Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.—Charles Mackay, The South Sea Bubble, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds

In this issue:

Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

-Record Stocks as Symptoms of Monetary Abuse: The Venezuela and Argentina Model

-Record Stocks NOT EQUAL to G-R-O-W-T-H: Japan and China

-Record Stocks NOT EQUAL to G-R-O-W-T-H: US, Europe and ex-China and Japan Asia

-Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

-What the Philippine President’s Dream of Phisix 10,000 Means

-Dismal Rebound in February Philippine OFW Remittances

Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

I will open this outlook with this splendid quote from nineteenth century Scottish poet and author Charles Mackay from his epic book, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds[1]

IN READING THE HISTORY OF NATIONS, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first…

Some delusions, though notorious to all the world, have subsisted for ages, flourishing as widely among civilised and polished nations as among the early barbarians with whom they originated,—that of duelling, for instance, and the belief in omens and divination of the future, which seem to defy the progress of knowledge to eradicate them entirely from the popular mind. Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper. To trace the history of the most prominent of these delusions is the object of the present pages. Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

Record Stocks as Symptoms of Monetary Abuse: The Venezuela and Argentina Model

Has stocks markets been about economic growth?

Let me frame this question under contemporary popular wisdom, has record stocks really been about booming economies?

The above equity benchmarks are from the Latin American nations of Venezuela and Argentina whose stocks have been racing to record highs since 2013.

Year to date as of Friday’s close, local currency returns for these indices have been at 39.45% and 38.94% respectively. In 2014, the same bourses returned a spectacular 41.01% and 59.14% while in 2013 returns have been at a shocking nosebleed 480.48% for the IBVC and a breathtaking but less stellar 88.87% for the Merval!!!

Yet a short glimpse of their respective statistical (annual) economic growth data suggests of mediocre performance for Venezuela and lethargic activities for Argentina. 

But economic numbers don’t represent food on the table. The reality has been that basic supplies appear as being rationed in Venezuela. As aptly described by the New York Times last January: “the situation has grown so dire that the government has sent troops to patrol huge lines snaking for blocks. Some states have barred people from waiting outside stores overnight, and government officials are posted near entrances, ready to arrest shoppers who cheat the rationing system.”

In Venezuela, tourists have been even asked to bring their own toilet papers due to the near absence of supplies! It has been a little less desperate for the Argentine economy, but goods shortages exists nonetheless. And such scarcity of supply has been highlighted by the recent sensational shortages of tampons!

If the economies of both nations has been in dire straits, so why has their respective stocks been racing to record highs?

A concise answer has been that because of the lack of access to credit, the governments of both countries has been relying on the monetary printing press to finance political economic spending, the result of which has been massive devaluation of their currencies and HYPERINFLATION!

And given the rigorous clampdown on capital and currency flows by their governments, and since residents of both countries have sought safety of their savings from devaluation and from the severe loss of purchasing power, equities—which signify as titles to capital goods—have served as refuge from monetary abuse. Said differently, the store of value function of currencies of both countries has shifted to stocks!

Venezuela and Argentina represents the extreme episodes of stocks functioning as shock absorbers from monetary debasement.

But the buck doesn’t stop here.

Record Stocks NOT EQUAL to G-R-O-W-T-H: Japan and China

Venezuela and Argentina’s symptoms seem as being replicated everywhere but at a tempered basis that comes in different shades or form.

In the case of Japan, milestone high stocks have been diverging from the statistical economy. Japan’s economy has been laboring to climb out of an economic rut or particularly intermittent recessions.

But the Japanese government thinks that they have found an elixir to her economic predicament. They believe that stock market boom and destruction of a currency translates to economic salvation.

So they have mandated the Bank of Japan to devalue her currency, the yen, by  expanding the her balance sheets by buying enormous amounts of bonds and stocks since 2013. And the government has extended and expanded the same program in November 2014. Japan’s largest pension fund, the Government Pension Investment Fund (GPIF) has likewise been enlisted to the stock market buying program.

Unfortunately the result has been devastatingly opposite to what has been intended: stocks continue to diverge with the real economy as resident (individual and institutional) money continues to gush out of the nation.

Aside from the BoJ and GPIF, foreign money has largely been responsible for driving Japan’s stocks to record levels.

Chinese stocks have also frantically been skyrocketing as the statistical economy has been dramatically slowing.

Chinese property prices continue to fall in March but at a much subdued pace. However, China’s new built houses as of February crashed to its lowest level or by 6.1% year on year!

Broad indicators reveal that the Chinese economy’s downtrend appears to be accelerating. The continuing downshift includes fixed asset investments, retail sales and industrial production which has all contributed to the statistical economic growth of 7%, the slowest since 2009.

The Lombard Street Research (LRC) counters that real economic growth in China has CONTRACTED in 1Q 2015 Q-on-Q where the Chinese economy endured a ‘historic collapse’.

