Well, to tell you the truth, in all this excitement, I've kinda lost track myself. But being this is a .44 Magnum, the most powerful handgun in the world, and would blow your head clean off, you've got to ask yourself one question: 'Do I feel lucky?' Well, do you, punk?—Dirty Harry (Callahan), played by Clint Eastwood
In this issue
Is China’s Coronavirus Portentous of the Year of the Metal Rat? The Pig-Rat’s Nasty Tandem
-Is China’s Coronavirus Portentous of the Year of the Metal Rat?
-Shocks from The Pig-Rat Tandem: Symptoms of the Credit Cycle
-The Metal Rat May Be Inclined Towards the USD and Less Eager on Stocks
-The Pig-Rat Tandem’s Contribution to Economic Shocks and Underperformance
Is China’s Coronavirus Portentous of the Year of the Metal Rat? The Pig-Rat’s Nasty Tandem
Is China’s Coronavirus Portentous of the Year of the Metal Rat?
How should we take the following events as a precursor to the fortunes of the Chinese zodiac year of the Metal rat?
Figure 1
Due in part to the outbreak of the deadly coronavirus, which originated in Wuhan, the capital of Hubei province, China’s major equity benchmark, the Shanghai Composite Index, plunged 2.75% on Thursday, January 23rd, posting its worst loss for the end of the lunar year in three decades. (Figure 1 topmost pane)
And as the Chinese government aims to contain the virus from morphing into an epidemic or pandemic, social activities are being stringently controlled, which included the lockdown of some cities affecting as many as 56 million people, for now.
Many have called off the lunar year celebrations. (Figure 1, middle pane)
China's government imposed travel restrictions, as well as ordered shut the nation’s 70,000 movie theaters. Disney closed its Shanghai Disneyland in response to the outbreak, and had later been joined by several branches of Starbucks and McDonald's.
Meanwhile, Hong Kong’s government announced a citywide coronavirus emergency, which suspended classes until February 17, aside from the cancellation of all official travel to the mainland.
That’s aside from the Chinese government’s latest measure of suspending all inter-provincial road passenger transport from and to Beijing. Likewise, twenty-five provinces, municipalities, and autonomous regions in covering more than 1.2 billion people have activated the Level-I alert of public health incident, according to the China Daily.
Last night, China’s President Xi Jinping warned of the “spread of a deadly new virus is accelerating”, and thus declared that following the first 1000 room hospital, a second 1,300 room, will be built in a month or less.
And exacerbating this, major East Asian benchmarks have suffered deficits from the start of the year. The worst year-to-date performers have been national bellwethers of Laos (-5.17%), the Philippines (-2.45%), and China (-2.41%). (Figure 1, lowest pane)
With New Year’s celebration virtually aborted and turned upside down, would these signify as good Feng Shui for the metal rat?
Shocks from The Pig-Rat Tandem: Symptoms of the Credit Cycle
The Chinese zodiac sign of the year of the Pig has a history of being been chain-linked to either financial or economic turmoil, as I warned last year. Superstitions have little to do it with, except as coincidence. Instead, the credit cycle embodies the occurrence of such turbulence.
To recap on the 12-year cycle of the year of the pig:
1947-1949: Precursor to the Foreign Exchange crisis
1958-1960: Economic Slump (1959- year of the pig)
1969-1971: Balance of Payment crisis
1983-1985: Debt Moratorium/ Economic recession
1995-1997: Antecedent to Asian Financial Crisis
2007-2009: Forerunner to the Great Recession
Since the Philippine independence from the US, economic turmoil has shockingly encumbered the year of the pig. Its relations per year differ though. The year of the pig heralded the crises of 1949, 1997 and 2008. The emergence of a crisis (1983) or its culmination (1971) has also shrouded the year of the pig.
The year of the PIG hasn’t been responsible for such gamut of economic dislocations. Or it hasn’t been superstitions that have plagued the Philippine financial and economic sphere since 1946.
These episodes shared some common denominators: credit expansion. Its ramifications were price inflation, economic slump, recession or a financial crisis or a combination thereof.
Some had external influences. Domestic origins were responsible for the others.
There had been no let down from the year of the Earth Pig. Credit strains intensified in the banking system.
Figure 2
Exhibiting signs of tightening financial conditions, the Philippine yield curve INVERTED for the FIRST time since at least 2000! (Figure 2, upper pane)
Such historic and seismic activities, but had largely been unnoticed by the public, had been reflected in the banking system’s liquidity conditions as manifested by the BSP’s KPI of cash-to-deposits, as well as, the liquid assets to deposits ratio. (Figure 2, lower window)
Figure 3
The BSP response has likewise been monumental!
Aside from the massive downside adjustments of 400 bps in the banking system's Reserve Requirements Ratio, resonating its response to the 1997 Asian Crisis, not only did it join the global central banks in paring down its policy interest rates, but most importantly, it rekindled its nuclear option of monetizing public spending to unprecedented levels!
As ramifications to an economic downturn, global central banks eased in a panic to lower rates at levels last seen during the Great Recession that sparked a massive risk-on on financial assets in 2019!
And that’s not all.
Not only has the BSP engaged in stealthy rescue measures, but they even transcribed it in a report!
