Infographics: Canada's Hissing Housing Bubble

The Visual Capitalist on Canada's hissing housing bubble:

“Markets can remain irrational longer than you can remain solvent.” – John Maynard Keynes

The last time we gave a good run down of Canada’s housing market was in May 2015, when we noted that The Economist gave it the dubious title of the most overvalued housing market in the world. Since then, in just 10 months, prices in Vancouver and Toronto have soared to marks that are 14.1% and 8.7% higher respectively.

Frothy prices, million-dollar shacks, and buying frenzies have prompted world-class short-sellers to come out of the woodwork. For a speculator such as Marc Cohodes, who advises hedge funds on Wall Street that want to bet against the Canadian housing market, this type of classic bubble behavior is music to his ears.

“The cross currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” says Cohodes, who was once profiled as Wall Street’s highest-profile short-seller by the New York Times. “A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street.”

Mr. Cohodes has recently said that Canadian real estate has reached “peak insanity”, and it’s part of the reason that investors around the world are trying to find a way to bet against the market.

Home Capital Group, one of Canada’s largest financial institutions, is now the most-shorted stock on Canadian exchanges. The same alternative mortgage lender recently also came under scrutiny for suspending 45 of its brokers for falsifying borrower income.

DOMINOS FALLING

Just as falling oil prices helped to drag the Canadian dollar down, the “lower for longer” price environment for crude has had a similar effect on house prices in the Prairies. Homes in Fort McMurray, the epicenter of the Canadian oil sands, have crashed an average of $117,000 in just a year.

Meanwhile, price tags in the once-strong housing market of Calgary have declined from their peak in October 2014 by -5.4%. The city, which is a financial center for Canadian energy, is bracing for a particular tough year ahead as well. Houses are spending more time on the market, and sales volume and prices continue to fall.

But it’s not just Canada’s oilpatch that is starting to see the writing on the wall. Toronto, which has helped to buoy the rest of the country’s housing growth for years, has also started to cool down.

According to the Teranet – National Bank House Price Index, prices have risen just 0.3% since October in Canada’s largest real estate market. With the prospect of rising interest rates in the future, it’s not expected to heat back up, either. In fact, TD Bank expects that Toronto will have a “moderate” decline in 2017.

AND THEN THERE WAS ONE…

For investors bullish on near-term gains in Canada’s housing sector, there is one last hope that resides on the West Coast.

Vancouver’ housing market sailed again in February, shooting up a record 3.2% in just one month. This is the best month for the market since August 2006. It was so good, in fact, that it single-handedly propped up Canada’s national index for housing.

Canada’s market as a whole saw gains of 0.6% in the month, but it would have dropped to a lacklustre -1.1% without the inclusion of Vancouver in the 11-city index.

The only problem?

The city, which has been a primary beneficiary of rampant foreign buying, is continually cited as the market most ripe for a deep correction, as it continues to defy all common sense.

While Keynes is right in that markets can remain irrational for longer than one can stay solvent, it seems that Canadian housing has turned a corner: regional markets in other parts of the country have stumbled, and the last remaining pillar is Vancouver.

It may continue to buck the trend for now, but it is a wobbly pillar at best.

It's not just Canada, like stocks, debt financed housing bubbles as consequence from ZIRP, QE and NIRP have almost been everywhere.

Courtesy of: Visual Capitalist

Infographics: Deaths of Roman Emperors vs. Coinage Debasement (Inflationism)

The Visual Capitalist showcases on the death of Roman emperors with that of inflationism. 

The Money Project is an ongoing collaboration between Visual Capitalist and Texas Precious Metals that seeks to use intuitive visualizations to explore the origins, nature, and use of money.

Correlation does not necessarily imply causation.

In other words, just because two sets of data may follow a similar pattern, it does not mean there is any direct causal relationship.

However, as we were assembling our previous research on Currency and the Collapse of the Roman Empire, we noticed something that was too uncanny to skip past: during the 113-year stretch of time from 192 to 305 AD, an astonishing amount of Roman emperors (84%) were either brutally murdered or assassinated.

This, of course, was a particularly troubled period for the Romans. During the Crisis of the Third Century (235 to 284 AD) specifically, the combined pressures of invasion, civil war, plague, and economic depression threatened to bring down the Empire.

Coincidentally, during this same time frame, the silver denarius went from having 2.7 grams silver to being “silver” in name only. Base metals such as bronze and copper were added to the silver coins to debase the currency, and by the year 300 AD, a silver denarius (or its equivalent) had only a trace of silver left.

Notes on the Data

Data on Roman Emperor deaths is from this resource, and the debasement of silver coinage was previously covered by Armstrong Economics.

Roman Emperor deaths or abdications included in the visualization are ones that occurred between the birth of the Empire (27 BC) to the fall of the Western Roman Empire (476 AD). It’s also worth noting that, according to the source, there is a significant amount of emperors who had fates that are unclear or died under mysterious circumstances, and therefore the list may not be entirely accurate.

This has not just been correlation. The main untoward effects of inflationism is the destruction of society. And the destruction of society entails not only economic hardships but such decay spreads to the socio-political spectrum as well. So political unrest, revolts and wars are consequences of inflationism. Of course, since inflationism is political, funding wars or military campaigns could be a reason why governments indulge on this.

Two important quotes

From John Maynard Keynes (The Economic Consequence of Peace):  (emphasis added)

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.

From Ludwig von Mises (Theory of Money and Credit): (bold mine)

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e. of anti-democratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.

