Why the War on Mining Will Fail!

Statist Prohibition: The War on Mining

The Duterte regime is an administration based on prohibition.

During the post election period, I deduced that the composition of the cabinet, and not their pronouncements, will determine the incoming administration’s policies:

Understand that cabinet positions signify as heads of the implementing agencies of the government. Hence when the president uses his apparatchiks to execute his political programs, the political path or direction veers toward the leftism. 

Additionally, I wrote of the significance of the Environment and Natural Resources department to the left.

Environment: Land is a key factor of economic production. And this is why the environment position is also critical in as much as it is for the agriculture. The communist aim is for the complete control over resources. This not only secures funding for their programs, it is also designed to ensure logistics and control of production. 

So when Mr Duterte offered anti-mining fanatic and tycoon Ms Gina Lopez the DENR post, such has partly affirmed on my suspicions of the left leaning policy direction of the incoming regime.

It is an example of revealed preferences. Action speaks louder than words.

Yet today’s environmental politics have become a vehicle for socialism in disguise. For instance, Patrick Moore founder of the Greenpeace abdicated from the organization he established because “Greenpeace took a sharp turn to the political left, and began to adopt policies that I could not accept from my scientific perspective.”

A pro-business environment cannot just happen when the cabinet is comprised of members of the red brigade, military bureaucrats, and appendages of cronies. That’s because hardly any of them—based on their experience, interests, network and ideology—has been shaped by free markets.

But they all have a common ground: statism. The difference is on how their different versions of statism should work.

Even worse, because of such divergence, their interests would likely run antithetical to each other. Duterte’s cabinet essentially represents a cauldron or mishmash of internal contradictions. Once operational, the cabinet will likely be filled with tensions from conflicts of interests.

Nevertheless, it is Mr Duterte’s political inclinations that ultimately will matter. Early this June, he reaffirmed or reiterated to deny that he is a communist and instead that he declared that he represents ‘left of center’. Of course he has to reject communism. That’s because the military won’t likely accept a communist leadership. Besides, left of center and communism can signify a wordplay, left of center can also be defined as soft core communism.

One may ask, wouldn’t two heads be better than one? But the quality of diversity matters. Policy decisions from the current makeup of the Duterte cabinet will hardly be about the miscellany of the merits between market economy and interventionism, but rather, it would largely characterize interventionism. Again the stark difference will be that of the essence of redistribution: the beneficiaries and the losers of competing interest groups, as well as its mechanics (how to go about such process)

In short, policy decisions will mostly be about division of spoils: who will gain and who will lose.

From Mr Duterte’s actions, through Ms. Lopez, he has already condemned or blackmailed the mining industry.

Why the War on Mining Will Fail

The stock market’s response to the Lopez appointment represents a typical reaction to the surge in political risks due to perceived policy uncertainty. In particular, this is called regime uncertainty or business apprehensions over property rights. Or distressed business confidence, as explained by Austrian economist Robert Higgs, from “investors’ private property rights in their capital and the income it yields” that “will be attenuated further by government action.” And “such attenuations can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights”¹

So in consideration that according to Philippine Republic act no. 7942¹, “All mineral resources in public and private lands within the territory and exclusive economic zone of the Republic of the Philippines are owned by the State”, this implies that should Ms Lopez impose a ban on mining, all it takes is for her to do is to revoke all the mining claims. And by doing so, such would incite assets of all mining companies to evaporate!

Of course, an outright ban on mining is easier said than done.

Remember, contrary to the fantastically simplistic utopian mindset of billionaire Ms. Lopez, the mining industry is not just statistics or economic or financial numbers. It involves lives of hundreds of thousands of people who survive from it. The government also depends on the industry for its taxes. So an outright ban will have very very very nasty (social stability, economic and political) consequences, something which both Mr Duterte and Ms Lopez will surely live to regret on...if they impose a total ban.

Here are the numbers.

Based on the data from the Mines & Geosciences Bureau in the 1H of 2015 in the formal mining industry there were an estimated 234-235 thousand people employed (2014-1H 2015) and the government also raked in Php 32.27 billion in taxes in 2014 and Php 13.76 billion in 1H of 2015. The sector had a gross production output of Php 204.7 billion in 2014 and Php 108.21 billion in 1H of 2015.

Of course this represents only the formal economy.

