No Formal Phisix-Financial Commentary this week; Start of the Breakdown?

It’s due time for me to take a weekend recess from my weekly regular market updates to spend valuable scarce time with my family. 

Anyway here is the music by 1980s new wave band, Tears for Fears’ (TFF), a favorite of mine, with the “Start of the Breakdown” from their first album "The Hurting" (youtube source here)

The basic theme of the all the music from “The Hurting” album has been on emotional distress and the primal scream therapy.

So TFF singer and songwriter Roland Orzabal may have vented his “primal scream” through the morose song when faced with their past “breakdown”

Considering that markets across the globe have essentially risen and has become heavily dependent from central bank subsidies or inflationary steroids, those artificial monetary stilts have been fundamentally unsustainable. Thus, a systemic "breakdown" from all accrued imbalances over the past years, for me, signifies an issue of a WHEN and not an IF. 

And as I have been documenting here, various international political agents have recently been hurriedly jumping on the bandwagon to warn of its symptoms, e.g. excessive risk taking, extremely low volatility, chasing the markets, substantially stretched valuations, et. al.

It is not clear yet whether the heightened global market volatility over the past weeks presages the advent of such a monumental "breakdown" or if current events merely reflects on seasonality or cyclicality.

All these will ultimately be revealed by time

Yet if my hunch is right that this may be early phases of THE "breakdown", or as Credit Bubble Bulletin's Doug Noland recently observed "it appears that the global bubble has been pierced", then this would be bad news for “bullish” stock market consensus (as well as for the bubble segments of every economy that has embraced on such steroids).

As fund manager Dr. John Hussman recently wrote, “Somebody will have to hold stocks over the completion of the present cycle, and encouraging one investor to reduce risk simply means that someone else will have to bear it instead”. 

Since every financial security transaction requires a buyer and seller, financial market meltdowns would imply steep financial losses for each buyer of securities from current record "high" extremely overpriced levels.

The prospect of such staggering losses may be accompanied by eventual emotional distresses too...which brings back the memories and relevance of TFF's music.

Infographics: The History of Metals

From Visual Capitalist (hat zero hedge)

Courtesy of: Visual Capitalist

Quote of the Day: Fed’s allocation of credit is an Inappropriate Use of Central Bank’s Asset Portfolio

A balance sheet has two sides, though, and it is the asset side that can be problematic. When the Fed buys Treasury securities, any interest-rate effects will flow evenly to all private borrowers, since all credit markets are ultimately linked to the risk-free yields on Treasurys. But when the central bank buys private assets, it can tilt the playing field toward some borrowers at the expense of others, affecting the allocation of credit.

If the Fed’s MBS holdings are of any direct consequence, they favor home-mortgage borrowers by putting downward pressure on mortgage rates. This increases the interest rates faced by other borrowers, compared with holding an equivalent amount of Treasurys. It is as if the Fed has provided off-budget funding for home-mortgage borrowers, financed by selling U.S. Treasury debt to the public.

Such interference in the allocation of credit is an inappropriate use of the central bank’s asset portfolio. It is not necessary for conducting monetary policy, and it involves distributional choices that should be made through the democratic process and carried out by fiscal authorities, not at the discretion of an independent central bank.

Some will say that central bank credit-market interventions reflect an age-old role as “lender of last resort.” But this expression historically referred to policies aimed at increasing the supply of paper notes when the demand for notes surged during episodes of financial turmoil. Today, fluctuations in the demand for central bank money can easily be accommodated through open-market purchases of Treasury securities. Expansive lending powers raise credit-allocation concerns similar to those raised by the purchase of private assets.

Moreover, Federal Reserve actions in the recent crisis bore little resemblance to the historical concept of a lender of last resort. While these actions were intended to preserve the stability of the financial system, they may have actually promoted greater fragility. Ambiguous boundaries around Fed credit-market intervention create expectations of intervention in future crises, dampening incentives for the private sector to monitor risk-taking and seek out stable funding arrangements.

This is from Federal Reserve Bank of Richmond President Jeffrey M. Lacker and his Director of Research John A Weinberg at the Wall Street Journal

The point is that the de facto easing policies embraced by central banks as the FED has been to invisibly redistribute resources in favor of certain parties which leads not only to the accumulation of imbalances but also to ethical controversies such as moral hazard, inequality et.al.

And along the same redistributive basis, Germany’s Bundesbank chief Jens Weidmann last week warned against the ECB’s proposed QE via Asset Backed Securities

From Reuters: (bold mine)

ABS are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or now the ECB.

Then the credit risks taken by private banks would be transferred to the central bank and therefore taxpayers without them getting anything in return," said Weidmann, who is also an ECB policymaker.

"But that goes against the basic principle of liability that is fundamental to a market economy: Those who derive benefit from something should bear the loss if there are negative developments," he was quoted as saying.

Bottom line: There are natural limits to the central bank’s embrace of Keynesian zero bound quasi boom policies. Those limits are becoming increasingly apparent even to central bankers.

US Fed’s Reserve’s Verbal Easing Spurs Fantastic US-Europe Stock Market Roller Coaster Ride

US stocks partied Wednesday when the Fed minutes hinted that they would go slow on rate hikes and at the same time talked down the US dollar.

But Asian markets responded tepidly to US stock market ebullience, Japan’s Nikkei even fell .75% yesterday.

What’s more surprising has been that European stocks, which has been battered during the past few days, opened strongly—evidently carried over by US sentiment—but gains of which just evaporated going into the close of the session.

Here is the intraday chart of the German DAX which closed with marginal gains.

UK’s FTSE 100 which got clobbered down by .78%.

Europe’s largest 50 companies via the Stoxx 50 likewise exhibiting the same glee to dour sentiment. Most of Europe’s major benchmarks closed markedly down

 

And what has been even more fascinating has been the twist of fate in US stocks. Whatever one day gains acquired during the verbal easing has been more than erased…as yesterday’s broad based losses exceeded the other day’s gains! 

The S&P 500 two day chart exhibits the magnificent roller coaster ride!

Bloody Thursday for US stocks in general led by the small caps. (from stockcharts.com)…

One more revealing chart has been the collapse of oil prices specifically the WTIC (-3.84%) as well as the Brent (-1.46%) yesterday.

The commodity benchmark the CRB has also been on a downtrend. 

The meltdown of oil prices have significant impact to the welfare states of major oil producers. It also serves as an indicator to the state of the global economy and global liquidity.

Has Fed (as well as her cohorts) lost their potency to stimulate risk assets?

Is this the start of the breakdown?

