated bank stocks out of the woods. The massive 2.25% surge of the Financial Index shaved the week’s loss to 2.19%.

If history should rhyme, RRR cuts have done little to help bank health conditions and share prices. (figure 6 lower left window) Banks have been pulling down the headline index.

Also, the backlash from unfettered manipulations should become apparent soon. (figure 6 lower right window)

1Q 2019 GDP Falls to 4-Year Lows: Which to Blame: Tight Liquidity or Sluggish Public Spending from Political Impasse? Have Consumers Recovered?

We are not in a GDP factory. As the share of GDP devoted to health care and education goes up and the share devoted to manufacturing goes down, we are giving more weight to a sector where real output and the quality of labor input are extremely difficult to measure.—Arnold Kling

In this issue:

1Q 2019 GDP Falls to 4-Year Lows: Which to Blame: Tight Liquidity or Sluggish Public Spending from Political Impasse? Have Consumers Recovered?

-5.6% 1Q GDP 2019: Which to Blame: Tight Liquidity or Political Impasse?

-While Public Spending Share of the GDP Continues to Grow, The Marketplace Remains a Significant Component

-1Q19 5.6% GDP’s Theme: Consumer Recovery in the Face of Public Spending and General Economy Weakness

-The Sharp Deterioration in Credit Conditions is Inconsistent with a Strong Consumer

-5.6% 1Q 2019 GDP: Fiscal Stimulus Has Been Tied to Monetary Policies

1Q 2019 GDP Falls to 4-Year Lows: Which to Blame: Tight Liquidity or Sluggish Public Spending from Political Impasse? Have Consumers Recovered?

5.6% 1Q GDP 2019: Which to Blame: Tight Liquidity or Political Impasse?

First a few excerpts extracted from last week’s articles. (all bold mine)

From the Inquirer (May 7): The BSP chief earlier acknowledged that banks had been complaining to him of tight liquidity in the financial markets – an offshoot of the 175-basis point increase in interest rates last year to fight off inflation – but added that some central bank officials remain unconvinced that monetary policy should be eased at this point.

From the Inquirer (May 9): The central bank on Thursday cut its key interest rates by 25 basis points and, thus, formally began unwinding the tight monetary policy regime it implemented last year to fight high inflation. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno – came into office last March vowing to bring down the cost of money – cited the recent declines in the inflation rate for the decision of the Monetary Board, which came on the same day the government announced a weaker-than-expected growth for the local economy in the first quarter.

From the Inquirer (May 12): President Rodrigo Duterte said the country’s gross domestic product for the first quarter of the yearwas affected by Congress’ bickering over the budget that led to underspending. But now that the P3.7 trillion budget for 2019 has been signed and funds are available, the President said these would be given to all regions, regardless of political affiliations, he said in a speech in Davao City on Friday evening.

It was a week filled with data disclosures ranging from 1Q GDP, Bureau of Treasury’s Public Debt, Philippine Statistic Authority and Bangko Sentral ng Pilipinas’ Consumer Price Index, select PSE 1Q Financial Statements and more…

Though the excerpts have been about the 1Q 2019 GDP, the attributions seem as coming from directions.  Do you notice of the inconsistencies?

The first two relates to financial conditions, in particular, the banking system’s “tight liquidity” conditions, and the subsequent policy response to the GDP, or the BSP Monetary Board’s relenting to their Governor's wish (since March), for the first rate cut (among the many coming).

But are these concerns that different?

Many in media have focused on the latter than the former. (See Bloomberg Tweet figure 1)

While Public Spending Share of the GDP Continues to Grow, The Marketplace Remains a Significant Component

With 1Q GDP rate at 5.6% dropping below Q2 2015 level, in the realm of politics, wouldn’t it be politically convenient for some entities to take the blame for the GDP's underperformance?

Figure 1

Public spending has indeed been taking the lead role in the nation’s political economy.

Through its aggressive public spending projects, the nation’s financials and resources have increasingly been corralled or captured by the National Government (NG). Such deepening control of the finances and resources highlights the pivotal shift to a neo-socialist/fascist/state capitalist economic model.

