In this Issue
As USD Peso Touched 50, a November 2008 Low and My Yearend Target, Pandemonium and Confusion Engulfed the Mainstream!
-Media and Experts Grapple for Explanation; Admission of the Peso Plunge as “Ground Zero for the Rout”!!!!
-Boom Boom Boom Policies Condemn the Peso!
-Massive Deficit Spending Will Compound on the Miseries of the Peso!
-The USD Peso from Price Momentum and Price Pattern Perspectives
-Engineering Pumps To Maintain And Expand “Valuations Are Still The Priciest In Asia”
As USD Peso Touched 50, a November 2008 Low and My Yearend Target, Pandemonium and Confusion Engulfed the Mainstream!
From My January outlook [Phisix 6,575: Good Bye 2015: Year of Propaganda! Hello 2016: Year of the Grizzly Bears? Before it’s news.com January 13, 2016]
My crystal ball portends that the USD PHP in 2016 may hit 50 or may even jump past 50. USD Php 50 would be my end of the year target. At 50, the USD PHP would translate to an annual 6.02% gain.
Should a crisis (regional or global) surface, then the 56.45 high during October 13, 2004 will most likely come into picture. For the USD PHP to reach the 2004 level means that the USD will soar by 19.95% against peso.
On Thursday November 24, USD php touched 50 intraday before it closed at 49.98.
Media and Experts Grapple for Explanation; Admission of the Peso Plunge as “Ground Zero for theRout”!!!!
On the same day, bedlam reigned over media and their experts
Some great samplers. (all italics mine)
From the Financial Times, Spiller in Manila: Philippine peso hits 50 per dollar for first time since 2008(November 24, 2016): It was the first time the currency traded through the 50 level since November 24, 2008, precisely eight years ago. The most recent time the currency has closed weaker than 50 to the dollar was mid-November 2006. Since Donald Trump was elected president, the peso has fallen 2.8 per cent, which is a middle of the range performance compared to other Asian currencies. So far this year, the peso has weakened 5.7 per cent against the dollar, making it the second-worst performer in Asia after China’s renminbi.
To straighten FT’s inaccurate numbers; in 2008, the highest USD php close was at 49.999 that was during November 20. Meanwhile, the intraday record high then was in November 21 at USD php 50.17.
From Bloomberg, Philippine Peso Weakens to 50 per Dollar to 2008 Low: Chart (November 23, 2016):A tumble for the Philippine currency that began soon after the new president took office in late June has weakened the peso past 50 against the dollar for the first time since 2008. Since Rodrigo Duterte took power, concerns over his deadly drug war -- which has killed thousands -- and his anti-U.S. rhetoric have led investors to pull back. The drop deepened this month amid an emerging currencies rout that followed the U.S. presidential victory of Donald Trump.
And the following article should be the most interesting.
From Bloomberg, Philippine Market in a Funk as Peso Slides to 2008 Crisis Level (November 24, 2016):
Asia’s emerging markets have faced outflows since Donald Trump won the U.S. presidential election earlier this month. The Philippines is ground zero for the rout as a resurgent U.S. dollar and Manila’s still-expensive stock market have made it even more vulnerable, with the peso plunging to an eight-year low.
The currency of the Southeast Asian nation reached 50 to the dollar for the first time this decade on Thursday and headed for its biggest annual loss since 2013. While equities are poised for their worst month since August 2013, valuations are still the priciest in Asia. A Bloomberg gauge of the dollar is heading for the strongest close since at least 2005 amid speculation the president-elect’s policies will push the Federal Reserve to undertake a faster pace of rate
“Emerging markets globally are experiencing fund withdrawals, but what makes the Philippines different, or vulnerable, was its valuation,” said Smith Chua, chief investment officer at Bank of the Philippine Islands, the nation’s second-biggest money manager with the equivalent of $12 billion in assets under management. “The foreign-exchange movement has also been a significant factor for overseas investors. As the year is heading to a close, some of them want to lock in their gains before the peso weakens further.”