Abenomics: Weak Yen Takes Toll on Small Japanese Companies

I have recently posted on how the weak yen has wreaked havoc on profitability of many corporations, now we see evidence of the discriminatory effect from the weak yen mostly on small Japanese companies.

From the Wall Street Journal Real Times Economic Blog

While the total number of corporate bankruptcies hit a 24-year low for the six months to September, suggesting corporate Japan is doing well, in part helped by public works spending, a closer look at the data shows that the number of corporate bankruptcies caused by factors related to the yen’s weakness is rapidly rising.

Bankrupt firms citing the weaker yen surged to 214 during the first nine months of the year, compared with just 89 during the corresponding period last year, data released Wednesday by Tokyo Shoko Research Ltd. showed. Only the sales slump following April’s increase in the sales tax was cited by more firms as the main factor behind their bankruptcies.

The failed businesses, many of them small, were struck by the higher costs of imported materials such as fuel, minerals and food as the exchange rate shifted from less than ¥80 per dollar two years ago to as high as ¥110 in recent days. Hit hardest was the transportation industry, including trucking companies, which saw 81 companies go bankrupt. The number of insolvencies totaled 44 in manufacturing, 41 in wholesale and 19 in services, the research company said.

Understand that a weak yen policy (as well as other forms of interventions) redistributes resources politically from one group at the expense of the others. 

For instance, a weak yen policy has been partly designed to subsidize foreign exchange earners such as exporters compared to the rest. I say partly because there are other motives, viz inflate away debt or generate price inflation or subsidize government actions.

In the context of exports, now if we look at Japan’s merchandise trade as % to GDP, which is at 28.4% as of 2012 based on World Bank data, assuming that exports and imports are evenly distributed (even when they are not as Japan trade balance has been in a deficit that got worsened under Abenomics), this means that a weak yen policy supports only 14.2% (28.4/2) of the statistical GDP. As a caveat, this back of the envelop estimates assumes evenly distributed gains to exporters when they are not. [Exports have actually hardly gained under Abenomics] Also this looks merely at statistical numbers without considering the real economic transmission mechanism of a weak yen policy.

Yet because of natural limits in the Japanese economy, say how inflation changes the patterns of domestic consumer spending by putting a kibosh on discretionary spending, the effect would be to put pressure on corporate profits as input costs rise while firms have not been able to pass the costs to consumers as previously predicted:

In short, corporations appear to be very hesitant to raise prices perhaps in fear of demand slowdown. Thereby this means a squeeze in corporate profits. Abenomics has only worsened such existing conditions.

Yet the most vulnerable group to inflationism have been no less than small businesses. 

So while the “total number of corporate bankruptcies hit a 24-year low…in part helped by public works spending” the surge in “bankrupt firms citing the weaker yen to 214..compared with just 89 during the corresponding period last year” or signifying 140% jump, it has been the small businesses catering to domestic markets that has mostly been hit. 

Further note that so-called improvements in corporate bankruptcies has been due to “public works spending” which means many of the mainstream corporations have been benefiting not from organic economic demand but from political redistribution of resources.

As one would note Abenomics weak yen policy has about rechanneling of resources to favored interest groups or crony capitalism.

Yet the massive distortions from government interventions as I previously noted would only disrupt the economy: 

It’s a wonder how the Japanese economy can function normally when the government destabilizes money and consequently the pricing system, and equally undermines the economic calculation or the business climate with massive interventions such as 60% increase in sales tax from 5-8% (yes the government plans to double this by the end of the year to 10%[21]), and never ending fiscal stimulus which again will extrapolate to higher taxes.

It's a wonder how the Japanese economy can ever recover when small and medium scale businesses, whom have been the main victims of Abenomics, have been the heart and blood of the Japanese economy. As the Economist noted in 2010: (bold mine) More than 99% of all businesses in Japan are small or medium-sized enterprises(SMEs); they also employ a majority of the working population and account for a large proportion of economic output. While most of these companies are not as well known as Japan’s giants, they form the backbone of the service sector and are a crucial part of the manufacturing and export supply chain. 

Notice too why exports haven't picked up? 

Also given Japan highly fragile fiscal conditions, all these interventions implies that it’s a system that has been thriving on borrowed time and is not bound to last. 

Booming Japanese stocks, one of the major beneficiaries of political redistribution and direct interventions in particular BoJ's record buying of Japanese stocks, will eventually face economic reality.

US Stock Markets Celebrate on the Fed’s Easing of Rate Hike Concerns and on the Talking Down the US Dollar

Russian physiologist Ivan Pavlov, in his classical conditioning experiment, used the ringing of the bells to stimulate or alert (conditioned) dogs that food was present.

All it took for the US stock markets to reverse gear from fear to greed has been for officials of the US Federal Reserve to assuage the public on rate hikes and to talk down the US dollar (implied easing).

The intraday chart of the S&P 500 from stockcharts.com reveals of the vertical lift off from post Fed minutes

First the verbal easing, from the BBC: (bold mine)

US markets rose sharply after minutes from the September meeting of the Federal Reserve were released.

The transcript indicated that US central bankers were wary of raising rates too soon.

Officials were worried markets were too focused on a rate rise happening during a specific period of time.

The minutes reveal an eagerness to assure observers that a rate rise would be linked solely to positive economic data.

The Fed has kept its benchmark federal funds rate - which determines other short-term interest rates in the US economy, from car loans to mortgages - at 0% since the end of 2008, when the financial crisis hit.

Now that the central bank has announced an end to its extraordinary stimulus measures - which included buying bonds to keep long-term interest rates low - focus has shifted to when it will raise the short term rate.

Then the specter of a strong dollar, from the Telegraph: (bold added)

The US Federal Reserve has raised fears that the strengthening dollar and weak growth overseas could lead to a drop in American exports.

Officials at the central bank said that slowing growth in Europe, Japan and China could limit demand for goods produced in the US. Meanwhile, they also worried that the strengthening dollar would make foreign goods and services seem cheaper by comparison, holding inflation below the central bank’s 2pc target.

“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the US external sector,” the Fed said in the minutes of its September meeting, published on Wednesday.

