Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy

In this issue:

Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy

-Has Mr. Bastiat’s principles come to haunt the BSP?

-The Fallacy of Aggregate Demand

-The Stages of Inflation

-The 2009 Pivot Towards the Domestic Demand Bubble

-Costs are NOT Benefits

-Bastiat’s Unheeded Warning for the BSP

-Why a Rotation to Emerging Market Stocks is Unlikely

-Phisix: Market Internals Point to a Steep Correction

Phisix: In 2009, the BSP Engineered a Crucial Pivot to a Bubble Economy

Two of my neighboring “carinderias” or informal retail food (eatery) outlets raised viand prices by 14% this week.

Has Mr. Bastiat’s Principles come to haunt the BSP?

In April 2009, in a speech before the Australian-New Zealand Chamber of Commerce, the Bangko Sentral ng Pilipinas governor Mr Amando M Tetangco, Jr concluded[1]

Frederic Bastiat, a 19th century French economic journalist, once said, “there is only one difference between a bad economist and a good economist: the bad economist confines himself to the visible effect; the good economist takes into account the effects that can be seen and those effects that must be foreseen”.

It may be difficult to perfectly foresee things but this should not discourage us from trying. Thus, I encourage all of us in this venue to remain positive, yet vigilant for any circumstances that could come our way. The BSP, for its part, will remain committed and continue to put forth monetary policy actions and banking reforms that will allow our economy to withstand the road blocks comprising panics, crises and other changes in the horizon.

The good governor had framed Mr. Bastiat in the confused context of merely about foreseeing things or making predictions. But this was not the intended message of Mr. Bastiat. Mr. Bastiat wrote about the importance of the subsequent order effects or the intertemporal tradeoffs (short term versus long term) of political actions to the real economy. 

Let me expand the truncated quote of Mr. Bastiat:

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

The excerpt came from the book “That Which is Seen and That Which is Not Seen”[2]. Bastiat’s book has essentially been about exposing the unseen or unintended consequences from the centralization—via the politicization—of the economy, particularly through seeing good news in destruction (broken window fallacy), demilitarization (disbanding of troops), public work spending, taxes and most importantly credit (inflationism) among the many other forms political interventionism also tackled in the book.

You see, the great Claude Frédéric Bastiat was more than just a journalist, a political economist and a legislator; he championed private property, free markets, and limited government and whose ideas have functioned as one of the pillars for the Austrian school of economics[3].

In other words, the essence of the book whence the BSP chief cited Mr. Bastiat has been diametrically opposite to the principles of central planning as advocated by the former. Bastiat was not for “monetary policy actions”

Has Mr. Bastiat’s principles have come to haunt the BSP?

The Fallacy of Aggregate Demand

Strains on the BSP have become increasingly evident.

Despite the melt-UP in the peso this week, the BSP has once again hinted at a supposed “further tightening”. The BSP governor was quoted, “we continue to be mindful of strong domestic liquidity and credit growth that could heighten financial stability risks…[This] was an important consideration for the preemptive move of raising [the reserve requirement] at our last meeting.”[4]

The fact that the BSP chief had to go to the public again (for the second time in less than 3 weeks) to signal “tightening” is a manifestation of political pressures on BSP monetary policies. The BSP have been a promoter of zero bound rates since 2009 (see below).

In addition, March data on Philippine forex reserves or Gross International Reserves revealed a modest decline of $ 700 million ($.7 billion) reportedly partly due to “foreign exchange operations of the BSP”[5]. Since the Peso meltdown came during the third week of March, this has possibly muted on the scale of operations by the BSP. 

The Peso has been this week’s biggest gainer. This has reversed all the previous declines. This comes as most Asian currencies rallied strongly against the US dollar. Given Friday’s close, the Peso now trades modestly up for the year.

Of course as I mentioned last week, aside mainly from intervention, another factor that would support the peso over the interim is the RISK ON environment. This volatile RISK ON environment supposedly comes from what media claims as ‘rotational’ dynamic as international money managers switch out of technology funds and stampede into Emerging Markets funds allegedly out of valuation reasons. [This I will discuss later]

Yet the decline in March forex reserves validates my suspicion that “the BSP may have used anew forex reserves to defend the peso.”[6] And as I have repeatedly been saying, the BSP has adamantly refrained from using the interest rate channel or the self-imposed banking sector limits to the property sector and instead relies on superficial actions of marginally raising reserve requirements, currency interventions and jawboning via signaling channel or information dissemination management.

In terms of communications management, following the official raising of bank reserve ratios 2 weeks back, the BSP announced “lower” inflation for March a week ago. This week the Philippine government released economic data purportedly showing a strong 24.4% jump in exports. Then the BSP chief went on air to hint at “tightening”. Such are intensifying signs that the peso is being “managed” by the BSP.

In other words, aside from the providence temporarily provided by the region’s strong currency vis-à-vis the weak dollar trade, as I recently wrote, any improvement in the peso will have the BSP’s fingerprints on them[7].

I noted that BSP has been a promoter of zero bound rates since 2009. I have recently discovered that this bubble commenced in 2009, after the BSP chief exhorted for a shift in policies in order to promote ‘domestic demand’ via aggregate demand policies of low interest rates and fiscal spending.

From the Trade Union Congress of the Philippines[8]: (bold mine)

“There are views that Asia must boost domestic consumption and end its dependence on exports,” Tetangco said. “In the longer term the view is that Asian economies may need to look more at their own domestic economies as the engine of growth.”

According to Tetangco, counter-cyclical support to aggregate demand in the form of expansionary fiscal and monetary policies, along with strong policy actions to ensure financial and corporate sector health could contribute to faster recovery.

“Maintaining an expansionary monetary policy stance to the extent that the inflation outlook allows, could support market confidence and assure households and businesses that risks to macro-stability are being addressed decisively,” he said.

In a barter economy, exchanges are conducted through direct exchange of product/s or service/s without the use of the medium of exchange. Say for instance, a shoemaker will exchange an agreed number of his produce (shoe/s) with a baker for an agreed amount of the latter’s product/s (bread/s). In short, trade is simply an exchange of agreed outputs between two producers or service providers.

The problem with a barter system is in the matching of people’s wants and needs to encourage transactions. Such is called the ‘coincidence of wants’[9]. For example, during a given moment, a shoemaker wants to trade his shoes only with the farmer’s vegetables. But the farmer solely desires to trade his vegetables for the baker’s bread. On the other hand, the baker wants to exclusively trade his bread for shoes with the shoemaker. So the mismatch between the wants and needs of each producer becomes an obstacle (or high transaction costs) to the facilitation of exchange in a barter system. 

The introduction of the money or an intermediary as medium of exchange solves this discrepancy by providing liquidity to the producers.

So what am I attempting to point out? All these shows that demand is a function of supply. Money is just a medium of exchange. And the purchasing power of money equals the extent of supply.

Example: If a person carrying a bag of N million of currency units (US dollar or Peso or Euro or etc…) due to an accident is stranded in a remote island inhabited by primitive tribes who lives on fish and coconuts and whose contact with the outside world is severely restricted, then the purchasing power of such currency unit (if accepted by the tribes at all) is only fish and coconuts.

We have seen the value of money in action recently during a supply shock brought about by Typhoon Yolanda in the hardest hit area of Tacloban City in Leyte. Despite the availability of money as I noted here[10]…

Trade or voluntary exchanges has been incapacitated for the simple reason of lack of access to basic goods (food, water, medicine) to fulfill physiological needs (Maslow’s Hierarchy of Needs).

And the lesson of money being…

The unfolding developments from the unfortunate Typhoon Yolanda tragedy represent a testament to the fundamental economic truism where money, in and of itself is not wealth, rather it is the purchasing power of money (or what money can buy) that reflects on wealth.

This brings us back to domestic aggregate demand based policies pushed and implemented by the BSP chief in 2009.

What the BSP chief effectively ordered was to inflate the system or to blow bubbles. 