In its 2018 Financial Stability Report, the BSP acknowledged the massive buildup of such imbalances. (p. 19) [bold and underline added]
If there are risk issues to raise, it will have to be the prospects of managing liquidity. Aside from simply having more loans versus deposits, using liquid assets as a source for funding more earning assets needs our attention. However, the bigger issue will be that continuing on the path of being a bank-based financial market means that the provision of credit will require taking on mismatches in tenor and in liquidity. As more credit is dispensed, such mismatches will only increase.
Sadly, mainstream institutions have either dismissed or repressed this.
And in the face of increasing leverage, the BSP also raised concerns about the capability of its platform to handle payments and settlements of the Financial System. (p. 29 to 30)
Developments in the clearing and settlement space are unfolding at two distinct levels. At the most basic, the amounts processed for payments are significant, of the order of 15 times that of the resources of the banking system or of the economy (Figure 3.13). This highlights the substantial amount of (gross) liquidity needed to support financial market activity. This point is not trivial because it means that the magnitude of settlement/pre-settlement risk may be a much bigger concern than credit risk.
It also suggests why unwinding failed transactions can have broad system-level implications. Despite institutionalizing the delivery-versus payment protocol, the system remains vulnerable because a single bilateral failed trade may require a network of unwinding. Unfortunately, such data is not easily accessible and the extent to which these “settlement fails” represent a possible systemic risk—not just in size but more so in terms of interlinkages that can spillover to the rest of the economy—is not readily determinable, at least at this time. In general, payments system data remain largely untapped and not having even a cursory view of the dynamics of the payments network leaves financial authorities blind to their possible consequences. This is a major concern
Unfortunately, with its complete dependence on such platforms and the absence of causal factors, the BSP provides no concrete solution to these substantial risks!
So the risk baton will be passed over by the Earth Pig to the Metal Rat.
The Metal Rat May Be Inclined Towards the USD and Less Eager on Stocks
Philippine risk assets likewise generated positive returns in 2019, the year of the Pig.
Saved by massive end session pumps, the main equity benchmark eked a meager 4.68% returns in 2019, the second positive return in six outings for the year of the pig since 1959.
Aside from Philippine Treasuries, the peso surged 3.7%.
Will such positive returns continue in the year of the Metal Rat?
Figure 4
In looking at patterns, positive returns might be the result of the alternating performances of the equity benchmark of the year of the rat since 1960. But such gains were accrued following negative returns from the year of the Pig.
But what if this year’s outcome will come in the shade of 2007-2008’s two-year boom-bust cycle? Or, this year’s positive may lead to negative returns in 2020.
Compared to the year of the Pig, the average USD peso has generated strong returns in the year of the Rat. The average USD peso has been up in four of the five years, with an average gain of 17.8%.
The Pig-Rat Tandem’s Contribution to Economic Shocks and Underperformance
The big jump of the USD-peso and the crash of the equities in 1960 and 1984 had mainly been a consequence of economic shocks.
As noted last year, 1983 was the year the Philippine Government declared a debt moratorium (debt default)!
Figure 5
From Wikipedia: The country was hit hard by the second global oil crisis of the decade, in 1979. And when the US Federal Reserve raised interest rates in the early 80s, the Philippines’ debt ballooned rapidly, pushing the Philippine economy towards an economic nosedive by 1983 (bold italics added)
In the meantime, 2020’s predecessor, the year of the metal rat in 1960, almost shared a similar economic fate.
Aside from the former Philippine President Carlos P. Garcia’s January 26, 1959 SONA, which indicated pressures arising from credit-fueled inflation and a growth slowdown or stagflation, I excerpted Messrs Dohner and Intal from an NBR paper (p.180): “Philippine trade and industrial performance have been determined by a system of protection initiated in 1950. To deal with external imbalance, the Philippine government began licensing imports, in amounts determined by essentiality of the product. The incentives created for domestic production of these goods led to rapid industrialization and growth during much of the decade, but the growth rate had slowed appreciably by 1959.” (bold added)
The Philippines used to be ahead of its neighbors. However, the cumulative effect of such shocks or dislocations resulted in the reversing their relative financial and economic status.
According to the ADB: (bold added)
The Philippines has frequently suffered from periodic macroeconomic instabilities (Figure 3.21). The instabilities often resulted from persistent fiscal and current account deficits, over-borrowing and over-lending activities in the banking sector, and excessive exposure to short-term external debt. These often depressed investor confidence and led to capital flight, sharp currency depreciation, and economic recessions. Sharp monetary contraction and high interest rates to stave off currency depreciation and inflationary pressures during these crisis periods aggravated the economic downturn. The 1984–1985 economic collapse cost the Philippines a decade of potential economic growth and development. Major recession or low growth episodes occurred in 1960, 1970, 1982–1985, 1991– 1993, 1998, and 2001, and were associated with the macroeconomic instabilities in the last five decades. Indeed, these periodic and frequent downturns largely explain why the Philippines lagged behind many of its regional neighbors.
And yet the pig rat tandem played critical roles or have been associated with most of these shocks, as indicated in the underline texts.
And let us not forget, a cauldron of miasmic events for 2020: the Taal eruption in the Philippines, which may still be ongoing, the bushfires of Australia, the flare-up of the US-Iran conflict, a Trump impeachment trial and now the outbreak of the coronavirus of China…for January alone!
What a close for the year of Earth Pig! What an inaugural for the year of the Metal Rat!
As SFPD Inspector Harry Calligan in the 1971 film Dirty Harry asked, “Do I feel lucky? Well, do you?”