From Breibart (bold mine)[2]: Lombard Street Research (LSR) has reported that China’s “real” (after-inflation) GDP actually fell -0.2% for the quarter ending March 2015. Despite the official government claim of +1.3 percent growth for the quarter and +7 percent annualized growth. China’s quarterly performance was the worst showing since the Global Financial Crisis as, “real” domestic demand suffered a historic collapse. LSR’s Diana Choyleva has been the best Western economist at untangling China’s less-than-authentic economic statistics. She reveals that after peaking in 2014 at +2 percent on real domestic demand growth, China has collapsed by over 4 percent and to a -2.1 percent. Choyleva says this is the first negative performance observed since LSR began recasting China’s quarterly economic reports in 2004.

Trouble in the real economy has been more than a slowdown, as credit risks mounts.

Aside from the recent missed interest rate payment by Cloud Live Technology, another company, power-transformer maker Baoding Tianwei Group Co. expressed doubts whether it can make interest payments on April 21, signaling risks of another potential default.

Yet despite the economic fragilities, the Chinese government continues to force feed credit into system. The Chinese government appears to either be buying time from a bubble bust or hoping that blowing new bubbles may cure problems caused by previous bubbles.

Chinese loan growth beat expectations in March even as money supply growth continues to ebb. Those loans appear as being rechanneled into the frenzied bidding of stocks. Even funds from China’s shadow banks have reportedly been increasingly used for wanton stock market speculation.

Worst, despite recent imposition of regulatory controls, margin debt used to finance stock market speculation has reportedly more than doubled the US counterpart.

From Bloomberg[3]: Securities firms’ outstanding loans to investors for stock purchases were a record 1.64 trillion yuan ($264 billion) as of April 10, up 50 percent in less than three months, despite bans imposed by the CSRC in January and April on lending to new clients by four Chinese brokerages…China’s margin finance now stands at about double the amount outstanding on the New York Stock Exchange, after adjusting for the relative size of the two markets.

The serial record breaking Chinese stock market benchmark has already surpassed the Japan contemporary in terms of market capitalization.

At the close of Friday’s trading session for Chinese stocks, Chinese regulators once again say that they will tighten margin trade as exchanges announced expanding shorting facilities.

From the Wall Street Journal[4] (bold mine): The CSRC warned small investors, who have been big drivers of the rally, not to borrow money or sell property to buy stocks, ratcheting up its rhetoric about the market. Mainland investors opened stock-trading accounts at the fastest pace ever in the week ended April 10, and margin account balances reached a record 1.16 trillion yuan ($187 billion) as of Thursday, according to the Shanghai Stock Exchange. The regulator banned a type of financing called umbrella trusts that provided cash for margin trading, the practice of borrowing against the value of common shares held at a brokerage, and placed limits on margin trading for highly risky small stocks that trade over the counter, rather than on exchanges. The regulator said customer accounts needed to be better classified, potentially a warning that limits will be placed on the type of trading permitted for small investors. The exchanges issued rules that would make it easier for investors to short, or bet against, stocks. To short a stock, an investor borrows shares and sells them, hoping the price will fall and so let them repay with cheaper shares. It has been difficult to short stocks in China even as valuations soared because it has been virtually impossible to borrow shares. The exchanges said they would push for an increase in the supply of shares available for lending and increase the number of stocks whose shares can be borrowed.

This seems like another superficial or political staged attempt to curb or control the stock market bubble that has been going berserk.

The Shanghai index pole-vaulted 6.27% last week.

With Chinese stock market futures as indicated by China A50 futures suffering a 5.97% loss Friday, Chinese stocks may be headed for a sharp selloff in Monday’s opening.

And it has not just been about stocks, Chinese junk bonds have been enjoying a record run.

From Bloomberg[5] (bold mine): Investors in Chinese junk bonds are taking the biggest gamble in at least a decade. Leverage for speculative-grade Chinese companies is at its highest since at least 2004, whether measured by earnings relative to interest expense or total debt to a measure of cash-flow, according to data compiled by Bloomberg using a Bank of America Merrill Lynch index. Borrowers have also piled on the most debt relative to their assets since 2007. The deterioration in credit quality coincides with the slowest annual growth since 1990 for Asia’s biggest economy, and helps explain why Fitch Ratings Ltd. predicts defaults will climb. That’s bad timing for bond investors who swallowed a record $209.2 billion of Chinese-company notes denominated in either dollars, euros or yen last year, Bloomberg data show.

As one can see for Japan and China, record stocks have been a function of monetary abuse.

Record Stocks NOT EQUAL to G-R-O-W-T-H: US, Europe and ex-China and Japan Asia

You think it is different for the US or for Europe? Well think again.

Record US stocks has been about growth? Hardly

The US Federal Reserve of Atlanta, one of the twelve regional Federal Reserve banks, has a NOWcasting or real time forecasts of the US statistical economy.

Here is what they see for the 1Q 2015 as of this writing: The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2015 was 0.1 percent on April 16, down from 0.2 percent on April 14. The decline came after Wednesday morning's industrial production release from the Federal Reserve Board

Record stocks on a .1% G-R-O-W-T-H??!!