Yet in the knowledge that much of the Filipino consumers have little access to the formal banking system, credit inflation was tacitly designed to boost the supply side, who in their vast expansion programs, would add to the demand side that would boost revenues of the government and simultaneously indirectly and covertly divert the society’s resources towards subsidizing government spending via suppressed interest rates on sovereign liabilities

Credit creation and expansion to bubble industries has affected relative price levels and has distorted economic coordination of resources aside from altering the production process. This has become very conspicuous now.

Inflated profits from earlier credit creation and bigger capital expansions facilitated by greater bank lending provided a significant boost to consumer demand too. People within the bubble industries, as well as in the adjunct industries have more disposable income to buy consumption goods and spend on leisure activities. So alongside from OFW based remittances and income and profits from BPOs, disposable income from bubble industries artificially bolstered or padded revenues of retail outlets, hotels and many other consumer based products. This gave property developers, shopping mall and hotel operators and financial intermediaries of asset bubbles (financial assets and property related) the impression of the boundless potentials of the Filipino consumers.

But of course, contra the mainstream, nothing is ever aggregate. Even companies from within the industries benefiting from the bubble do not benefit evenly. Some benefit more than the others. Some clues of such dynamics can be seen from the variance in the compounded annualized growth rates of earnings per share and book value of the 30 member Phisix components.

Moreover given the predisposition by the banking system and the credit markets to lend to big named and politically connected borrowers, such entails that the distribution of benefits and risks tend to be concentrated. The corporate bond market is a shining example of this, as I earlier noted “because of the small size of the corporate bond market, the top 10 share in terms of % to the total is at 90.8%. Said differently, the benefits and risks of Philippine corporate bonds have been concentrated to these top 10 issuers.[11]”

You see the farther the distance a firm or an enterprise is to the epicenter of the credit inflation, the lesser the benefits from the Cantillon spillover effects. So essentially, for the Philippines, the informal economy would signify as the last link in the credit process. Yet as farthest in the monetary economic link, they are to be the hardest hit by the effects of BSP’s bubble policies.

For the informal sector to raise prices is a sign of trouble. For instance, informal sector eateries (or even “sari sari stores” mini convenience stores) operate in highly competitive markets where the typical business model have been based on slim margins and are highly dependent on the scale of volume. Since most of their consumers are from the minimum wage levels, such consumers are heavily sensitive (elastic) to price changes given their limited purchasing power. So raising prices would signify as a drastic recourse in response to changes in prices of entrepreneurial operations. Yet an escalation of price inflation will put many informal enterprises out of business. 

And I pointed out last week, money from credit growth simply means additional purchasing power, which will be spent or allocated in the real economy. The temporary-short term increase in purchasing power in favor of select groups will impact prices and the distribution of goods and the production process over relative time frames. Thus additional money from credit growth from the fractional banking system marginalizes existing money which means a long term loss of real purchasing power. Yet despite government data, this process has now been intensifying

To make clear, whether inflated money stems from bank credit growth or from government monetizing spending via deficits, the effects will be the same. As the great Austrian economist Ludwig von Mises wrote, “Today the techniques for inflation are complicated by the fact that there is checkbook money. It involves another technique, but the result is the same. With the stroke of a pen, the government creates fiat money, thus increasing the quantity of money and credit”[12].

The difference will be from the source/s of risks. Since the 68% of the 30+% money supply growth comes from banking loans to the private sector then this means the immediate risks for the Philippines is one of bubble implosion from a credit fueled asset bubble.

Meanwhile the risks for countries like Argentina and Venezuela or the rest of the other nations that saw money growth at over 30+% in 2011 and or 2012 or in both years based on World Bank data—such as Sudan, Tajikstan, Myanmar, Malawi, Liberia, Iran, Guinea-Bissau, Ghana, Ghana, Equatorial Guinea, Congo Republic, Belarus, Azerbaijan and Angola—has been mostly on hyperinflation or total bankruptcy. [As a snarky side remark, a very impressive lists of colleagues.]

Yet in 2012, Belarus recently suffered from hyperinflation[13]. Meanwhile, Myanmar property bubble[14] appears as being accommodated by the huge money supply increase.

The Stages of Inflation

Inflation in essence signifies a series of political actions whose effects on the marketplace can be identified as having 3 stages which vary in time periods. 

The first stage is when consumer prices barely rise at all even if the rate of money supply growth significantly expands. That’s because most people think that price inflation will be transient. Therefore instead of spending, the people tend to save more money in anticipation of lower prices. [As a side note, this seems as the case in Japan today[15]]

Such action would imply an increase in social demand for money. The gestation period tends to be longest here. Yet this phase represents the sweet spot for the invisible transfer of resources from the society to the government. The great dean of Austrian economics Murray N. Rothbard explained[16],

The government obtains more real resources from the public than it had expected, since the public’s demand for these resources has declined

The second stage is when the public comes to realize that prices continue to rise, so they step up the rate of goods purchases. So the social demand for money falls. The rate of price increases now accelerates. They will rise to the proportion of rate of growth of the money supply. This would be the rigid quantity of money theory[17]. The second phase serves as a springboard to the third phase, thus has a very much shorter time frame. Argentina’s inflation seems as in the second stage.

The third and final stage will be when trust in the domestic currency continues to substantially erode. People will go into a panic buying spree in order to dispense of their currency in exchange for real goods. Here price inflation will far outpace money supply growth. This phase is known as the runaway or hyperinflation.

For the Philippines, if the 30+% money supply growth rate continues then we should expect a significant pick up in price inflation rates, no matter what the mainstream or official data says. This also shows that the Philippines may be in the basketball equivalent of the third quarter of the first stage of the inflation cycle.

Yet all the financial price “management” measures by the BSP (applied to the peso and to bonds) will eventually fail for they continue to deal with the symptoms rather addressing the root cause of the present imbalances.

Nonetheless given the propensity to attack the symptoms, it is not farfetched that the Executive Branch will join the BSP to impose populist ‘price control’ measures.

But should this be the case, then we should expect an aggravation of shortages. What will happen is that statistical price inflation will fall but the peso will also plunge. But if the peso will be controlled, then either we see the vaunted forex reserves decline significantly or that a foreign exchange black market will emerge.

The 2009 Pivot Towards the Domestic Demand Bubble

Importantly, as noted above it was in 2009 where the Philippines economy made a critical pivot towards a bubble economy. This has been a consequence of BSP’s bubble blowing policies aimed at refocusing to the economy towards domestic demand via aggregate demand policies.

Essentially Mr. Tetangco’s call to action for a shift in focus by sacrificing external trade in 2009 essentially validated my observation last week[18],

we shouldn’t expect material improvements in domestic export industry even amidst a weak peso environment due to substantial resources already committed by a large segment of the formal economy in the redirection of their efforts towards bubble blowing industries rather than to the production for exports. In short, current easy monetary policies have incented a shift in the Philippine economy’s production structure favoring bubble industries at the expense of external trade.

By politically choosing winners and losers through monetary policies, the BSP has fundamentally “crowded out” resources available to the export industry via transfers to the bubble sectors and to the government. Along with restrictive regulations, the weak peso will hardly pose as subsidy for exports as massive resources have already been sunk into future malinvested projects that will soon be exposed as unprofitable. 

So while the Philippine government reported[19] a 24.4% spike in February 2014 export growth last week (see chart via this link), this only represents half of the real picture. Why? Because the supposed extraordinary growth came from a vastly depressed February 2013 export data (see chart here). In nominal terms, February 2014 data has even been below many of the monthly data for the 2^nd and 3^rd quarter of 2013. So the so-called ‘strong’ growth seems all been about framing and the contrast principle or compared to what?

This brings us back to the inner sanctum of the BSP’s fulcrum towards bubble policies.

Let us do some legwork on the recent data.