The mining sector represents a puny segment of the Philippine economy with a share of 1Q 2016 1.24% and 2015 1.06% (RGDP) or .9% and .8% based on NGDP, and with .2% of total taxes revenues in 2014. And this is the reason why it is being bullied and blackmailed.

And because the Duterte regime believes that the bubble economy will continue to provide them with the necessary tax revenues for their pet boondoggles, they believe that they can exorcise the mining industry of environmental evils through intimidation.

Here is an example. Take a look at this comment: "I will require you to go to Canada or Australia, learn how to mine the precious metals inside the bowels of the earth and do it. Because ... (if) you are spoiling the land, I will cancel it without hesitation." 

 

The overweening Mr Duterte practically believes in fairy tales. He essentially thinks that he can achieve market based performance with socialist repression. Canada and Australia are basically relatively liberal economies even from the mining standpoint. These countries invite investors and promote competition. They do not bully or intimidate them.

His model China has even become the top gold producer in the world. As for China’s role as top gold producer, that’s because the central bank has become its principal buyer!

Once the bubble economy begins to corrode and where prices of metals soar, such industry bullying will come to an end. Ban on mining will transform to welcome back mining!

Of course, another reason why mining won’t likely be totally banned is because the Bangko Sentral ng Pilipinas not only buys gold from the miners (even illegal miners), they get revenues from sales to them!

So I expect the BSP to oppose a total ban.

Of course, a total ban will fail too.

Here is a simple thought exercise.

What happens when hungry people see food in a vacant land in the neighborhood? Will they one, instinctively go and pick the food up? Or two, will they wait for the government’s permission to pick the food up? Or three, just ignore the food?

If your answer is number one, then just replace food with gold or other open pit minerals. This means that people will mine products regardless of what government says. That’s because minerals have value. So when minerals are accessible for mining, the public will mine it. Such is the reason why they become a source of livelihood whether or not the government approves on them.

Meanwhile, number two represents the government’s chimerical position where people should behave as sheep (sheeple)

This is an example of why guerilla mining have proliferated.

In fact, they have represented what the Duterte and Lopez tandem have been bellyaching about. The 2014 slide from the Chamber of Mines shows us that only 2% of the million hectares of mineable properties are covered by permits! And yet these 2% account for as the responsible miners being subjected to political harassment. This reveals that much of the mineable properties are being subject to guerilla mining.

Proof?

This Reuters April 2015 report says that there are about 300,000 small scale or guerilla gold miners.

Small scale miners used to sell to the BSP. Apparently because law of economics say that when one raises the cost of something, one also get less of it. So when the BSP increased taxes (excise and withholding) such led to vastly reduced sales and output. And the alternative response by the informal economy has been to increase smuggling!

"Smuggling activity could still be prevalent," he said, adding many small-scale miners also operate without proper permits. By law, all gold produced by small-scale miners must be sold to the Philippine central bank.

Data from the MGB showed gold sold by small-scale miners and traders to the central bank in 2014 was worth only 180 million pesos ($4 million) based on current foreign exchange rates, compared with $25 million in 2013, $47 million in 2012, $764 million in 2011 and $962 million in 2010.

"Gold production (by small miners) in 2014 was about 18 tonnes, down from about 30 tonnes before the BIR started collecting taxes from small miners," Jasareno said, referring to the Bureau of Internal Revenue, which in 2012 ordered the imposition of a 2-percent excise tax and 5-percent withholding tax on gold purchases

See what higher taxes can do?

That’s economics at work.

Of course, part of the reason why output has collapsed can also traced to the recent bear market 2012-2015 of gold prices.

I believe that with NIRP central bank policies in place, such bear market in gold HAS ENDED.

But the increase in smuggling activities simply means going around higher costs of doing business.

So to apply total ban on mining simply means to induce a shift in mining activities to the underground. And such shift would translate to magnifying the risks to the environment.

I don’t think that Mr. Duterte’s cooperatives will work too. Reason? Mining is a capital and technology intensive industry. Just where will cooperatives get funds and expertise? From the government?

Cooperatives will only mean corruption, inefficient mining and aggravation of the despoliation of the environment.

And mining won’t be stopped no matter how the government prohibits it. That’s even if they shoot to kill the population involved in them. If they resort to the latter, then expect a civil war.

Instead, the more practical direction is that mining will again serve as another aspect of the regime’s division of spoils. Mining will become a haven for Duterte cronies.

