More on the Crucifixion of the Philippine Peso Via The Inflation Tax

In this issue

More on the Crucifixion of the Philippine Peso Via The Inflation Tax

-The Inflation Tax

-Utilizing Crisis Measure in a Boom? Why?

-The BSP’s Inflation Tax Ravages People’s Purchasing Power!

-Bullish Formula: Greater Leverage, Higher Real Economy Prices, and Rising Rates?

More on the Crucifixion of the Philippine Peso Via The Inflation Tax

The Inflation Tax

Like the Phisix the USD peso has been locked in a tight trading range ever since it broke the 50 level last February 20.

The USD peso was down .33% this week to Php 50.16 from the other week’s 50.325.

The rally by the peso reflected on the general weakness of the USD in Asia. It’s only the yuan that declined.

In early March I wrote [Another Bullseye!!! Record BLOWOUT in 2016 Fiscal Deficit Mainly Financed by the BSP! March 5, 2017]

As a side note, because the net claim on central government went down by Php 28.18 billion, perhaps the government registered a surplus in January 2017.

It turned out that the government indeed posted a slight Php 2.2 billion budget surplus last January, according to the Department of Treasury

 

December’s colossal deficit naturally had to have a recess. So January’s surplus should be intuitive. January’s surplus arose from government revenues, which increased 9.93%, based on Tax revenues (+13.87%) Bureau of Customs (+15.64%) non tax revenues (-21.45%), while expenditures grew at a slower (+6.67%).

However, with the BSP’s data on domestic liquidity released last week, where net claims on central government bulged again to Php 39.729 billion, this likely means the return of ever increasing deficits.

That’s because monetization of government liabilities has become the preferred route by the government to finance deficit spending. The BSP hides its actions via the inflation tax.

Thus, the peso represents the sacrificial lamb on the altar of popular politics.

As a side note, the BSP has interestingly overhauled the entire data set of Depository Corporations Survey (SRF based) but ironically historical growth figures remained the same.

The upper chart reveals that the government’s deficits were matched with the BSP’s monetization of the government’s debt. Such monetization was channeled through the banking system in 2015-17.

Utilizing Crisis Measure in a Boom? Why?

The last time the BSP resorted to the Pandora’s Box of debt monetization was in 2008-9, obviously in response to the Great Recession. Then, because GDP plunged to less than 1% (upper left), tax collections likewise declined and thus the explosion in the deficit (upper right).

However, the BSP actions signified a quick one (lower chart). It reduced the monetization program in 2008 and reversed it 2012.

And in response to the taper tantrum, the BSP did another quickie in 2013. It ceased adding into it in 2014 where the BSP holdings of government liabilities flat lined until the latter half of 2015.

Today, however, with no Great Recession and with an alleged boom in the Philippines, the BSP has resorted to an emergency measure.

To repeat, a crisis measure amidst a supposed boom! War is peace? Freedom is slavery? Ignorance is strength?

Wow! This is truly spectacular!

And today’s actions have truly been dramatic compared to the Great Recession in terms of scale, the length of use and swiftness!

The BSP’s Inflation Tax Ravages People’s Purchasing Power!

And because the banking system has been flooded with liquidity, production (lower window) and consumer loans spiked. And this was reflected on M3.

Despite the forced easing on the banking system, curiously, both production and M3 growth appear to have plateaued.February M3 rate was at 12.6%, the fifth month of 12%+ growth rate. The present rate is down from the May 2016 high of 13.5%

Meanwhile, February’s bank issued production loans was at 17.6%. This marks 9 out of the last 10 months above the 17% growth rate. The highest growth clip was at 18.08% which occurred last November.

And while industry loans appear to have hit a wall, consumer loans at 24.65% zoomed to its highest level (beyond my data which starts at 2007); perhaps since the pre-Asian crisis or a fresh record (this is a guess)

And with too much money in the system, real economy prices have been palpably soaring. Or, too much money chasing too few goods.

The General Retail Price Index (GRPI) which is defined by the government’s Philippine Statistics Authority (PSA) as “a statistical measure of the changes in the prices at which retailers dispose of their goods to consumers or end-users relative to a base year”, rocketed to 5.1% in February!

On the other hand, the Consumer Price Index (CPI) again defined by the PSA as “an indicator of the change in the average retail prices of a fixed basket of goods and services commonly purchased by households relative to a base year” have likewise swelled to 3.3% over the same period. (upper window)

So GRPI has raced past 4 year highs while the CPI which signifies “a major statistical series used for economic analysis and as a monitoring indicator of government economic policy” still remains below 2014

The difference between the measures of consumer prices based on retail declaration of prices sold compared to the estimated prices paid for or bought by consumers have significantly widened!

In my view, the reason for this is to justify the BSP’s present policy rates.