Courtesy of: The Money Project

Quote of the Day: More Socialism Means Less Real Democracy

From economic professor Sandy Ikeda at the FEE.org:

The greater the degree of central planning, the less the authority can put up with deviation and individual dissent. I also realize that there is more than one dimension along which you can trade off self-direction for direction by others, and some of these dimensions do not involve physical coercion. For example, groups can use social or religious pressure to thwart a person’s plans or shrink her autonomy, without resorting to physical aggression.

But there is no denying that along the dimension of physical coercion, which is the dimension along which governments have traditionally operated, the more coercive control there is by an outside agency, the less self-direction there can be. Coercion and self-direction are mutually exclusive. And as government planning supplants personal planning, the sphere of personal autonomy weakens and shrinks and the sphere of governmental authority strengthens and grows. More socialism means less real democracy.

Democratic socialism, then, is not a doctrine designed to protect the liberal values of independence, autonomy, and self-direction that many on the left still value to some degree. It is, on the contrary, a doctrine that forces those of us who cherish those liberal values onto a slippery slope toward tyranny.

US Pollitics: Will Donald Trump Spur the Demise of the GOP? Will a New US Political Structure Emerge?

The Donald Trump phenomenon seems to have caused a Richter scale 7.0 earthquake on establishment politics... 

Caricature from Ben Garrison/hat tip zero hedge

Here are some noteworthy quotes on 'The Donald Phenomenon'

From analyst Martin Spring: (bold mine)

Without Ohio’s 66 delegates, Trump now faces an extremely difficult path to reach the majority of delegates he needs to avoid a “contested” GOP convention. So the establishment looks like it will win and no candidate will enter the convention with a majority of delegates locked up. So after the first ballot, they are free to vote for whoever the establishment wants. It looks like the computer may be right after all. This is beginning to appear to be a very insane situation. The last time no candidate had the required amount for a nomination was 1976. Under the rules of the GOP, all these primaries were pointless. Delegates can choose one of the candidates who ran, or someone else entirely – Romney?

With the people voting for Trump, the Republican Party may have to face a huge, strong anger backlash from his supporters. We are more likely to see a third party candidacy from Trump himself. The establishment will not have an outsider in that office so Trump might as well run third party to illustrate the corruption. The Republicans prefer Hillary to Trump any day of the week. The establishment fears ending elections that cannot be bought by their supporters, for their families might get fired from cushy jobs. Trump would not just sign whatever bill was put before him...

Someone like Trump presents a huge threat to the establishment. They would have to assassinate him because he got in their way. The establishment might try blaming Cuba again or someone else they really do not like. The talk behind the curtain is clear— hand it to Hillary and everything remains intact.

So a Republican split is looking more likely. They have drawn the line in the sand. By no means will they accept Trump. He might as well begin forming a third party. What is going to be exposed is that we do not live in a Democracy. As long as the people vote for their groomed candidates, the pretense is fine. Now when it threatens their existence, well it’s time to bring the grapes of wrath down upon everyone. Their mistake: they assume this will all blow over. Where they are wrong is that to defeat Trump, they must expose the truth. It’s their game and they make the rules. Your vote really means nothing to them. I suspect this is step one in what the computer warns will be an entirely new political system ahead.

From Libertarian author Robert Ringer: (bold added)

But make no mistake about it — all members in both wings of the party fully understand the importance of the theater aspect of the political game, never losing sight of the fact that their overarching, joint objective is to stay in power. Everything else about the game is secondary. The unspoken understanding among Demopublicans is, “You scratch my back and I’ll scratch yours. And if you refuse to play the game, you can be sure that you won’t be around long.”

Nevertheless, the Republican wing of the party has been dying a slow death since the end of the Calvin Coolidge era. Coolidge was the last great U.S. president, a fervent believer that the government’s role was to stay the hell out of the way, hence his slogan: “The business of America is a business.”

But when Coolidge handed the freedom baton to Herbert Hoover, the downward spiral began. Hoover was the George W. Bush of his time, offering little resistance to the big spenders in the Democratic wing of the party and paving the way for Franklin D. Roosevelt, the first president to fundamentally change America.

Like the stock market, there have been a few upticks here and there, most notably under Ronald Reagan, but the long-term trend line for America has been downward. And since the first anti-American president appeared on the scene in 2009, members of the Republican wing of the Demopublican Party have not even made a pretense of opposing policies that are specifically intended to collapse the economy.

As a result, everything has been going along just fine for the anti-American crowd for seven years, with the Demopublicans moving ever closer to fascist control of the populace. Then, suddenly, from out of nowhere that damn Donald Trump came along and started threatening to burst the Beltway bubble. Of course, the establishment didn’t take him seriously at first, which is likely to go down in history as their Waterloo mistake.

Like Napoleon, they were breathtakingly arrogant and, as a result, completely miscalculated the strength of their sworn enemy — the American people. Now that Republicans realize they made a terrible mistake in mocking and dismissing the chosen leader of the masses, The Donald, they have become increasingly frantic.

It’s become a real-life version of Road Runner (Trump) and Wile E. Coyote (establishment Republicans). Every time the latter thinks they’ve convinced Republican voters that Trump is a fraud, a phony, and/or an unknowledgeable fool, they wake up in the middle of the night to the haunting sounds of “Beep! Beep!”

I’m hoping that Trump’s great contribution to America will be the official end of the pompous Republican wing of the Demopublican Party — the wing that has brought us such frauds as Recreant Romney, Mush McCain, Mooch McConnell, and, more recently, Robo Rubio. Make no mistake about it, the power brokers behind the scenes are still determined to maintain the status quo, but there’s a good chance that their long-running scam is finally coming to an end

Will the Trump phenomenon expose on the populist fraud called Democracy which the establishment has used as camouflage to protect their interests?