In 2013, Philippine government revenues grew by 11.8% year on year based on the data provided by the National Statistical Coordination Board (see left window). This rate is way above the CAGR of 8.07% over the past 17 years or from 1996-2012 and was obviously influenced by the half year 30+% money supply growth. Since the BSP reconfigured the nation’s economic structure, government revenues jumped by a CAGR 8.85% from 2009 until 2013. Again the latter has been skewed by the hefty increase in the 2013 data.

To reemphasize, this substantial growth in government revenues has largely been brought about by a boom in the mostly the bubble sectors of the formal economy due to bank credit inflation, as evident by the 30++% money supply rate growth, that has inflated revenues, income and earnings.

Meanwhile expenditures grew by only 5.8% in 2013. This has largely been below the 17 year CAGR (1996-2012) of 9.1%. Since 2009, the annualized growth rate has been slower than the earlier years at 5.75% or about the same rate as 2013. This has eased on the fiscal deficit which should signify as good news.

But media yammers about restrained government spending. A report insinuates that anti-corruption measures have diminished government spending in Asia (including the Philippines) therefore involuntary “austerity” comes at the cost of statistical growth[20]. For media anything that slows spending is bad. Such is an example of the Bastiat’s “seen” effect while at the same time discounting the “unseen” benefits of the diminished government spending.

And signs of “prudence” may just be jettisoned in 2014, as I previously noted[21],

The BIR, which accounts for 70% of the government’s total revenues, expects a 16.16% increase in her 2014 target. That’s because national government budget will expand by 13% to Php 2.265 trillion in 2014. So government spending will grow about twice the statistical economy….

All these means that the incumbent government will have to increasingly rely on a sustained credit financed boom of assets in the formal economy in order to fund her fast expanding spendthrift appetite, as well as, to maintain zero bound rates or negative real rates (bluntly financial repression) to keep her debt burden manageable.

Now let us move on to debt (right window)

According to the data from Bureau of Treasury, Public debt (domestic and internal) in 2013 has grown by only 4.5% in 2013 as against the CAGR of 9.54% from 1996-2012. Since 2009, the total public debt has grown by only 5.3% compounded annualized. [note: not included is the government guaranteed debt]

And here is the beauty: the Philippine government has shifted the share of debt burden in 2009 which was at 44:56 in favor of domestic debt to 2013’s 34:66 share, again in favor of domestic debt. While public debt continued to grow modestly, the Philippine government deftly transferred the weightings significantly towards domestic debt (again from 56% in 2009 to 66% 2013) in order to optimize the capture of the subsidies provided by the Philippine society to the government from negative real rates—financial repression policies.

The statistician cum economic analyst will see this as good news. Yehey, great debt management they say! But if we apply the great Bastiat’s methodology of looking at the “unseen” long term consequence from current policies that have brought about the current benign “visible” effects, we will see a vastly different picture.

Costs are NOT Benefits

Well the above figures reveal to us that costs are not benefits.

What seems as prudent is in fact reckless. The principal cost to attain lower public debt has been to inflate a massive bubble. The current public debt levels have been low because the private sector debt levels, specifically the supply side, have been intensively building.

And yet the secondary major cost from inflating a bubble in order to keep debt levels low has been to diminish the purchasing power of citizenry, so aside from domestic price inflation, this can now be seen in the falling peso. Government debt has been and continues to be subsidized by the private sector in possession of the currency, the peso.

A third major cost has been the illicit and immoral transfer of resources not only to the government but also to politically connected firms who has and continues to benefit from the BSP sponsored redistribution. Such has concentrated benefits to a few but has distributed the risks and the costs to the rest of non-beneficiaries, including this analyst.

A fourth major cost is that bubbles have effectively heightened “financial stability risks”. The BSP has created and unleashed an inflation ‘Godzilla’ which they proclaim they wanted to slay but seem to have second doubts.

Yet credit inflation has increasingly been concentrated to a few Philippine version of “too big to fail” companies. Meanwhile stock Market PE ratios of blue chip companies are at a stunning 30-60 and equally shocking has been the price to book value which have significantly been valued above 3. Such financial instability risks include the suppressed yields of Philippine treasuries which continue to reflect on the artificially priced convergence trade. The latter has been instrumental in the misallocation and redistribution of resources transmitted via the interest rate channel.

A fifth major cost is that resources channeled to the bubble sectors are resources that should have been used by the market for real productive growth. Much of these resources are now awaiting reappraisal from the marketplace via a shift in consumer’s preferences which will render much of these misallocated capital as consumed capital.

A sixth major cost is that once the bubble implodes, government revenues will dramatically fall while government spending will soar as the government applies the so-called “automatic stabilizers” (euphemism for bailouts). This would also extrapolate to a phenomenal surge in debt levels. All these will unmask today’s Potemkin’s village seen in the fiscal and debt space.

And the most likely response would be to increase taxes which should further penalize real economic growth. I expect sometime in the future the Philippine government will raise E-VAT to 15%[22].

A seventh major cost is that not only will a bust imply possible curtailment of civil liberties but the onslaught against economic freedom in particular the informal economy will likely intensify. This will come with more mandates, regulations and other restrictions. A government deprived or starved out of taxes for her insatiable spending appetite will desperate seek a larger tax base whose resources they intend to seize by taxation.

There may more but grant me the leeway such that I do not possess all the knowledge required as of this writing.

Nonetheless the cost benefit tradeoff reveals why the BSP will unlikely use the interest rate policy tool unless they have been forced by the marketplace.

Bastiat’s Unheeded Warning for the BSP

Going back to the BSP’s citation of the great Bastiat

I’m sad that the good BSP chief may not have read the book he excerpted. It would have given him a gem of an insight that may have prevented such risks from spreading and burgeoning. But yet again in doing so he may not be the anointed.

Here is Mr. Bastiat’s response to state guaranteed loans, or we might say the BSP’s aggregate demand policies.

This solution, alas, has as its foundation merely an optical illusion, in so far as an illusion can serve as a foundation for anything.

These people begin by confusing hard money with products; then they confuse paper money with hard money; and it is from these two confusions that they profess to derive a fact.

In this question it is absolutely necessary to forget money, coins, bank notes, and the other media by which products pass from hand to hand, in order to see only the products themselves, which constitute the real substance of a loan.

For when a farmer borrows fifty francs to buy a plow, it is not actually the fifty francs that is lent to him; it is the plow.

And when a merchant borrows twenty thousand francs to buy a house, it is not the twenty thousand francs he owes; it is the house.

Money makes its appearance only to facilitate the arrangement among several parties.

Peter may not be disposed to lend his plow, but James may be willing to lend his money. What does William do then? He borrows the money from James, and with this money he buys the plow from Peter.

But actually nobody borrows money for the sake of the money itself. We borrow money to get products.

Now, in no country is it possible to transfer from one hand to another more products than there are.

Whatever the sum of hard money and bills that circulates, the borrowers taken together cannot get more plows, houses, tools, provisions, or raw materials than the total number of lenders can furnish.

For let us keep well in mind that every borrower presupposes a lender, that every borrowing implies a loan.

Has Mr. Bastiat’s principles come to haunt the BSP?

Why a Rotation to Emerging Market Stocks is Unlikely

Developed economy stocks led by the US have been showing signs of pronounced weakness.

Unlike in January where the correction has been led by the blue chips (S&P—lower right and Dow Jones—lower left), we seem to be seeing a change in complexion.

First, volatility in both directions has become more pronounced. The downside bias appears to be picking up momentum. If the degree of fluctuations continues then this will reinforce my perception that this has been a topping process.

Two, as pointed out earlier[23], market breadth has significantly been deteriorating where the average stocks have been falling faster than the cushioned fall in the blue chips.

Third, one key barometer, the Nasdaq biotechnology index has been the first index to fall into a bear market.

Fourth, there are increasing signs of the periphery to the core in progress.

The periphery to core dynamic of the bubble bust cycle appears to be gaining strength. This can be seen through the growing signs of divergence[24]

This has been a long term process.

