And as man cannot bear to be without the miraculous, he will create new miracles of his own for himself, and will worship deeds of sorcery and witchcraft, though he might be a hundred times over a rebel, heretic and infidel ― Fyodor Dostoyevsky, The Brothers Karamazov
In this issue:
Phisix 7,800: Peso Smashed, January Remittance Growth Rates Plunges, Short Term Treasury Yields Spike!
-US Dollar’s Domino Effect: Philippine Peso and Malaysian Ringgit Smoked!
-OFW Remittances: Growth Rates Crash in January! Structural Headwinds Compounded by Event Risks
-Short-Term Philippine Treasury Yields Spike as Yields Flatten! Basel Standards are No Guarantee of Adequate Risk Measurement
-Capital Flight from Local Elites? Asian Currencies and CDS Spreads Show Why This Time Won’t Be Different
-Sweden Cuts Rate Announces QE as BIS and OECD Warns on Low Interest Rates!
Phisix 7,800: Peso Smashed, January Remittance Growth Rates Plunges, Short Term Treasury Yields Spike!
Marking the close occurred in a stunning 4 out of the 5 trading days this week!
It’s just horrifying to see how the Philippine stock market has transmogrified into a broken system characterized by mass hysteria and rampant manipulation!
US Dollar’s Domino Effect: Philippine Peso and Malaysian Ringgit Smoked!
In noting of the Philippine pesos’ outperformance, last week I asked, “For now, the Philippine peso now takes on the leadership but for how long?”
The currency markets appeared to have answered my question.
Although the US Federal Reserve’s FOMC dropped the word “patient” from their recent policy meeting, a “surprisingly downbeat outlook” and Fed Chairwoman Ms. Janet Yellen’s implied assurances of stretching an interest rate hike via “doesn’t mean we are going to be impatient” sent the US dollar tumbling. The US dollar even experienced a flash crash! (see right window). Growing accounts of real time flash crashes represents another sign how fragile and vulnerable the current financial markets have been.
So these factors—the Fed’s dovish stance and PBOC intervention—sent Asian currencies rallying hard (see right also see JP Morgan Bloomberg’s Asian Currency Index ADXY). The same factors have likewise accommodated a risk ON environment.
Yet the Philippine peso and the Malaysian ringgit defied the general regional sentiment. Against the US dollar, the peso plummeted 1.19% while the ringgit has been once again crushed, down by 1.3%.
This week’s meltdown has not only erased the gains of the year, but has dragged down the peso to a year to date loss of .2%. Current momentum suggests that the USD-peso may break the 45 levels soon (see right)
Meanwhile, the ringgit’s sustained losses have brought the USD MYR pair to the peak of 2008! (see left)
Aside from the US dollar’s relative strength over most currencies, there are likely internal factors that have led to the pesos’ decline.
OFW Remittances: Growth Rates Crash in January! Structural Headwinds Compounded by Event Risks
This week the BSP came out with a report on personal and cash remittances for the month of January.
Strikingly, personal and cash remittances inched up by ONLY .2% and .5% respectively! This marks the second below 2% growth rate in 3 months!
January’s growth rate crash represents the worst level since January 2009!
Yet the trends of the rate of growth of personal and cash remittances have been on a downhill as noted above.
It would be facile to blame seasonality for this. I can also add the Dodd-Frank ACT 1073 remittance-transfer as potential obstacle to remittance flows as previously discussed.
But a showcase of the January activities since 1990 reinforce the downside trend of growth rates in remittance flows. As one would note from the left graph, since 1998, remittance growth rates have been on a steady decline.
It would appear that the law of compounding and diminishing returns likewise affects remittance trends. Nominal remittance levels have reached size and scale where growth rates have become incremental.
While seasonality and Dodd Frank may have contributed, they are likely to be secondary (epiphenomena) or aggravating factors. But January activities show that seasonal dynamic appear as minor events.
And current conditions like crashing oil prices may have likely been another more significant contributing cause too. As I warned last December[1]
And yet how will the blowing up of the Middle East bubble extrapolate to Philippine OFW remittances? More than half or about 56% of OFWs according to the Philippine Overseas Employment Administration (POEA) have been deployed to this region. Will OFWs (and their employers) be immune from an economic or financial crisis? This isn’t 2008 where the epicenter of the crisis was in the US, hence remittances had been spared from retrenchment. For this crisis, there will be multiple hotbeds. The ongoing crashes in oil-commodity spectrum have already been showing the way.
So the above suggests that the structural declining trend in remittance growth rates seems as being reinforced by secondary causes such as oil prices and possibly the Dodd-Frank statute.
What is the implication of the remittance slowdown?
Well, as I wrote this week[2]:
This partly explains the ongoing pressures in retail activities and the weakening of the consumer household activities (HFCE) as revealed by the 4Q 2014 GDP data provided by the government, as explained here.
Yet ironically, the supply side (housing, shopping malls, hotel and related industries) continues to project consumer trends as perpetually headed to the sky for them to borrow and build with ferocity. For instance, the daughter of the Philippines' richest tycoon anchors her firm's expansion projects largely on remittances as posted here
The end result from the widely divergent expectations and activities will be a huge or massive excess capacity mostly financed by debt!