The schizophrenic rally has been broad based…

…as the US dollar index slumped 

Oh, the Fed seems wishy washy over financial stability risks but renewed her concerns over stock market valuations. From the Fed minutes (bold mine)

The improvement in business conditions was reflected in reports of increased demand for loans at banks in several Districts. Demand rose for loans to both households and businesses, and a couple of participants indicated that borrowers were expanding their use of existing credit lines as well as obtaining new commitments. Bankers in one District stated that, while they had eased the terms and conditions on loans in response to competition from other lenders, they had not taken on riskier loans. Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads. However, one participant suggested that the leveraged loan market seemed to be moving into better balance, and that market participants appeared to be taking appropriate account of the changes in interest rates that might be associated with the eventual normalization of the stance of monetary policy. Moreover, a couple of participants, while stressing the importance of remaining vigilant about potential risks to financial stability, observed that conditions in financial markets at present did not suggest the types of financial stability considerations that would impede the achievement of the Committee's macroeconomic objectives.

Slowdown in Europe, Japan and China?  Who cares, stocks surge!

Fed warns again of “stretched stock market valuations”. Who cares, stocks soar!

Like Pavlov’s dogs all it takes for the market to trigger an autopilot frenzied bidding has been for the Fed to utter E-A-S-I-N-G (here implicitly)

Everything else doesn’t matter. Stocks are bound to rise forever!

How Prostitution, Drug Dealing and Smuggling Bolsters Europe’s Economy

Recently I wrote on how governments desperately try to pump economic G-R-O-W-T-H by massaging statistics: (bold original)

In Italy, sagging economic growth has impelled the government to include the illegal drug sales, smuggling and prostitution in the gross domestic product calculation in order to buoy the statistical economy in May 2014. How does one get to compute “illegal” into GDP? Beats me. The United Kingdom also followed to include the sex and drug industry also in their GDP late May 2014.

Sovereign Man’s Simon Black explains the new accounting methods used by some governments to compute for the “illegal” activities in the markets as part of G-R-O-W-T-H: (bold mine)

For example, to figure out how prostitution contributed to the country’s economy, Spain’s national statistics agency counted the number of “known prostitutes” working in the country and consulted sex clubs to calculate how much they earned.

Known prostitutes? Do they have a Facebook group?

And how about if these “known prostitutes” move around the borderless Schengen area? Their contribution to GDP is probably counted several times then.

So, using these scientific methods Spain’s statistics agency announced that illicit activities accounted for 0.87% of GDP.

(Perhaps this is one of the reasons why a whopping 547,890 people left Spain last year, most of them to Latin America, according to the national statistics agency.)

This compares similarly to the UK where Britons, according to its own statistics agency, spent 12.3 billion pounds on drugs and prostitutes in 2013, or 0.79% of GDP.

That’s more than they spent on beer and wine, which only amounted to 11 billion pounds.

And you probably thought Britons were heavy drinkers. Turns out they enjoy hookers and blow even more.

On the more uptight and conservative spectrum of Europeans, Slovenian households spent 200 million euros last year on prostitutes and drugs, or 0.33% of Slovenia’s GDP.

Curiously enough, Slovenia’s Finance Minister just announced today that the country’s budget deficit will be 200 million euros higher than previously thought. Coincidence? I don’t think so.

On the more libertine extreme, in Germany estimates suggest that prostitution and drugs amounted to as much as $91 billion in 2013—or an incredible 2.5% of the total economy.

This is the sign of the times. Governments are so desperate to maintain the illusion of growth that they’re turning to desperate, comical measures.

Across the entire continent, Eurostat estimates that gross EU GDP is larger by 2.4% if all illegal activities (not just prostitution and drugs) are accounted for.

Funny thing, they also report that total real GDP growth in 2013 (the year they started counting illegal activities) was just 0.1%.

In other words, illegal activities are now the difference between economic growth and economic recession in Europe.

As Mark Twain quoted 19th century British Prime Minister Benjamin Disraeli "There are three kinds of lies: lies, damned lies, and statistics."

Don’t worry be happy. For the statistics worshiping consensus, stocks backed by G-R-O-W-T-H have been predestined to rise forever!!!!

US President Obama Joins Chorus, Warns on Wall Street’s excessive risk-taking

Remember what I earlier wrote?

The point is the IMF, like many other global political or mainstream institutions or establishments, CANNOT deny the existence of bubbles anymore. So their recourse has been to either downplay on the risks or put an escape clause to exonerate them when risks transforms into reality which is the IMF position.

Well, US President Obama seems to have joined the bandwagon of political agents decrying “excessive risk taking” (euphemism for bubbles)

From the Wall Street Journal: (bold mine)

President Barack Obama on Monday urged U.S. financial regulators to keep looking for new ways to rein in excessive risk-taking in the financial sector, possibly through compensation and additional capital rules for the biggest financial firms, a White House spokesman said.

In a meeting Monday morning at the White House, Mr. Obama urged regulators “to consider additional ways to prevent excessive risk-taking across the financial system, including as they continue to work on compensation rules and capital standards,” White House press secretary Josh Earnest said during a press briefing Monday.

No new initiatives in these areas were considered Monday; rather Mr. Obama and participants discussed the need to finish outstanding compensation rules required by the 2010 Dodd-Frank law and reviewed the current state of capital rules, according to people familiar with the meeting.

In the case of the POTUS, the admonition doesn’t seem to be about “escape valves” but about the opportunity to expand government control on the financial markets. This resonates with the call of his former chief of staff, Emanuel Rahm (now Chicago Mayor) who in 2008 said, "You never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before."

President Obama doesn’t say that such “excessive risk taking” have been products of financial repression policies that has largely benefited the US government in two ways: subsidies on public debt and government spending through suppressed interest rates and from the inflation of tax revenues that has cosmetically improved US fiscal standings. 

Nonetheless for the POTUS to implicitly raise the risk of bubbles means that politically influential elites, as I have previously discussed, appear to be apprehensive of the current developments for them to have these politicians express (on proxy) their sentiments.

Again this shows that bubbles have natural limits. And the natural limits are working their way to the mindsets of even the major beneficiaries the political agents. Changes occur at the margins.

Again as the great Austrian economist Ludwig von Mises warned: (bold mine)

But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.

If they mean what they say these barrage of warnings will translate to policies.

I don’t know if current global stock market developments signify a head fake or heralds the advent of the real thing…

US stocks have converged to the downside…

And so as with global stocks: MSCI World $MSWORLD, Asia ex-Japan AAXJ, Europe Stoxx600 and iShares Emerging Markets (EEM)

Is this the start of the breakdown? We’ll see.

Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is

All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis. Jesse Livermore, How To Trade In Stocks

In this issue

Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is

-The Strong US Dollar and the Return of the Risk OFF Climate

-ASEAN Equities in the Shadows of the Strong US Dollar

-The Currency Periphery to the Core Dynamics

-7,400 is not the Technical Hurdle, the BSP Chief Is

-BSP Governor Tetangco, Jr Hits on Stock Market and Real Estate Irrational Exuberance

Personal Notes;

-Pls help share a prayer for the speedy recovery of my principal, MDR’s Securities’s owner, Mr. Manuel D. Recto, who presently endures a health ordeal.