First to be affected has been commodities, then emerging markets. This has now spread to the developed economies. The initial impact in developed economies has been in the fringes: overpriced technology stocks. Now even the blue chips are affected.

Falling yields of the 10 year notes reinforces the sign of pressures on risk asset deflation.

Some experts have said that there has been an ongoing rotation from high flying technology stocks to emerging markets due to valuations.

I doubt that this logic has merit. First of all emerging markets like the Philippines has hardly been cheap at all. Emerging markets may seem cheaper than high flying technology but such comparison would be fallacious as this has been based on the contrast principle.

This leads us to the second factor: What drove popular stocks to their high flight status? If they are driven debt and if the current meltdown means liquidations from earlier leverage build up, then this would have an impact to the real economy. Sustained market pressures will hit overleveraged Wall Street firms first before the real economy—where the latter has hardly benefited from the FED’s subsidies.

Emerging markets have been slammed last year, but despite the sharp rallies in risk assets they haven’t been clean from debt. In fact the recent rallies have only whetted the appetite for debt where much of these may have been used to push up prices of risk assets.

Third just look at where the biggest rally in emerging markets comes from. In terms of emerging market debt, Argentina and Venezuela has been the biggest gainers from the recent rally according to JP Morgan see chart from February 3 to April 8^th here.

Ukraine has been said to be part of the “tantalizing trio”. Ukraine’s stocks have also been astoundingly up by 40% year to date. And as I noted in the past Ukraine’s has the tendency to go stock market bubble blowing, she had two bubble bust in 2008 and in 2012 or in a span of 4 years. Ironically, Ukraine seems headed for a civil war.

And this is a striking comment as quoted by the New York Times[25] on the character of people piling into emerging markets.

“Many of the funds that are buying these companies don’t even know what they are buying,” said Elizabeth R. Morrissey of Kleiman International Consultants, an emerging-market investment monitoring and analysis firm. “All of a sudden, we have Joe Middle Class loading up on emerging-market bond E.T.F.s. That is a little frightening.”

My guess is that these are the same category of desperately seeking yield funds stampeding into Philippines equity assets with 30-60 PE ratios.

Phisix: Market Internals Point to a Steep Correction

As for the market breadth, I think retail punters have become exceedingly or wildly bullish on outrageously mispriced and overvalued Philippines equity markets.

Retail players have been trading a broader segment of the market as shown in the Issues traded (averaged on a weekly basis) left pane. So the small number of moneyed retail punters has been bidding up on illiquid second-third tier issues, hoping to squeeze marginal yields. 

Yet the last two times such level has attained, the Phisix had a 6% correction in March of 2013 and a 20+% in June 2013.

Such aggressiveness can also be seen in the average daily trade where retail punters have been churning more frequently. I don’t expect much new accounts. Average daily trade has surpassed the May highs and is at the August levels. 

The last time such levels were reached we saw significant corrections.

I spoke about the likely class of foreign funds buying into outlandishly priced Philippine stocks, yet recent actions suggest that foreign buying though still positive has been in a slowdown.

Since foreign money accounts for a little more than half of the peso volume daily trade, the slackening of foreign activities has been mirrored by the Daily Peso volume.

The above only suggest that another interim significant correction may likely be next phase.

Nonetheless if the declines in the stock markets of developed economies worsen, then the supposed “animal spirits” that has backed much of the statistical growth figures will be exposed as a charade.

And as I recently wrote[26],

Such sustained risk off scenario will ricochet back to emerging markets where both the stock markets and the economies of developed-emerging market in tandem will substantially sputter. Then the Global financial-economic Black Swan manifested by the Wile E. Coyote moment appears.

If this becomes true, then what seems as a likely correction to occur may morph into a full bear market.

---

[1] Amando M Tetangco, Jr: Philippines – navigating through the global financial turmoil Australian-New Zealand Chamber of Commerce Philippines Annual General Membership Meeting, Makati-City, 14 April 2009 Bank of International Settlements 

[2] Frédéric Bastiat What Is Seen and What Is Not Seen Library of Economics and Liberty

[3] Thomas DiLorenzo Biography of Frederic Bastiat (1801-1850) Frederic Bastiat (1801-1850): Between the French and Marginalist Revolutions Mises.org, Wikipedia.org Frédéric Bastiat

[4] Inquirer.net BSP hints at further monetary tightening, April 10, 2014

[5] Bangko Sentral ng Pilipinas End-March 2014 GIR Stands at US$79.8 Billion April 7, 2014

[6] See Phisix: BSP’s Response to Peso Meltdown: Raise Banking Reserve Requirements March 31, 2014

[7] See Behind the Furious Rally of the Philippine Peso April 10,2014

[8] Trade Union Congress of the Philippines Bangko Sentral urges government to end dependence on exports July 2, 2009

[9] Wikipedia.org Coincidence of wants

[10] See Typhoon Yolanda: From Natural to Man-Made Calamity; Spontaneous Order Thrives! November 18, 2013

[11] See Phisix: Will the Global Risk OFF Environment Intensify? February 3, 2014

[12] Ludwig on Mises Inflation Economic Policy Thoughts for Today and Tomorrow(1979), Lecture 4 (1958)] Mises.org p 62

[13] See Belarus Hyperinflation: Money Abhors a Vacuum June 23, 2012

[14] See Myanmar’s Property Bubble June 28, 2012

[15] See Japan’s Ticking Black Swan February 24, 2014

[16] Murray N. Rothbard E. The Government as Promoter of Credit Expansion Chapter 12—The Economics of Violent Intervention in the Market (continued) Man, Economy & State

[17] Henry Hazlitt THE INFLATION CRISIS, AND HOW TO RESOLVE IT p.58

[18] See Phisix Melts Up as Money Supply Growth Sizzles for the Eight Month April 7, 2014

[19] National Statistics Office Merchandise Export Performance : February 2014 April 10, 2014

[20] Wall Street Journal Real Time Economics Asia’s anti-corruption battle produces unofficial austerity April 9, 2014

[21] See Phisix: The BSP’s Self Imposed Hobson’s Choice March 9, 2014

[22] See E-Vat 15%: Possible Consequence from Current Quasi Boom Policies December 10, 2012

[23] See Signs of deteriorating US Stock Market Internals? April 8, 2014

[24] See Phisix Meltdown: A Reality Check on the Bullish Dogma June 10, 2013

[25] New York Times I.M.F. Warns of Risk From Emerging-Market Corporate Debt April 9, 2014

[26] See US Tech Stocks Falls Most Since 2011: More Signs of the coming Wile E Coyote Moment? April 11, 2014

More Signs of Cracks in China’s Massive Bubble: Bond Auction Failure, Rising NPLs, More Defaults

Aside from this week’s slump in external trade where both China’s export and imports fell in March y-o-y by 6.6% and 11.3% indicative of an intensifying economic slowdown, reports also say that property developers have substantially scaled back in raising money through the shadow banking system via trust sales

From Businessweek/Bloomberg:

Chinese developers raised 49 percent less through trusts in the first quarter as the collapse of Zhejiang Xingrun Real Estate Co. highlighted default risks.

Issuance of property-related trusts, which target wealthy investors, slid to 50.7 billion yuan ($8.16 billion) from 99.7 billion yuan in the fourth quarter, data compiled by Use Trust show. The yield on AA rated five-year bonds has climbed 175 basis points in the past year to 7.23 percent, according to Chinabond. That compares with a2.74 percent on corporate securities globally, Bank of America Merrill Lynch indexes show…

New property trust offerings accounted for 30 percent of total trust sales in the first quarter, down from 33 percent in the last three months last year, according to data compiled by Use Trust. Figures from the research firm are for collective products only, which are sold to more than one investor.

And even more signs of debt delinquency or risks of debt default…

Companies with other kinds of building projects are also facing repayment concerns. A unit of China Sports Industry Group Co. (600158) failed to repay 144 million yuan of principal on a 600 million yuan trust loan for a sports center development, according to a statement from the company to Shanghai’s stock exchange dated April 4.