In 2018, public expenditure as a ratio of GDP hit a milestone high of 19.56%. As such, the NG’s fiscal deficit soared to an unprecedented Php 558 billion or 3.2% of the GDP. (figure 1, middle window)

Incidentally, the ramping up of public expenditure driven record deficits have coincided with the declining trend of the headline GDP.

And these statistics cover only DIRECT exposure of the government. How about the indirect exposures such as Private Public Partnerships (PPPs) and private sector sub-contractors of public works and the bureaucracy?

With such massive diversion of financing and resources from potentially productive uses by entrepreneurs to politically determined consumption activities, would it not be natural for the real economy to lose momentum from capital erosion?

Assuming the accuracy of GDP as the nation’s health temperature, would not the falling GDP be associated with higher deficit-to-GDP ratio (from sharp increases in public spending), as had been the case from 2016 to the present? (figure 1, lower window)

Even with the growing direct role of public spending, and even if we account for the private sector’s implicit role in political projects, a significant but the declining share of the economy remains in the hands of the marketplace.

1Q19 5.6% GDP’s Theme: Consumer Recovery in the Face of Public Spending and General Economy Weakness

Figure 2

The kernel of the 1Q GDP: Recovering consumers rescued the GDP as Public spending, investments and external trade slowed!

There may be some truth to the story presented by the 1Q 2019 GDP that the plunge in public spending GDP may have been from budget impasse. Public spending GDP plunged to 7.4% from 12.6% in December 2018 and from 13.6% 1Q 2018.

But let us dive into the other GDP data first.

From the expenditure GDP, the bounce in durable goods GDP (6.8% 1Q 2019 vis-à-vis 4.9% 4Q 2018, 10.3% 1Q 2018) partly offset the plunge in construction GDP (5% 1Q19, 17.6% 4Q18, 10.8% 1Q18). [figure 2, upper pane]

Public construction GDP crashed by 8.6% in 1Q19 (19.3% 4Q18, 22.6% 1Q18) as private construction GDP slowed to 8.6% (19.3% 4Q18, 8.1% 1Q18) [figure 2, lower window]

Merchandise trade also tumbled. Export GDP (5.8% 1Q19, 14.4% 4Q18, 10.3% 1Q18) more than halved from the 4Q18 as Imports GDP slowed substantially (12.4%, 19.1%, 11.3%). 

The downturn in imports should reflect domestic demand and input for exports.

But the good news: The harried consumers supposedly saved the day! The GDP’s consumer’s construct: lower inflation (PCE deflator) boosted spending. Household Final Consumption GDP jumped 6.3% in 1Q19 from 5.3% in 4Q18 and 5.6% in 1Q18.

And because the obverse side of the Expenditure GDP is the Industrial Origin GDP (production side), the latter reflects basically on the same story as the former.

Figure 3

Of the three major categories, only services GDP (7% 1Q19, 6.8% 4Q18, 6.7% 1Q18) improved while Industry GDP (4.4% 1Q19, 6.6% 4Q18, 7.7 1Q18) and Agriculture GDP (+.8 1Q19, +1.8% 4Q18, 1.1% 1Q18) deteriorated. (figure 3, upper window)

In the services sector, strength in the GDPs of Trade (7.4% 1Q19, 6.7% 4Q18, 6.1% 1Q18), Transport (8.1%, 3.7%, 6.6%)and Finance (9.8%, 6.3% 7.8%) more than offset the stagnant Real Estate GDP (4.1%, 4.1%, 4.6%), and weakness in Public Administration (9.7%, 14.7% 13.2%) and Other Services (5.7%, 9.4% 7.0%) GDP. (figure 3 lower window)

In sum, in the face of weakness in public spending and slower industrial economic activities, the 1Q19 GDP was constructed on the premise of the recovery of consumers.

But would pinning the blame on public spending not function as a convenient way to say, that since politicking pulled the GDP lower, then the latter’s recovery depends on the resolution of the former? Therefore, such events imprint on the public's mindset that more public spending translates to the path of economic elixir!

Are we supposed to dismiss the ramifications of the unparalleled scale of public spending that spurred record fiscal deficits in the context of opportunity cost and the crowding out effect?

The Sharp Deterioration in Credit Conditions is Inconsistent with a Strong Consumer

It may be true that public spending which had been manifested in the NG’s budget deficit (Php 90.245 billion 1Q19, Php 180 billion 4Q18 and Php 152.2 billion 1Q18) and the deficit-to-GDP ratio (2.15%, 3.64% and 3.89%) materially slowed in the 1Q.

