Instead, ESG investment compliance means all the gas in our offshore waters that could have powered the UK to becoming a truly carbon-nuetral, energy secure state in 20-30 years time is untapped and un-investible. For now – the skills to tap it are already disappearing. ESG has evolved into a religion, a high church of environmental orthodoxy. Its heretical to suggest ESG can’t work unless we evolve towards a cleaner energy ecosystem by continuing to burn hydrocarbons. A crisis this way comes: for all the posts on Linked-In boasting about green investments, or the industry awards for Green Bond of the year, or the multitude of certificates one can earn on ESG investments – it will all count for nothing this winter—Bill Blain
In this issue
Despite Lower September CPI, Philippine Treasury Yields Soar, Spreads Steepen! Greenflation Implodes the ESG Bubble!
I. Stagflation Ahoy! Despite Lower September CPI, Philippine Treasury Yields Soar, Spreads Steepen!
II. When Transitory Means Forever
III. Global Energy Crisis Intensifies! Bond Yields Soar as Credit Anxieties Escalates!
IV. Greenflation Implodes the ESG Bubble! From One Tail Event to Another!
Despite Lower September CPI, Philippine Treasury Yields Soar, Spreads Steepen! Greenflation Implodes the ESG Bubble!
I. Stagflation Ahoy! Despite Lower September CPI, Philippine Treasury Yields Soar, Spreads Steepen!
From the Inquirer, October 5: The September inflation rate, lower than expected, has given the central bank more room to maintain its interest rates at their current historic lows, according to market watchers, even as the agency warned that the consumer price index will remain elevated before returning to within the government’s target band later this year. In a statement, the Bangko Sentral ng Pilipinas (BSP) also stressed that the current inflation regime is, for the most part, out of its hands and can only be remedied by policies that would ease supply problems.
From the CPI Primer of the Philippine Statistics Authority: The CPI is most widely used in the calculation of the inflation rate and purchasing power of the peso. It is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures (PCE) in the calculation of the gross national product (GNP). Another major importance of the CPI is its use as basis to adjust wages in labor management contracts as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases.
From the Businessworld, October 8: The Philippine central bank expects consumer price increases to slow in the coming months as meat prices go down. Meat prices, which contributed to faster inflation in the past months, have eased, Bangko Sentral ng Pilipinas ng Pilipinas (BSP) Governor Benjamin E. Diokno told a televised news briefing on Friday. Meat inflation slowed to 15.6% in September from 22.1% in May. “It could still slow down because of our programs that allow higher pork imports and lowering the tariff for these products,” he said in Filipino. Mr. Diokno said food inflation had remained elevated in the past months because of low fish, vegetables, and meat supply caused by typhoons and an African swine fever outbreak.
Had treasury traders adapted the mindset of the pin-the-tail-on-the-donkey analysts, the 4.8% CPI of September would have prompted them to put a bid on the securities issued by the Philippine National Government. The bidding process would have pushed prices up or yields lower to validate the environment allowing the central bank to have "more room to maintain its interest rates at their current historic lows."
But the treasury traders have a different viewpoint from the Philippine Statistics Authority (PSA) and the Bangko Sentral ng Pilipinas (BSP). Instead of adjusting yields lower in reaction to this data, they sold down Philippine treasuries, pushing yields significantly higher this week. Even more, PDS 10-year spreads surged to 2018 highs!
To recall, the CPI hit a high of 6.7% in September 2018.
Figure 1
So not only have yields gone up on the news of the CPI, but the treasury spreads have widened substantially. A bearish steepening. A bear steepener, according to Investopedia, is usually suggestive of rising inflationary expectations–or a widespread rise in prices throughout the economy.
Treasury traders are thus suggesting that current inflation is not only higher than stated by statistics, but it is also about to climb higher. Much, much higher!
Treasury spreads serve as a leading indicator of the CPI with a time lag. 10-year PDS monthly spreads have been expanding since 1Q of 2019. (Figure 1, upper pane) It accelerated in early 2021, paused in the 2Q, and reaccelerated in the 3Q to reach 2018 highs. This race to 2018 levels have been more pronounced from a weekly perspective. (Figure 1, middle window)
By putting a cap on the rise of the CPI, the BSP hoped to contain interest rates from rising.
It wanted to maintain the inflation tax or financial repression policies to subsidize the ballooning debt of the public and the private sectors. The spread between 1-year Philippine treasuries and the CPI is at the deepest in at least decades. (Figure 1, lowest pane)
The BSP believes in the power of money printing to inflate debts away.
In a 2015 study, economist Carmen Reinhart (currently World Bank’s chief economist and Belen Sbrancia in a paper wrote*: High public debt often produces the drama of default and restructuring. But debt is also reduced through financial repression, a tax on bondholders and savers via negative or below market real interest rates. After WWII, capital controls and regulatory restrictions created a captive audience for government debt, limiting tax-base erosion. Financial repression is most successful in liquidating debt when accompanied by inflation
*Carmen Reinhart and M. Belen Sbrancia, The Liquidation of Government Debt, IMF.org, January 2015
So why would the BSP not want higher inflation?