-I have cobbled enough strength to write about the latest very interesting developments even when I am presently indisposed. With more indications of a possible major inflection point, recess can wait another day

Phisix: 7,400 is not the Technical Hurdle, the BSP Governor Is

The Strong US Dollar and the Return of the Risk OFF Climate

In mid-September, I noted of the sharp spike in the US dollar which had been broadbased which I said then could serve as harbinger to a possible return of the risk OFF moment[1];

Their individual charts reveal that the US dollar has been rising broadly and sharply against every single currency in the basket during the past 3 months.

This may have been due to a combination of myriad complex factors: ECB’s QE, expectations for the Bank of Japan to further ease, Scotland’s coming independence referendum, or expectations for the US Federal Reserve to raise rates in 1H 2015 (this has led to a sudden surge in yields of US treasuries last week), escalating Russian-US proxy war in Ukraine and now in Syria (as US Obama has authorized airstrikes against anti-Assad rebels associated with ISIS, but who knows if US will bomb both the Syrian government and the rebels?) more signs of a China slowdown and more.

Yet a rising US dollar has usually been associated with de-risking or a risk OFF environment. Last June 2013’s taper tantrum incident should serve an example.

For most of Asian bourses, the return of the Risk OFF moment in the face of a soaring USD has become pretty much evident. 

In the past, each time the US dollar surged (see top pane with Asian ex-Japan iShares AAXJ overlapped with the US dollar index), this placed a cap in the gains of BOTH Asian and Emerging Market (iShares EEM) equities as measured by their respective ETFs.

The peak and troughs of the US dollar has been highlighted by the green trend lines, while the highs and lows of Asia (ex Japan) have been exhibited by the blue lines.

The graphs shown in the lower panes represent the RATIOs of Asia (ex-Japan) and the Emerging Markets (EEM) relative to the US Dollar. Those orange rectangular indicators reveal of the crucial inflection points: 1) peak US dollar vis-a-vis cyclical lows of AAXJ-EM in July 2013. 2) Culmination of AAXJ-EM relative to US dollar lows in November 2013 and 3) a repeat of 2) during April-May 2014.

From July until August, such inverse relationship seems to have been “broken” as both the US dollar index and Asian (ex-Japan) and Emerging Markets (EEM) have converged to spike correspondingly!

It’s only this September when the old relationship seems to have returned with a vengeance!

To understand more of the significance of these indices, the basket of iShares All Country Asia ex-Japan (AAXJ)[2] and their weightings consists of China 23.83%, South Korea 18.69%, Taiwan 15.45%, Hong Kong 12.67%, India 9.14%, Singapore 6%, Malaysia 5.09%, Indonesia 3.4% Thailand 2.93% Philippines 1.63% and others .89%. The top 5 weighting on a sectoral basis has been financials 31.54%, info tech 21.17%, consumer discretionary 9.17% Industrials 8.57% and telecoms 6.72%.

Meanwhile the iShares MSCI Emerging Markets (EEM)[3] consist of a broader basket of 17+ emerging markets and their respective weightings: China 18.39%, South Korea 14.64% Taiwan 12.09%, Brazil 10.14%, South Africa 7.35%, India 7.15%, Mexico 5.09%, Russia 4.55% Malaysia 3.98% Indonesia 2.6% Thailand 2.31% Poland 1.77% Turkey 1.55% Chile 1.43%, Philippines 1.22% Hong Kong 1.03% and others 4.51%. The top 5 sectoral components consist of Financials 27.3%, Info tech 16.82%, energy 9.83% consumer discretionary 8.8% and materials 8.28%

The only exception to the general trend of faltering equity assets has been the equity benchmarks of China, India and the Philippines.

The general trend, as of Friday, seems to reveal of a spreading decay of the performances among Asian-Emerging markets. On a sectoral basis, the ongoing deterioration of emerging market-Asian stocks has likewise been led by dominantly weighted Financial sector[4].

Last week I showed of the two sharply contrasting faces of the milestone 7,400 highs of May 2013 and September 2013 in the Phisix[5]. Apparently like her other Asian and EM peers, domestic financials has severely lagged the recent blitz, or has become a baggage to the “massaged” ramp to reach 7,400. 

And speaking of massaging ramp, almost everyday has become a marking the close day at the PSE, as bulls desperately set the index to close higher by pushing it up by about .2 to .3%. Amazing pumps. (chart from technistock.net)

Back to EM. Add to the EM miseries has been a dramatic fall in commodity prices (represented by CRB Raw materials) which has had a strong correlation with MSCI EM share prices (chart from Yardeni.com)

This marked equity EM underperformance in the face of the rising US dollar appears consistent with the patent economic slowdown in EM economies.

The IMF recently warned that a sustained EM downdraft would impact advanced economies. Yet I have been pounding on the table that an EM growth cascade will mostly likely influence to weigh on Advance or developed economies (DM). That’s unless DM internal growth neutralizes EM weakness. Yet sagging DM growth will also serve as feedback mechanism back to EM and vice versa, or my periphery to core dynamics[6]:

Unfortunately the IMF team stops there. They did not expand their horizons to include of the subsequent feedback mechanism from DM to EM! If EM growth affects DM, so will there be a causal chain loop, or DM growth will also have an impact to EM growth!

Doing so would extrapolate to a contagion process, as the slowdown feedback mechanism in both EM and DM will self-reinforce the path towards a global recession!

In other words, if the current deterioration in Asia-EM equity sphere worsens, and if equities will manifest on real economic aspects which will have significant impact on DM, then a global recession looks likely in the near horizon. 

Perhaps, 2015 at earliest or 2016 the latest?

ASEAN Equities in the Shadows of the Strong US Dollar

Let us narrow down the perspective to US dollar-ASEAN equity.

In contrast to AAXJ or EEM, the FTSE ASEAN 40 appears to have some signs of positive ‘convergence’ with the US dollar. The FTSE ASEAN (blue line) climbed along with the US dollar (green line) into May 2013. That’s until the then Fed Chief Ben Bernanke floated with the “taper”. The Fed’s taper brought ASEAN stocks swiftly into bear markets, even as the US Dollar index tumbled.

ASEAN stocks found a second wind in February 2014 as the US dollar stabilized and began its upward trek. Along with the ascending US dollar, ASEA went on path to beat the May 2013 highs.

