Government Say Industrial Production Grew by 6.8% in April, BSP Banking Credit Data Says No

The Philippine government via the Philippine Statistics Authority announced that Industrial Production grew by 6.8% last April. Nice. Only if it were true. 

The reason that it is really hard to believe such statistically aggregated numbers, which are derived from mostly surveys, are twofold. 

One, government’s own data have been in glaring conflict with each other. As example, reported activities in industrial production have made big deviances with reported national accounts data in the context of NGDP. The wild divergent gyrations of what should be similar data are proof to such inconsistencies. 

Two, real data don’t seem to confirm survey data. 

By real data, I mean in terms of comparable BSP’s banking loans to the manufacturing sector. 

Banking loans are actual data made by banks based on declared usage on a specific sector. While declaration and actual use of borrowed money may differ, the aggregate credit money issued has been more or less accurately represented.

To account for the credit intensity (credit growth over NGDP), in the last nine quarters the Philippine economy (via NGDP) borrowed Php 2 to 3 for every Php growth or output

As caveat to such statistics, since bank borrowing represents a small segment of the population while NGDP is supposed measure all the economic activities, such data tends to dilute the overall exposure of the system’s leverage. Additionally, sectoral borrowings are different. Moreover, GDP could have been inflated thereby likewise diminishing the state of actual leverage in the system.

Based on the PSA’s 1Q NGDP, from the industry perspective, at 20.33% manufacturing accounted for the largest share of estimated peso output in 1Q 2016.

Based on the BSP’s April bank credit data, the share of manufacturing loans to the overall loans to productive activities totaled 16%—the second largest after real estate at 19.63%

As a side note, remember this? Why Blowoff Episodes Reveals That The Boom Is The Disease! June 5, 2016

Since GDP is about money based spending and since bank credit growth accounted for more than 70% of money supply growth, then this means that the core segment of GDP has accrued from bank credit growth. In short, bank credit growth is the quintessence of GDP performance.  

The chart above of the NGDP (blue) and Bank Credit Growth (red) provides the empirical evidence of such relationships

Nevertheless, when major industries have been borrowing Php 2-3 peso for every peso output, for manufacturing the relationship between lending conditions and output seems out of whack.

Alternatively, such only shows of how the manufacturing sector has helped reduced the headline “leverage” in the system

The value of industrial production has been negative from June to December 2015. The big rally came in 2016 (as BSP stimulated), particularly January’s 27.2%, February and April’s 6.8% while March underperformed at 1.8%.

But bank loan growth to the sector over the same period was only 5.49% in January, 5.73% February, 1.84% in March and 2.91% in April.

Because headline value output has been larger than credit growth, then this means that the industry has been self-financing since the start of the year!

How wonderful!

So government statistics could have been exaggerating on the output. Or that the BSP have been underreporting actual loans. Or loans to the other industry have been redirected to the manufacturing sector.

Perhaps too, the manufacturing sector has been so awash with cash to have provided self-financing for their working capital or for capex. Ironically, the sector suffered 11 months of reported contractions in the sector in 2015! So government statistics seem to suggest that output losses would bring about a lot of cash!!!

How splendid!

Maybe suppliers of the industry have not only provided credit for products sold to the sector, but they could have lent money to their clients. Perhaps buyers of the manufacturing sector made advanced payments on their purchases. Or buyers could have lent money to their manufacturing suppliers outside of the regular transactions.

Or manufacturers tapped the bond markets (which is very unlikely given the juvenile state of capital markets). Or it could be that manufacturers tapped the informal sector, such as those providing 5-6 loans in motorcycles!

Such is the kind of headline “economics” that has been predominant in the mainstream.

The vulgar use of statistics have been projected as to resemble the actual state of the “economic” affairs even when such operate on an egregious self-contradictory logical relationship with its purported subject.

And because everyone seems to believe, without question, what the government says, such statistics are deemed as a reflection of reality. 

In essence, bubbles are the belief in accomplishing something from nothing. And headline “economics” like this, which tries to show something from nothing, reinforces the current state of the evolving bubble (boom-bust) cycles.