Additionally, whatever growth that had been posted in the recent past has been below the 3.24% average. Yet again record stocks.

More.

Factset, a company that provides financial information, recently noted that for 1Q 2014 negative earning guidance has dominated earnings announcements. Importantly, they note that stock markets have been rewarding companies posting negative earnings announcement more than those with positive earnings[6]!

Even more. Record US stocks comes as bankruptcies climb to its fastest level since 2010.

From Reuters[7] (bold mine): The number of bankruptcies among publicly traded U.S. companies has climbed to the highest first-quarter level for five years, according to a Reuters analysis of data from research firm bankruptcompanynews.com. Plunging prices of crude oil and other commodities is one of the major reasons for the increased filings, and bankruptcy experts said a more aggressive stance by lenders may also be hurting some companies. While U.S. stocks have climbed to near record levels and the jobless rate has fallen to a six-year low, 26 publicly traded U.S. corporations filed for bankruptcy in the first three months of 2015. The number doubled from 11 in the first quarter of last year and was the highest since 27 in the first quarter of 2010, which was in the immediate aftermath of the financial crisis. In addition, many of the bankruptcies were large. Six companies had reported at least a billion dollars in assets when they filed in the first quarter of this year, the most in the first quarter of any year since 2009. The $34 billion in assets held by the 26 companies is the second highest for a first quarter in the past decade. The highest was the $102 billion held by the public companies that filed in the first quarter of 2009 when the crisis was at its worst.

Yet it has been pretty bizarre for Fed officials and Wall Street to quibble over a measly proposed quarter of a percent (.25%) rate hike, which goes to show how hooked on credit the entire economy and financial markets has been founded on.

As for Europe, this earnings chart indicates why Europe’s turbocharged stocks have hardly been about growth!

Record or near record stocks has become a dominant feature even in ex-Japan and China Asia. Yet if one looks at their respective economic G-R-O-W-T-H trends since 2011, they have MOSTLY been on a decline: Australia, South Korea, Taiwan, Singapore, Hong Kong, Indonesia and Thailand. Only India, Vietnam and New Zealand appear to beat the region’s dominant trend.

On the other hand, what the establishment has mostly ignored has been the relationship of debt with record stocks…that is with the exception of a few…

For instance, German Finance Minister Wolfgang Schaeuble expressed concerns last week that that “high debt levels remain a source of concern for the global economy”, where the Chinese economy has been "built on debt".

Moreover, research company MSCI recently warned against global property bubbles (bold mine): “Fears of a renewed global property bubble are rising as prices and yields hit records last seen before the financial crisis” as “the pricing of real estate around the world had become ‘increasingly aggressive’….The main factor behind the pricing is “exceptionally low” bond yields, which made property much more appealing to investors in relative terms, Mr Hobbs said, citing “frenzied buying”.

In sum, record stocks (as well as record property prices and bonds) have mostly been about unbridled and rampaging speculative activities financed by credit that has been pillared on zero (or negative) bound rates, QEs and other monetary easing tools than they have been about G-R-O-W-T-H.

Reasoning from price changes will be detrimental for one’s portfolio.

Phisix Record 8,000: Market Confidence or Publicity Campaign to Project Confidence?

This bring us to the Philippines where popular wisdom has been to tie record stocks with to confidence from economic G-R-O-W-T-H

The following represents the hazards of rationalizing from price changes, or the recency bias or serial position bias or ticker tape mentality.

The Philippine president graced the opening ceremony at the PSE last Tuesday where officials of the Philippine Stock Exchange cajoled to the honored guest[8]. (bold mine)

In his welcome remarks during the event, PSE Chairman Jose T. Pardo said, "At the 8,000 point level, the index is giving returns just this year of already more than 10 percent. It is interesting to note that the unprecedented ascent to 8,000 comes with other remarkable market indicators."

Mr. Pardo cited the brisk trading activity in the first quarter of 2015 which soared by 40 percent from the same period a year ago. He also mentioned that in the first three months of the year, total market capitalization of listed firms rose by 18 percent to P14.98 trillion from the same period in 2014 and that foreign funds registered a net buying of P48.87 billion in the January to March period, a 182 percent increase year-on-year. There was also an increase in local investor participation as they accounted for 53 percent of trading activity in the first quarter of the year.

"This can only mean one thing, confidence in the economy under your leadership, Mr. President", Mr. Pardo stated.

Last week’s 2.2% correction came with a net foreign trade of NEGATIVE Php 5.71 billion, the largest since October 2014.

If record Phisix 8,000 has allegedly been about ‘confidence’ partly predicated on foreign trade, then the above indicates an OOPS moment!!!

With the above and this week’s correction, has confidence on G-R-O-W-T-H been reversed? Or will this be explained or justified away by sidestepping the selling activities as mere profit taking? So rising stocks equals G-R-O-W-T-H but falling stocks equals denial?

The problem with rationalization has always been the inconsistency of the logic presented.