From conservative author Pat Buchanan (emphasis mine)

What the co-conspirators of Sea Island were up at the Cloisters was about as religious as what the Bolsheviks at that girls school known as the Smolny Institute were up to in Petrograd in 1917.

From what has been reported, it would not be extreme to say this was a conspiracy of oligarchs, War Party neocons, and face-card Republicans to reverse the results of the primaries and impose upon the party, against its expressed will, a nominee responsive to the elites’ agenda.

And this taxpayer-subsidized “Dump Trump” camarilla raises even larger issues.

Now America is not Russia or Egypt or China.

But all those countries are now moving purposefully to expose U.S. ties to nongovernmental organizations set up and operating in their capital cities.

Many of those NGOs have had funds funneled to them from U.S. agencies such as the National Endowment for Democracy, which has backed “color-coded revolutions” credited with dumping over regimes in Serbia, Ukraine and Georgia.

In the early 1950s, in Iran and Guatemala, the CIA of the Dulles brothers did this work.

Whatever ones thinks of Vladimir Putin, can anyone blame him for not wanting U.S. agencies backing NGOs in Moscow, whose unstated goal is to see him and his regime overthrown?

And whatever one thinks of NED and its subsidiaries, it is time Americans took a hard look at the tax-exempt foundations, think tanks and public policy institutes operating in our capital city.

How many are like AEI, scheming to predetermine the outcome of presidential elections while enjoying tax exemptions and posturing as benign assemblages of disinterested scholars and seekers of truth?

How many of these tax-exempt think tanks are fronts and propaganda organs of transnational corporations that are sustained with tax-deductible dollars, until their “resident scholars” can move into government offices and do the work for which they have been paid handsomely in advance?

How many of these think tanks take foreign money to advance the interests of foreign regimes in America’s capital?

We talk about the “deep state” in Turkey and Egypt, the unseen regimes that exist beneath the public regime and rule the nation no matter the president or prime minister.

What about the “deep state” that rules us, of which we caught a glimpse at Sea Island?

Has the Trump phenomenon been the "karma" from US foreign imperialist backdoor policies or US government's meddling abroad?

Or could it be that the Donald may be just be another Trojan horse?

From Bill Bonner: (underscore mine)

But we find it hard to imagine that The Donald hasn’t already made a deal with the “powers that be.”

His career was forged in the white heat of the building trade – with mafia-run unions, along with banks and regulators in Las Vegas and New York hammering him.

He denies it. But he depends on all of them – the government, the banks, and the system of Bubble Finance – to keep his fortune intact.

He knows how important they are. And he knows how they operate.

Donald claims to be one of the greatest dealmakers in history. It is hard to imagine that he hasn’t made the most important deal of his life.

Central bank inflationism seem to have spread to drastically affect even the political spectrum. 

And yet the Trump, Europe's refugee crisis, Europe's rise of right wing politics, territorial disputes, Middle East crisis, Brexit and many more seems just the appetizer.

Charts of the Day: Emerging Market Debt: Up Up Up and Away!

With the world's zero bound standard PLUS NIRP for developed economies, ballooning debt should be a natural consequence to such policies.

Writes the Financial Times: (bold fonts added)

Levels of debt in emerging markets continue to rise and are becoming a source of “significant concern”, the Institute of International Finance warned on Wednesday.

Total government, household, financial sector and corporate debt in emerging markets rose $1.6tn last year to $62tn, or more than 210 per cent of gross domestic product, according to the IIF, which represents global banks and other financial institutions. It happened even as developed markets reduced their overall debt by an estimated $12tn last year, to about $175tn.

“Total debt in EMs is high and getting higher,” said Hung Tran, the IIF’s executive managing director. “This will inhibit the ability to borrow to support growth, and the need to delever in the future will be a strong headwind to future growth.”

Mr Tran said the IIF’s figures were consistent with those of the Bank for International Settlements, which said recently that dollar-denominated lending to EMs had peaked in the middle of last year and subsequently fallen for the first time since the global financial crisis.

The BIS, the central bank of central banks, warned of a vicious circle of deleveraging, financial market turmoil and a global economic downturn.

“Many non-financial corporations in emerging markets and especially in China have paid down their foreign currency debts so the BIS is correct,” said Mr Tran. “But they have increased their local currency debts by more than the amount they have paid down so net on net the stock of debt continues to increase everywhere, particularly in China.”

Companies in developed markets reduced their level of debt to GDP by 0.4 percentage points during 2015 to 87.4 per cent, the IIF’s figures show, while those in emerging markets added 6.7 points to reach 101.3 per cent of GDP. The IIF’s figures are for 19 emerging markets; in those countries taken together, corporate debt rose more than $1.9tn in 2015, to more than $25tn.

Surging debt on lower growth: have these not been ingredients which crisis are made of?

Phisix 7,100: More Statistical Mirages and An Eight Issue Powered Vertical Rally

Two dismal months for financial markets may give way in March to a relief rally for assets such as global equities, as some key central banks (the People’s Bank of China, the European Central Bank, and the Bank of Japan) ease more, while others (the Fed and the Bank of England) will remain on hold for longer. But repeated eruptions from some of the seven sources of global tail risk will make the rest of this year – unlike the previous seven – a bad one for risky assets and anemic for global growth.—Nouriel Roubini

In this issue

Phisix 7,100: More Statistical Mirages and An Eight Issue Powered Vertical Rally

-Similarities and Differences of 2015 and 2016

-January’s Industrial Production: Real Boom or Statistical Pump?