And the exposure on trust products, which are part of the shadow banking system, have been sizeable.

Outstanding property trust products, including collective and single, totaled 1.03 trillion yuan as of the end of last year, accounting for 10 percent of all types of trusts, according to data posted on the website of China Trustee Association.

And as more delinquent companies surface, these have been reflected on Non-Performing Loans (NPL) of banks.

Here is an update from Marketwatch/Caixin:

Bad loans have sharply increased for many Chinese banks as more companies struggle to make repayments, data from recent bank annual reports show.

The total value of non-performing loans at 12 major banks was 467 billion yuan on Dec. 31, an increase of 76.3 billion yuan ($12.3 billion), or 19.5%, from the beginning of 2013.

And in jeopardy are big state owned companies and their subsidiaries involving steel producers and traders and the coal mining industry.

Among the defaulters were subsidiaries of big state-owned enterprises (SOEs), which banks normally view as safe clients, a loan officer at a joint-stock bank said. In many cases, he added, the parent SOEs did not save their subsidiaries, mostly because they were in deep trouble themselves.

In addition, importers have been defaulting too. From Reuters/Chicago Tribune

Chinese importers have defaulted on at least 500,000 tons of U.S. and Brazilian soybean cargoes worth around $300 million, the biggest in a decade, as buyers struggle to get credit amid losses in processing beans.

Three companies in the eastern province of Shandong had defaulted on payments for shipments as they were unable to open letters of credit with banks, trade sources said on Thursday.

The same report cites that along with commodity firms, semiconductor and software companies are among the most at risk of credit defaults

Many defaults seem to be surfacing in many corners of the Chinese economy almost simultaneously.

But as rising incidences of defaults emerge, in desperation Chinese investors have shunned private sector debt and have gravitated into the riskier local government debt in hopes that the latter will be supported by the national government. This despite warnings from authorities.

From another Bloomberg report:

China’s first default is prompting investors to discriminate against privately-owned companies, boosting demand for local government bonds even as the central bank warns of the dangers of a $2.9 trillion pile of debt…

Premier Li Keqiang said last month that failures of financial products are “unavoidable,” a week after a solar company whose controlling shareholder is the chairman became the first Chinese issuer to default on its onshore notes. Risks of nonpayment have climbed as economic growth slows after a five-year credit binge. Li said there would be no “regional financial risks,” prompting investors to bet the state would stand behind local-government financing vehicles.

So despite the Premier Li’s  pronouncement last week that there will be "no major stimulus—"We will not take, in response to momentary fluctuations in economic growth, short-term and forceful stimulus measures…We will instead focus more on medium- to long-term healthy development"—assurances of containment from debt woes has provided investors the incentive to shift towards LGY debt. 

The Chinese government has announced at the start of April of a 'minor' stimulus program consisting of “additional spending on railways, upgraded housing for low-income households and tax relief for struggling small businesses”, as discussed here.  Importantly the formal declaration had been “short on specifics”.

This shows that in the world of politics, communications are meant to be opaque, and promises are meant to be broken. While the conflicting position by the government gives her leeway or the flexibility adjust, unfortunately this has also been aggravating the risk environment.

And as the same report indicates, many of the private sector debt exposure signify as offspring of the local government. 

Regional authorities, which aren’t allowed to sell debt directly, have set up thousands of financing vehicles to raise funds to build subways, highways and sewage works. Local governments are responsible for 80 percent of spending while they get only about 40 percent of tax revenue, the legacy of a 1994 tax-sharing system, according to the World Bank.

A 2008 stimulus package deployed amid the financial crisis and funded with off-balance sheet lending added to the debt burden for local governments. Their liabilities rose to 17.9 trillion yuan as of June 2013 from 10.7 trillion yuan at the end of 2010, according to National Audit Office data.

LGFVs were among the three riskiest types of debt highlighted by the People’s Bank of China in its fourth-quarter policy report. Their debt is headed for a “mini crisis” because defaults will be needed for restructuring, Li Daokui, a former adviser to the central bank, said March 25.

In other words, many Chinese local governments have been circumventing rules set by the national government as previously noted here which has been a potential source of China’s Black Swan. The above also serves as a showcase of deep conflicts within governments. 

And speaking of internal conflicts, in the face of intensifying debt concerns, the friction between Chinese financial regulators particularly the central bank, the People’s Bank of China (PBoC) and China Banking Regulatory Commission (CBRC) has likewise been deepening. According to the Financial Times, the PBoC accuses the CBRC of being “too close to the state banks” or regulatory capture while the latter blames the former for creating the current conditions and “promoting financial innovation” or “regulatory arbitrage”. The report also says that the CBRC warned of such risks from the stimulus launched in 2008.

All these seeming state of confusion has brought about even more risks and uncertainties. Yet these are indications that current adjustments to the China's debt burden would most likely be disorderly.

Finally, last week the Chinese government also suffered her first bond auction failure since June of last year.

From another Bloomberg article:

China’s Ministry of Finance failed to sell all of the bonds offered at an auction today for the first time in 10 months amid speculation short-term interest rates will climb as corporate tax payments tie up funds.

The ministry sold 20.7 billion yuan ($3.3 billion) of one-year debt today, less than the planned issuance of 28 billion yuan, according to a statement on its website. The average yield of 3.63 percent compared with the median estimate of 3.4 percent in a Bloomberg News survey yesterday, when the yield on similar-maturity existing notes was 3.32 percent.

The credit crunch has now been spreading from the private sector, to the local government and now to the national government: such is the periphery-to-core dynamics in motion.

And my impression is that 'tax payments' serve as smoke screen to the real dynamic—which as shown from the compilation of reports above, are signs of the widening fracture of China’s bubble.

The USD-Yuan and yields of 10 year lcy sovereign debt closed the week almost unchanged. 

Nonetheless despite all the above, China’s stock market bulls pushed the Shanghai index nearly to February highs after this week’s 3.48% run. 

Maybe the stock market sees a world differently from that of the real economy.

Quote of the Day: War fever feeds on ignorance

Ignorance is a primary fuel of nationalism and aggression. Patriotism is the last refuge of scoundrel, as Dr . Johnson observed, and the first platform of fools.

Three professors from Princeton, Dartmouth and Harvard University just did a poll that found only 16% of Americans queried could find Ukraine on the world map. Actually, that’s better than I expected, given American’s notorious geographical illiteracy. Seeing Ukraine’s map on TV every night no doubt helped.

Worryingly, but hardly surprisingly, the poll also found that the further a poll respondent thought Ukraine was from its real location, the more likely he was to support US military intervention in Ukraine. Few Americans could find Iraq (Eye-raq to most), Afghanistan, or Iran (Eye-ran) on the map.

“Let’s get those dirty Commies,” goes the latest wave of war fever to sweep the US, “if we can only find them!” Some respondents put Ukraine in Australia, or South America…

War fever feeds on ignorance. If mobs in Paris had known in August, 1914, that they would die on the mud of Flanders few would have been so eager for war. All sides in World War One mistakenly believed in a short, sweet military victory. The great French voice against the folly of war, Jean Juares, was assassinated by nationalists.

“The proportion of collage grads who could correctly identify Ukraine (20%) is only slightly higher than the proportion of Americans who told Pew (the respected polling outfit) that President Obama was Muslim in August, 2010,” found the Ivy League professors.

About the same percentage of Americans believe that Elvis is still alive, or that an Islamic Caliphate will shortly rule America. Ever since the Bush administration, stupidity and ignorance have become fashionable.

This is from historian Eric Margolis—commenting on the controversial poll published at the Washington Post Blog, where the less Americans know about Ukraine’s location, the greater the desire to intervene—at the LewRockwell.com. 

I find the observation of the relationship between ignorance (which should not be limited to geography) and militancy highly relevant. And this applies everywhere, not just to American's perception to the Ukraine geopolitcal conundrum.