And here is what the PSE officials forgot to say…

…that record stocks has been engineered by index managers. 

Massaging or manipulating the index via “marking the close”, which represents a violation of the SEC Securities Regulation Code, has been used with blatant regularity and has apparently been condoned by the authorities.

And to add to last week’s discussion[9] of the growing concentration of trade activities, here are more facts about record Phisix 8,000.

On market cap distribution

As of the close of April 17, the market cap weighting of the top 15 issues of the Phisix constitutes a staggering 79.57% of the domestic bellwether!

Meanwhile, the 10 best performers as measured by year to date gains (as of last week) has an accrued market cap share of an astounding 55.23%!

So movements of the 10 best performers or the top 15 biggest market caps determine the direction of the Phisix!

On Peso volume distribution

Peso volume trades of the 30 members of the Phisix basket relative to total volume (Phisix issues+ non-Phisix issues+ special block sales + odd lot) on a daily basis have been climbing since February. They have now ranged from over 60% to 80% of total volume.

Yet if adjusted for major special block sales to include Friday’s Php 26 billion Meralco special block sales, the volume from Phisix trade expands to the range of 65% to 95%. The above doesn’t even include minor special block sales. Firms from the Phisix basket constitute a large majority of special block sales even from the perspective of minor block sales

So this translates to a massive gravitation of trading activities towards Phisix companies.

And it has been more than just the entire Phisix.

Aside from valuations, gains and market cap weightings, like a centripetal force, trading activities has been converging into the top 15 biggest firms.

The same top 15 issues have increasingly been taking the bulk of the daily peso trade volume based on gross basis (left) especially if adjusted for major block sales (right).

Additionally, with the top 15 garnering the market’s attention and or signifying the index managers’ maneuvering, the 10 outperformers from the 15 biggest market caps have also been absorbing an increasingly significant share of the daily peso volume trades (left). This has been magnified by the special block sales (right)!

So since record Phisix 8,000 has been a function of an increasing concentration in terms of trading, price setting, valuations and performance activities towards the biggest market cap issues, in particular, the 10 best performers, it can be construed that record Phisix 8,000 has hardly accounted for as a genuine product of market confidence, but rather about stealth publicity measures to “project” market confidence that has been engineered from rampant market manipulations.

What the Philippine President’s Dream of Phisix 10,000 Means

Yet the Philippine president hopes to see 10,000 Phisix at the end of his term.

Given the appalling or revolting degree of current overvaluations even at 8,000, what the president proposes will be a transmogrification of the Philippine stock exchange into a destructive hub of casino speculators.

What he seems to also be suggesting is for stock market’s basic function as channel to intermediate savings into investments, enabled and facilitated by price discovery predicated on the discounting dynamics of finance, to be totally obliterated or dismantled!

He appears to also implicitly promulgate that—since soaring stocks will extrapolate to a redistribution of resources in favor of the beneficiaries, particularly the elites, many of whom has already been basking in glory to be included in the roster of the world’s richest, all coming at the expense of the average citizens—inequality must be promoted!

Of course, Phisix 10,000 can be achieved. All he has to do is to mimic the monetary policy aspects of Japan’s Abenomics. He can instruct the Bangko Sentral ng Pilipinas and public pension funds to emerge from the shadows and to openly buy stocks.

Yet this will crash the peso and send price inflation to the skies, while at the same time inflating the already inflated balance sheets of the many companies particularly the publicly listed ones.

So instead of positively contributing to the economy, Phisix 10,000 will lead to a total collapse of the real economy!

Of course, the other way to do it is for market manipulators to stay their course. But where will the index managers get their funding to sustain present activities?

I am reminded of the fateful BW bubble that turned into a scandal. BW’s preposterous 52x run climaxed with the visit of Macau’s casino mogul Stanley Ho to the PSE. This eventually was followed by the stock’s monumental collapse back to its origins!

Dismal Rebound in February Philippine OFW Remittances

Low or zero growth even in the government’s own statistical accounts has now been reckoned as taboo and has even been subject to implied censorship!

In the perspective of remittance statistics, in the past where rate of growth falls in line with government projections, the BSP headlines will ostensibly indicate of the N% of the increase, or be accompanied by acclaims such as “Sustain Robust Growth” or “Continue to Rise”.

But with recent accounts of low growth, the BSP headlines will just denote of, or frame remittance data as having “reach” X levels. This seems designed to sanitize the unpopular event or to put a positive spin on the below expectation numbers.

Yet, framing aside, the reality has been February’s remittance growth rates continue to disappoint.

The BSP on personal remittances[10]: Personal remittances from overseas Filipinos (OFs) amounted to US$2.1 billion in February 2015, an increase of 4.0 percent compared to the same period in 2014. As a result, remittance inflows for the first two months of the year reached US$4.1 billion, posting a year-on-year growth of 2.1 percent, Bangko Sentral ng Pilipinas Officer-in-Charge Nestor A. Espenilla, Jr. announced today.  For the period January-February 2015, personal remittances from land-based workers with work contracts of one year or more, and migrants’ transfers totaled US$3.1 billion. Meanwhile those from sea-based and land-based workers with work contracts of less than one year aggregated US$1.0 billion.