However by September, the US dollar has gone parabolic, and the ASEA-US dollar convergence trend appears to have been ‘broken’ as the FT ASEA index plunged.

First of all a clarification.

The FTSE ASEA ETF basket comprises mostly large caps with an 83.49% share and with midcaps at 16.32% of ASEAN majors whose weightings are distributed as follows: Singapore 33.72%, Malaysia 29.65%, Thailand 15.22%, Indonesia 13.06%, Hong Kong 4.1%, Philippines 3.2%, United Kingdom .84%, and the US .22%[7]. Again on a sectoral basis, the top 5 are Financials which carries the dominant weight with 46.45% share, Telecoms 19.38%, Industrials 9.57%, Consumer discretionary 7.37% and Consumer Staples 5.43%.

In short, mostly financial stocks of Singapore, Malaysia, Thailand and Indonesia have borne the yoke of the ASEA 40. Thus the underlying present weakness of ASEA, again in the face of a surging US dollar translates to ongoing infirmities with mostly financials in the ASEAN ETF.

I recently asked if the surging US dollar will have a contagion effect on Asian’s high flyers[8]: “Yet will the region’s high flyers, India’s Sensex, Indonesia’s JCI, the Philippine Phisix, Thailand’s SET and the New Zealand 50 be immune to a seeming transition towards a risk OFF environment?”

This week’s outcome shows that the contagion dynamic has alive and kicking but operates at a different degree compared to 2007.

In June 2013, the response to the “taper” was a violent tantrum—risk assets had been sold swiftly and almost simultaneously across the globe.

In the current rising US dollar milieu, selling pressure has been gradual and selective but has commenced to spread, like Ebola, and seems to be intensifying.

The first June 2013 dynamic was a shock and adjust. The current September 2014 dynamic has been a slomo corrosion of the foundations for risk assets.

Among the three major ASEAN aspirants hoping to beat the May 2013 highs, Indonesia’s JCI has been the first to match and in fact crossover the previous record highs of May 2013.

Unfortunately the bulls failed to hold the sanctified ground which they fought intensely for the last two weeks. This week the bulls got decisively crushed when the JCI collapsed by 3.57%, thus a major setback for a new high.

Thailand’s SET has been another aspirant to reach May 2013 highs. Unlike her peers the JCI and the Philippine Phisix, the SET has yet to touch the May 2013 highs. But this week, the Thai bulls had also been clobbered, as the SET tanked by 1.87%. So this week’s losses adds to the distance which bulls would need to cover for that much desired pivotal game changer. So near yet so far.

The battering from the re-emergent RISK OFF environment became evident also with the Korean Kospi which was also thumped by 2.73%, the Singapore’s SET which was also whacked by 1.18% and Japan’s previously turbocharged Nikkei was smashed by 3.21%.

Meanwhile Australia’s S&P/ASX, and the Hong Kong Hang Seng rallied back to close with marginal gains. Taiwan Taiex managed to rebound up by 1.3% for week.

Hong Kong’s Friday rally came amidst reports that the political impasse would be resolved through negotiations. As of this writing, opposing protagonists have reached a deadlock.

Whether such protest has been externally orchestrated or not[9], the consensus hardly realizes of the gravity of risks of the extended political stalemate; first the ratio of banking loans to the real economy has reached a record 203% at the end of the June 2014, compared with 138% in 2007, and importantly, Hong Kong’s banking exposure to China is just under $ 500 billion or 55% of all loans in the system, the Wall Street Journal quotes the HKMA[10].

A disruption of flow of financing in either direction (China to Hong Kong or vice versa) may trigger financial dislocations and defaults in both the mainland and Hong Kong.

Also a sustained interruption in the flow of domestic businesses—say for instance last week, Hong Kong real estate companies and retailers have been alarmed by the sharp drop in customer traffic and sales on areas affected by protests[11]—may expose many highly vulnerable and sensitive overleveraged companies to sharp business oscillations, thereby raising risks of financial instability.

And as the peso skidded to the 45 level, the Phisix chimed with the region to a one day modest selling pressure. But domestic bulls made sure that the overvalued and severely mispriced Philippine Phisix was to be immune from foreign events, so they went into another Pavlovian frenzied charge last Friday to ensure that the benchmark would close with virtually little losses for the week.

Bottom line: China has been economically and financially fragile due to excessive leverage and now compounded by a struggling economy under the weight of the former. Add Hong Kong and Singapore to this equation. In terms of debt, the Japanese political economy has been no better. Yet the Japanese economy has been grappling to emerge out of the web of interventionists chains even as the productive sectors repeatedly sputter. Meanwhile many emerging market economies (like the ASEAN majors) have been reeling from the repercussions of domestically germinated bubbles. Thus geopolitics can be the spark that may unglue everything. Here the rising US dollar is like a lit fuse which has been fast approaching the trigger that would unleash the main event.

US market rallied strongly last Friday based on payroll data. But so did the US dollar which as shown above went parabolic! Well see how things go next week

The Currency Periphery to the Core Dynamics

Another very important clarification. The appearance of “convergence” between the ASEA and the US dollar index is not what it seems.

Previous accounts of the rising US dollar index has been primarily because of the weak euro and yen more than it has been about the region’s currency standings vis-à-vis the US dollar. 

The ICE’s US dollar index equivalent, the DXY, and JP Morgan Bloomberg’s Asian currency index ADXY[12], tells the story.

The Bloomberg’s ICE Dollar Index (DXY) basket consist of the euro 57.6%, the yen 13.6%, British pound 11.9%, Canadian loonie 9.1%, Swiss franc 3.6%, Swedish Krone 4.2%

Since the DXY spike during the taper tantrum last June 2013 (upper window), the DXY has corrected and been range bound for most of the year UNTIL August 2014. The latest DXY pole-vault has been at a THREE year high!

Meanwhile the JP Morgan Bloomberg Asian basket (ADXY) comprises of the Chinese yuan 38.16%, Korean won 12.98%, Singapore dollar 11.07% Hong Kong dollar 9.22% Indian rupee 8.75% Taiwan dollar 6.1% Thai baht 4.92% Malaysian ringgit 4.3% Indonesia rupiah 2.85% and Philippine peso 1.65%.

The JP Morgan Asian currency index ADXY reveals the last ADXY meltdown was during the June July 2013 “taper tantrum”. Today’s re-emergent volatility seems yet halfway the predecessor.

Importantly, Asian currencies have been rising along with the US dollar index from April until August 2014 (blue line lower pane).