Perhaps one may expect that the Lopez group and their allies or network, will not only become media friendly to the Duterte regime, they may become eventual mining magnates.

Sorry MVP, Mr Duterte says you are out. But the Lopez Group is in!

The nice part about policymaking is that errors in policy judgements have no consequence for policymakers. Yet the bigger the error, the mechanical response has always been to double down. More of the same is needed!

Yet if death penalty should be re-imposed then this should first be applied to them. Policy errors affect, not just one or a few people, but millions.

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1 Mines and Geosciences Bureau Republic Act No. 7942 AN ACT INSTITUTING A NEW SYSTEM OF MINERAL RESOURCES EXPLORATION, DEVELOPMENT, UTILIZATION AND CONSERVATION

1 Robert Higgs Regime Uncertainty, Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War Independent review 1997 p. 568

Uncanny Resemblance in Short Term Charts

You can accuse me of employing clustering illusion (looking for patterns) but the charts above appears to have some resemblance. 

Not only do they share similarities in the undulations of price actions, they share almost the same timeframe. 

The first chart actually represents the PSEi which includes today’s marvelous 1.33% close. It bottomed in the third week of January 2016 then made a parabolic run which has been in progress. 

The second (lower) chart is actually the Shanghai index, which had a temporary bottom in February 2015, then made a stunning almost ceaseless run. 

The Shanghai index peaked in mid-June 2015. 

The difference has been that from the lows, the Shanghai index stormed by 68% as against the Phisix at 27.33%. 

Yet should the Phisix maintain current pace of increases, we’d hit the rate of return of the Shanghai index at 60%+ or 9,750 by the end of the year.

Nevertheless, here is the bigger picture of the two over the same period. 

The upper left rectangle of the SSE represents the portion of the picture clipped and shown above. 

Meanwhile the sliced version of PSEi’s equivalent also in the red rightmost rectangle above.

Yet previous price actions showed of massive reversions to the mean. 

For the PSEi, could this time is different?

Charts: Climatic Manias in Motion!

For the top 100 cities, China’s property prices zoomed by 50% y-o-y according to the Wall Street Journal (as quoted by ZH)!!!!

Philippine PSEi seem to be following the footsteps in terms of the intensity of China’s property price actions. As of yesterday, the PSEi has surged by an astounding 26% in 4 months plus! This should be 27% if the PSEi closes 1% today. 

In 1Q 2016, China's credit expansion skyrocketed USD $1 trillion in 1Q! So the tsunami of money found its way to a nationwide property pump. This as against a relatively smaller amount of credit expansion from the BSP's silent stimulus, through the domestic banking system. The domestic version apparently spilled over to mostly the PSEi! That's because domestic property prices has shown little improvement (as noted yesterday) 

And as for my suspicions about rotational pumping on the top 5 issues, well it has been happening. Massive pumping has happened in the top 3 issues yesterday, SM, ALI and JGS while the rest is happening today!

BSP’s Silent Stimulus Has Had Tepid Results to the Philippine Property Sector in 1Q 2016! More Signs of Mounting Excess Capacity!

For the 1Q 2016, prices in Asia’s housing markets have been generally been weakening. According to the Global Property Guide, “Asian housing markets weakening, except China. Six of the eleven Asian markets for which figures are available saw house price increases during the year to Q1 2016, though most were just modest increases. In fact, only China's house prices rose strongly last year. Six Asian housing markets were stronger in Q1 2016 compared to a year earlier.” (bold original)

The regional slowdown means that the Philippines have been part of the current dynamic, where the "average price of 3-bedroom condominium units in Makati CBD rose by 3.9% during the year to Q1 2016, from y-o-y increases of 2.96% in Q4 2015, 5.41% in Q3 2015, and 6.61% in Q2 2015 and 5.4% in Q1 2015. Housing prices increased 2.54% q-o-q during Q1 2016".

So while high end property prices partially recovered from a big slowdown in 4Q 2015 on a quarterly basis, which essentially validates my suspicions last year, for the comparative 1Q period of 2015 (+5.4%) and 2016 (+3.9%), present growth rates have indicated of a 27% downturn in growth rates!

Positive growth still means demand outstripping or growing faster than supply though. So even if demand may slow, for as long as supply slows faster, then prices will reflect on positive growth. Or a credit fueled demand may have temporarily juiced up demand relative to supply.

