The Greeks had implicit faith in the ability of the government to take care of their needs. It seems never to have occurred to them that the individual person is self-controlling and responsible for his own acts. They labored under the delusion that their democracy was a guarantee of peace and plenty, not realizing that unrestrained majority-rule always destroys freedom, puts the minority at the mercy of the mob, and works at cross-purposes to the effective use of human energy and individual initiative.' Paradoxically, when not kept within bounds, the democratic process has always led to the destruction of democratic ideals and has served as a springboard to dictatorship and war. The temptation to buy votes through governmental spending is too great —Henry Grady Weaver
In this issue
Has Meltdown of the PSEi and Treasury Markets Been Election-Related? Q1 2022 8.3% GDP: Low Base-Effect, Election Spending Financed Consumer Boom
I. Have the National Elections Traumatized the Domestic Financial Markets?
II. Why the Amplified Volatility? Price Setting Actions of Foreign Selling Prior to Post-Elections
III. No Trend Goes In a Straight Line: Oversold PSEi 30 Due For Bounce; Bear Market or Correction?
IV. Yields of Philippine Treasuries Surge Post Elections!
V. Deepening Financialization, Greater Interest Rate Risks
VI. The Low-Base Effect of Q1 8.3% GDP: Quarantine Restricted versus Reopening GDP
VII. Q1 GDP Reinforces the Thrust to Centralize the Economy
VIII. Election Spending Fueled Consumer Boom!
IX. A Fuel Subsidy Induced Boom in the Transport Sector? Retail GDP vs. SM Retail Sales and Food CPI vs. JFC Sales
Has Meltdown of the PSEi and Treasury Markets Been Election-Related? Q1 2022 8.3% GDP: Low Base-Effect, Election Spending Financed Consumer Boom
In an environment where liquidity is under pressure, political uncertainties amplify the vulnerabilities of fragile markets.
Despite the conclusion of the national elections and eye-popping Q1 GDP, the PSEi and treasury markets wilted against the barrage of selling in the expectations of higher inflation.
The oversold PSEi 30 is due for a rebound. But this should mark a dead cat's bounce.
The low-base effect comparing the Pandemic and Reopening, consumer 'boom' from the election spending binge, and a repressed CPI contributed to the outsized GDP.
Q1 Sales of SM Retail and Jollibee contrasts with the Q1 Retail and Food GDP.
I. Have the National Elections Traumatized the Domestic Financial Markets?
Let us open with several news quotes.
Inquirer: May 10: The interest rates sought by local creditors on short-term government borrowings soared on Tuesday (May 10), a day after partial, unofficial results showed Ferdinand Marcos Jr. with an insurmountable lead in the presidential race. With a domestic debt market jittery about high inflation, which think tank Moody’s Analytics last Monday said will be a “headache” for the next administration, the Bureau of the Treasury (BTr) was able to borrow only P5 billion out the P15 billion it wanted to raise from short-dated T-bills.
Inquirer, May 10: American financial services giant J.P. Morgan dropped the Philippines to the bottom of an investment list comprised of its Southeast Asian peers in a new report released after it became clear Ferdinand “Bongbong” Marcos Jr., the namesake son of the late dictator, was headed for a landslide win on Monday’s presidential elections. J.P. Morgan did not mention Marcos’ name in the May 9 report that flagged rising risks from high public debt and surging inflation – factors it said would slow economic growth and hurt corporate profits.
Inquirer, May 11: With a campaign lacking in details on how the perceived winner in the May 9 polls intends to manage the economy, the private sector has shifted to a wait-and-see mode until former Sen. Ferdinand Marcos Jr. outlines his plans and names his economic team. Investors are eagerly awaiting the lineup of the next administration’s Cabinet as they evaluate the prospects under a new leadership, considering the big challenges such as rising inflation and a mountain of debt to the country’s recovery from a pandemic-induced recession.
Bloomberg/Taipei Times May 11: Foreign investors are on wait-and-see after elections in the Philippines won by Ferdinand Marcos Jr and a rally in the equities market might be a challenge, Philippine Stock Exchange President Ramon Monzon said yesterday. “Further upside? It’s going to be tough. We have a lot of macroeconomic problems,” Monzon said in an interview with Bloomberg TV.
Some people harbor the impression that the outcome of the national elections had little to do with last week’s bloodbath in the PSEi 30.
They blame external factors instead. This rationalization is an example of attribution bias.