-Government’s Building Permit Data Shows of A Surprise: Stagnation in Construction Activities in 2015!!

-BSP’s Politically Correct FDI Report and the Foreign Exchange Inventory Spike in February GIR Data

-Unintended Consequence: ECB’s Bazooka Powered the Euro and Asian Currencies Higher!

-Phisix 7,100: EIGHT Issues Have Led the Vertical Rally

-Bidding Frenzy Amidst Decaying Fundamentals: Ayala Corp’s Topline Revenue Fumbles! AEV Posted Decline in 2015 Income Growth Rate!

Phisix 7,100: More Statistical Mirages and An Eight Issue Powered Vertical Rally

Similarities and Differences of 2015 and 2016

At the advent of 2015, the consensus predicted that the year was bound for not only for munificence but for economic nirvana. The statistical economy would continue to post growth rates in line with their elevated expectations such that corporate earnings growth for listed companies would soar to the mid teen levels. These had been used to justify a serial pump on prices of Philippine stocks.

In a little over three months, the headline index soared by 12.4% from the year’s start to hit an acme at 8,127.48 in April 10, 2015. Yet the race to landmark highs had been unaccompanied by the general market.

Within this period, clowns masquerading as economic ‘experts’ had been unabashedly shouting at the top of their lungs that the Philippines had attained newfound prosperity through a “this time is different” economy. Some went on to aggressively revise their forecasts growth projections for returns on Philippine assets upward. Also some believed that political efforts were responsible for such a feat. And because of the certitude of continuity, some ‘experts’ even implicitly heckled at those who thought otherwise.

Yet after the April breakthrough event, things began to turn murky. The Phisix started to lose ground with no apparent reason. The peso also exhibited signs of strains. The flattening yield curve seemed headed for inversion.

All these occurred even while economic and financial headlines remained mostly sanguine despite some instances of blemish. GDP numbers climbed. Media focused on corporate headlines which exhibited G-R-O-W-T-H. However, the Phisix continued to flounder.

Then the August crash came. Media and experts rushed to pin the blame on exogenous forces, in particular, China.

Automatically, bulls came out strongly to push the PSEi from 6,600 back to 7,000. The PSE even celebrated the return of the 7,000 to highlight the economy’s “resilience”. Yet the irony has been that despite the claims of “resiliency” , the PSE had to censor 2Q performance of listed firms, and eventually even the third quarter performance because souring numbers percolated!

Meanwhile, bizarrely mainstream media mounted a two week PR blitz to promote the real estate sector during the last quarter of 2015. As it turned out, the reason for such media campaign had been to shore up the sector which was palpably suffering from incipient weakness.

The headline have been seen critical to the ‘animal spirits’.

So the government has not only resorted to the inflation of the GDP by toying around with base numbers, the Bangko Sentral ng Pilipinas (BSP) had to even stunningly recast the two years of OFW remittance data set in order to skirt the issuance of reports which had BIG NEGATIVE numbers on it, specifically October and November’s monthly data.

At the close of 2015, contra the consensus, the Phisix closed with a 3.85% deficit.

Importantly, the year ended with establishment and the government vehemently denying all forms of deficiency by the embellishment and or expurgation of data which did not conform with the G-R-O-W-T-H agenda, the rampant of manipulation markets* and by the arrant misrepresentation of actual financial and economic conditions.

*This week’s buying binge included three fantastic sessions last minute Viagra Pump.

But the miseries of the Phisix didn’t stop there. Again despite the much touted economic “robustness”, the year 2016 was baptized with a crash! But this time the meltdown led the headline index straight into the bear markets.

Moreover, despite desperate attempts to camouflage fundamental shortcomings, infirmities have surfaced. For instance, PLDT reported a collapse in 4Q earnings which helped dragged down its 2015 performance by a third. In spite of the rhetorical legerdemain, the PSE’s largest firm SM Investments posted a ZERO net income growth for 2015 as topline growth fell hard!

But even with such revelation, the Phisix has rallied with vehemence to the upside. So what have been the similarities and differences between today and 2015? Or what justifies today’s panic bidding?

The similarities: The upswing in early 2015 and today have all been mainly anchored on rabid denial of any fundamental shortcomings. Importantly such has underpinned the casino’s impulse: HOPIUM.

The differences: The rally to record highs in 2015 came with sparse signs of fundamental deficiencies. Today’s rally has been transpired amidst signs of increased strains in fundamentals.

Another difference, the use of misinformation to support such denials appears to have become more pronounced in 2016.

January’s Industrial Production: Real Boom or Statistical Pump?

The Philippine government announced that January industrial production growth rates zoomed by a fantastic 26.5% year on year.

I question this data on three grounds: the market for production output, manufacturing input prices, and banking system’s manufacturing loan growth.

Here was the government report¹: (bold added) 1) Value of Production Index rebounds in January 2016: Value of Production Index (VaPI) for total manufacturing significantly rose to 26.5 percent in January 2016 compared with the negative 1.1 percent in January 2015, according to the preliminary results of the Monthly Integrated Survey of Selected Industries (MISSI). This was brought about by the three-digit growth experienced by chemical products (309.6%), particularly for drugs and medicine sub-sector. Other major sectors that pulled up the performance of VaPI were tobacco products (49.6%), food manufacturing (19.1%) and beverages (11.7%). 2) Volume of Production also exhibits two-digit growth Volume of Production Index (VoPI) likewise posted 34.3 percent increment in January 2016 compared with 2.6 percent during the same period last year. Chemical products contributed significantly to the growth with 312.4 percent, followed by major sectors that registered two-digit growth in VoPI, namely: tobacco products (49.4%), machinery except electrical (23.6%), food manufacturing (20.2%), electrical machinery (19.2%) and beverages (10.1%).