Figure 4

But here is another contradiction.

The NG claimed that GDP and fiscal spending slowed in the 1Q 2019. If so, why the staggering record Php 350.7 billion increase month on month on March’s public debt to add up to another record Php 509 billion in the 1Q 2019?  (figure 4, upper pane)

Aggregate public debt grew by 13.4% to a record Php 7.8 trillion in March! Annualized public debt-to-GDP in the 1Q19 increased to 46.4% from 44.65% at the end of 2018.

In 2018, the NG borrowed a record Php 650 billion to finance Php 558 billion worth of deficits. And that’s aside from the Php 268 billion funding from the BSP.

Why has the government raised such an enormous amount of money in 2018? Why the glaring mismatch between declared public spending and published public borrowings? For what reasons? Have these surplus funds been spent? Spent on what?

It can’t be about frontloading of future expenses. The NG borrowed substantially again (Php 510 billion) way beyond the published fiscal deficit (Php 90.25 billion) in the 1Q 2019.

Have these been about the diversion of money to backdoor channels to finance election spending?

And the GDP inconsistencies don’t stop there.

Since the 1Q19 GDP has been constructed to portray the reinvigoration of consumers, how exactly has such recovery been financed? Or, what was the source of the spending of consumers?

The BSP published March banking data to reveal that consumer credit contracted by 6%, the first time since at least 2003! If credit card growth halved and payroll lending contracted, what was the basis or source for the added firepower of consumers? (figure 4, middle window)

The growth rate of cash in circulation (M1 +3.87%) last March, as published by the BSP, also dived to levels last seen in December 2004. Despite this week’s elections, if the BSP’s data is accurate, financial liquidity has been rapidly dwindling rather than improving.  Or, cash transactions in the economy, according to this data, have been materially slowing. (figure 4, middle window)

And the credit slack hasn’t been solely about consumers.

The falling appetite for credit, which has stumbled to multi-year lows, for the production sector exhibits the inhibited economic activities that may have limited growth in investments, profits, jobs, and wages. How would these add to the consumer’s purchasing power?

And if the industrial sector has struggled and if cash transactions in the marketplace have diminished and if there has been a dramatic reduction in the use of consumer’s credit card, the only possible sources for the marginal growth in consumer spending could be from drawing of their savings, liquidation of assets and from the undeclared expenditures by the NG.

Has the declining rate in the increase of consumer goods truly added to the consumer’s purchasing power?

Or has the NG padded the GDP similar to 4Q 2018?

5.6% 1Q 2019 GDP: Fiscal Stimulus Has Been Tied to Monetary Policies

Better still, soaring public liabilities point to more economic and fragilities ahead.

The NG’s borrowings have partially offset the downshift in credit growth of the banking system’s portfolio.

However, the difference has been that unless financed by credit creation (banking system & or BSP), the massive borrowing by the NG amplifies the liquidity drain in the financial system.  For instance, bank deposits may have funded the Php 235.9 billion ofRetail Treasury Bonds issued last March by the NG.

Has the surge in government debt crowded out banking system to have spurred a yield curve collapse/ inversion?

The nation’s financial leverage stands at a stunning record Php 15.57 trillion (Php 7.77 trillion banking loans plus Php 7.8 trillion public debt) or 92.5% of annualized GDP. (figure 4, lower window)

So who should benefit from BSP Governor Diokno’s rate cut?

If there are significant skeletons in the closet on the balance sheet of the banking system, substantial additions to the banking system’s current loan portfolio will only increase the system’s vulnerability. Such would lead to more, not less liquidity constraints.

Additionally, this shows that the Philippine economy can’t stomach rates at 4.75% and above! Some sign of macro strength/resiliency, no? The Philippine political economy can’t wean away from its chronic addiction to emergency policies!

This leaves the NG as the direct main beneficiary of the rate cuts.