Bullish Formula: Greater Leverage, Higher Real Economy Prices, and Rising Rates?

So let me hypothesize: spiraling prices have been substantially diminishing disposable income thus prompting for a shift in consumer spending pattern. This likely means the recourse to MORE debt (via credit card +12.77% Feb versus +11.49% Jan and payroll +53.49% Feb versus +55.16% Jan) to cover the perceived loss in life’s conveniences.

So income crimped households have increasingly leveraged their balance sheets as interest rates rise!

And from the supply side, spiraling prices should entail higher operating costs and limited room for price increases that might impact gross revenues. The short of it is that corporate profits or earnings will most likely be eroded. And income shortfalls will likely lead to more borrowings.

  

So profit strained enterprises would likely increase balance sheet gearing as interest rates rise!

And if household spending power is reduced while the race to build supply remains at the current rate, then just what happens to the demand for shopping malls, hotels and casinos, condos and other property projects???????????

And if the economic activities of both households and enterprises slow, then just what happens to the government’s financial conditions? How will a broadening of deficits be financed?

And if real economy prices continue to rampage then just what happens to all cost estimates for political projects in the pipeline?

And will the BSP exacerbate the crucifixion of the peso and risk a currency crisis through the intensified utilization of monetization of government spending just to finance the present huge appetite for boondoggles???

Also as the inventory of Philippine debt has been siphoned off from the markets by the BSP, will the Philippine government begin to use more of the debt markets to finance her lust for political binges?

So the revenue pressured government will likely increase leverage as interest rates rise!

Most yields of domestic treasuries continue to climb (left). Based on ADB’s Asian Bond Online, the Philippines has registered the highest yield increase in bps year to date.

Wouldn’t all these be zealously bullish for the economy and for Philippine assets??????????

Phisix 7,270: More Signs of Price Instability, JKSE-Phisix Correlations and the Global Reflation Trade

Global Markets Catches Up with the Phisix; Has the JKSE-Phisix Correlationship Been Broken?

With the ongoing furious race to milestone heights, some may wonder why the Philippine Phisix has hardly participated in the “risk ON” environment that has overwhelmed global equity markets.

For instance, the Indonesian JKSE has broken into fresh record highs the other week. And this week’s .48% gains furthered the JKSE’s distance from the breakout point.

For now, Indonesian President Widodo’s earlier harangue and harassment of equity bears seem to have succeeded. Mr. Widodo has used the stock market as a policy tool to spiff up the administration’s image at the expense of the functioning market [see earlier email -The Indonesian Government Wages War on Stock Market Bears and Interest Rates! Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2016]

Nonetheless, despite a slowing GDP and stagnating property prices*, since the Indonesian central bank (Bank Indonesia) cut policy interest rates for the sixth time in October 2016, such has incited the re-acceleration in loans to the private sector which was similarly reflected on the substantial rebound in the nation’s overall loan portfolio. Such jump in credit growth has likewise been manifested in the sharp escalation of money supply growth, seen via M2.

Taken together, a substantial portion of money injected into the financial system has only been rechanneled into domestic stocks from which have stirred a frenzied pump. And this has prompted for the recent fresh highs.

This exhibits how Indonesia’s stock markets have become another punter’s haven that has been detached from reality—largely bankrolled by easy money and by government’s intrusion in its stock market.

And this is the sort of dynamic that tells us why monumental history is presently unfolding…and not just in the context of record stocks, but of its aftermath.

*The Global Property Guide’s note on Indonesia’s 2016 housing prices (March 23 2017): “In Indonesia, residential prices in the country's 14 largest cities fell by 0.89% during 2016, after falling 0.2% in 2015. House prices fell 0.37% q-o-q during the latest quarter.”

Figure 1: ASEAN Equities Top, JKSE-PSEi Bottom

Back to the Phisix.

Given the present global conditions, the domestic benchmark has not underperformed.

Based on the year to date activities, the domestic bellwether has been almost at par with most the ASEAN’s equity benchmarks. Year to date, Indonesia’s record JKSE has delivered an inferior 5.11% return relative to the Phisix at 6.27% (as of March 24). The difference thus springs from the baseline effect—the Phisix began the year at a relatively lower base compared to JKSE.

This entails that the PSEi has outsprinted the rest of the field at the start of the year where the rest of the world has only been in a catch-up mode.

Yet the PSEi has spent over two months in a consolidation phase. Or it has been sauntering in a very narrow trading range (7,100-7,400) following the 9 day (engineered) meltup which occurred at the close of December through the first week of 2017.

Interestingly, the price trend dynamic of both the JKSE and the Phisix for the past two years or from 2014-2016 has revealed of amazing signs of synchronicity. Both yardsticks have essentially ascended and descended in seeming confluence. (see bottom figure 1). Or there appears to be a tight correlation for the noted benchmarks.