Intriguingly, despite the 26.5% G-R-O-W-T-H, only 6 out of the 20 sectors or 30% of the manufacturing subsectors posted positive while the rest suffered contraction.

The implication has been that only ‘some’ of the 6 sectors, accounted for the largest segment of the industrial production survey, to have overwhelmed the general conditions. To be specific, that some may in fact be a single industry, chemicals (drugs and medicine).

So just where have all such jump in production been directed at?

January’s export numbers reveals of a NEGATIVE 3.9% year-on-year growth. This implies that the export sector remains in a growth recession.

Nevertheless, the surge in January’s chemical production hardly seems to have found an export market. That’s because based on January’s numbers, chemical exports contracted by a staggering 34.6% (see bottom)! So perhaps part of January output will show up in February numbers. That’s an ‘if’.

So if the January’s production blitzkrieg has hardly been for exports then it must have been for local consumption.

But then why the sudden upsurge in chemical production (mainly for drugs and medicine)? Has there been an epidemic to have incited an explosion in the demand for domestically produced drugs? This can hardly be about the Zika virus. There is no treatment or vaccine available for the Zika virus. Besides, testing kits for the Zika virus has not been made commercial, so these are limited to research centers in the US.

Yet growth rates of chemical production during the last quarter were at October -2.1%, November 9.4% and December 10.5%. Meanwhile, the government’s health CPI stood at wow (!) an astounding constant 2.99% in January 2016, in December, November and October! In short, those constant CPI monthly numbers do not support a supposed explosion in demand for health products or services.

Heck, constant CPI Health numbers??? This exhibits evidence that the government’s numbers have not just been derived from fictitious surveys but numbers churned out from econometric models unrelated to the real world!

So it unlikely that the swelling of chemical production for January have been about a permanent substantial upswing in (consumer) demand.

The other possible factor could be about tobacco production. But changes in tobacco production had been “normally” volatile. For the last semester of 2015 the government’s monthly numbers were: August +25.2%, September +36.3%, October 131.3% November +54.1% and December -3.3%.

The gyration of production numbers somewhat resonates with the government’s measure of tobacco CPI. Tobacco CPI seems to have consistently sustained high rates of increases (year on year) as noted over the same period: August 4.4%, September 4.1%, October 4.3% November 4.9% and December 5.7%.

Curiously, such high rates of tobacco CPI occurred even when general CPI hit a low of .4% in September and .6% in August.

This implies that while tobacco production and CPI may have reflected on economic forces (surge in demand relative to supply, that spilled over to production), the other possible explanation for the sharp fluctuations could be from distortions impelled for by excise taxes. Excise taxes for tobacco products are increased 4% annually since 2013.

And yes, do note that the sharp growth oscillations in tobacco production such as in October and November which hardly boosted industrial production growth rates at NEGATIVE 9.2% and +1%, respectively.

So tobacco production was barely a factor to January’s surge. The other growth rates have been insubstantial enough to contribute to the abrupt boom in January production numbers. This most likely means that January’s industrial production data spike had been based on single industry: drugs and medicine!

So tweak one industry’s growth numbers to project a boom????!!! (looks like the PSEi)

Yet a colossal improvement in manufacturing activities should have eased on the prolonged deflationary pressures on producer prices or prices of manufacturing inputs.

But that didn’t just happen! The government’s measure of January’s producers’ prices shows of a -6.0% year on year and -1.5% month on month. Such hardly signifies any improvement from the previous rates at all (see left). In short, from the perspective of producers’ prices, there was barely a tinge of demand pick up in production activities.

Moreover, production activities need to be funded. Question is how was January’s industrial production boom financed?

Seen from the banking system, while the January’s loan growth to the manufacturing sector modestly improved to 5.49% year on year, this seems hardly the scale of funding required for the sharp upturn in industrial activities (see right). As example, the banking sector’s loan to the manufacturing industry posted an 8.5% growth rate in June 2015. But industrial growth rate over the same month was a NEGATIVE 7.3%!

So if the government’s numbers were a reflection of reality, then this means financing came from elsewhere. Perhaps it was derived from the pockets (savings) of the owners of the manufacturing outfits. Oddly, just how can this happen when in 8 out of 9 months (as of December) industrial output showed contraction, or when manufacturers must have incurred sustained financial losses?

Perhaps too that credit was provided by non-banks: credit from suppliers, buyers or other non bank entities.

You see, in the statisticians’ world, prices have little relevance on how resources are allocated. So they end up with numbers on causally related variables which are brazenly self-contradictory.

Government’s Building Permit Data Shows of A Surprise: Stagnation in Construction Activities in 2015!!

In today’s world, every headline with a PLUS sign on it has served as a Pavolvian conditioned stimulus to prompt the public to panic buy the stock market

The government declared that approved building permits construction activities expanded by 7.5% in Q4 2015². So media and their favorite experts used this as pretext to declare on how splendid construction activities had been.

Yet positive headlines are great to a crowd who do not bother to ask.

On a quarterly basis, year on year growth performance by ALL categories (with the exception of the number of residential permits), namely, number of approved permits, floor area and total value for residential and non-residential permits have been TRENDING DOWN for the last two years!!

The government’s data revealed that 4Q’s construction residential permit growth at 14.7% had primarily been driven by single-type houses (25.4%) and other types of residential constructions (69.6%), while duplex/quadruplex (-51.1%), residential condominiums (-34.8%) and apartment/accessoria (-5.6%) dragged down on government’s index.