The BSP Launched a Silent Stimulus: More Evidence; A Derivative Inflated GIRs

I have recently suggested that the some entity must have launched a “silent stimulus” such as to forcibly steepen the yield curve. Such silent stimulus coursed through the interest rate channeled impelled for a reversal in the recent trend (July 2014-September 2015) of declining bank credit growth.

Moreover, the reversal of the decline in bank credit conditions subsequently became apparent, or has likewise been reflected on the domestic liquidity trend.

I proposed three motivations for such actions. 1) The masquerade of falling price levels (as measured by the government) which has inflated GDP is unsustainable, 2) election spending and 3) sustained crash in PSE.

In that note, I presented charts of the PSEi, the BSP’s measure of banking loans and M1 growth.

Now I provide further evidence as shown in charts below.

What used to be general curves that seem headed for an intense flattening and inversion suddenly bounced back! Spreads from ADB’s 2 year, my own 1,3 and 5 year versus 10 year revealed of a V-shape bounce! They look like the vertical-parabolic climb by the PSEi!

ADB’s data showed that in December 15 2015, the spread between the 2 and 10 year narrowed to just 4 basis points! Spreads were mostly below 100 bps from September 2015 to early February 2016.

These concerted “steepening of the yield” actions on different curves occurred almost at the same time window particularly from 4Q 2015 to 1Q 2016.

Coincidentally, during the same time frame, growth in the BSP’s balance sheet (top, nominal php) appears to have accelerated.

From a year on year % basis, asset growth in the BSP’s balance sheet jumped by over 5% during the 4Q 2015 and picked up speed in the 1Q 2016!

Asset growth of the BSP hit a low on January 2015 from where it began its ascent. All these were happening even as the yield curve seriously flattened!

Moreover, the banking system’s balance sheet (lowest window, nominal php) headed down from mid 2014 through July 2015. So when the BSP stepped up to increase their assets, the banking system’s balance sheet likewise responded with a SPIKE in the 1Q 2016!

We can match the upsurge in the banking system’s balance sheets with the surge in M1! And we can do the same with BSP’s CPI data! BSP’s May CPI data posted a significant 1.6% increase! 

 

The BSP’s measure of CPI hit a low of .4% in two consecutive months (September and October 2015) from where it sharply bounced back.

For whatever reasons, the BSP has forcibly opened the monetary spigot!

Just awesome!

And here is the most important insight, if the Philippines has been resilient as publicly stated, then why the stimulus at all????????????

 

And here is more.

BSP’s “loans and advances” skyrocketed by a staggering 92% in March and 81% in February!

Although from March data, the share of loans and advances to the BSP balance sheet accounted for only 3.7%, the BSP dished out Php 163.5 billion and Php 154 billion over the said period!

Exactly to whom has these loans been extended to? And more importantly, why has these loans been made?

Could a bank have been in trouble to borrow from the BSP? Or could the BSP have lent to the banking system for the latter to acquire bonds in the secondary market in order to “fix” the yield curve? Or could the BSP have lent peso to the banking system in exchange for dollars in order to shore up the GIR?

It’s hard to pinpoint where these had been made.

But GIRs could have been one of the likely options

Growth rates of the BSP’s International Reserve and the Gross International Reserves seem to have gone in opposite directions!

International reserves accounted for 86.3% share of the BSP’s assets as of March 2016.

What’s truly intriguing has been the spike in the forex holding of the BSP’s GIR. Those forex holdings ballooned in February and March of 2016 almost exactly when the BSP issued those loans!

Additionally, if we consider the amount involved in the swelling of GIRs seem to partly coincide with the BSP loan*.

*The difference of GIR was US 1.392 billion, based from January’s USD 826 million to March’s USD 2.22 billion. This is against the amount of BSP’s nominal loan growth over the same period which posted an increase of Php 78 billion which stemmed from the Php 163.5 billion in March relative to January’s Php 85.6 billion. At php 47 to a USD, the additional forex segment of GIR totaled Php 65.3 billion. The BSP’s excess loans of 12.7 billion may have been distributed elsewhere.

Even more, those GIRs now incorporate a part (US 495 billion) of the government’s $2 billion global bond issuance last February.

As I pointed out in the past, previous episodes where the Philippine government raised bonds hardly ended up in the GIRs. Well if they did, the BSP hardly reported on them.