This convergent dynamic appears to have been broken only in the last two months.

JKSE’s record upside breakout came as the PSEi has forged what chart technicians call as a “flag formation”—a continuing pattern.

As a side note on flag formation: while the intermediate trend has been up, the originating trend has been down—so the 64 billion peso question is; continuation of what pattern? The answer lies on the observer’s bias.

Yet has there been a recalibration in the Phisix-JKSE correlationship? Or will there be a restoration of the previous convergence? If the latter on which direction?

More Signs of Price Instability

Here’s more.

Yet the present trading range has signified an outcome of rampant and relentless pumps and dumps.

End session pumps and dumps for the week totaled 55.56 points with 65% share accounting for as pumps and the remainder as dumps. The Phisix was down 1.03% or lower by 75.4 points. This entails the end of the week outcome has been immensely sanitized by price distortions borne out of such unscrupulous engineered price actions.

Figure 2: Stunning Amplification of Price Volatility

Such flagrant contortions can be seen in the escalating magnitude of volatility ensconced in the headline index.

The vast dispersion of gains and losses within sectors for this week has been astounding (lower left window). 

The property, financials and industrials stunningly cratered by 3.5%, 2.48% and 1.73%, respectively. Because their combined market weighting at 49.09% (18.35% financials, 17.31% property, and 13.43% industrials—as of March 24) was slightly lower compared than the gainers at 49.69% (holding 39.37% and services 10.32%), the latter group’s impact severely diminished the enormous losses of the former group. The holdings and the services jumped by .83% and .86% this week. The combined events resulted in the diminished 1.03% decline in the headline index.

It’s even fascinating to see a rare unanimity in the price activities of the property and industrials. All property and all industrial issues tumbled this week! The property sector: Ayala Land (-5.48%) SM Prime (-3.28%), Megaworld (-3.06%) and Robinsons Land (-2.31%). The industrials: food giants Universal Robina (-1.23%) and Jollibee (-2.69%), backed by power firms Aboitiz Power (-3.22%), First GEN (-.45%), EDC (-.66%), Meralco (-4.21%) and Petron (-1.1%).

On the opposite end, eight of the ten or 80% of holding issues were sharply up: AEV (+3.29%), LTG (+2.8%) AGI (+2.68%), AC (+1.81%), GTCAP (+1.56%), JGS (+1.17%), SMC (+.97%) and the largest member, SM (+.6%). Supporting the holding sector, three of the four services also boomed; TEL (+3.84%), GLO (+1.78%) and ICT (+1.67).

In perspective, furious selling occurred in the property and industrials, aside from the financials, but ferocious bidding transpired at mostly the holding sector supported by the services.

It can be deduced that foreign money was responsible for most of the selling pressures in the Phisix given the largest net selling at Php 3.34 billion since end December. In the meantime, the locals shored up the PSEi gainers through a rotation. That is, perhaps locals sold holdings at the broad markets to finance aggressive bids in select PSEi issues. The 16.14% decline in peso volume indicated of a retreat in liquidity which most likely meant that buyers weren’t able to meet the seller’s urgency to exit, hence the expanded price volatility. In addition, the significant deterioration in market internals for both the PSEi and the broader spectrum suggests that selling activities were not limited to the PSEi 30 basket (except again for a few heavyweights).

The question is why the colossal deviances in the weekly activities, particularly for the holding sector, when their major subsidiaries were under severe selling pressure? Has this been designed anew to stage manage the index?

Even more. 12 issues or 40% of PSEi members had price changes of 3% and above (in both directions). 17 issues or 57% had price changes of 2% and above (again bidirectional). 25 issues or 83.33% registered price changes of 1% and above! (lower right window)

And yes such incredible escalating volatility has been happening even as the Phisix has been drifting in a tight zone.

Most haven’t realized that these are signs of a seismic buildup in stressors or a symptom of intensifying price instability. It’s either we’d be seeing a breakout above 7,400 or a plunge to 6,500 in the near horizon. Or we could even see both.

Has the Reflation Trade Climaxed?

And here’s the thing.

Has the euphoric and ebullient US markets lost its footing to mark a significant top? As I suspected, strains from US dollar illiquidity has once again resurfaced to have impelled oil prices to tumble back below $50.[See Has the Fed “Fallen Behind the Curve”? March 11, 2017]

It would be interesting to see what happens next to oil prices?  Will it hold ground or flounder back to $45 or even below? If the latter should happen, then the reflation trade will almost certainly lose its shimmy. The question is how will this affect producers, creditors and fiscal conditions of producing nations

As for the US, will a reprise in the oil price debacle be now compounded by mounting woes in the US retail sector?

If the US stock markets flub, then just how will this affect the global risk ON scenario?

How will such reversal impact domestic stocks?

Interesting, no?