While this may be partly valid, nothing exists in a vacuum. Differently put, long-term market actions tend to smooth out interim price volatility. And volatility is a product of existing socio-economic conditions.
But was the carnage an anomaly? Or was it part of the composite trend?
Strikingly, no one seems to ask, what causes volatility?
Genuine free markets are unlikely to generate systemic boom-bust cycles because they operate on decentralized forces. Without a unifying link, market forces handily absorb the failures of some enterprises to redeploy unproductive resources for productive uses.
In the markets, volatility would represent specific issues rather than a broad-based phenomenon.
That is to say, when authorities tamper with money, economic and financial imbalances accrue. Easy money policies primarily fuel an unsustainable boom, which leads to its eventual perdition. The boom-bust process implies magnified fluctuations or volatility in the marketplace.
For instance, under the camouflage of the pandemic, the BSP injected a record Php 2.3 trillion to propel markets higher to combat deflation. Yet, has anyone ever thought of the longer-term consequences of such massive infusions? Or, can it only benefit the economy without costs? If so, why stop at Php 2.3 trillion? Why not Php 20 or 100 trillion? Why not print our way to prosperity? The answer is that there are costs, which the BSP does not explain to the public.
And economic maladjustments are not solely from the sphere of money; political interventions also play a crucial role.
II. Why the Amplified Volatility? Price Setting Actions of Foreign Selling Prior to Post-Elections
And so why the current volatility?
Faced with perceived untoward external developments, the exit of foreign funds should not induce anxiety in robust domestic markets operating on salutary economic fundamentals.
While some realignments may cause partial dislocations, a resilient market economy can afford them because of their malleability.
And because free markets have the tendency for capital accumulation, these are likely to be used against losses incurred by specific firms for redeployment.
Again, that is not the case when the entrenched misdirection of resources from political dependence results in the economy becoming rigid or inflexible. Insufficient savings from capital consumption activities further reduces the adaptability of the economy.
A byzantine regulatory regime further stifles small businesses in many dimensions, covering the creation, expansion, and survival.
So when perceived changes in the economy magnify the perception of risks relative to returns, foreigners may choose to relocate their investments elsewhere. Or, they may opt to stay liquid.
The thing is, if construed as a safe-haven from adverse external developments, domestic markets can even see inflows!
In any case, aggressive sellers tend to seek the next level of buyers should there be insufficient volume to meet the price offered at existing levels. Thus, in a selloff, marginal sellers set the decline in prices.
Bluntly put, in the PSE, the peso volume represents a critical factor in the marketplace.
With low volume, an overpriced market dependent on liquidity flows becomes prone to the magnification of volatility.
Figure 1
The benchmark PSEi 30 plummeted by 5.63% this week, the largest in 2022 and the second sharpest fall since the week of January 29, 2021. From the week ending April 22, the headline index plunged 8.8%.
As repeatedly said here, despite the unprecedented injections by the BSP, the peso turnover remains insufficient to support its rally. Since peaking in early February, the peso volume has steadily dropped, pushing the index lower. (Figure 1, topmost window)
And since March, selling activities by foreign money began to rev up, but they remain a minority relative to the share of transactions.
Shorn of volume, foreign sellers started to dictate the price and tempo of declines despite the historic pre-closing pumps. (Figure 2, second highest window)
This week, foreign money sold Php 4.16 billion worth of shares. Foreign trade represented only 33% of total turnover. The share of foreign trade has steadily declined since 4Q 2019. (Figure 1, second to the lowest window)
The scale of foreign selling crescendoed as the election neared. And the anxiety was further reinforced by the outcome of the national elections.
As proof, market participants of the PSE discounted the announcement of the seemingly splendid 1Q 2022 GDP.
In my humble opinion, slowing monetary liquidity, represented in the PSE as volume turnover, compounded by political uncertainty, prompted this fiasco.
Why the uncertainty? The news quotes elaborate on the symptoms.
In any case, perceived as legit, the historic popular vote represents an extension of the neo-socialist policies of the incumbent administration.
How is socialism, in many of its variant forms, compatible with the market?
No one bothers to ask.
III. No Trend Goes In a Straight Line: Oversold PSEi 30 Due For Bounce; Bear Market or Correction?
Yet, no trend goes in a straight line.
That said, the oversold PSE is due for a material bounce.
