Why the Duterte Government’s “Build, Build, Build” Signifies a Recipe for a Crisis

Last weekend, I wrote

The NEDA just did NOT get the memo. Like the war on drugs, political mega deals with the Chinese government will be beyond the scope of edicts, legislation and mandates—or even the constitution.

Confirmed!

From the Friday’s proposed massive infrastructure spending program (Inquirer November 4, 2016)

“Build, build, build” is the battlecry of the Duterte administration as it intends to ramp up infrastructure spending to the tune of P8 trillion in the next five years, according to Transportation Secretary Arthur Tugade.

Cabinet members on Thursday called on Congress to grant President Duterte emergency powers on transportation projects as they presented the administration’s planned infrastructure program to spur development and ease traffic congestion in the country.

Without the emergency powers, the projects, which include new roads, bridges, railways, and the improvement of airports, will  be delayed, Tugade said.

Selective bidding

“Is the population willing to wait some more?” he said at a press briefing in Malacañang.

The emergency powers being sought for the President would allow him to conduct selective bidding, direct contracting, or negotiated procurement for materials or services for projects intended to deal with the transport problem.

The bill that would authorize these powers would also bar lower courts from issuing temporary restraining orders or injunctions against the projects. Only the Supreme Court would be given the authority to issue such an order.

First, emergency powers simply omit or bypass the check and balances provided by the extant institutional and legal framework. Through centralization, the executive imbues or absorbs MORE political control over the economy.

Short circuiting the defective check and balances would entail of even MORE abuses than less. Greater risks of abuses have been sidelined due to the populist embrace of the superhero syndrome. Or the public’s blind faith on the strong man government to deliver promises. Yet the public forgets that the leadership is NO god and is just a human being who is subject to mortal frailties.

Second, it is pretty much obvious that martial law would NOT be required at all for the current drift to an ochlocratic leftist dictatorship.

The executive only requires a stamp pad legislative branch and a supine supreme court to put in effect its pet projects.

By virtue of complete control over the other branches of government, the executive branch can unilaterally impose whatever it desires.

Third, transforming the consciousness of the society requires a strong command of language that gains popular acceptance.

And this has easily been attained by virtue of indoctrinating fallacies as reality.

Government infrastructure spending equals G-R-O-W-T-H has signified a shibboleth for the majority, including so-called experts.

Benefits are seen, but never the cost.

Mao’s China, USSR, Cuba and North Korea have all relied on government spending including infrastructure, but where are they now?

The Japanese government has embarked on a series of fiscal infrastructure stimulus since its bubble imploded in 1990s. Yet more than two decades after, the Japanese economy still wobbles from economic stagnation while the cost of such undertaking has catapulted its debt conditions to the largest in the world. It’s why Abenomics embarked on a grand NIRP experiment which also includes never ending infrastructure spending. So Abe-Kuroda’s grand experiment has now translated to greater risks of instability more than G-R-O-W-T-H. [I dealt with this in Philippine Peso Tumbles 1.4% the Largest Weekly Loss Since 2014; Why the Weak Peso Signifies a Long Term Trend September 18, 2016]

Modern day China or “Communism with Chinese characteristics” has been no different.

Even the Chinese government’s addiction to credit intended just to inflate GDP statistics has become so evident for the mainstream to ignore

From Bloomberg (November 2 2016; bold mine)

In the five fastest-growing provinces, total fixed-asset investment exceeded the sum of their gross domestic product in the first three quarters of this year, according to new data from 29 of 31 provincial governments. In Chongqing, Guizhou, Tianjin, Jiangxi and Anhui, combined total investment was 6.56 trillion yuan ($969 billion) versus their combined economic output of 6.37 trillion yuan, the data show.

Despite a transition toward services and consumer-led growth, investment by the government, developers, or companies is still the engine fueling the fastest expansion rates. While the economy looks resilient for now -- the latest evidence of strength coming Tuesday with data showing the official manufacturing gauge jumped to a two-year high -- the addiction to investment and rapid credit growth needed to fund it is a growing concern.

China’s government has vowed break its stimulus addiction by boosting services, which accounted for more than half of the overall economy’s output last year for the first time, and consumption, a major prop this year. But quitting the old build-it-and-they-will-come mentality is proving harder to do at the provincial level as it remains the quickest way to juice GDP.

The reason why the Chinese economy seems “buoyant” today has been due to the astounding skyrocketing of social financing costs to the tune of $2.6 trillion (Yardeni.com). Bank loans have shot to the moon with a stunning $1.9 trillion of credit growth in a YEAR! That’s T-R-I-L-L-I-O-Ns!