I’ve noticed that for the many who agitate and pine for war are mostly those with hardly any inkling of war’s horrors. Their conception of war seem to emanate from the movies or shows they’ve watched or from games that they have played—as third party or from the audience perspective.  They perhaps expect somebody to do the fighting for and in behalf of them, while like in sport games, they cheer from the sidelines. They hardly seem to grasp that in war, the lives of their treasured family, relatives, friends or their neighbors may be at stake while their homes devastated and ravaged. They also seem to see wars as cost—free (I mean economic aside from social costs).

And mostly the same group usually serve as unwitting instruments or mouthpieces of the major beneficiaries of war: the political class—who pitch the war fever amplified by media to gain popularity via the herding effect to justify the imposition of taxes, inflationism and economic repression in order to expand their control over society and their resources. Wars after all are not only about politics, but about business too.

So the other beneficiaries or the cohorts of the political class are the defense industry and their financiers aside from mainstream media.  And all it takes to push for war is to rile up on the emotions of the unthinking electorates. As a saying goes, if all you have is a (emotional) hammer, everything looks like a nail.

US Tech Stocks Falls Most Since 2011: More Signs of the coming Wile E Coyote Moment?

One of the classic ‘chase’ sequence in the Looney Tunes cartoon series of the Road Runner and the Coyote, is where the villain Wile E. Coyote pursues the protagonist the Road Runner at the edge of the cliff. 

But the Coyote runs over the cliff, thinking that he still has been running on the ground.  The Coyote temporarily defies gravity, until he discovers that there is NO ground underneath. And that’s where he plunges to the ground.

I’ve been saying that outrageously overvalued and grossly mispriced stocks, from central bank puts, are equivalent to the Wile E. Coyote running off the cliff.

They can run run & run way until….

…the delusions wear off. (Wile E Coyote portrait from the BobcatinBeijing)

Following two days of rebound, outlandishly priced technology stocks suffered another bout of drubbing, but this time with more forcefulness.

From Bloomberg:

U.S. stocks fell, with the Nasdaq Composite Index sinking the most since 2011, as technology shares resumed a selloff on concern valuations are too high as earnings season begins. Treasury rates sank to a three-week low on speculation interest-rate increases won’t be accelerated.

The Nasdaq Composite Index sank 3.1 percent at 4 p.m. in New York to a two-month low that erased its gain this year. The Standard & Poor’s 500 Index lost 2.1 percent to the lowest since Feb. 19. The 10-year Treasury note fell five basis points to 2.64 percent.

I know it may be premature to call for an inflection point or the Wile E. Coyote moment. But there are increasing signs of these.

One is the developing pronounced volatility in both directions, but now with a downside bias. Such is a sign of a topping process. This can be seen developing in the high flyer indices as the Nasdaq (-6.9%) and the Russell 2000 (-6.7%). 

Two deterioration in market breadth as I called out a few days back. The Nasdaq Biotech is just about 1% away from the bear market.

Three, the periphery to core dynamic or the unwinding phase of the bubble bust cycle has become very evident or has been running in full throttle.

First to be affected has been commodities, then emerging markets. This has now spread to the developed economies. The initial impact in developed economies has been in the fringes: overpriced technology stocks. Now even the blue chips are affected.

Falling yields of the 10 year notes reinforces the sign of pressures on risk asset deflation.

Emerging markets have been buoyed lately by foreign money whom have been recklessly chasing yields. However when the decline in the stocks markets of developed economies worsen, the statistical growth numbers backing these will be exposed as a charade. 

Remember, the global real economy has hardly been growing due to the invisible transfers from negative real rates (financial repression) via zero bound rates and QE. So whatever statistical growth we are seeing have mostly been carved out from the artificial spiking of the asset markets bolstered by credit.

Such sustained risk off scenario will ricochet back to emerging markets where both the stock markets and the economies of developed-emerging market in tandem will substantially sputter. Then the Global financial-economic Black Swan manifested by the Wile E. Coyote moment appears.

The Cyprus model of 'deposit haircuts' will likely be a standard response by global governments, thus cash in the banking system may also be at risk.

A global risk asset meltdown will hardly bring about a safehaven or that there will be no place to hide—except perhaps in gold and gold related assets.

Indonesian Stocks Sinks, Chinese Stocks Soar and More on the Peso and the BSP ‘Tightening’

As noted here, like the Philippines, Indonesian stocks have been in a frenzied mania. 

In mid March, reports where the populist leader—Jakarta Governor Joko Widodo announced that he would be running for presidency—sent the JCI to a one day boom of 3.23%. Despite a interim few obstacles, Indonesian stocks charged to approach the pre-taper highs of May.

Today, what seems as a ‘one way trade’ embedded in Indonesia’s Wall Street’s expectations may have hit a roadblock as the man on the streets have voted in a different direction and this sparked a mini-selloff.

From Jakarta Globe:

Indonesian stocks fell on Thursday — sending the main index to its biggest decline in seven months — after early legislative results showed that presidential candidate Joko Widodo’s party may not have enough seats to secure its own pick and would have to form a coalition, disappointing investors who hoped for an easy nomination…

Joko’s Indonesian Democratic Party of Struggle (PDI-P) managed to get about 19 percent of the votes, as shown by most quick count polls in Wednesday’s elections, but short of the 25 percent needed to secure its own presidential candidate. PDI-P collected 19.64 percent of the popular vote, according to a survey by LSN. Official results are scheduled to be released on May 7-9.

The JCI tanked by 3.16% today

The Indonesian currency ,the rupiah, was also hit. The USD-rupiah gained by .61%.

I doubt if today’s steep decline may turnout to be an inflection point. Like in the Philippines, the Indonesia’s Wall Street will likely find other justifications to “buy the dip”.

Stocks have now become a one way trade. The bigger the risks, the more frenetic the upside response have been. 

For instance, Indonesia whom almost tipped into a crisis, have instead incited violent rallies in bonds, stocks and the currency at a pace seemingly beyond the pre-taper levels.

Nonetheless the importance of today’s event has been the revelation of a vital disconnect between Indonesia’s financial markets and her version of the main street.

And such divergence or parallel universes can be seen not only in Indonesia, but in Chinese stocks as well. 

Despite the news of a sharp fall of external trade in March for both exports –6.6% and imports –11.3%, signifying a deepening slowdown in the Chinese economy (chart from Zero Hedge)…

…the Shanghai Composite Index surged by 1.38% today.

Why?

Because supposedly of a proposed cross listing…

From Reuters: 

Hong Kong shares closed at their highest level in more than three months on Thursday, lifted by news that Beijing's securities regulator will allow cross-border stock investment between Hong Kong and Shanghai.

The announcement also boosted mainland indexes, with the Shanghai composite index reaching a two-month high…

The new rules will allow mainland investors to trade shares in designated companies listed in Hong Kong, and at the same time let Hong Kong investors buy shares in Shanghai-listed firms.

Cross listings are indeed a positive signal over the LONG term, but there are considerable short term activities that can serve as impediments to the long term.

One example, another prospective default. Just the other day, a small polyester yarn manufacturer in Zhejiang, the Zhejiang Huatesi Polymer Technical Co Ltd filed for bankruptcy and thus heightening the risks of another bond default. (Reuters). Week in week out, we get more reports of troubled Chinese companies or financial institutions.

As one would note the feedback loop between credit woes and economic slowdown has been intensifying. Again more signs of parallel universes. And again more interim potential sources for economic or financial black swans which can upend any long term gains from reforms.

The same divergence can be said of the rally in the Peso today. 

I wrote earlier today that  the BSP has been intervening and that exports as driver of the rallying peso has been largely misguided.

And I belatedly read a media report where the BSP chief supposedly hinted at 'tightening'. The BSP governor said that they are “mindful of strong domestic liquidity and credit growth that could heighten financial stability risks”. [As a side note, the same report shows how demand morphs into a black hole when discussing inflation]

Yet the market’s response has been divergent. While the peso rallied strongly partly perhaps to such proposed actions, stocks ignored the threats and even got bidded higher, and Philippine treasuries seemed indifferent.