The last time the Philippine peso neared 50 to the dollar in 2008, the global financial system was melting down and the central bank raised interest rates to defend it…
Some foreign-exchange strategists estimated earlier this month the currency would reach the 50 level only by next year as a seasonal increase in money remitted by overseas Filipinos for Christmas spending will curb a decline in the currency.
Wow. GROUND ZERO for the rout!!! I thought my eyes were hazy when I first read it. To ensure I didn’t read this wrong, I had to reread it a couple of times. Yes GROUND ZERO was written indeed! Stunning!
Wouldn’t “ground zero for the rout” be reckoned by the establishment religion as heretical???!!!
Just WHY would a country, supposedly blessed with “sound” macroeconomic condition, be subjected to “GROUND ZERO for a rout”???? Just what happened to its alleged SOUNDNESS???
Duterte and Trump would shutter its resiliency?????
And WHY, all of a sudden, has valuations became THE focus or even THE PRETEXT????
Hasn’t G-R-O-W-T-H justified such excessive valuations??????
And just how has “sound macroeconomic condition” squared with or redound to “excessive valuations”????
Haven’t excessive valuations or severe asset mispricing been symptoms of an acutely maladjusted economy???????? If markets have been distorted then so will the economy be! After all, the essence of the economy has been the markets that pillar them.
Yet a read on the establishment literature would suggest that valuations don’t really matter. For the same experts, priority is only on prices. Hence, when they shout G-R-O-W-T-H, our role is to “buy buy buy” with hands over fist!!!!!!
Well, how about the concern where central bank raised interest rates in 2008 to defend the peso?
The conditions in 2008 and today have totally been different. Based on BSP data, bank loans to the productive economy and household consumption soared 309% from end 2007-end 2015! That’s 15.3% CAGR!
And that’s the leverage reported only from the banking sector, which excludes gearing from internal non-bank (capital markets, shadow banks, intercompany loans and etc.…) and external bank and non-bank sources.
So the Philippine banking system had been significantly LESS sensitive to interest rates in 2008 than it is today.
And the mainstream experts remain in massive denial of the USD peso trend for them to remain blind to see burgeoning structural weakness of the domestic currency
So the above articles ascribe the peso’s predicament to Mr. Trump and Mr. Duterte as main contributors (culprits). Also, the sudden epiphany that valuations mattered (again) served as an aggravating factor.
Blatantly absent in any media discussion has been origins of the weak peso even from the price perspective itself, or that current prices signify products of the past. Otherwise stated, to reach 50, from a low of 40.595 (February 4, 2013), the USD php had to serially scale up steps of the ladder, in particular, 41, 42, 43, 44, 45, 46, 47, 48 and then to the Trump-Duterte tandem at 49 and 50, in a period of 3 years and nine months!
In other words, even before Mr. Duterte and Mr. Trump emerged, the peso had already been fumbling—consistently for more than 3 years!
For purpose of numeracy, from the stipulated 2013 lows until end December 2015, the USD php has registered a 15.93% return—outside the influence of the Trump-Duterte tandem.
It’s just Trump-Duterte made rationalizing the peso’s fall as more colorful and as useful scapegoats for experts on their misreading the economy and the markets.
This brings to the fore the escapism from responsibilities as prescribed by John Maynard Keynes,
“A 'sound' banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”
While this is NOT to deny the role of Trump-Duterte tandem, the dynamic duo has largely played the role of secondary causes.
Boom Boom Boom Policies Condemn the Peso!
Exchange rates are fundamentally determined by demand and supply.
As the great Ludwig von Mises taught me*,
These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one.
All actions have consequences.
Remember the 10 months of 30+++% of money supply growth in 2H of 2013 to 1H 2014 brought about by zero bound rates? That’s a massive supply side expansion of liquidity or money supply (see upper window).
For the mainstream, these are the free lunches that essentially come with no untoward aftereffects.