The BSP on cash remittances (bold added): Cash remittances from OFs coursed through banks summed up to US$1.9 billion in February 2015, higher by 4.2 percent than the level posted a year ago. This brought cash remittances for the first two months of 2015 to US$3.7 billion, representing a 2.4 percent increase relative to the year-ago level. In particular, cash remittances from land-based and sea-based workers rose to US$2.8 billion and US$0.9 billion, respectively.  The bulk of cash remittances came from the United States, Saudi Arabia, the United Arab Emirates, the United Kingdom, Singapore, Japan, Hong Kong, and Canada.  The slowdown in growth in recent months could be due to base effect as remittances last year were relatively high given higher transfers from overseas Filipinos that were intended for the rehabilitation and rebuilding efforts in Eastern Visayas due to the damage caused by Typhoon Yolanda.

This month’s numbers marks the third in four months of dismal or below expectations growth figures.

February 2015 remittance growth rates have sunk below 2009 levels, or have been worse than 2009, or accounts for as the lowest growth rate since 2002!

Key questions:

One, should ‘base effects’ of low growth in February data—allegedly due to the previous ‘high growth’ in response to Typhoon Yolanda according to the BSP—occur immediately or a year after the event?

Typhoon Yolanda occurred in first week of November 2013. November and December remittances soared, but since, remittance trend has been on a steady decline. However the recent downshift appears to have sharply intensified. These are base effects?

Has the BSP been reasoning from price changes?

Two, has the decline in remittances been instead a function of diminishing returns (see chart above lower pane)?

Three: If the much touted OFW remittances growth rate remains muted or subdued, then where will demand come from?

Yet how will high expectations of consumer based statistical economic G-R-O-W-T-H be met? More importantly, how will this be financed? Will income (wages, dividends, earnings, profits, rents and interests) from BPOs, construction, shopping malls, hotel and casinos offset the decline in remittance growth rates? Or will credit growth recover and zoom?

[As a side note, following a landmark spike in 1 month Philippine treasury bills last Thursday, index managers—who may be reading me—came back to contain recent bouts of volatility in the short term spectrum, Friday. We’ll see how this goes.]

What will be the effect of diminishing growth of remittances to the supply side? The supply side has been in a frantic race to build shopping malls, housing, condos, hotels and allied industries, so where will these industries get their customers? What happens if expectations won’t be met?

Unlike establishment analysis, where demand seems to just pop out of statistics, demand will only emanate from income or savings or borrowing. OFW remittances mostly account for as wages earned from employment. And OFW employers depend on economic activities of their  respective locality.

Since remittances and BPOs depend on global political economic developments, which represent most of their sources of income, how then will a sustained downshift in global economic conditions (or even a prospective crisis) impact these economic agents? Or have these agents acquired superhuman or divine powers to become ‘immune’ to external economic developments? The consensus seem to assume such conclusion for them to project fantastically high economic growth rates.

Expectations that will eventually crash into reality like share prices of the infamous Enron—previously billed as the “seventh largest company in the world”.

---

[1] Charles Mackay Preface to the First Edition, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, Library of Economics and Liberty

[2] Breibart.com REPORT: ‘REAL’ CHINA GDP SHRINKS AS DEMAND COLLAPSES April 16, 2015

[3] Bloomberg.com China Walks $264 Billion Tightrope as Margin Debt Powers Stocks April 13, 2015

[4] Wall Street Journal China Raises Red Flag on Its Stock Markets April 17, 2015

[5] Bloomberg.com China Junk Bonds Pose Most Risk Since ’04 on Credit-Quality Dips April 14, 2015

[6] See US Stock Market Bubble: In 1Q 2015, Firms with Bad Earnings Have Been Rewarded More than those with Good Earnings April 2, 2015

[7] Reuters.com U.S. public companies seek bankruptcy at fastest first-quarter rate since 2010 April 14, 2015

[8] PSE.com PSE cites President Aquino's leadership for market’s ascent to 8,000 April 14, 2015

[9] See Phisix 8,100: A Story of 10 of the 15 Biggest Market Cap Heavyweights and the Combustion of the Global Risk ON Moment April 12, 2015

[10] Bangko Sentral ng Pilipinas, January-February 2015 Personal Remittances Reach US$4.1 Billion April 15,2015

Chart(s) of the Day: Yields of Philippine 1 Month Treasury Bills Soar to 3 Year High!

Hasn’t it been portrayed by media and the establishment that the Philippine political economy have developed 'invincibility' and or 'immunity' to all sorts of risks? 

If so, then who from the establishment institution/s has been so desperate or frantic enough to raise short term liquidity by dumping 1 month bills on the marketplace to send yields of 1 month treasury to 3 year highs?! And why?? (charts from investing.com)

Yet there have been repeated attempts at vehemently “massaging” yields as seen during the past few days. 