Aside from the transition to the death cross, the rounding top of PSEi 30 seems to have broken its neckline. Yet, the coming rebound may likely find resistance at this neckline or around its proximity.
Interestingly, some see this meltdown as a "correction".
From the high of 7,502.48 on February 9, 2022, a 15% slide certainly does look like a correction.
But when seen from the record acme of 9,401.2 on January 29, 2018, which translates to a 29% deficit, the PSEi 30 remains in a bear market. (Figure 1, lowest window)
What you see depends on where you stand. Biases determine the framing of one's mind.
IV. Yields of Philippine Treasuries Surge Post Elections!
Figure 2
The Treasury markets represent an ignored but the more crucial factor of market perception.
Unlike stocks, there have been continuing liquidations in the treasury markets signified by surging yields. Treasury yields have been on an uptrend since 2020 and have been accelerating upwards. (Figure 2, topmost pane)
The irony is that after the recent slowdown, weekly BVAL benchmark yields spiked sharply right after the elections! The mirror image was that selling in the Treasury markets intensified!
(Figure 2, second to the highest pane)
And yes, while climbing yields have represented a regional phenomenon, the pace of gains varies, signifying distinct and idiosyncratic conditions of economies.
The Philippines trails Thailand and China in terms of nominal yield growth (YTD). (Figure 2, second to the lowest pane)
An institution quoted by the news provides a valid observation: the fixed income market expects higher inflation from the new administration.
Let me add: another force to reckon with should be the rise of default risks.
In the transition to the new administration, the outgoing regime insidiously implemented two controversial measures.
It increased minimum wages in the NCR and other regions. Small businesses will bear its brunt while favoring firms of the elites. Also, since minimum wages signify a form of price control, it adds to imbalances in the economy, increasing its vulnerability to more inflation!
As I have been saying here, the bias for political interventions and centralization demonstrates the structural nature of inflation forces in the economy.
It also implemented the unpopular increases in Philhealth’s premiums, which will be retroactively applied.
Woe to the consumers!
There is more.
V. Deepening Financialization, Greater Interest Rate Risks
There seems hardly any realization of the critical role interest rates risk/duration risk plays in an environment transitioning to Financialization.
And Financialization is an offspring of the easy money policies of the central banks. Money supply growth represents about three-fourths of the published GDP through 2021 and counting... (Figure 2, lowest pane)
PSE companies are the most substantial credit takers in the financial system.
So, aside from spiking inflation, rising rates will compound the pressures on their profit margins. But it gets worse. A sustained rise in rates will also siphon liquidity for operations and expansion, increasing their susceptibility to credit risks.
Circling back to the PSE, financial conditions will determine its turnover, which means unless the selloffs in the treasury markets abate, one can expect a low volume environment to persist.
The primary source of financial liquidity is the banking system. Savings is part of this story.
In this financial context, rising rates magnify the risks of further liquidations in the face of a highly leveraged system.
Sad to say for those hopeful about the recently concluded elections, market evolution points to the climax of the salad days of record public spending and deficits.
The late former Prime Minister of England famously said,
The problem with socialism is that you eventually run out of other people's money.
Referred here is the purchasing power of money. Central banks can always "print" money.
As a side note, the USD peso, nestled at the resistance, escaped the heat from the recent selling spree, which should be a fascinating development.
VI. The Low-Base Effect of Q1 8.3% GDP: Quarantine Restricted versus Reopening GDP
The huge 8.3% GDP of 1Q 2022 represents one of the spins behind rising yields/rates.
Again, there might be some truth to this, but it ignores the basics of the BSP policies, public debt levels, and the inflationary biases of a neo-socialist economy.
Because of its outperformance, the backward-looking consensus piled upon each other to upgrade their GDP outlook.
Authorities further predict that the GDP will recover its pre-pandemic levels.
But neither the nominal values of the real GDP nor household consumption supported this idea.
Figure 3
Real GDP values dropped back to reinforce a secondary trend line. (Figure 3, upmost window)
On the other hand, with nominal values giving up on the revenge spending of household GDP in Q4, household GDP also strengthened the case of a secondary trend line or slower GDP over time. (Figure 3 middle pane)
In any event, the exemplary gains of the 1Q represented primarily a product of the low-base effect from the GDP contraction of 3.8% in the same period last year.
The 1Q thus represented a Quarantine Restricted against Reopening GDP.
Hey, but the GDP is a government construct!