So soaring stocks— mostly publicly listed companies which have been acquiring alot of debt— from the BSP’s signaling only heightened financial stability risks. What do you call stocks trading at 30-60 PERs and PBVs at 3 and above?

I have argued lengthily why so far this has just been a rhetoric. That’s because the so-called magical transformation of the Philippine economy has all been about the domestic markets response to distortive policies which has promoted 'aggregate demand' that went 'specific' demand or select supply side credit driven demand. In short, a credit fueled demand boom or an inflationary boom.

And since July, the BSP governor has sporadically attempted at influencing the markets by threatening to tighten—  unfortunately a tightening that has hardly occurred except for superficial or symbolical actions like the thinly raising of the reserve requirements.

And market divergences are a natural consequence to discounting such a move.

Behind the Furious Rally of the Philippine Peso

Last weekend I wrote, 

Yet we cannot discount any temporal relief rallies in both the peso and the treasury markets mainly due to interventions and secondarily from the interim RISK ON mode.

Remember Philippine treasury markets have not only been an illiquid market but have been tightly controlled by the government and their cohorts, the banking sector. I also expect the BSP to deploy some of their forex reserves rather than use the interest rate tool to keep the financial repression stimulus for the government ongoing.

The Philippine Peso mounted a fantastic (+1.33%) comeback the during the past 4 days.

This has been pillared by today’s whopping almost one percent (+.95%) run. The USD-peso chart above reveals of a seeming breakdown.

Mainstream media tell us that today’s export data and foreign flows has been the catalyst for the surge in the Peso

From the Bloomberg:

The Philippine peso strengthened to a one-month high as a report showed exports increased the most since 2010.

Overseas shipments in February rose 24.4 percent from a year earlier, the government reported today, compared with a revised 9.2 percent increase in January and the 16.6 percent gain forecast in a Bloomberg survey. Overseas investors have pumped $100 million into local stocks this month, taking inflows this year to $494 million, according to exchange data.

The peso advanced 0.5 percent to 44.533 per dollar as of 10:49 a.m. in Manila, according to Tullett Prebon Plc. The currency touched 44.475 earlier, the strongest level since March 11. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 15 basis points to 4.77 percent.

It has not been stated why a surge in exports should boost the peso. It was just rationalized or assumed in a post hoc manner that today’s export data from the Philippine government equates to the strength in the peso.

The above chart from the Philippine Statistics Authority reveals of the February jump in exports which has been led by electronic products which accounted for 40.6% of total exports.

Now if we look in the context of nominal US dollar trade where February’s huge jump accounts for $4.654.15 billion (preliminary), the 2014 data would look very less than impressive.

Why? For one, the level of February exports have not reached any new milestone highs. In fact, the February data has been lower than the level of exports during the third quarter of 2013 (red rectangle as superimposed by me on the chart of tradingeconomics).

What has really punctuated the supposed growth in exports has been the depressed export data of February 2013 (red arrow). This has made the February 2014 look outstanding. 

Thus, all the buzz on February exports has all been about the contrast principle—what you see depends on where you stand or what you compare with.

The Philippine government have not yet disclosed on the figures for February imports. So it is a curiosity to see why a supposed strong export growth (based on an statistical outlier) would influence the peso positively.

Yet if the growth of imports exceed exports then a trade deficit is in the order. Ceteris paribus, this isn’t peso bullish.

Nonetheless the recent ballooning of trade deficits have been offset by remittances and BPO proceeds—and as noted in the above report—the influx of money to chase extremely overpriced Philippine equities. The Phisix broke the 6,600 level to gain .64% today. Mania at its finest.

Yet since the peso’s meltdown during the third week of March, aside from last week’s raising of reserve requirements, the Philippine government seem to have been using the signaling channel to massage the Peso’s direction. Last week, the BSP reported “slower” statistical price inflation. Today aside from “strong” export data, the BSP reported positive FDI inflows. And as I previously noted above, the RISK ON environment has helped in the peso rebound.

But what has been largely ignored is that the BSP has been intervening to firm up the Peso. 

Two weeks back I wrote

Aside from the raising the reserve requirements ratio, given the wild intraday movements of the peso during the week, I deeply suspect that the BSP may have used anew forex reserves to defend the peso. 

My suspicion has been confirmed the Philippine forex reserve in March has indeed dropped, although by a margin.  

From the BSP:

This level was lower by US$0.7 billion than the end-February 2014 GIR of US$80.5 billion…The decline in reserves was due mainly to outflows arising from payments by the National Government (NG) of its maturing foreign exchange obligations, foreign exchange operations of the BSP, and revaluation adjustments on the BSP’s gold holdings and foreign-currency denominated reserves.

This simply proves my point that any improvement in the peso will have the BSP’s fingerprints on them.

Ironically, to my surprise, yields of local 10 year treasuries have yet to get caught up with the mania—surge in the peso and in the Philippine stocks, they should be declining along with the USD-peso. 

The BSP and the Philippine government has been applying direct interventions as well as indirect measures (via the Talisman effect) to influence the "managed" domestic financial markets. Unfortunately, unless they address the 30++% growth in the domestic money supply, the effects from the above will be evanescent.

Oh by the way, the Chinese government today reported a substantial decline in her merchandise trade for March 2014, specifically for y-o-y exports fell 6.6% and imports 11.3% (Guardian)! This is significant. China has been the Philippines second largest export market after Japan with a 14.7 share of overall exports.

And going to Japan, the largest export market for the Philippines (with a 25.4% share in February), the Japanese government raised sales taxes from 5% to 8% this April. Unfortunately the Japanese consumers have hardly used the prospects of the coming higher taxes to stack up on daily necessities, but instead they drove a binge on big ticket items. 

From Reuters: (bold mine)

Japanese consumers spent more aggressively on higher-priced items like art works in the run-up to the tax than Takashimaya had expected, based on its experience in 1997, President and Chief Executive Shigeru Kimoto told a news conference. 

For April, the retailer forecasts a 14 percent drop in sales, followed by a nearly 6 percent decline in May and then an almost 4 percent drop in the three months to August. 

If the said forecasts becomes a reality, then Asian exports will suffer huge declines. So with Philippine exports. 

Good luck to the bubble worshipers.

Signs of deteriorating US Stock Market Internals?

While the recent declines in major US stock indices looks like just another typical “buy the dip” correction, market breadth appears to exhibiting signs of deterioration.

The average US stocks, according to Bespoke Invest, has been down by an average 12.8% from their recent 52-week highs.

By size category. Small caps have been the biggest losers. I suspect that this may be in proportion to the earlier gains.

By sector. Of the 10 sectors, half have fallen below the average. I have no clue yet whether the current degree of declines by each sector have reflected on the scale of their earlier gains. But recent declines seem as largely broad based with exception of the Utilities

Nevertheless the Nasdaq Biotechnology index has been down by 17.04% as of last night and seems to be knocking at door of the bear market. If the biotech falls into a bear market will it drag the rest? Or will it be the other way around, where stocks of major composites buoy the Biotech away from the grasp of the bear market?

We will see soon if these have merely been a shakeout or an inflection point

Interesting developments.

The Foundations of Man Made Global Warming are Crumbling as More Scientists Defect

Cracks in the pedestal of anthropogenic global warming have increasingly become evident.

The former leader of global warming alarmism, James Lovelock continues to pound against the green advocacy.

Writes Austrian economist Gary North at the Tea Party Economist: (bold mine)

Green guru and geophysicist James Lovelock, considered one of the pioneering scientists of the 20th century, has officially turned his back on man-made global warming claims and the green movement’s focus on renewable energy. Lovelock conceived the Gaia theory back in the 1970s, describing the Earth’s biosphere as “an active, adaptive control system able to maintain the earth in homeostasis.”