This means gains of the US dollar then has been against the other components of the US dollar index rather than from Asian currencies.

This also implies that the gains of ASEAN equities as measured by the ASEA ETF came in the backdrop of rising ASEAN currencies, even as the DXY rose. That’s why it would seem schizophrenic to see rising stocks along with falling domestic currencies. That’s unless the current environment has been about massive debt monetization by governments ala Venezuela and Argentina.

The whole equation only radically changed in September when what has been mostly a strong US Dollar index because of erstwhile weak US dollar components has now PERMEATED into the BROADER currency sphere.

And because of the broad based strength of the US dollar, the pillars of many EM Asian-equity benchmarks came under pressure or have been frazzled. Thus the innate signs of diffusions from currency to risk assets in the EM-Asian spectrum. ASEAN bonds have yet to exhibit the same symptoms. Again a sustained ascent of the US dollar could most likely bring about the culmination of the topping process of ASEAN stocks.

So even from the currency perspective alone, the periphery to the core dynamics has clearly been in motion and has similarly been signaling contagion.

7,400 is not the Technical Hurdle, the BSP Chief Is

Philippine bulls have a herculean problem.

I’m not referring to the resistance level of 7,400, overvaluations, mispricing, speculative binges, malinvestments or overleverage, rather I am alluding to BSP chief who once again raised not only sanitized alarm bells, but what’s different this time around is that he announced that the BSP will supposedly manage everyone’s risk appetite!!!

First I’ve been saying that the BSP chief’s warning has been getting very much frequent but couched as diplomatically stentorian.

Despite the supposed floridness of Philippine growth conditions, the good governor Amando M Tetangco, Jr vents another sterilized statement of caution in his September 30 speech[13] (bold mine): “Even as our fundamentals show strength and we have built buffers against external shocks, we remain cognizant that there are risks that could challenge this positive narrative. For instance, there is the uncertainty over the timing and magnitude of the US Fed policy shift into more normal mode. This headwind could take many forms, among others: financial stability pressures from repricing of credit; sharp downward adjustments in prices of real and financial assets; and, capital flow volatility that could re-emerge as global investors react to news. If these risks are not managed well and result in unwarranted tight financial conditions, fragilities in EME financial markets could be exposed. In turn, these could negatively feedback to the real economies of EMEs. On the part of the BSP, although our series of monetary tightening actions in the past few months have been principally aimed at managing inflation expectations, these have also been put in place to help guide the domestic financial market to a smooth transition as monetary policy begins to normalize in the US. In the case of the domestic economy, the key challenges over the medium term are likely to relate mainly to addressing potential supply-side bottlenecks, bridging identified gaps in existing infrastructure, minimizing the impact of natural calamities, and promoting greater economic inclusion by, among other things, generating more employment.”

Mr Tetangco has been saying this quite too often, is he seeing something coming soon which he can’t directly say???

Yet what is the relationship between the “uncertainty over the timing and magnitude of the US Fed policy shift into more normal mode” with risks of “financial stability pressures from repricing of credit; sharp downward adjustments in prices of real and financial assets; and, capital flow volatility”? The good governor, as always, doesn’t explain or has hardly ever presented an attempt to elaborate on the connection between US interest rates and financial stability risks.

He either assumes the crowd understands this or he assumes that they don’t know or don’t care at all. And I believe no one in the circles dares to ask him on these.

That’s because since most in the audience have been either uniformed or are sheer courtiers of the administration, what they see in such statements are halo effects—the content of the speech doesn’t matter at all, what matters is the impression of the messenger.

What the BSP governor has supposedly been averse of can be summed up in a word: CREDIT.

The domestic banking and financial system has over indulged by issuing credit, while the non banking system has absorbed too much credit, both in foreign and local currency denominated liabilities, based on very low interest rates (financial repression) to borrowers regardless of their credit worthiness.

Such democratization of credit expansion has made the system vulnerable to rising interest rates. Even at zero bound, debt levels in and of itself can impair balance sheets of both lenders and borrowers. Rising rates will help, if not accelerate, in exposing of the many unviable projects that have all been dependent on zero bound rates.

The BSP just gave us a recent example.

In their recent survey of lending standards[14] they reported steady and unchanged conditions for overall credit standards for business lending.

But not for the households which according to them have shown signs of tightening (bold mine):  “In particular, banks’ responses indicated stricter collateral requirements and increased use of interest rate floors for all types of household loans. Banks’ responses also showed net tightening of standards on loan covenants (except for housing loans), wider loan margins for credit card and auto loans, and reduced credit line sizes for credit card loans. By type of household loans, a continued net tightening of credit standards for housing loans was noted while credit standards for credit card and auto loans showed some tightening from being unchanged in Q2 2104.Most of the respondent banks foresee maintaining their credit standards over the next quarter. However, some banks expect overall credit standards to tighten slightly due to an anticipated deterioration in borrowers’ profiles and reduced tolerance for risk, among others.

What motivates households and enterprises to borrow? From the same BSP survey (bold mine): “For loans to businesses, the net increase in loan demand was attributed by banks to increased needs for working capital and fixed-capital investments of borrower firms as well as lower interest rates and clients’ improved economic outlook. Meanwhile, the net increase in demand for household loans reflected the low interest rate environment and more attractive financing terms offered by banks.

So household demand for credit continues to rise due to low interest rates but credit quality has been declining. Has the BSP’s response been due also to the rise in 1Q NPLs[15]?

There was also reportedly a net tightening of credit conditions in commercial real estates, again from the BSP: “The net tightening of overall credit standards for commercial real estate loans was attributed by respondent banks to perceived stricter oversight of banks’ real estate exposure along with banks’ reduced tolerance for risk, among others. In particular, respondent banks reported wider loan margins, reduced credit line sizes, and stricter loan covenants for commercial real estate loans. Demand for commercial real estate loans was also unchanged in Q3 2014 based on the modal approach. A number of banks, however, indicated increased demand for the said type of loan on the back of improved clients’ economic outlook, lower interest rates, and increased working capital financing needs of clients.

The BSP first says that there have been steady and unchanged conditions for overall credit standards, but they point to exemptions in consumer lending and commercial real estate as areas experiencing tightening condition due to perceived deterioration in credit quality for households loans and supposed stricter oversight of banks real estate exposure.

At the end of the day whether it is households, non-real estate business or real estate and related businesses the common denominator for all these borrowing and lending activities has been LOW INTEREST RATES.

Why should the BSP worry about US interest rates if the banking system have been sound? The answer simple. The banks have been portrayed to look strong even if they haven’t.