Unfortunately for the index managers, it appears that the developing 2 year uptrend has signified a powerful force to have kept manipulations at bay. 

Yet more signs of record stocks in the face of record imbalances at the precipice. 

Lady Protestor Disrupts ECB's Mario Draghi Speech, Shouts: “End ECB ‘dick-tatorship’”

Despite record setting stocks, central bankers seem as looking less popular these days. 

From the Guardian

Mario Draghi, the president of the European Central Bank, has been showered in confetti by a female protester who interrupted his monthly press conference in Frankfurt screaming: “End ECB ‘dick-tatorship’”. 

The woman, wearing a black T-shirt carrying the same slogan, clambered on top of the desk where Draghi was delivering his opening speech after the bank’s latest policy meeting. She threw a handful of papers at him, and sprinkled confetti into the air.

It was unclear what point the protester hoped to make, but copies of the leaflets she was throwing, which later emerged on Twitter, accused the ECB of exercising “arrogance” and “autocratic hegemony”. She was identified by the police as a 21-year-old from Hamburg.

More pictures

(above images from FT Alphaville) 

Perhaps this could have been related to the recent Blockupy anti-ECB violent protests during the ECB's official inauguration of its new headquarters at Frankfurt Germany last March. See pictures here. Then, several police cars were set ablaze that led to the arrest of the 350 dissenters.

Nonetheless, the lady assailant of Mr. Draghi, the 21 year old Ms. Josephine Witt had her tweets published at the Zero Hedge, which included her manifesto...

The above seem to signify symptoms of a developing phenomenon.

Here is my guess. Once the global crisis becomes a reality, protests against central banks will snowball and may even become more violent.

Indonesian Government Imposes Foreign Exchange Controls: Limits Use of Foreign Currencies in Domestic Transactions

I recently pointed out of the growing risks in the ASEAN region, particularly in Indonesia. 

The rupiah has been taking it to the chin and now has crashed to record levels. Question now is: To what extent will the current ‘capital buffers’ hold in the prospect of a sustained US dollar juggernaut vis-à-vis the rupiah??? Where is the breaking point for the system to snap?

If Indonesia’s system wilts and eventually cracks how will this affect the entire region? Do the big bosses of the BSP and their hordes of economists know?

(note: I made an error in my previous post where I mentioned Indonesia’s currency as ‘ringgit’ instead of the ‘rupiah’. Changes had been made above)

Well, in the face of crashing rupiah and record high stocks, the Indonesian government just imposed foreign exchange controls

The Nikkei Asia reports: (April 13; bold mine)

Bank Indonesia, the country's central bank, will require all companies to use the rupiah for domestic transactions starting July 1 to bolster the currency.

In recent months, domestic transactions using foreign currencies, mostly the dollar, have been running around $6 billion a month. Manufacturers, particularly, frequently engage in this sort of trading.

The central bank will impose sanctions on those using foreign currency in domestic cash and noncash transactions, with some exceptions for the government budget and financing of strategic infrastructure projects, with central bank approval. The restrictions were introduced in 2011, but had little effect since there were no clear penalties for breaking the rules.

Eko Yuliantoro, acting head of the central bank's Department of Currency Management, said Thursday the bank will impose penalties on companies or individuals that do not comply with the rules. Violations are punishable by imprisonment up to one year and a fine of up to 1 billion rupiah ($77 million). The bank has formed a task force with the ministries of Finance, Trade, Home Affairs, Tourism and other authorities to oversee implementation of the rules.

Bank Indonesia Gov. Agus Martowardojo said Friday that as of April 7, the rupiah had fallen 4.85% since Jan. 1 and that the trend may continue through the rest of the year. He said it would be difficult to reverse the bearish trend in the rupiah through market intervention. "To address the vulnerability in the national economy, a disciplined monetary policy will be required," Martowardojo added.

According to the central bank, the total foreign debts of Indonesian companies, including state-owned enterprises, has reached $163 billion and only 26.5% of that is hedged. As the U.S Federal Reserve is expected to raise interest rates in the future, a move that could trigger further appreciation of dollar, he will ask all companies in Indonesia to improve their foreign fund management and hedge their dollar exposures.

For the Indonesian government to drastically impose foreign exchange controls appears to highlight signs of desperation from the sustained downside volatility of her currency.

The exchange controls had actually been announced last week, April 9, based on a report from Reuters.

Yet the USD-rupiah has been rising despite the proposed imposition of capital controls this coming July.

The currency markets may have seen or interpreted the government’s actions as potentially contributing to the weakening of Indonesia’s economic conditions or has read through the government's seeming panic, or has downplayed on the purported effects of such capital controls.

The weak rupiah appears to have temporarily benefited the Indonesian economy in terms of record FDI’s in 2014 (see chart here). But this appears as being neutralized by resident capital flight. The upsurge in dollar based transactions—“running around $6 billion a month”—have likely been symptomatic of this.