Figure 2
It also wanted to sustain its bailout policies for banks. The ON RRP of the BSP has squeezed the interest rate expense of the banking, which implicitly transfers resources from the average depositors to them. (Figure 2, upmost pane)
Or, precisely put, via the historic low rates of BSP, depositors have been made to rescue the banking system.
That is to say, the CPI is not just an ordinary economic statistic. Because it serves as a "monitoring indicator of government economic policy," it has a political component.
Keeping policy rates at a historic low is a function of politics primarily, before economics.
II. When Transitory Means Forever
And please do note that by virtue of statistics, the BSP relieves itself of the burden of responsibility of its policies by shifting the blame on supply-side issues.
In public, they say inflation is a problem of mismatches between the actions of businesses and consumers. They did not state the reason.
To them, the massive over Php 2 trillion liquidity injections, partly from its direct infusions through asset swaps, have been cost-free! Free lunches from money printing!
Yet, it is no coincidence that when the BSP embarked with its program to inject unprecedented liquidity partly through the direct funding of the NG in the 2Q 2019, the CPI likewise started its upside climb! (Figure 2, middle pane)
The BSP believes that their interventions have only benefits! Free lunches!
The acceleration of public spending, which hit record territory in 2021, has gone alongside the direct QE of the BSP, another milepost.
Are we supposed to believe that public spending has no contribution to the demand or prices of goods and services spent on by the bureaucracy? (Figure 2 lowest window)
And for the nth time, price pressures in the economy have been sold as "Transitory"!
Back in December 2020, with the November CPI at a 17-month high, the BSP chief explained (PNA, December 4, 2020): "In a Viber message to journalists Friday, Diokno said the average inflation until the next two years is projected to remain within the BSP’s 2-4 percent target band “as the impact of supply disruptions due to recent typhoons is expected to be largely transitory.”
Rephrasing George Orwell: War is Peace. Freedom is Slavery. Transitory is Permanence.
III. Global Energy Crisis Intensifies! Bond Yields Soar as Credit Anxieties Escalates!
And as noted last week, external factors may contribute to the mounting domestic price pressures.
And the overlapping interdependence of one node to another affects the entire complex networks of enterprises comprising what is known as the economy. Such escalation of regime uncertainty magnifies the risk environment on a systemic scale, which brings into light the call to action by international shipping and transports groups to restore freedom of movement worldwide.
This account represents the supply shocks presently being experienced around the world.
Again, add the recent record liquidity injections by global central banks that boost demand; we get a perfect storm of surging prices from the cocktail mix of "too much money chasing too few goods caused by supply shocks."
Stagflation Ahoy! NEDA Chief Says Recovery Will Take 10 Years! Will Surging Global Inflation Escalate Domestic Price Pressures? October 3, 2020
An energy crisis has currently swept Europe and China and appears to be spreading around the world.
Figure 3
Because energy prices are flying, the energy-heavy Bloomberg Commodity Index surpassed the 2011 record high before slightly pulling back! (Figure 3, upmost left pane) Based on the rate of change, recent gains are still nowhere near the 1970s and the early 80s (Figure 3, upmost right pane).
Again, the Philippines imports close to half of its energy requirements, mainly oil and coal.
These imports indicate substantially higher prices, not only for inputs of the energy downstream industries but also for products affected by energy rationing abroad.
Domestic utilities are likely to suffer from a margin squeeze unless allowed by the NG to adjust selling prices. A profit margin squeeze magnifies the risks of supply shortfalls leading to power outages or rationing, similar to China.
As an aside, the rationing of energy distribution covers half of the provinces in China! Even while some states are suffering rolling brownouts, India’s coal reserves are rapidly depleting!
Meanwhile, should the NG decide to smooth out local prices by granting subsidies to either power generators or consumers, the record fiscal deficit is likely to widen, which should translate to escalating public debt and the acceleration of the BSP's historic monetization.
So aside from the heightened risks of brownouts, the surge in power bills will likely further shrink the constrained purchasing power of domestic consumers!
Again, this will not be limited to energy.
For instance, products affected by energy rationing or high prices may fuel an increase in global food scarcity.
From the Reuters, October 7: World food prices rose for a second consecutive month in September to reach a 10-year peak, driven by gains for cereals and vegetable oils, the United Nations food agency said on Thursday. (Figure 3, middle pane)
Because the energy crisis has affected fertilizer production in the Eurozone and the US, agriculture input costs could soar, or agriculture output may be about to decrease, or a combination thereof. (Figure 3, lowest pane)
Alas, international food prices could surge to a fresh high soon!
Most importantly, power outages or high energy bills may compound economic disruptions from the present pressures on the international supply chain may also come from sectors affected by operation disruptions, supply and transport bottlenecks, and material and labor shortages.