Note of the pivotal shift in last quarter’s activities particularly from business residential construction to private, most likely household, construction.

Meanwhile, the 5.6% growth in non-residential construction permits were mostly from commercial buildings (12.6%) and other types of non-residential constructions (143.8%) as “ all other types of non-residential constructions showed decrements in number”.

Since the government uses the number of permits to discuss or report on the headline activities, it is easy to generate growth numbers (upper window). However, when seen from floor area and value those growth scenarios drastically changes.

Over the same period, in the context of floor area, residential growth shrank by .92% while non residential growth bulged by 7.75%. Total FA growth inched up by only 2.5%! (see middle pane)

Data of construction building permits from PSA can be seen here.

In terms of value, residential growth eked up by only 1.16%, while non-residential growth contracted by a huge 6.47%. Total value shriveled by an astounding 5.24%! (lower pane)

The significant DECREASE in floor area and the NEGATIVE value from government’s 4Q construction building permit activities points to a hefty reduction of big scale construction projects which had been partly offset by the G-R-O-W-T-H of mom and pop projects. This is aside from spending on private household construction.

In short, PSE companies have spent significantly LESS in securing construction permits during the 4Q! Awesome!

Moreover, 4Q construction activities, which was negative in value based on approved permits, has hardly reflected on government’s own metric for the industry’s official GDP.

When I aggregated the quarterly numbers to generate its annual performance, we get a bigger surprise: The total number of construction approved permits popped up by a puny 2.61% in 2015! Meanwhile, Floor Area declined by a marginal -.77% as Value plummeted by an awesome 10.8%! (see left)

Nice G-R-O-W-T-H numbers eh???

And it has been interesting to see how the rate of growth in the banking system’s construction loan portfolio has somewhat dovetailed with building permits. (see right)

The peculiar thing has been that despite the substantial decrease in construction activities (again based on building permit values), the banking sector’s portfolio to the construction industry continues to sizzle (28% January).

Just where has all those mountain of borrowed money been going?

On the other hand, has the jump in the banking system’s January real estate loans been about the financing of 4Q’s boom in single-type houses and other types residential (non-condo) projects?

The government’s approved building permits accounts for just one of the interesting self-contradictory statistics which they have used to inflate their imagery.

Yet the numbers above hardly has been a manifestation of a meaningful uptrend in G-R-O-W-T-H but in the contrary.

BSP’s Politically Correct FDI Report and the Foreign Exchange Inventory Spike in February GIR Data

Of course it has not just been permits.

The BSP reported FDI performance for the month of December and for the year 2015.

The public was told that FDI was about G-R-O-W-T-H.

From the BSP³: (bold mine) Foreign direct investments (FDI) stood at US$273 million in December 2015. This developed as investor sentiment remained positive amid the country’s favorable growth prospects.  More than half of the FDI net inflows during the month were investments in debt instruments, consisting largely of intercompany borrowing/lending between foreign direct investors and their subsidiaries/affiliates in the Philippines which amounted to US$140 million.  This level was seven times the US$20 million registered in December 2014.  The other FDI components also posted net inflows

The BSP selectively picked on areas that registered G-R-O-W-T-H and applied rationalization on these as reflecting 'positive sentiment'. But at the same time, they deliberately omitted on the overall performance. Of course, they understand that people are hooked to headlines and not on the details.

But the BSP hid the fact which from their own table reveals that December FDI crashed by 51.3%! Except for Debt instruments, which inflated by a titanic 617%, every category registered big declines (see above). So given the begging the question premise where positive data equals positive sentiment. Then from December perspective this means the opposite, investor sentiment was NEGATIVE.

On the other hand, the BSP reported that 2015 FDI was “steady” even when it was down by a marginal .3%.

As one would note, decline, loss, decrease and or negative numbers has represented a social taboo, so such numbers has to be sanitized in the context of G-R-O-W-T-H.

So negative is positive, low is high, few is many.

And such manipulation of the public’s mindset reinforces why the Philippine economy has been a bubble. Hardly anything of what one sees appears real!

And notice too that the bulk of FDI share has been on debt financing rather than from equity. Such underscores the increased leveraging of the system.

Meanwhile, the BSP also declared that Philippine GIRs increased to $81.3 billion in February⁴: “Preliminary data showed that the country’s gross international reserves (GIR) rose to US$81.30 billion as of end-February 2016, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. announced today. This level was higher by US$0.61 billion than the end-January 2016 GIR of US$80.69 billion due mainly to revaluation adjustments on the BSP’s foreign currency-denominated reserves and gold holdings resulting from the increase in the price of gold in the international market, net foreign currency deposits by the National Government (NG) as well as the BSP’s income from investments abroad. These were partially offset by the BSP’s foreign exchange operations and payments made by the NG for its maturing foreign exchange obligations.” 

 

Revaluation in gold prices had indeed accounted for $774.8 million increase in the BSP’s February GIR. But the increase in gold priced holdings has been more than neutralized by liquidations to the tune of $791.8 million in the GIR’s “foreign investments”.

This means that the bulk of the increases in February GIRs of $608 million have largely stemmed from the BSP’s foreign exchange holdings, which skyrocketed by an astounding $645 million to $1.47 billion!

Yet the foreign exchange stockpile, at again $1.47 billion, represents almost the same October and November 2013 levels at $1.35 billion and $1.5 billion respectively. (see top chart)

However, the spike in the foreign exchange stockpile in 2013 coincided with the peak of the USD Php in December 2013 at an average of 44.93. Likewise, these coincided with the 2013 peak in GIRs.