Why? Because the BSP doesn’t really know of the viability or credit worthiness of each of the loans that have been extended throughout the system. And this lack of knowledge is what they admit as “uncertainty” and thus the warning “risks that could challenge… financial stability pressures from repricing of credit; sharp downward adjustments in prices of real and financial assets; and, capital flow volatility”.

They have practically NO idea what happens when there will be a “repricing of credit” and or how intense and scalable will “sharp downward adjustments in prices” and or how volatile capital flow will be. Had they known this won’t even been mentioned.

And as one would note, changes happens at the margins.

The BSP’s recent panic rate hikes have only marginally filtered into the banking system’s credit activities.

Watch how the economic agents act rather than what they say.

Despite the BSP’s actions, the banking system credit activities as of August 2014[16] continue to swell.

While year on year % change of general loans have decelerated last month to 19.12%, it still is the second highest growth rate since January 2013. The highest was in July 2014 at 20.92%. General loans have been growing about three times the economy! How the heck won’t inflation appear at such rate of growth?!

Year on year changes on real estate loans in July was at 17.67% as against 16.76% or a marginal decrease. On the other hand, consumer loans sustained a sharp uptick particularly from June to August or 16.01%, 16.17% and 16.59% respectively. These numbers hardly squares with the BSP survey on bank lending standards.

And the recent jump in loans appears to have reversed the recent declining money supply growth trend. Year on year money supply growth for August bounced backed to 18.5% from last month’s adjusted 17.9%[17].

As a side note, I’d like to say kudos to the BSP’s Economic and Financial Learning Center (EFLC) team for being responsive, accommodative and forthright to my queries. I hope their bosses are like them.

Going back to the BSP Chief’s September 30 speech on growth inclusiveness: “It is also imperative that we focus our efforts on Inclusiveness, the second I. We must create an environment that not only enables more of our countrymen to enjoy prosperity as the economy grows… but also one where they can actively participate in making the economy grow. Indeed, durable economic growth is one that is inclusive. It must cast a wider employment net in a broader set of industries, while remaining entrepreneur-friendly. On the BSP’s part, we continue to strengthen our initiatives to promote greater financial inclusion through regulations that broaden access to financial services and programs that deepen financial learning.

John Maynard Keynes quote on inflation should serve as a wonderful rebuttal to such propaganda[18]

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Just how on earth will “a continuing process of inflation”, in this case by credit expansion in the Philippine banking system via financial repression (negative real rates) policies, where “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens” that “impoverishes many, it actually enriches some” [yes cronies] become part of the inclusive growth agenda?

Beats me, but BSP communications keeps getting more contradictory, obscure and non transparent

BSP Governor Tetangco, Jr Hits on Stock Market and Real Estate Irrational Exuberance

I missed an earlier highly crucial speech last week that underscored the BSP’s Governor Tetangco, Jr’s role as nemesis for the bulls, where he cites his recent and prospective actions[19] (bold mine)

The BSP has done a number of things over the past few months. We have raised reserve requirements, hiked the SDA rate, the RRP rate and then, recently, both the SDA and the RRP rates together.

These we did in response to various factors to achieve the following results:

1. To rein in domestic liquidity growth. M3 growth is now down from above 30 percent to just above 18 percent in July this year. We expect M3 growth to continue on its deceleration path and reach more normal levels later this year.;

2. To help manage the financial stability risks of the over-all low interest rate environment. While we have not seen broad-based asset mis-valuations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield. So far, coupled with changes in reportorial requirements and macroprudential measures, the monetary policy actions appear to have achieved some success in moderating the buildup of “irrational exuberance” in certain market segments.;

3. To help steer inflation expectations Our most recent Business Expectations Survey showed that the number of those who expected inflation to go up in the current and next quarters has increased. In addition, our survey of private sector economists shows inflation forecasts that are precariously close to the upper end of our target range. This is particularly true of forecasts for 2015, for which the NG target is lower at 2–4 percent.Further, our own forecasts are also now higher. We now see 2014 inflation to average 4.48 pct, up from previous 4.33 pct, and 2015 inflation to average 3.79 pct, up from previous 3.72 pct. While most of the reasons cited for the heightened inflation expectations are due to supply side pressures, elevated expectations need to be addressed sooner rather than later. These could fuel second-round effects, which may be more difficult to arrest once they have set in; and

4. To reduce the possible financial stability impact of extended periods of negative real interest rates. Right now because of excess liquidity in the system, the industry doesn’t seem to mind much that real interest rates are negative. But ladies and gentlemen, when the tide turns, those projects that you may have “approved” based on a specific expected value may not provide you the “return” you anticipated. With this in mind, our policy actions have been aimed at helping you manage your own risk appetites.

Let me first start with a quote from the great Austrian economist Ludwig von Mises[20]

Where does inflation start? It starts as soon as you increase the quantity of money. And where does the danger point begin? That is another problem. The question cannot be answered precisely. People must realize that you cannot give a statesman advice: “This is the point up to which you may go and beyond this point you may not go, and so on, you know.” Life is not as simple as that. But what we have to realize, what we have to know when we are dealing with money and monetary problems, is always the same. We have to realize that the increase in the quantity of money, the increase of those things which have the power to be used for monetary purposes, must be restricted at every point. 

Look at the scatterplot chart above of money supply growth rates vis-à-vis CPI rates. The densities between developed and emerging markets (relatively low CPI and low money supply growth) and (high cpi and high money supply growth) emerging markets reveals of the generally positive correlation in the relationship between these two variables or higher money supply growth leads to high CPI.

The Philippines has been noted as extending out of the graph, hence operates as an “outlier”, i.e. having to have too much money supply growth but with suppressed inflation rates.

There are two reasons for this unrealistic inflation data; one is structural. This has been acknowledged by the BSP themselves, where regulatory obstacles have hindered market forces from being reflected on statistics[21].

The second is theoretical; by deliberately keeping inflation numbers suppressed this allows government to cap bond rates and consequently interest rates, therefore sequester invisibly a larger segment of society’s resources.

It’s for both reasons we can’t really depend on government statistics

Yet I have dealt with the supply side decoy or smoke screen for so long which I won’t elaborate here.

Anyway do note of the BSP’s evocative statement “the industry doesn’t seem to mind much that real interest rates are negative”. Yet the monetary authority doesn’t specify which industry/ies has been permissive of negative real rates.

Of course, why would industrial or household borrowers, who are beneficiaries of the negative real rates, complain of the transfer mechanism which they benefit from? The BSP should have asked the savers, the pensioners and the salaried class whose money have been losing purchasing power as asset and consumer prices skyrocket.