In short order, the world is likely to suffer from a substantial pullback in global trade! Deglobalization!
Figure 4
After a big surge, global trade has shown initial signs of slowing last July, based on data of the CPB Netherlands Bureau for Economic Analysis. (Figure 4, topmost window)
Circling back home, to reemphasize, the continued surge of domestic money supply growth will likely contribute to the demand side growth.
Growing dependence on imports will also be a factor.
Again, because of the inefficient domestic production, much of local demand will likely depend on imports.
Yet, more dollars will be needed for imports, compounding pressures on the USD already burdened by mounting external debt, which accounts for USD shorts. (Figure 4, second to the highest window)
The further softening of the peso, brought about by BSP monetary expansion, thus should exacerbate inflation pressures.
And surging commodities have prompted yields of global government debts to scale higher here and elsewhere, which likewise increased anxieties in the credit markets.
The treasury yields in the ASEAN region soared last week, led by Malaysia and the Philippines. (Figure 4, second to the lowest pane)
National Credit Default Swaps and yields of US Dollar national bonds soared too.
From the Credit Bubble Bulletin, October 9: Contagion this week also spread to Asian sovereign CDS. Indonesia CDS jumped 10 to 88 bps, the high since March. Philippines CDS rose eight to 61 bps, the high back to July 2020, while Malaysia CDS rose seven to 60 bps (high since July ’20). Vietnam CDS gained six to 115 bps (high since July ’21)…. Philippine dollar bond yields surged 24 bps to 2.69%, the high since April 2020. Indonesian dollar bond yields rose 16 bps to 2.44% (high since March).
These are the likely factors incorporated in the surging domestic treasury yields and the steepening of its curve.
IV. Greenflation Implodes the ESG Bubble! From One Tail Event to Another!
And the current global energy dilemma may not find easy or even a band-aid solution.
Because of the pursuit of the ideological commitments towards a green economy (think Paris Climate Accord), investments, production and consumption of politically eschewed “climate-harming” energy products as fossil fuels, Natural gas, and coal, have declined over time. As such, the revival of these energy sources would take years, if not decades. Even nuclear power investments and consumption have been in a long-term downtrend.
Needless to say, the world shifted to renewable/alternative energy with hardly a stable baseload to support it. Present developments exhibit a massive backlash from centrally planned environmental policies.
The 'Greenflation' is bursting the ESG bubble!
That said, the alternative fix is to constrict demand through conservation. Hence, the de facto policy mix has been to allow the markets to partly clear through higher prices and energy rationing through rotating power outages or brownouts. Likewise, to expand supply by repealing discriminative investment policies against politically incorrect climate-energy investments or permit their reopening.
Here is an example. From the Reuters, October 8: China has ordered its two top coal regions to boost output and will allow coal-fired power utilities to charge customers higher prices as the country battles its worst power crunch in years. Inner Mongolia and Shanxi told coal miners to lift combined annual production capacity by more than 160 million tonnes, while China's cabinet said market coal-fired power prices may now fluctuate up to 20% from base rates, an increase on previous limits, or more for high energy-consuming sectors.
But there’s a catch 22.
Aside from supply disruptions and rising prices, the constriction of demand extrapolates to lower economic growth that magnifies risks of a meltdown in the global credit and financial markets. At the end of 2021, global debt will reach 260% of the GDP, according to some estimates.
It also redistributes wealth from energy consumers to the upstream energy sector or resource holders.
At the onset of the pandemic in April 2020, oil prices stunningly fell momentarily to negative as the world economy froze due to the simultaneous lockdowns.
Today, energy prices are rocketing! At last week's climax, the equivalent of natural gas prices in Europe exceeded USD 200 per barrel of oil according to several estimates!
The imbalances brought about by massive political interventions in the economic system have fomented a transition of one extreme event to another, revealing or exposing inherent weaknesses embedded in the system!
An incredible pendulum swing of tail events!
Ya think that global central banks, including the BSP, can print oil, natural gas, and coal?
After all, sharply volatile prices manifest the massive distortions in the allocations of resources in the global political-economic system.
Figure 5
For instance, the state of credit impulse could provide a roadmap of the future.
As a significant buyer of several major commodities, the slowing credit impulse of the Chinese government may translate to lower demand and thus reduced prices unless the authorities revive credit flows.
The credit impulse of G3 has also been weakening.
G3's credit impulse leads the Global Manufacturing PMI by about 12 months. Unless reignited, the falling rate of credit impulse indicates a sharp contraction of global manufacturing in 2022.
Likewise, if realized, the reverse head and shoulder pattern of the 10-year US Treasury yields extrapolate to a possible explosive upside move.
Global interest rates are at an extreme 5,000 year low. If the 1930s serves as a precedent, depressed rates may reverse and skyrocket either because of inflation or a financial crisis. Or even a combo.
The point is, we can expect the ramifications of the series of extreme gyrations of commodity and energy prices to resonate with the fluctuations in the global economy and the financial markets.