While the BSP did partly counteract such monetary outgrowth by increasing policy and SDA rates, as well as raise reserve requirements twice for each (in 2014), these have not been enough to negate the tsunami of supply side expansion based on “the relationship between the quantity of, and demand for, money”. Hence, the imbalance from the 30% will lead to a LOWER exchange rate value for the peso overtime.
Yet the illusions from Boom Boom Boom created demand enough to slow the pesos’ decline. Unfortunately, illusions haven’t and won’t stop the peso from its decay. Reason? Because Boom Boom Boom is the principal CAUSE!
Worst, the BSP stoked another liquidity expansion at the 4Q of 2015 and 1Q of 2016 which I called as the “silent stimulus”. From then, the M3 U-turned from a slowdown to reacceleration
The BSP also adapted an interest rate corridor last June, which actually brought down policy rates anew to record lows. Despite their denial that the “shift to the IRC system does not represent a change in the BSP’s stance of monetary policy”, they eased.
While it is true that the internal operating procedures changed, the prices offered for the use of the facility came down. The policy rate chart from tradingeconomics.com can be seen here.
So the BSP once again has renewed attempts at combusting money supply growth through bank lending expansion—that’s twice for the year.
Again how will these not lower the exchange value of the peso? Especially against the US Federal Reserve, which in view of higher inflation expectations, as I presented earlier and in the recent past, may tighten money supply?
Massive Deficit Spending Will Compound on the Miseries of the Peso!
Second, despite empirical evidences*, deficit spending has been revered by the mainstream as THE elixir to “inclusive G-R-O-W-T-H”.
* chart from Benn Steil and Emma Smith, Paul Krugman Doubles Down On Fiscal Expansion Claims Contradicted by Data, CFR Ge-Graphics Blog, November 14, 2016
But deficit spending, again, is no free lunch.
It would have to be paid for by raising taxes or by monetization by the BSP or by borrowing. Since raising taxes would provoke public outcry, monetization or borrowing has been the least politically sensitive option which would likely serve as the government’s path dependent option
And such could be the reason/s for the BSP’s latest twin moves. The BSP may be attempting to lower funding costs for borrowing by government institutions (central, state or local and GOCCs) and or by private sector partners engaged in government projects.
And notice that each quarter where deficits ballooned, the USD php kicked higher. Such frequently occurred during the previous administration from 2013-2016.
Mr. Duterte’s leftist regime’s baptism of fire for the 3Q has only brought fiscal deficit to a scale that almost surpassed the Aquino administration’s final days marked by spending splurges.
And here’s where the Duterte factor comes in.
The Duterte regime has very ambitious spending programs covering all aspects of government (bureaucracy, welfare, warfare and public works). This will compound on the financing needs by the government, which will be funded partly through the raising of taxes, and mostly through credit expansion and the monetization of spending by the BSP.
Such actions essentially underwrite the coming dramatic fall of the peso (regardless of what the FED does—or even if the FED embarks on another QE).
And Mr. Duterte’s current and proposed spending will piggyback on the imbalances acquired from the credit BOOM BOOM BOOM days of the previous administration via the 30%+++ money supply growth that financed massive amounts of malinvestments.
Anytime the statistical GDP begins to falter, expect a stampede out of the peso. And this is why the peso has been and will be GROUND ZERO for the present and coming rout.
You see I have been a peso bear only since 2013. Here is my consistent take [Phisix: Why Tomorrow’sFundamentals will be Distinct from Yesterday March 3, 2014]
the continuing credit boom will mean a weaker peso and significantly higher interest rates than the consensus expectations. Tomorrow’s fundamentals will materially be distinct from that of the yesterdays.
The USD Peso from Price Momentum and Price Pattern Perspectives
From a price momentum perspective, in terms of scale, the recent surge by the USD php has nearly (+7.5% in three months) but not quite attained the same degree of gains acquired during first two (+9.6% six months) of three leg price spikes brought about by 30%+++ money supply outgrowth (unseen) but publicly blamed on the taper tantrum (seen).