And whatever strength by the peso, or its outperformance in the region, will be further exposed if such trends continue.
Short-Term Philippine Treasury Yields Spike as Yields Flatten! Basel Standards are No Guarantee of Adequate Risk Measurement
There could have been another factor to last week’s peso meltdown.
Yes symptoms of funding pressures have reappeared in the Philippine treasury markets. Short term rates have massively spiked to return to December levels! That’s just two months after the Philippine government raised $2 billion overseas. The $2 billion loans may have helped temporarily improve February Gross International Reserves now at $81.3 billion.
Yet to apply the BSP chief’s splendid advice to journalists (whom I previously quoted[3]):
Economic numbers rarely tell the complete story when taken at face value. Therefore, a responsible journalist who seeks to offer readers a fuller appreciation of the information will examine the figures within a broader context or against an array of other relevant indicators.
So even if the BSP declares that the Philippine banking system as having “adequate capital levels against risks” for commercial and universal bank and for rural and coop banks, “figures within a broader context or against an array of other relevant indicators” in the prism of the treasury markets suggests that the alleged diminished risk outlook has been inconsistent or incompatible. Said differently, what statistics say and what the treasury markets have signaled have diverged.
Further, the obsession towards statistical or quant models as measures of risks as to declare the system safe has been vastly misplaced.
Proposed changes at the Basel standards or ‘Basel IV’ have already been raising a hubbub at the international banking world.
An officer from the American Bankers Association exposes on the flaws of the Basel standards (as excerpted by Euromoney)[4]. [bold mine]
"As Basel III was an admission that Basel II got things wrong, Basel IV is a clear recognition that there is much that is wrong with Basel III," he says. "Yet the folks at Basel have not yet looked in the mirror and asked whether what is mostly wrong might be happening in Basel, that the simple concept of Basel I, to have some basic global capital standards, has been lost in an effort to over-engineer and micromanage at the global level the fine details of capital standards."
Yet why have some bankers been pushing back on Basel Committee on Banking Supervision’s (BCBS) proposals?
BCBS wants to end the practice of risk-weighting lenders’ exposures by reference to external credit ratings and instead suggests using measures such as capital adequacy and asset-quality metrics on exposures to other banks, for example. For corporates, the BCBS argues a given borrower’s revenue and leverage should determine credit risk weights rather than ratings, with the latter typically discriminating between industries and local-accounting standards.
Bankers see plenty of problems. Since this way of risk-weighting exposure to other banks is determined by common tangible equity ratios and the non-performing assets ratio, it does not adequately take into account divergent liquidity and business-risk profiles, nor differences in supervisory processes under Pillar 2 of the Basel regime, says a senior regulatory adviser to the CEO of a large European universal bank.
The adviser adds: "Credit rating agencies look at a multitude of factors and these metrics are always richer, incorporating thorough timely reviews, and engagement with counterparties and agencies. You can also never empirically replace these qualitative assessments.
The answer to the push back; because there is no uniformity in the risk profile of each loan portfolio.
To repeat “You can also never empirically replace these qualitative assessments”. Hmmm
Doesn’t this resonate with what I wrote back in October 2014[5]?
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.
Even bankers and regulators see Basel standards as inadequate measures of risk. So the citation of accounting metrics or statistics does nothing to uphold the supposed soundness of the system.
Going back to the Philippine treasury markets, the spike in short term yields has once again steepened the yield curve flattening dynamics.
Such flattening dynamic posits for an implied tightening of the liquidity environment as banks has less incentives to lend in an economy that has become increasingly dependent on debt.
Again considering that the Philippine treasury markets have been tightly held or controlled by the Philippine government and their banking sector vassals, those short term yield spikes signify as signs of growing fissures in the system.
And could the peso selloff have been also prompted by increasing concerns over risks build up despite the government and media’s attempt to whitewash them?
Capital Flight from Local Elites? Asian Currencies and CDS Spreads Show Why This Time Won’t Be Different
Two more items.
Has the local elites been seeking refuge away from the peso and domestic equities?
The BSP’s Balance of Payment report[6] says that in 4Q 2014 and in the entire 2014, the financial accounts registered net outflows.
I quote below the BSP’s explanation per category and put an emphasis on the activities of residents
4Q Direct investments (bold added): The direct investments account yielded higher net outflows of US$977 million in Q4 2014, more than double the net outflows of US$471 million in Q4 2013. Residents’ net acquisition of financial assets of US$2.4 billion exceeded their net incurrence of liabilities (foreign direct investments in the Philippines or FDI) of US$1.4 billion. This developed as equity capital placement abroad by resident non-banks surged to US$1.7 billion from US$226 million.