The latter seems to signify the current operating environment of the Philippine property sector.

Here is how Philippine property prices (residential) performed during the 4Q 2015, according to the Bank for International Settlements data

It’s not just the perspective in the slowdown in 4Q 2015 housing prices, where BIS housing prices essentially confirmed the Global Property Guide’s observations.

But a more important factor has been that over the 6 year period (2009-2015), the boom bust cycle appears to have emerged. To wit, following a boom, Philippine housing (high end) property prices seem to have hit an inflection point and has been headed down!

The BSP’s monumental shift in monetary accommodation in 2009 lubricated a run in housing prices from 2009-2013. Yet the rate of growth of residential property prices peaked during the 2H of 2013. From there, it has been downhill.

So Q4 2015 and Q1 2016 numbers seem to only reinforce the current long term housing price dynamics.

And the more interesting factor is how money supply growth has coincided with housing property prices (lower window). The 10 month 30%+++ money supply growth in 2H 2013 to 1H 2014 seems to have been very crucial in the powering of housing prices to its zenith.

Since money supply growth petered out (partly due to the BSP’s slight tightening) in 2014, housing prices followed suit.

And now that the BSP launched a silent stimulus 4Q 2015-1Q 2016, such has filtered into housing prices as indicated by the Global Property Guide.

This appears to be similar in the way the Chinese government reignited their housing bubble with a whopping 1Q 2016 credit expansion to the tune of over USD$1 trillion!

And here is an even more interesting observation. While residential prices have been trending lower in Makati, land prices rebounded strongly (13.63%) in the 4Q of 2015.

The divergence is stunning. It seems to show that property developers continue with their race to build supply (thus the aggressive bids on land prices) even as topline growth (now confirmed in real estate sales by PSE listed firms in 1Q 2016) has been tapering!

If such dynamic holds then we are bound to see even more pronounced massive debt financed surplus capacity for the sector!

And yet more signs of the effects of the BSP’s silent stimulus in the context of the government’s measure of construction wholesale and retail prices.

Construction prices have almost simultaneously bounced backed in 1Q 2016!

From here it would look as if construction boom have been perked up again.

But such doesn’t seem to be the case.

An even more fascinating development has been that while real estate prices and construction prices have both rebounded, growth rates in construction permits have remained stagnant!

While it may be true, that the number of construction permits grew by 10.41% in the 1Q, the broader picture says that mom and pop construction activities have been mainly responsible for this. That’s because total floor area of indicated construction dropped by 2.9% over the same period, while total value of construction have dropped by a big 5.7%!

So smaller projects have been booming while bigger projects have been down.

Overall since the GDP is measured in terms of money spending, decline in the value of construction doesn’t speak well of the construction GDP. This means that in order to save the construction sector (statistical GDP), the government has to take its place (along with it the consequences).

And the biggest decline for the construction permits had emerged from residential activities. Residential floor area and value skidded -2.55% and -9.7% respectively. This compares to non residential which registered a mix showing of -.04 decline in floor area while value jumped 7.46%.

If construction permits have been accurate indicators of present and coming construction activities, then these numbers hardly corroborates a strong rebound in the real estate-construction sector.

And here’s more. The slowdown in construction permits appear to be reinforced by the BSP’s banking loans to the construction industry. Growth rates have fallen to 22.2% last April. It’s been in a downtrend since 2013. Such sagging trend has been in place, in spite of the BSP’s silent stimulus!

And while banking loans to the property sector spiked in January and February, it has declined in March and April. Banking loan growth rates to the sector has fallen back to 3Q 2015 levels.

Of course, we can’t rely on the sanctity of statistics because they have most been likely to be underreported. Perhaps, loans to the property sector are being alternatively financed through shadow banks, through off balance sheets, through diversion of loans from other industries to the real estate sector, through the bond markets, through intercompany loans, through private placements or through many other probable means.

Credit growth from stealth monetary easing has only incited massive wave of speculations similar to the present activities at the PSE even when construction activities demonstrate stark sluggishness.

What this only has shown has been of money illusion from the reopening of the monetary spigot by the BSP to rescue asset prices, the GDP and possibly to finance election spending.

And the ramifications from these have been to deepen economic discoordination as manifested by indications of broadening excess supply!

Desperate times calls for desperate measures?