VII. Q1 GDP Reinforces the Thrust to Centralize the Economy
Real household consumption GDP ramped up by 10.1% in Q1 2022.
Based on PSA data, employment rates improved slightly by 1.3% in 1Q 2022. It expanded from 92.9% in 2021 to 94.2% in 2022. (Figure 3, lowest pane)
With conditions in the labor force hardly providing the anchor for this boom, what exactly was the source of this growth? And how was this funded?
As an aside, the SWS has a starkly divergent view of the labor force.
Figure 4
At any rate, despite its bounce, the share of household GDP remains on a critical downtrend. (Figure 4, topmost pane)
And opposite to the households is the Government GDP.
While it registered a measly 3.6% growth, its uptrend remains intact and continues to accelerate higher. Government Consumption accounted for 14.6% of the real GDP, excluding public construction spending. (Figure 4, middle pane)
The Household-Government GDP data exhibits the transitioning relationship to denote the rapidly growing role of the government, which comes at the expense of the household contribution.
In the context of the economy, since the government is not a wealth producer, a growing share of the GDP translates to more redistribution, effectively reducing economic productivity.
To business planners, the evolving relationship represents a disturbing development. Instead of focusing on consumers to gain market share or improve margins, businesses would have to shift attention toward capitalizing on the growth of the public sector.
Increased politicization represents the metamorphosis of the economy, manifesting the implicit thrust to centralize it.
The public spending-revenue share of the GDP also exposes the inflationary bias of the system. Public expenditures continue to swell hence, confirming the developments in the GDP. (Figure 4, lower pane)
However, the proportion of public revenues continues to decline, manifested by the record deficit and public debt.
The easy money policies of the BSP allowed, accommodated, and promoted this transition.
But this era is approaching its culmination.
VIII. Election Spending Fueled Consumer Boom!
Again, what spurred the so-called consumption boom in 1Q 2022?
We offer a guess: Election spending!
We noted that LGU spending came at record highs in Q1. Not only funded by the Bureau of Treasury, but LGUs went into a borrowing spree!
Cash in circulation also grew at an unprecedented nominal value.
The Impact of Vote-Buying; the April CPI Breakout; The Structural Foundations of Inflation May 9, 2022
A torrent of election money flooded the economy!
That windfall naturally filtered into consumer spending, which spruced up the GDP.
As noted here, aside from the low-base effect and election spending, the depressed CPI likewise bolstered the GDP.
IX. A Fuel Subsidy Induced Boom in the Transport Sector? Retail GDP vs. SM Retail Sales and Food CPI vs. JFC Sales
Here are some other interesting observations from the GDP data.
Figure 5
The transport sector was one of the fastest-growing sectors in Q1! Remember the brouhaha about fuel subsidies to plug income deficits from record oil prices? (Figure 5: highest window)
Why would a sector require subsidies when it grew at a stunning rate of 26.5%? Or was the sector’s growth due to inflation and the subsidies?
The realm of inconsistencies belongs to the world of statistics and politics.
And there’s more.
While the household consumption GDP failed to recover its pre-pandemic trend, the retail GDP has already accomplished what its consumers missed. (Figure 5: middle window)
Following a smoldering Q4, real and current retail GDP retreated slightly from its record highs. Real retail GDP expanded 7.3% in Q1.
Unfortunately, the retail GDP has diverged from the retail or merchandise sales performance of SM Investments, the largest retail chain nationwide, which dropped back to 2018 levels! (Figure 5: lowest window)
And it is not just retail.
Figure 6
In Q1 2022, Real food GDP rocketed by 20.7% to bring its peso value levels close to the 2019 highs. The current priced food GDP carved a new record! (Figure 6, highest pane)
With a vibrant Food GPI, why did the food CPI flounder in Q1? Too much supply? (Figure 6, middle pane)
Here is the thing. Domestic sales of the largest food retailer, Jollibee Foods, in the 1Q have barely resonated with the GDP. JFC sales, which posted a 21.23% YoY in Q1, saw its domestic sales in peso retreat to 2017 levels. (Figure 6, lowest pane)
Of course, a boom may have occurred in the retail and food sectors outside these titans. But how would this happen?
If not, which of these data should we give credence?
Finally, from the standpoint of SM and JFC, election spending might have contributed to their sales, but it was not enough to lift them back to anywhere close to pre-pandemic levels.
Why would it? Just ask the Treasury Markets.
Yours in liberty,
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