They should have asked me how my children’s tuition fees have soared along with food prices!

And take further note, “We expect M3 growth to continue on its deceleration path”.

Well, this isn’t likely to happen if the BSP doesn’t do its job of “real” tightening. By real tightening I mean squeezing out of excess liquidity in the system by bring real rates into positive territory. But can this spendthrift government afford to lose its foster a boom to finance public spending paradigm?

Leaving real rates negative via baby steps tightening will only whet the orgasmic borrow and speculate activities. The perception of scarcity (rates will rise tomorrow so borrow and spend now!) enhances this process. This will compound on the present financial instability risks!

And I just love this…”While we have not seen broad-based asset mis-valuations, the BSP remains cognizant that keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield.”

Now read this: “Some broad equity price indexes have increased to all-time highs in nominal terms since the end of 2013. However, valuation measures for the overall market in early July were generally at levels not far above their historical averages, suggesting that, in aggregate, investors are not excessively optimistic regarding equities. Nevertheless, valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year.

The second quote is from the Fed Chairwoman Janet Yellen[22]

So essentially the BSP chief parrots the Fed Chairwoman Janet Yellen who recently observed, valuation metrics in some sectors do appear substantially stretched, or in Mr Tetangco’s version, we have not seen broad-based asset mis-valuations.

Don’t you love the lack of originality???

Yet the BSP chief acknowledges what the Austrian economists have been warning about: “keeping rates low for too long could result in mis-appreciation of risks in certain segments of the market, including the real estate sector and the stock market as markets search for yield.”

First of all bubbles have never been in the central bank’s dictionary. And because they are not in the dictionary, they have hardly any models built around them. So if there are hardly any models, they nary have a clue on what bubbles are.

Yet they can see or have been told of its symptoms. Either their acknowledgement of symptoms comes from pressure groups (say the BIS) or from their own is something no one can say.

But for the BSP chief to say low rates can result to misappreciation of risks represents music to my ears!!!!

Governor Tetangco has jumped to my ship and is now the nemesis of the bulls (for now)! If Mr. Tetangco means what he says then expect more interest rate increases.

He further notes “when the tide turns, those projects that you may have “approved” based on a specific expected value may not provide you the “return” you anticipated. With this in mind, our policy actions have been aimed at helping you manage your own risk appetites.”

This is what I have been saying for so long. All projects dependent on zero bound will be exposed for what they truly are—unprofitable ventures!

Here is the dilemma, Governor Tetangco mistakenly thinks that managing risk appetites will be an orderly process. That’s where he will be surprised. It’s not going to be orderly but a disorderly process.

The obverse side of every Mania is a Crash!

Stocks and real estate for example feed on each other. The fantastic growth in real estate sector for instance which has been funded by credit has led stock market investors to bid up their shares possibly on credit too. So credit has funded both overvaluations in stocks and in properties. If the BSP tightens significantly then all segments that has substantial gearing exposure, not just stocks and real estate will be jeopardized.

And then he will realize of what we have been saying, Potemkin Villages propped up by credit expansion will remain Potemkin Villages.

So eventually the disorderly adjustment will hit the real economy hard

Here is a prediction, the BSP governor will rescind and recant his hawkishness and turn dove again. But by that time, it will be too late.

The BSP’s chief volte face validates my earlier prediction[23]:

The BSP has been BOXED into a corner.

Option 1. If the BSP tightens then the whole phony credit fueled statistical economic boom collapses. So will be the destiny of free lunch for the Philippine government.

Option 2. If the BSP maintains current negative real rates or invisible subsidies via financial repression to the government through a banking financed boom, then stagflation will deepen and spur higher interest rates despite the BSP’s King Canute rhetoric.

So we are most likely to end up with Option 1 where economic reality via the markets will force the BSP to eventually tighten, or else God forbid, the Philippines suffer even a far worst fat tailed disaster: hyperinflation.

We are now firmly in OPTION 1

---

[1] See Phisix: BSP Panics, Raises BOTH Official and SDA Rates!!!! September 15, 2014

[2] iShares.com iShares MSCI All Country Asia ex Japan ETF

[3] iShares.com iShares MSCI Emerging Markets ETF

[4] See More on the Diverging Market Internals in the US and Global Stock Markets September 27, 2014

[5] See Phisix: The Untold Story of the Two Faces of the 7,400 Historic Highs September 28, 2014

[6] See Periphery to Core Dynamics: IMF Warns of Deepening Emerging Market Slowdown September 23, 2014

[7] Fidelity.com Portfolio Composition: ASEA

[8] See Asian Currencies Tumbles Led by New Zealand dollar and Indonesian Rupiah, Philippine Peso Falls to 45 September 30, 2014

[9] See Has the Hong Kong Protests been Part of the US Pivot to Asia? October 1, 2014

[10] Wall Street Journal Hong Kong Lenders Feeling Pinch of Bad China Loans September 29, 2014

[11] Wall Street Journal Hong Kong Protests Have Retailers and Real-Estate Companies Worried September 30, 2014

[12] Bloomberg.com BLOOMBERG CURRENCY INDEXES

[13] Amando M Tetangco, Jr: Infrastructure, inclusiveness, institutions –raising the Philippines to the next level speech at the Philippine Economic Briefing, Manila, 30 September 2014. Bank of International Settlements

[14] Bangko Sentral ng Pilipinas Bank Lending Standards Remain Broadly Steady in Q3 2014 October 3, 2014

[15] See Phisix: Stagflation Upends Boom Time Politics as BSP’s 1Q Property NPLs Surge! July 28, 2014

[16] Bangko Sentral ng Pilipinas, Bank Lending Grew at a Decelerated Pace in August September 30, 2014

[17] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Rises in August September 30, 2014

[18] John Maynard Keynes Excerpts from The Economic Consequences of the Peace by John Maynard Keynes, 1919. pp. 235-248. PBS.org

[19] Amando M Tetangco, Jr: Convergence in a divergent world speech at the ACI Phils-FMAP-IHAP-MART-TOAP Joint General Assembly, Makati, 23 September 2014. Bank of International Settlements

[20] Ludwig von Mises Chapter 6 Inflation LUDWIG von MISES on MONEY AND INFLATION A Synthesis of Several Lectures p.24

[21] Loc cit September 15, 2014

[22] See Phisix: What Janet Yellen’s “Irrational Exuberance” Speech Implies July 21, 2014

[23] See Phisix: Have You Been Aware of This Week’s Peso Meltdown? March 24, 2014