And in recognition of the risks from the vagaries of capital flows, the Indonesian government dangles tax incentives to foreign firms to stem the risks of capital flight.

From the Wall Street Journal (April 10)

Indonesia will start offering foreign investors a lower tax bill if they reinvest profits here, a measure that could stem capital flight as the U.S. prepares to raise interest rates and buffer the economy from “uncomfortable” rupiah weakness, the finance minister says.

Starting later this month, companies that reinvest dividends will receive a 30% deduction on their taxable income over six years, Finance Minister Bambang Brodjonegoro said in an interview. Those businesses also will be able to use losses to offset profits for up to 10 years, compared with five currently. Other incentives include lengthening tax holidays for certain industries, including the petrochemical sector, which is the biggest recipient of foreign investment in the country.

The tax incentives would be aimed at keeping foreign capital within Indonesia’s borders, a move Mr. Brodjonegoro hopes will stem an exodus of hot money if the U.S. Federal Reserve raises interest rates, as expected later this year. Foreign capital dominates markets in Southeast Asia’s largest economy, and hints of rising rates in 2013 sent both the rupiah and the local stark market into a nose dive.

Nevertheless, Indonesia’s record low rupiah has only caused external trade to plummet as both February exports and imports have crashed to 2008 levels!

February exports and imports plunged 16.02% and 16.24%, respectively according to Reuters.

The surge in currency volatility has apparently contributed to the immense distortion of the Indonesia’s entrepreneurs’ economic calculation and coordination process that has led to the trade collapse! Just how will entrepreneurs do their profit –cost analysis with such intense forex price fluctuations? 

The crash of her external trade has hardly improved her current account deficit. Capital flight could have also been a factor.

Even more, mounting government expenditures comes in the face of growing indications of economic weakness. Add to these the enormous $163 billion of foreign debts where only 26.5% has only been hedged.

So aside from potential shift in the Fed's ZIRP (zero bound policies), the rupiah's weakness has been structural--specifically, a product of domestic policies that has been transmitted to the economy via boom bust cycles.

Well, foreign exchange controls will have unintended consequences.

As Cato Institute’s monetary economist Steve Hanke explained in 1998 (bold mine)

When convertibility is restricted, risk increases, and so the risk-adjusted interest rate employed to value assets is higher than it would be with full convertibility. That’s because property is held hostage and subject to a potential ransom through expropriation. As a result, investors are willing to pay less for each dollar of prospective income and the value of property is less than it would be with full convertibility.

This, incidentally, is the case even when convertibility is allowed for profit remittances. With less than full convertibility, there is still a danger the government will confiscate property without compensation. This explains why foreign investors are less willing to invest new money in a country with such controls, even with guarantees on profit remittances.

So investors become justifiably nervous when it seems a government is considering imposition of exchange controls. At that point, settled money becomes “hot” and capital flight occurs. Asset owners liquidate their property and get out while the getting is good. Contrary to popular wisdom, restrictions on convertibility do not retard capital flight, they promote it.

While the prospective implementation of forex restrictions has been directed at domestic transactions by local enterprises and individuals, it won’t be far fetched where capital controls may spread to foreigners.  Failed interventions beget more interventions

So despite the record setting stocks via the JKSE , I expect the current capital flight dynamics in Indonesia to intensify. And such would magnify the risk of a regional contagion.

How Regulations Suffocate the Economy and Restricts Freedom

Sovereign Man’s Simon Black on the deleterious effects of soaring regulations (bold mine)

On March 16, 1936, the government of the United States published the very first edition of the Federal Register.

President Roosevelt had been taking a lot of heat over the previous year; under his New Deal program, dozens of government agencies were passing new rules, regulations, and codes at an absolutely feverish pace.

It became impossible for anyone to keep track of them—even the other agencies within the government.

So in the summer of 1935 they created a new law requiring every executive agency to publish a daily, official record of their activities.

This official record was called the Federal Register. And it would contain a complete set of every rule, regulation, code, and proposal issued by each of the executive agencies.

The first edition was published on March 16, 1936. It was sixteen pages.

Every single work day since then, without fail, the government has published the Federal Register.

Its first full year (1937) contained a total of 3,450 pages. By 1942, the Federal Register had grown to over 10,000 pages.

It passed 20,000 for the first time in 1967. More than 30,000 in 1973. And more than 40,000 the following year in 1974.

The Federal Register exploded during the 1970s, in fact, touching nearly 90,000 pages by the end of the Carter administration.

During Reagan’s time, the publication shrank to under 50,000, only to rise again under subsequent presidents.

The longest edition ever published was logged at 6,653 pages in a single day, during the administration of Bush II.

President Obama has averaged nearly 80,000 pages per year, far and away the highest of any President in US history.

This morning’s edition, in fact, is a whopping 358 pages full of new rules, regulations, and proposals.

Did you read it? Neither did I. But as the old saying goes, ignorance of the law is not an excuse.

This is absurd. Every single one of those regulations makes people less free.