Moreover, I have suspected that the BSP has been engaged in window dressing of its GIR position by borrowing USD through the use of derivatives.

As I wrote last April: Phisix 7,250: Philippine Peso Tumbled by 1.3%! Why?; The Perspective from the Stock Market Cycle (April 25, 2016)

Yet I posit another angle for last week’s fall of the peso. Two weeks back I have noted that the BSP’s forex holdings under its GIR has skyrocketed to milestone highs. I then asked, “Could it be that derivative forward cover contracts could soon be expiring that would lead to a hefty decline in GIRs for the BSP to have borrowed from the national government in order to cushion on the coming drop?”

The BSP’s May GIRs declined to US$83.51 billion. The BSP blamed it on “the decrease in the price of gold in the international market and payments made by the National Government (NG) for its maturing foreign exchange obligations”.

Gold prices has indeed contributed to the chipping of the GIRs (USD -480 million), but this was mostly negated by an increase in foreign investments (USD +441 million). The difference (USD -226 million) being made up by the (USD -182 million) decline in forex holdings. The decline in forex holdings, as dragging the overall conditions of Philippine GIR, comes as I have predicted.

Yet more signs that the Philippine USD surpluses have signified nothing more than a derivatives based Potemkin Village.

Regardless the BSP’s forex holdings under its GIRs remain at record highs.

Forex reserves have almost been equivalent to social status (or as stated in economic jugular “macroeconomic stability”) thus the motivation which leads to the efforts to shore up on such status symbol.

In sum, the recent surge in BSP and the banking system’s balance sheets in the face of the abrupt widening of the interest rate spreads or the yield curve, which has been reflected by significant escalation in domestic liquidity, as well as an upturn in CPI, combine and corroborate to reveal that the BSP has engaged in a stealth easing program. Such program have become pronounced in 4Q 2015 to 1Q 2016.

Add to this the big jump in “loans and advances” by the BSP in 1Q, which may have been used as an “emergency loan” to a financial institution, or as lending to the banking system to price manage the yield curve and or to boost the USD stock in the GIRs.

Nonetheless, the recent surge CPI simply suggests that these massive balance sheet expansions by the banking system and in the BSP were mostly likely unsterilized. This seemingly had designed been to amplify the headline numbers. And headline numbers means to support the GDP and of the intensifying PSEi’s bubble. And or, it may have also been used to for election financing.

As for stimulus, as defined by dictionary.com such noun represents “something that incites to action, or exertion or quickens action, feeling, thought, etc.” In short, stimulus is artificial. Besides, the Philippines have been in a stimulus ever since 2009. So current weakness reveals that artificial stimulus has been experiencing diminishing returns. And diminishing returns will be punctuated by mounting balance sheet woes and on growing restrains on the currency or the pesos’ purchasing power.

Yet politicians, bureaucrats and the establishment have been addicted to this. And any form of addiction predicated on artificial substances will suffer from the long term consequences from its very essence—unnaturalness. Kicking the proverbial can down the road only translates to the worsening of the disease.

As for GIRs, even as the Philippine government reported a big current account surplus, growing foreign debt, add to this 1Q FDI 2016 that have been from mainly “Non-residents’ investments in debt instruments (consisting mainly of loans extended by parent companies abroad to their local affiliates”), mounting trade deficits, diminishing returns of OFW remittances and larger budget gaps means that demand for hard currency “dollars” will grow more than its supply of existing “dollars”.

Even more, the recent attempts to re-stimulate the economy means supply or money stock of peso will grow faster than the USD counterpart. This should mean pressure on the peso which should heighten demand for “dollars”

Additionally, if I am right that derivatives have made up a big segment of GIRs, derivatives only mean “borrowing” dollars to puff up outward conditions. This alternatively also implies that borrowed “dollars” would have to be repaid or rolled over. And repayment should mean more peso for every “dollar” liabilities.

 

SMPH’s Blowoff Phase: Will This Time Be Different???, The Taleb Distribution‏

Charts are the most widely used tool in the stock market. It is a tool preferred by brokers because it provides retail investors the comfort of having to experience a seeming cerebral exercise called “analysis”, thus encourages trade churning. Yet trade churning only buys these brokers their McMansions and yachts at the expense of their clients.  