In an April 3, 2014 BBC TV interview, Lovelock has come out swinging at his fellow environmentalists, accusing the new UN IPCC global warming report of plagiarizing his now retracted climate claims from his 2006 book ‘The Revenge of Gaia.’

“The last IPCC report is very similar to the (now retracted) statements I made in my book about 8 years ago, called The Revenge of Gaia. It’s almost as if they’ve copied it,” Lovelock told BBC Newsnight television program on April 3.

BBC interviewer Jeremy Paxman noted to Lovelock during the April 3 program:  ”Sure. But you then, after publishing these apocalyptic predictions, you then retracted them.”

The newly skeptical Lovelock responded: ”Well, that’s my privilege. You see, I’m an independent scientist. I’m not funded by some government department or commercial body or anything like that. If I make a mistake, then I can go public with it. And you have to, because it is only by making mistakes that you can move ahead.”

Lovelock dismissed the entire basis for global warming concerns in his BBC television interview. “Take this climate matter everybody is thinking about. They all talk, they pass laws, they do things, as if they knew what was happening. I don’t think anybody really knows what’s happening. They just guess. And a whole group of them meet together and encourage each other’s guesses,” Lovelock explained.

I have earlier posted James Lovelock’s proselytism here and his continued bashing of the environmental politics of global warming here.

And Mr. Lovelock has now been joined by Dr. Richard Tol, a former lead author for the IPCC.

Writes the New American: (bold mine)

Professor Richard Tol, a prominent climate researcher from Sussex University and a coordinating lead author of an important chapter of the IPCC report has also drawn negative attention to climate frenzy — in more ways than one. First of all, he has embarrassed the UN/IPCC by refusing to sign the report, which he says is an “alarmist” concoction of “scare stories.” However, perhaps even more damning than his original criticism of the report are his subsequent claims that climate change mafia have retaliated against him with smears aimed at destroying his professional reputation and credibility.

But even then, politicians keep drumming up the global warming bogeyman. Nevertheless more scientists have reportedly been defecting

Again from the New American

To that end, they are ramping up the dire climate forecasts, even as more and more scientists jump off of the global warming bandwagon and leading alarmists admit there is no evidence of global warming over the past seventeen years.

However, even many of the veteran AGW activists are acknowledging that their fellow alarmists have cried wolf too often, and that the new wave of fright peddling is failing. In an April 3 Bloomberg News column entitled, “Scare Tactics Fail Climate Scientists, and Everyone Else,” AGW advocate Clive Crook asks: “Why aren't climate scientists winning the argument on climate policy? It sure isn't for lack of effort.”

“I take seriously the harms that man-made climate change might cause,” says Crook. “Action does make sense: It's a question of insuring against risk…. But this cause isn't advanced by exaggerating what is known in order to scare people into action, nor by denouncing everybody who disagrees with such proposals as evil or idiotic.”

Well the increasing revelation of the “emperor has no clothes” in the environmental politics of global warming reminds me of the great libertarian Henry Louis Mencken (From HL Mencken’s 1918 book In Defense of Women)

Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary. Wars are no longer waged by the will of superior men, capable of judging dispassionately and intelligently the causes behind them and the effects flowing out of them. They are now begun by first throwing a mob into a panic; they are ended only when it has spent its ferine fury. Here the effect of civilization has been to reduce the noblest of the arts, once the repository of an exalted etiquette and the chosen avocation of the very best men of the race, to the level of a riot of peasants…

A politician normally prospers under democracy, not in proportion as his principles are sound and his honour incorruptible, but in proportion as she excels in the manufacture of sonorous phrases, and the invention of imaginary perils and imaginary defences against them. Our politics thus degenerates into a mere pursuit of hobgoblins…

Accounting Magic: Double Economic Growth Overnight, Nigeria Edition

All it takes for Nigeria to magically double the size of her economy is to apply some accounting-statistical trickery.

From Simon Black at the Sovereign Man (bold mine)

Over the weekend, Nigeria’s government made an accounting adjustment in how it calculates its GDP statistics.

By changing the base-year in GDP calculations from 1990 to 2010, Nigeria increased the reported size of its economy by 89% over the weekend.

So with a stroke of a pen, the West African nation leapfrogged South Africa to become the continent’s largest economy.

And in doing so the country’s debt-to-GDP ratio fell below 20%. The ratio of bad loans in the banking system when compared to the overall size of the economy also dramatically declined in proportion.

The same thing happened in Poland last year when the government there made a grab for private pensions, then counted those new assets against government debt.

It was just another accounting scam. But it dramatically lowered Poland’s debt-to-GDP ratio on paper, even though the government had not actually gotten any ‘richer’.

And how the same accounting-statistical manipulation can be seen applied to the balance sheets of the ECB and the US Federal Reserve. Again Mr. Black

Just hours ago, the European Central Bank released its 2013 annual report, showing a massive 44% surge in profits.

Diving into the numbers, though, it turns out that most of the ECB’s profits come from funny accounting tricks—revaluing a permanent swap line they have with the Federal Reserve, and moving funds from the “risk provision” column into the profit column.

I’m also reminded of the Federal Reserve’s own admission that they had $50+ billion in ‘unrealized losses’ due to the erosion of their portfolio of US Treasuries.

This is almost as much as their entire capital reserve… meaning that the Fed is practically insolvent by its own admission.

Not to worry, though. The Fed gets to employ its own accounting tricks to make these losses disappear, marking the assets on the balance sheet at their much higher ‘book value’, rather than the much lower ‘market value’.

Of course, the US government does exactly the same thing… often conveniently leaving out huge portions of its total debt such as the non-marketable securities it owes to the Social Security trust funds.

All of this really just goes to show how absurd it is to rely on these numbers conjured by politicians and central bankers.

And I’ve been repeatedly saying that since government issues all the accounting based statistics they will show what they want to show rather than what really has been.

To give you more example of fallacies of mainstream statistics,  the great dean of the Austrian school of economics Murray N. Rothbard exposed on the flagrant errors of the Keynesian multiplier. Mr. Rothbard’s case more lucidly explained by Professor Steven Landsburg: (bold orginal)

If you studied economics from one of the classic textbooks (like Samuelson) you might remember how this goes. We start with an accounting identity, which nobody can deny:

Y = C + I + G

Here Y represents the value of everything produced in (say) a given month, which in turn is equal to the total income generated in that month (because producing a $20 radio allows you — or perhaps you and your boss jointly — to earn $20 worth of income). C (which stands for consumption) is the value of the output that ends up in households; I (which stands for investment) is the value of the output that ends up at firms, and G (which stands for government spending) is the value of the output that ends up in the hands of the government. Since all output ends up somewhere, and since households, firms and government exhaust the possibilities, this equation must be true.

Next, we notice that people tend to spend, oh, say about 80 percent of their incomes. What they spend is equal to the value of what ends up in their households, which we’ve already called C. So we have

C = .8Y

Now we use a little algebra to combine our two equations and quickly derive a new equation:

Y = 5(I+G)

That 5 is the famous Keynesian multiplier. In this case, it tells you that if you increase government spending by one dollar, then economy-wide output (and hence economy-wide income) will increase by a whopping five dollars. What a deal!

Now, though I cannot seem to find a reference, I have a vague memory that it was Murray Rothbard who observed that the really neat thing about this argument is that you can do exactly the same thing with any accounting identity. Let’s start with this one:

Y = L + E

Here Y is economy-wide income, L is Landsburg’s income, and E is everyone else’s income. No disputing that one.

Next we observe that everyone else’s share of the income tends to be about 99.999999% of the total. In symbols, we have:

E = .99999999 Y

Combine these two equations, do your algebra, and voila:

Y = 100,000,000 L

That 100,000,000 there is the soon-to-be-famous “Landsburg multiplier”. Our equation proves that if you send Landsburg a dollar, you’ll generate $100,000,000 worth of income for everyone else.

The policy implications are unmistakable. It’s just Eco 101!!

See how accounting identities can create a paradise for everyone?