They criminalize the most innocent behavior and make it impossible for the average person to know what’s legal and what’s not as if we all have some some civic duty to read and memorize 80,000 pages per year of government regulation.

4,500 criminal statutes now exist under US Code. That’s 1,500 times more than the three crimes outlined in the Constitution– piracy, treason, and counterfeiting.

(Ironically, the Federal Reserve and commercial banks commit the latter on a daily basis…)

We’ve seen this theme countless times throughout history.

Under Diocletian’s reign, the Roman Empire’s body of laws and regulations multiplied like rabbits.

He centralized all aspects of the economy, controlling wages, prices, commerce, and agricultural activity. Violations in many cases were subject to the death penalty.

And when people complained, he told them that the barbarians were at the gate, and that individual liberty needed to be sacrificed for the greater good of security.

By Diocletian’s time, Rome was already bankrupt. His regulations pushed the Empire over the edge.

It’s not much different today. Each and every one of these obscure regulations COSTS MONEY.

So it’s not surprising that as the number of pages in the Federal Register has increased, so has the US federal debt.

In order to pay for all of this bureaucracy, every citizen has become subject to an increasingly complex and punitive tax system, enforced at the point of a gun by a bankrupt government desperate to keep the party going.

Let me add graphics of…

…the US government budget (deficit spending), and the...

...US federal debt. Both charts have been sourced from the Heritage Foundation

Yet the link between regulation and debt.

Every enacted regulation needs enforcement. Enforcement entails spending. And spending requires financing. Government financing are sourced from taxes, debt and inflation. Essentially, every increase in regulation entails higher taxes, debt or inflation. Hence, “Each and every one of these obscure regulations COSTS MONEY.”

And if the tax revenues can’t keep up with the pace of regulatory profligacy, thus the recourse towards deficit spending financed by debt: as “Federal Register has increased, so has the US federal debt.”

In addition, desperate governments will dragoon its citizens via innovative and increasingly repressive tax regimes, thereby “to pay for all of this bureaucracy, every citizen has become subject to an increasingly complex and punitive tax system, enforced at the point of a gun by a bankrupt government desperate to keep the party going.”

Yet every government spending represents resources extracted from the private sector, and mostly, resources taken away from the productive agents of the economy. Hence, regulatory overload impedes economic activities, and consequently, spawns black markets.

In addition, there are costs (time, effort and resources) to comply with regulations.

Economist Robert Higgs on estimated compliance costs endured by the US economy:

According to Wayne Crews, who makes an annual estimate of the cost of compliance with federal regulations alone, “Costs for Americans to comply with federal regulations reached $1.863 trillion in 2013”—which is equivalent to more than 13 percent of national income. Compliance with state and local government regulations surely adds a large amount to Crews’s estimate for federal compliance alone. No one needs to tell Americans, however, how onerous and exasperating the entire mass of government regulations and related red tape has become. Virtually every part of economic and social life now bears these heavy burdens, and any truly meaningful appraisal of the size of government today must take them into consideration along with the amounts the various governments are spending.

Even more, increasing regulations drives a chasm between the economic (productive) class and the political (parasitical) class, making the former subservient to the latter.

In her classic novel Atlas Shrugged, the late Ayn Rand honed in such politically induced societal entropy...

Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion- When you see that in order to produce, you need to obtain permission from men who produce nothing- when you see that money is flowing to those who deal, not in goods, but in favors- when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you- when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.

Yet this is a universal phenomenon or applies to every government.

Regulating people’s lives means LESS freedom. 

Arbitrary regulations, not only "criminalize the most innocent behavior" for being ignorant of what's legal and what's not, instead they have frequently been used as instruments of repression based on political expediency and the advancement of power over the citizenry. 

Therefore, increasing enactments of arbitrary regulations signify a slippery slope path towards corruption and dictatorship.

As Roman lawyer, orator and senator Publius Tacitus wrote (Annals 117 Book III, 27) Corruptissima re publica plurimae leges (The more numerous the laws, the more corrupt the government.)

Quote of the Day: One of the most pervasive and dangerous myths of our time is that military spending benefits an economy

No, the real enemy is the taxpayer. The real enemy is the middle class and the productive sectors of the economy. We are the victims of this new runaway military spending. Every dollar or euro spent on a contrived threat is a dollar or euro taken out of the real economy and wasted on military Keynesianism. It is a dollar stolen from a small business owner that will not be invested in innovation, spent on research to combat disease, or even donated to charities that help the needy.

One of the most pervasive and dangerous myths of our time is that military spending benefits an economy. This could not be further from the truth. Such spending benefits a thin layer of well-connected and well-paid elites. It diverts scarce resources from meeting the needs and desires of a population and channels them into manufacturing tools of destruction. The costs may be hidden by the money-printing of the central banks, but they are eventually realized in the steady destruction of a currency.

This excerpt is from physician, former US Congressman, former presidential candidate and the great libertarian Ron Paul in his latest outlook: The New Militarism: Who Profits? at his website the Ron Paul Institute