It’s a grand stimulus which has been DWARFED the 2008 (US $586 billion) scale. The IMF warned last August that China’s 254% debt to GDP is unsustainable and must "urgently address the problem." (CNN MoneyAugust 12)

Such massive infusion of credit has only stoked a runaway bubble in property that may spillover to stocks.

Yet the Chinese government cannot wean away from credit, because doing so would mean a collapse of the house of cards entirely DEPENDENT or built on credit expansion.

Government infrastructure spending does NOT represent the HOLY GRAIL.  

Since resources are scarce, government spending would entail resources taken away from the productive economy. The significance of the proposed “Build, build, build” project is the expansion of the government at the expense of the productive economy.

Another is that since the said infrastructure projects are political, then distribution of benefits would favor the politically well-connected parties from the private sector. Chinese and Japanese sponsors are likely to benefit from the administration’s doleouts.

Yet once China and or Japan will be engulfed by a crisis those deals with Philippine government can be expected to vaporize.

Third, with government growing faster than the private sector, this entails more debt, higher taxes and increased inflation which will all be manifested through a weaker peso. Yet more politicization would postulate to greater risks of instability and crisis.

Finally, all it takes to increase investments is to respect and uphold private property or property rights and its ramifications: promote voluntary exchanges and sanctity of contracts. The short of this is to implement Economic FREEDOM.

But since HUMAN LIFE is the ESSENCE of property rights, and since life has NOT been respected—having been subjected to political fetishes by playing the role of god—then NO amount of government spending will translate to an avalanche of investments.

That’s because investors would not only seek a Return on Investments (RoI), but more importantly, desire an assurance of the Return OF Investments as a fundamental feature of a commercial environment. If the latter can’t be secured, then there would hardly be any investments at all.

Phisix 7,230: Two Critical Breakdowns Reinforces the Newton’s Law Dynamic

I have no idea how things may turn out next week. But given how things have been evolving, the Philippine Stock Exchange will most likely witness another volatile week.

 

I am no fan of charts. That’s because charting has mostly been about history, also price trend perspectives can change based on selected timeframe/s, price trends can also be interpreted depending on indicators and patterns used (therefore dependent on the chartist's subjective bias), and most importantly, charts can be manipulated. Charts also provide an undeserving comfort of knowledge through inadequate assumptions and theory.

But since price charts are most frequently used tools by professionals, the industry and by the retail participants, I just can’t disregard them. To understand the market is to comprehend the thought process of the majority.

For now, let me don the hat of a chartist.

The two year chart of the PSEi has shown what seems as a critical breakdown last week.

Two straight weeks that accrued to a 5.6% loss appears to have substantially altered the tide of theballgame.

First, the PSEi has dropped to August to October 2015 levels. The present decline appears contiguous to themid October downdraft which was disrupted by a sudden 4.88% two day pump attributed to the resurgence of the OFW remittance growth and to the Philippines’ leadership's visit to China.

Two, 2016 appears to have engendered a minor head and shoulders pattern.

If the pattern holds true to its predictive abilities, then this suggest of sustained cascading of the Phisix. The pattern posits a target of 6,200-6,500. 

Third, the two year chart of the Phisix appears to have been broken once again. It was infringed in December of 2015 which led to the 6,084 low in January 21, but swiftly bounced back when global central banks launched a campaign to save the markets with NIRP. This coincided too with the BSP’s silent stimulus.

The PSEi soared back to 8,100 level in less than half of the time its predecessor accomplished in 2014-2015.

If the past will rhyme, then 6,500 to 6,600 would be the target. That’s if the breakdown from the two yearpattern will be confirmed by lower lows.

Lastly, the recent breakdown appears to reinforce what could be seen as a major double top. In short, recent price actions appear to fortify the likely scenario illustrated by the two year bearish picture.

The current momentum seems to reaffirm historical episodes of reversion to the mean. Vertical price actions eventually give way or succumb to what I reckon as “Newton’s Law” where most of the gains, if not all of them, would be negated.

Worst, it could be more than just negation but sustained downfall.

7,400 Again! Distribution of Returns Favors Losses; NEDA on China’s Political Mega Deals: Non Binding MOUs

7,400 Again!

A week back the PSE soared to 7,700, from a two day 4.88% ramp, which resulted to an astounding 3.53% weekly meltup. This week, fortunes radically changed. The PSEi suddenly regressed back to 7,404 from this week’s 3.21% quasi-crash.