In terms of average (per month), the recent price spike has been larger than its 2013 predecessor. This exhibits more intensity via vertical price action.
Broadly speaking, this means that the peso has become vastly OVERSOLD.
Given its oversold conditions, since no trend goes on a straight line, then a pullback by the USD or a rally by the peso should be a natural interim outcome. Any pullback can mirror that of the 2013 saga.
So even if my yearend target has already reached with still a month to go, it is unclear if the USD can maintain its upside momentum…
…but with some caveats.
The peso’s fall should be a lot less in degree than what has been happening today if we are to base solely on the above domestic premises.
The above dynamics signify a time consuming process and likewise depends on sentiment. That’s unless significant economic stress/es emerge.
This means that the excesses from the peso’s decline have sprung from external forces which hascompounded on the domestic issues—mainly blamed on the dynamic duo (Trump-Duterte)
This also tells us that should significant strains in the global financial system surface to take the upper handfrom the current violent rotation from stock towards bonds then such stress/es could mean further strength for the USD. Or USD overbought conditions can remain overbought.
Financial stresses can emerge via different avenues. For instance, China’s interbank woes become unglued, Italy’s politics morphs into a banking and a political crisis, Fed raises rates by a larger than expected say 50 bps instead of expected 25 bps, bond vigilantes capture the helm of the global bond markets and etc…
I think that the Bank for International Settlements should be proven eventually right on their view that the USD has replaced the VIX indicator as the key measure for volatility. Given the US dollar “short” phenomenon, the USD will most likely assimilate the function of a lightning rod or a shock absorber for any potential risks that may unravel anytime.
In short, given the fluidity of events, anything can happen.
We are at a monumental turning point.
From a chart perspective, the USD peso long term chart provides two opposing views depending on one’s bias.
For the Boom Boom Boom peso bulls, any forthcoming correction by the USD would most likely be seen as a double top for the USD php.
Yet for any bears, correction can mean that the USD php may retrace back to its 3 year trend line in order for ascending triangle to take shape.
I’m no fanatic for charts. But economic logic from two forces both internal and external tells ME, which I share to YOU, to remain LONG the USD.
Internal—ramifications from domestic credit expansion, and present and future rapid expansion of the government.
External—the growing risk of the unwinding of the US dollar shorts.
And I recommend not just long USD php, but practically USD emerging markets, Asia or even the euro.
I would also recommend the use the recent breakdown of gold prices to accumulate.
Just see how desperate governments have become for them to shamelessly and mercilessly seize or plunder the common man’s resources through the perversion of money.
That’s the recent case of the sudden demonetization of the most used denomination of India’s currency, the rupee. The demonetization, publicly advertised to uproot corruption, has caused untold economic dislocation, havoc and even needless deaths by mostly the poor.
It’s something I’d write about in the future.
But these add to up to more signs of an alarming future.
Engineering Pumps To Maintain And Expand “Valuations Are Still The Priciest In Asia”
For my close, the above represents the intense pumps during the last two minutes (left window) of Friday’ssession which climaxed with a muted the use of marking the close pump (right window).
Philippine stock market manipulators have once again exhibited their creative juices.
To recall on the Bloomberg article above, aside from the dynamic duo (Trump-Duterte) media experts attributed the Philippine market’s “GROUND ZERO for the rout” to “still-expensive stock market” where “valuations are still the priciest in Asia”.
Yet most of the trading sessions of last week tell us that the article had just accounted for a post hoc (reasoning from prices) narrative predicated on the available bias or to look for anything that would rationalize the event in order to publish something.
That’s because the serial massive market engineered pumps tell us that “still-expensive stock market” where “valuations are still the priciest in Asia” has to be propped or spruced up by whatever it takes! Again, valuations don’t really matter!
In short, the likelihood is that media and the experts quoted in the article never really believed in what they were saying!