Considering the USD Php February zenith of Php 47.64, has the BSP aggressively intervened in the USD Php market by selling its USD hoard or reserves? Perhaps such has been the reason for the substantial liquidations in foreign investments? And in order to offset the USD inventory loss and maintain or preserve on the GIR accounting position, has the BSP been borrowing foreign exchange through the swap markets and simultaneously hedged such borrowings with currency forwards?

Philippine GIR were reported in October at $83.607 billion and in November at $83.572 billion in October and November 2013. In January 2014, reported GIR fell to $79.4 billion or a drop of about 5% from October and November levels.

Since the structure of foreign exchange swaps usually involves very short time frame, if the BSP had indeed used derivatives to enhance GIRs, will we see such GIR numbers drop in the coming months (in May or in June)?

The BSP seems lucky to see a return of the risk ON conditions. Otherwise they may have to increase its foreign exchange borrowing.

Unintended Consequence: ECB’s Bazooka Powered the Euro and Asian Currencies Higher!

And speaking of foreign exchange, like the Phisix, the peso roared back to reclaim year to date gains (+.92%).

The USD peso sunk by .7% as the region’s currency has rallied strongly. The Thai baht and the South Korean won rallied the most this week.

Yet it has interesting to see how the markets reacted to a desperate ECB which last week announced more “shock and awe”.

Last week’s financial market rescue package by the ECB included interest rate on main refinancing operations of the Eurosystem reduced to zero. Interest rate on marginal lending facility slashed by .5 bps to .25% effective March 16. Interest rate on deposit facility further decreased by 10 bps to -.4% effective March 16. QE will be increased by €20 billion to €80 billion which starts on April. Investment grade corporate bonds will be included in the asset purchase program, and “a new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016”.

But instead of the weakening, the euro surged by an amazing 1.1%.

European and US stocks gave back its early gains last Thursday when ECB’s Super Mario suggested that “there would be no further cuts”.

But then perhaps stimulus addicts realized that “hey that’s what’s we’ve been waiting for” so the monumental push on Friday. But the risk ON rally hardly erased the euro’s gains.

Moreover, the ECB’s bazooka only furthered the weakness in USD Asia. This only reveals of more short covering of ex-USD currencies and assets

And of course, the weak USD translated to risk ON which means temporary license for panic buying.

Next week, the FED (March 16) and the BOJ (March 14) will hold their respective meeting. And this will further stimulate gambling addicts to drool over the possibility of more crisis resolution subsidies.

Phisix 7,100: EIGHT Issues Have Led the Vertical Rally

There has been no further proof than the intensifying conviction signifying the fear of missing out than the number of firms attaining record highs.

Yet it is one thing to see an increasing tolerance for risk. And it’s another thing when risks have been totally dismissed as inexistent. And the latter is what characterizes the Fear of Missing Out (FOMO): Emotions rule over reason.

Since most issues have emerged from, or have still been fighting off their respective bears, the yoke of the astounding vertical 16.7% climb of the headline index from the January 21 lows have been a few of its principal bearers. 

 

First, a short description of this week’s actions. The PSEi soared by another remarkable 2.89%. This week’s sharp ascent erased and reversed the year’s deficits to register a positive 2.11% return.

Next. technically speaking, the PSEi continues to approach the resistance threshold of the post August 2015 crash levels (right rectangle). This is aside from the breach of the resistance levels that paved way for two unsuccessful attempts to break the May 2013 record of 7,400 during the last quarter of 2014 (left rectangle).

In short, the current runup marks the fourth occasion for the PSEi to visit 7,100.

But in the current instance, the degree of ascent has been even more intense than the 2013 peers. In response to the bear market in August to October of 2013, the PSEi catapulted to a relative lesser 15.63% gains in 35 days. Likewise, in March the charge to the May 2013 record at 7,392 saw the headline index up by 15.15% in also 35 days.

Unfortunately, for the two 2013 episodes, the vehemence of such runups had been fated to fail. And it took a less impassioned incremental approach for the PSEi to recover from the 2013 debacle. To be specific, it took THREE attempts in 19 months for the PSEi to surpass the May 2013 highs!

Also current overbought conditions have only been extended from this week’s overdrive.

Bulls will highlight the point that the Phisix have now reached the 200 day moving average. But so what?

A break of the 200 day moving average does NOT GUARANTEE a return to record highs. If the previous MAJOR bearish patterns had been foiled by circumstance and by the deliberate managing of the index, what makes a break of the 200 day moving average so unique? Sheer belief by the consensus? The same consensus whom were totally blind to the recent crashes? By the way, those major bearish patterns, e.g. head and shoulders have not been totally reversed or negated yet.

And as previously discussed, bear market rallies tend to be ‘fast and furious’.

More than this, despite the supposed strength of the Philippine economy, the Phisix endured two major crashes in a span of 6 months, specifically in August 2015 and in January 2016.

In addition, from a historical context, the odds of a full recovery from incidences of V-shaped reactionary recoil from deep bear markets have been minute. 

Even more, stock market are more than just solely about price actions. Instead, stock market prices should account for the underlying value of the security it represents. As the sage of Omaha Warren Buffett once said, price is what you pay, value is what you get.

To revert to the FOMO.

Despite the frenzied blitz, the same headline index has still been off or remains 12.7% away from the April 2015 8,127.48 record.

Yet TWO issues have now reached RECORD levels while SIX other issues are poised within striking distance—with 8% or less—from the past watermarks

In particular, the TWO critical issues, JGS and AEV, combined had a market share weight of 11.43% as of Friday’s close. On the other hand, the market share of the other SIX PSEi issues—SM, SMPH, AC, JFC, GTCAP and MPI—on path to a fresh record, totaled 31.63%.