4Q Portfolio investment holdings: The portfolio investments account posted net outflows of US$1.2 billion in Q4 2014, 7.5 percent higher than the net outflows in Q4 2013. This development was reflective of the prevailing volatility in financial markets amid lingering uncertainty over the global growth prospects. Residents’ net acquisition of financial assets amounted to US$930 million, a reversal of the US$81 net disposal of financial assets in Q4 last year on account of net placements by domestic deposit-taking corporations (US$777 million) and the central bank (US$171 million) in debt securities issued by non-residents.
4Q Other investment accounts: The other investment account recorded net outflows amounting to US$2.3 billion in Q4 2014, more than five times the US$426 million registered in the comparable quarter last year. Net outflows stemmed mainly from higher net acquisition of financial assets which reached US$4 billion from US$1.2 billion in Q4 2013, due largely to higher residents’ deposit placements (US$2.7 billion) and net lending (US$1.4 billion) abroad.
The same Balance of Payment report for 2014 reveals the same dynamics.
Direct investments: The direct investment account reversed to net outflows of US$789 million from net inflows of US$90 million a year ago. This developed on account of the 91.7 percent rise in residents’ net acquisition of financial assets to US$7 billion from US$3.6 billion due to resident corporations’ net placements in both equity capital (US$2.9 billion) and debt instruments (US$4 billion) abroad.
Portfolio Investments: Portfolio investment account recorded net outflows of US$2.5 billion during the period, a reversal of last year’s net inflows of US$1 billion. This was due to residents’ net acquisition of financial assets of US$2.5 billion, from a net disposal of assets amounting to US$638 million combined with non-residents’ net withdrawal of investments amounting to US$3 million, a reversal from the net placements of US$363 million in 2013.
Other accounts: The net outflows in the other investment account doubled to US$6.9 billion from US$3.4 billion in 2013 on account of increased net placements in currency and deposits abroad by resident banks and non-bank corporations, amounting to US$2.7 billion and US$1.4 billion, respectively), and to higher resident banks’ net lending of US$2.7 billion.
Have domestic elites been bullish on the outside, but bearish in the inside? Have they been engaged in ‘do as I say, but not as I do’? So why the seeming outgrowth in capital exodus?
Finally, a lot of people from the formal sector have come to believe that the Philippines have become invincible to exogenous factors as to price domestic financial assets to perfection.
This week’s peso activity shows why this won’t be true, and add to this the above, the cost of insuring government debt via ASEAN 5 year CDS spread from Deutsche Bank.
While so far the Philippines has outperformed, the seeming near synchronized movements of CDS spreads shows of the relevance of the region’s influence.
The above only shows that this time won’t be different.
Sweden Cuts Rate Announces QE as BIS and OECD Warns on Low Interest Rates!
As I have been saying, central banks have aggressively embarked on crisis resolution measures even as global stock markets have run amuck.
The Swedish central bank cut rates into negative territory last week, as well as, announced the Swedish version of QE.
From the New York Times[7]:
The executive board of the Swedish Riksbank said that it had cut its main rate target by 0.15 percentage point to minus 0.25 percent, and that it would buy government bonds valued at 30 billion kronor, or about $3.5 billion, over the next few months.
The bank said in a statement that it saw signs “that inflation has bottomed out and is beginning to rise,” but that the strength of the currency “risks breaking this trend.” The measures on Wednesday were intended “to support the upturn in inflation,” said the Riksbank, which signaled its “readiness to do more at short notice.”
The actions of the Swedish Riksbank marks the seventh rate cut by global central banks for the month of March and 25th for the year based on the tabulation of the CentralBankRates.com. This has been a count for rate cuts alone and excludes other non interest rate actions.
It is as if we exist in two different worlds
Yet when the crisis emerges, global central banks would have little or no ammunition left to mount rescues as they have been desperately frontloading them.
“Lower oil prices and widespread monetary easing have brought the world economy to a turning point, with the potential for the acceleration of growth that has been needed in many countries,” said OECD Chief Economist Catherine L. Mann. “There is no room for complacency, however, as excessive reliance on monetary policy alone is building-up financial risks, while not yet reviving business investment. A more balanced policy approach is needed, making full use of fiscal and structural reforms, as well as monetary policy, to ensure sustainable growth and public finances over the longer term.”
The Bank for International Settlements has been consistently, persistently determined to warn of a risk buildup since 2014.
In the media briefing for the BIS Quarterly Review[9], Mr Claudio Borio, Head of the Monetary & Economic Department, goes on the record to caution the world from current set of policies. (bold mine)
In the process, central banks have shown that the so-called zero lower bound on interest rates is quite porous. Negative policy rates at the short end, coupled in some cases with large-scale asset purchases at the longer end, have pushed both term premia and nominal yields firmly and farther into negative territory. If this unprecedented journey continues, technical, economic, legal and even political boundaries may well be tested. The consequences should be watched closely, as the repercussions are bound to be significant, on the financial system and beyond.
The unforeseen technical, economic, legal and even political boundaries repercussions from inflationism reminds me of this majestic quote from the high priest of inflationism[10] (bold mine)
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.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
How so very relevant such quote have been today.
Has central banks implicitly functioned as communist Trojan horses whose policies could have been engineered to destroy the residual capitalist structure of the world?
.bmp)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)
.png)