And this week’s bloodbath had been considerably MITIGATED by a FURIOUS last two minutes afternoon delight PLUS marking the close pump.

Except for the last two minutes in Friday’s October 28 session, the PSEi traded not only below 7,400 but hovered close to 7,312.

In other words, without the manipulation or blatant price fixing, the PSEi could have traded at the October 13 low levels of 7,312.18 (or at least below 7,350)

From a chart perspective, the PSEi even broke the 200-day moving averages, but had to be pumped up back to the support level. This shows why I am no fan of charts, as they seem to suggest that price manipulations are incorporated as a reflection of "all relevant information".

Moreover, the incredible escalating accounts and degrees of volatilities showcases instability and has most likely signified as symptoms of an inflection point.

Also, this week’s meltdown marked the EIGHT time for the threshold 7,400 to have been touched.

7,392.2 or rounded to 7,400 as I have recently noted represents the May 15, 2013 milestone. So despite the populist din about G-R-O-W-T-H, the Philippine benchmark remains stuck at 7,400 for 3 years and over 5 months!

Yet in three years, the 7,400 watermark has provided a meaningful risk-reward distribution ratio.

In two ramps past 7,400, the bellwether returned 9.8% (April 2015) and 9.5% (July 2016), or an average of 9.65%.

On the other hand, in two accounts where the benchmark traded substantially below 7,400, losses were at 22.45% and 17.8%, respectively, or an average of 20.125%.

This reveals of a blueprint from the past two years. It shows that positioning at 7,400 has a risk-reward ratio of 2:1. Or for every peso that may be gained from positioning at this level, an equivalent of php 2 may be lost.

In short, the distribution of returns at present levels would imply for the larger losses relative gains!

Of course, bulls may spin this to suggest that at least higher lows or reduced degree of losses in 2013 vis-à-vis 2015-16 could mean a better risk reward distribution.

However, as I have pointed out numerous times here, price actions should not be seen in singular dimension.

For the local benchmark, in 51 years that covered 2 secular cycles and the third one still unfolding, vertical price runs have almost always suffered from Newton’s Third Law of motion—For every action, there is an equal and opposite reaction—or a variant of “reversion to the mean” applied to price actions. Or pumps equate to dumps. Or from boom to  bust.

Besides, stocks have not just been about prices but, more importantly, about discounted stream of cash flows from a convergence of cycles shaped by real economic activities. As the most expensive in Asia, such would signify a symptom of credit financed excessive or destabilizing speculation anchored on delusions. Ergo, a bubble.

 

And as for Newton’s Law in action, the charts of Meralco, Globe and GTCAP reveals of various advanced phases which these stocks have presently been experiencing.

Now let us shift from stocks to politics.

Below signifies an incredible excerpt on the government’s economic agency, the NEDA’s position on the political mega deals from China: [Legislators urge: Not so fast on China megadeals Interaksyon October 30, 2016] (bold added)

The MOU with China Road and Bridge Corporation is for the Fort Bonifacio-Ninoy Aquino International Airport Bus Rapid Transit project, while China Harbour Engineering Company signed for the Subic ClarkRailway project.

According to NEDA, the MOUs were, so far, merely for feasibility studies that are not binding on any party.

Ronaldo Tungpalan, NEDA Deputy Director General, added: "It's therefore not a contract. It is non-binding, and, in fact, at the official level, my discussions with my Chinese counterparts is that this does not in any way bestow prior rights upon the company who will do the study because we are, we will be, going through a competitive selection process."

After the feasibility study, Tungpalan said, the proposal will be brought before the Investment Coordination Committee and then presented to the NEDA board. Once approved, that's the time the project will undergo competitive bidding.

"From approval to bidding to monitoring and evaluation, I think you have sufficient safeguards, transparency from the different agencies that would be privy to this. So it's not something that one implementing agency like the BCDA can keep to themselves, because they have to go through the approval process. 

A BCDA statement said: "If, at the time of public bidding for these projects, these companies are deemed ineligible based on our strict procurement qualification rules and regulations, then these companies will not be qualified to participate in the bidding."

Two things here.

One, incumbent cabinet members appear to be in a state of confusion. They have been desperately trying to shore up or provide patchwork on the president’s tenuous position by countering or contradicting his claims.

Two. The NEDA just did NOT get the memo. Like the war on drugs, political mega deals with the Chinese government will be beyond the scope of edicts, legislation and mandates—or even the constitution.