In aggregate, the market share weight of these 8 issues comprised 43.06% of the headline index.

And to extend the perspective, the accrued weighting of the top fourteen PSEi issues excluding PLDT as of Friday has been 74.15%.

In early 2015, the string of record milestones set by many heavyweights had been when the PSEi was about 5% away from the record highs, or during the landmark highs.

In short, the fundamental reason for 7,100 or why there has been a 16.7% vertiginous rebound from the January lows, has been mainly due to these EIGHT issues that virtually weightlifted the headline index to its current state.

And by elevating the index, this created a spillover effect to the general markets.

Said differently, for now, the fantastic eight spawned a rising tide lifts most boats phenomenon.

This week, advancers beat decliners by another wide margin of 184. (upper left window)

Advancers have dominated the market’s sentiment in 6 out of 7 weeks. And this week marks the fourth consecutive week for broad market gains

Also among the 30 PSEi issues, 26 rose while only four issues led by PLDT declined. The lopsidedness of advancing issues, for firms which constituted the headline index, has occurred in 5 out of 7 weeks.

Additionally, rising tide has apparently percolated to the banking sector which was the week’s best performer. (upper right window) Not even negative yield spreads would seem to stop a rampaging badly bruised bull.

Curiously, in spite of the ferocity of the current advances, current peso average daily volume remains lackluster relative to the two prior periods where the PSEi traded at current levels, in particular, from April to September 2014 (6,400-7,400) and August to December 2015 (trading range of 6,800-7,300). (Lower pane)

In short, the present ripfest has been underpinned by a stunning low volume which only reveals of its lack of conviction, and more importantly, DESPERATION to bring back the old times!

Bidding Frenzy Amidst Decaying Fundamentals: Ayala Corp’s Topline Revenue Fumbles! AEV Posted Decline in 2015 Income Growth Rate!

And the aggressive bids have only been pushing up valuations to nosebleed levels.

Put differently, all frantic pumping and pushing during the past several weeks, has virtually shunned the significance of valuations.

Fascinatingly, government’s bullish G-R-O-W-T-H headlines, as discussed above, have incited even more dash for derring-do bids even when G-R-O-W-T-H has been nothing but a superficial image.

Based on Friday’s prices relative to the PSE’s 3Q earnings report (monthly January 2016 issue), a commanding majority of PSEi issues have Price to Book Value (PBV) that amazingly have been significantly overvalued!

And again, the concentration of such valuation excesses has been on issues within the top 15!

And ironically, I have pointed out last week, such hysterical pumping comes amidst deteriorating fundamentals that have spread from the periphery to biggest issues. PLDT has reported losses in 4Q and a significant drop in net income for 2015. SM, which ironically has been part of the febrile pumping, has posted ZERO net income growth for 2015!

Positive headlines always appeal to those who never ask.

Yes this week, Ayala Corp disclosed that 2015 have been another year of G-R-O-W-T-H.

But what they didn’t say was, LIKE SM, the firm’s top line growth has been falling dramatically for the past two years (see upper window)!

Their disclosure noted that consolidated revenues expanded 11% in 2015. That’s looks neat, until one realizes that this has been 30% off from the 15.6% growth in 2014 and half the rate of 22.09% in 2013!

This means that while earnings have looked impressive from the outside, they have been showing signs of entropy in the inside. To consider, why has the topline been hardly manifesting optimal contributions from the massive capacity additions? Or what has happened to the enormous (10%+) supply expansions?

Moreover, the company’s earnings seem to have shifted. They seem to have become dependent on contributions or supplemental revenues to the topline, particularly profits from joint ventures and partnership, interest income and others, aside from improvements on business costs rather than from core revenues (see detailed topline performance in % during the 9 months of 2015 on lower windows)

In short, over the past two years, the core businesses’ topline have been contributing less to AC’s earnings. So how sustainable can this be?

And like SM, Ayala Corp’s topline has either been weighed by too much competition or by demand slowdown. Or at worst, it could have been both.

The fact that the topline has been dwindling in the face of massive supply expansions simply reveals that excess capacity has emerged at the margins.

And considering that both of the biggest consumer firms, SM and AC, have been faced by the same predicament, bulging excess capacity extrapolates to an INDUSTRY dynamic!

And an outgrowth of excess capacity translates to eventual diminished domestic demand!

And add to the string of downcast reports in 2015 has been energy holding firm Aboitiz Energy Ventures. AEV’s NET income for 2015 at Php 17.7 billion was LOWER 4% from Php 18.4 billion! Stunningly, AEV’s share prices surged to a near record! LOWER and ZERO growth now serve as catalyst for frantic pumps!

And this makes 3 out of the top 10 PSEi (PLDT, SM, AEV) firms to underperform in 2015. Again THIRTY PERCENT of PSEi has performed below par.

Yet will a new record high in stocks abolish or reverse all the surfacing intrinsic defects? Or will this set up for even more bouts of volatility?

____

1 Philippine Statistics Authority Monthly Integrated Survey of Selected Industries : January 2016 – March 10, 2016

2 Philippine Statistics Authority Construction Statistics from Approved Building Permits for Fourth Quarter 2015 (Preliminary Results) March 9, 2016

3 Bangko Sentral ng Pilipinas, FDI Reach US$273 Million in December 2015; Full-year Level at US$5.7 Billion March 10, 2016

4 Bangko Sentral ng Pilipinas End-February 2016 GIR Level Reaches US$81.30 Billion March 7, 2016