As Growth Rates Slow, The BSP Toys with OFW Remittance Data Anew!

The BSP has been at it again!  

Or the BSP has been fudging with OFW remittance statistics again! 

(all bold mine) 

The BSP on January remittance data: Personal remittances from overseas Filipinos (OFs) increased by 3.2 percent year-on-year in January 2016 to reach US$2.2 billion, Bangko Sentral ng Pilipinas Governor Amando M. Tetangco, Jr. announced today…. Likewise, cash remittances from OFs coursed through banks amounted to US$2 billion in January 2016, rising by 3.4 percent from the level posted a year ago. 

On February data: Personal remittances from overseas Filipinos (OFs) reached US$2.3 billion in February 2016, higher by 9 percent than the level posted in February last year…Similarly, cash remittances from OFs coursed through banks grew by 9.1 percent year-on-year to US$2.1 billion in February 2016.

On March data: In March 2016 alone, personal remittances amounted to US$2.7 billion, 1.4 percent higher than the year-ago level. Meanwhile, cash remittances from OFs coursed through banks in March 2016 amounted to US$2.4 billion, posting a growth of 1.5 percent year-on-year.

In their April disclosure, the BSP revised all three data. And they have all been substantially downgraded!!!

January personal and cash remittance (monthly) growth rates: 1.9% and 2.1% (original 3.2% and 3.4%). February: 8.3% and 8.4% (original 9% and 9.1%). March: NEGATIVE 1.3% and NEGATIVE 1.2% (original 1.4% and 1.5%)! 

The BSP then shifted the blame on banks for such revisions: “Revised per amended reports submitted by banks”

I recently noted the BSP adjusted the entire TWO year (2014 and 2015) data set in order to shield increasing accounts of NEGATIVE growth!

The BSP’s smoke and mirror trick appears to be to post data only that have been in the positive, from which they then shout or declare G-R-O-W-T-H! And when no one seems to be looking, they considerably reduce them. The BSP seem to be hoping that people will just buy the headlines. It seems that for them, these numbers have no real world implications. 

Monetary authorities can’t seem to handle several truisms.

One, the world economy has been slowing down fast.

Two, the law of diminishing returns simply means that considering the size (over 10 million people or 10% of population), OFW growth cannot expand FASTER than the population growth forever. That’s unless authorities have tacitly been working on to significantly drain the resident population!

Three, the quality of overseas job openings may also evolve.

Fourth, currency factors play a role. Weakening currencies where OFWs are employed may see their remittance diminish.

Fifth, global political developments also matter. The rise of nationalism (anti-immigration, right wing politics) may prove to be a significant barrier to overseas employment.

Sixth, the BSP can’t seem to take into context the contributions of domestic economy. For instance, the government has been shouting at the top of their lungs that the economy continues to boom, where jobs have allegedly been growing! Yet if true, then why wouldn’t OFW growth slow? Has the government come to believe that the Philippine residents can multiply its population at the rate of how Gremlins populate?

In a genuine economic boom, where job and income substantially grows, there will be little incentives for residents to work overseas or seek migration. The fact that there remain a good number of people looking for job overseas essentially defies the government’s account of an economic boom!

Or does truth or reality need to be contorted for the simple reason that all economic sensitive statistical numbers has to remain positive?!

You see, the entire credit fueled supply side boom in the shopping malls, hotels (tourism) and housing (vertical and horizontal) have been predicated originally from OFWs. So perhaps the BSP may have been concerned that any candid announcement of theirs might prompt for a slowdown in the race to build supply that may be reflected on the GDP.

And a slowdown in the GDP should be a taboo! That’s because a magnified GDP allows the government to have generous access to credit at the lowest costs! And it’s not just the government but also politically favored firms!

Again, hardly does the BSP seem to realize communications opacity or obscurity will have real world consequences. They may fudge data to boost GDP over the short term, but eventually such costs will emerge overtime in the form of slowing sales (demand), magnified vacancies (excess capacity), financial losses, slowdown or curtailment in investments, job losses, amplified credit risks, increased poverty and more.

Some of these have become apparent today.

This shows the kind of boom mentality entrenched in the consensus.  Such mentality bears no margin of safety and have all been anchored on a riskless-one way trade. The seeming disinformation employed by the BSP only feeds to such confirmation bias.

And that’s why there will be a rude awakening. OFW data have already been showing the way!!!!