Recall that in the past, the BSP’s low rate interest rate regime served as an indirect subsidy to the NG’s tax collections intermediated through the credit creation from the banking system. Since credit expansion fueled the economic boom, tax collection zoomed along

Figure 5

At present, with positive real rates (1-year yield higher than CPI) signifying tight liquidity conditions, the NG has taken over the onus of credit issuance partly financed by the BSP. (figure 5, upper window)

With the escalation of financing and resources transferred to the NG through Fiscal Stimulus, the marketplace would have reduced access on these, thereby putting a constraint on the factors of productions. The result of which is to reduce output and increase prices. The eight-month plunge in April CPI has mostly been about food and beverage with core inflation falling much less.

Such pressures have become apparent with reduced bank credit, thereby M3, leading to the diminishing rate of growth for tax revenues (despite this year’s fuel tax hikes). [figure 5, middle window]

And the slowdown in credit and money supply has similarly been manifested on the recent retreat of the GDP. [figure 5, lower window]

This leads us back to the intro, has liquidity or government spending been the main driver of 1Q GDP?

Record deficits from record government spending depend on continued access to people’s savings (via present taxes) and or debt (via future taxes) and or the inflation tax. And the BSP’s monetary policy of inflation targeting has been designed to subsidize government spending through the tinkering of interest rates to either boost private credit demand or lower the NG’s credit cost and or to provide financing directly the NG. Therefore if liquidity pressures would be sustained and percolate to the economy then fiscal “underspending” may continue unless the BSP will adopt fully unfettered money printing, similar to advocacy of MMT.

The yield curve remains inverted despite the BSP’s rate cut.

And should the US-China trade war escalate, tightening of the external environment will exacerbate on domestic conditions.

The unfolding year of the pig's vicious cycle?

Interesting times, no?

Celebrating Another Record: May 8th’s Biggest “Rescue” Pump in the PSE’s History!

Celebrating Another Record: May 8th’s Biggest “Rescue” Pump in the PSE’s History!

People are awed by the spectacular. For this reason, in the stock market, record highs are glorified.

In the stock market, instead of the process, the ticker tape generates the attention of the audiences. Today, May 8th, a landmark feat in PSE’s history through the headline index, the PhiSYx, was attained.

The headline index closed the regular session and entered the market intervention phase down by 1.21%. But when trading resumed in the runoff phase, five minutes later, BOOM, the phiSYx was magically up by .2%! A phenomenal 1.41% RECORD pump transformed marvelously the index from deep red into green shoots!

Magical tricks also happen on the PSE!

The record mark-the-close pump was a culmination of the concerted pumping in the last hour of the day’s trading session.

Of course, it took an orchestrated move on several heavyweights to prop the index with such record intensity.

Four of the five firms with the largest market capitalization were among the most significant beneficiaries; which included, BDO and SM, of the Sy Group, where end session pumps produced 100% and 154% of their day’s gains of 1.79% and 2.94%, respectively.

JG Summit stole the thunder though. JGS entered the market intervention phase down by a whopping 3.28%, however, when the runoff bell rang, the firm’s price was suddenly up by an incredible 3.54% for a 6.82% pump!

BPI and URC were the other major beneficiaries from the index pump.

Even the buying sequence of brokers for these issues had been somewhat similar at the commencement of the runoff phase. Such entails the likelihood of access to the same brokers by one buyer or by a cabal of buyers operating on the rescue mission.

The advance-decline differentials which had been heavily skewed towards declines (133 to 46) reveal the general sentiment of the market as opposed to the index’s performance.

And the intensifying scale of pumps demonstrates the increasing desperation to sustain the general index on its current level. Do whatever it takes.

  

Most importantly, as a result of the blatant gaming of the PSE’s pricing system, equity securities have become immensely mispriced that which has been partially captured by the BSP led-Financial Stability Coordinating Council’s Financial Stability Report:

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 a Minsky 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.

Sustained and brazen manipulations embed on the public’s mindsets such “no evidence that investors believe the stock market to be overvalued” belief.

And instead of allowing the market to discover, balance demand and supply and to clear maladjustments arising from economic interactions, sustained manipulations have led to the conveying of misinformation to the public prompting for a buildup of malinvestments (race-to-build supply).

At the end of the day, the buildup of economic imbalances resonates with and emerges from, the contortions in the stock market.

Thanks to the National Government and the PSE’s tolerance and the seeming implicit encouragement of market manipulation.

(charts courtesy of PSE, technistock and colfinance)

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