Aside from trends, patterns and price level analysis, various stochastics and oscillators provide the cosiness of having attained specialized knowledge to its users. It is the equivalent in economics called ‘econometrics’—quant models. Such provides a placebo of confidence especially when price momentum coincides with the 'preferred' direction of such models.

Even fundamental based experts, like fund managers and institutional financial analysts, rely on chart.  They see this as a means to parlay their statistically founded “theories”.  They also see this as a tool to enter and exit positions.

But one essential thing that the public does not know, and which unfortunately ‘experts’ (institutional, media and some independents) barely convey to them, is of the exercise of tradeoffs between probability and payoff. 

For instance in the current climate, the blowoff phase have been rationalized in the context of various economic or fundamental premises. Such justifications can be summarized in a slogan “HIGH PRICES equals G-R-O-W-T-H” and its derived reductio ad absurdum + post hoc conclusion, "therefore because of G-R-O-W-t-H, Prices will Continue to Rise"! 

So high prices can only mean HIGHER prices! Get in before the train departs, they say.

But the train has already left.

Yet blowoff phases, again which are all in the charts and which are disregarded by experts because they do not fit into their biases, provide a wonderful blueprint of potential tradeoff between returns and losses through the lens of probabilities and payoffs

I have shown blowoff phases of AC and TEL.

And like clockwork, blowoff phases hardly ever provide sustainable returns. They indeed boost the dopamine, but the probability of success has been, based on history, close to ZERO!

SMPH should be no different.

But SMPH provides a twist. 

In the world of marking the closes, there was an exemption so far. A minor 28% run at the close of December 2014 has not encountered a serious selloff. This seems to share the same fate as with the 1998 ‘exemption to the rule’. (see below)

Nonetheless, outside the exemption, in the current setting, gains from the other minor spurts had been eliminated. Prior to yesterday’s marking the close “dump”, SMPH has scored a 31% return from the January troughs.

Note: I consider all less than 30% as minor runs while over 30% as majors

Now let us rewind back to the past to a get a clue if previous encounters will reinforce today’s momentum.

Those major blowoff runs in 2013 (upper) and 2007 (lower) all ended up with the Newton’s third law of motion “For every action, there is an equal and opposite reaction” and the “law of gravity” as the predominant forces that dictated on SMPH’s long term price actions.

In short, in both instances blowoff phases only gave back about all or 100% of the previous gains! 

Note I didn’t put the numbers on. It’s too time consuming.

Again we see the same dynamic unfold in 1998-2000 (top most), 1996-1998 (middle window) and 1994-1995. 

Just with a twist.

In 1998, SMPH had another seeming exemption. It soared by 62% in just one and a half months! The intensity and speed was far greater than that of today. Surprisingly there was no pullback then. That’s when seen from the short run perspective. What it did was to consolidate.

After a hiatus, a minor 23.4% run piled on the 62% gain by mid 1999s.

Nonetheless, when the correction appeared, the whole edifice came crumbling down. SMPH crashed by 35% by October 1999 and further slumped through the 1Q of 2000. 

At the close of the said cycle, Newton’s law and the law of gravity prevailed again!!! 

SMPH gave back both 62% and 24% as its price level fell back to where they started in 1999!

At the longer perspective, SMPH’s 62% run was not exempted at all. That time was no different. 

So from SMPH’s case, sustained returns from blowoff phases may not be exactly ZERO but they are CLOSE to zero. They could be seen as statistical fat tails.

But unlike fat tails which may provide big returns, they don’t. The succeeding gain of 1998 was smaller then initial ramp. The gain from today is just about a little over 2014's run. But the overall gains of 1998 was bigger than today 1998: 62+24 2014-2016: 28+31).

Risk analyst Nicolas Taleb would call this “picking up a penny in front of a steamroller” or Taleb Distribution

Yet the longer picture matters. Because even if there has been no immediate retrenchment, a full cycle shows that it will.

And the payoff from chasing wildly escalating prices or blowoff phases are close to 100% in terms of losses. 

The history of price action says that if you buy today then you are almost guaranteed to lose money. The burden of proof lies on its propagators. 

Yes, the respective histories of AC, TEL and SMPH’s all share of the same lesson.

Should such lessons be subverted by mere beliefs? Will this time be different?

We will and shall find out....soon