Phisix 6,200: Imploding Real Estate Bubble: Gradually And Then Suddenly?

Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief…It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something…The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up…The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly.—William White OECD chairman of the Economic and Development Review Committee (EDRC) and ex-BIS Chief Economist, in a recent speech at Davos

In this issue

Phisix 6,200: Imploding Real Estate Bubble: Gradually And Then Suddenly?

-Developed Economy Governments Panic over Stock Market Meltdown: Mounts Rescue Campaign

-Phisix 6,200: Will the Taper Tantrum Levels be Tested Soon?

-The 2016 Bear Market Represents an Offspring of the Past Bear Markets

-The Real Economic and Social Consequences of Bear Markets

-Oversold Conditions: Sectoral Performance and Market Breadth

-Divergence to Convergence: Price Levels, Market Breadth, Volume and the Peso

-Imploding Real Estate Bubble: Gradually And Then Suddenly

-Debunking Objections of Overdone Selling and the China Bogeyman

Phisix 6,200: Imploding Real Estate Bubble: Gradually And Then Suddenly?

Developed Economy Governments Panic over Stock Market Meltdown: Mounts Rescue Campaign

Following a violent return of risk OFF conditions, authorities rushed to rescue of global stock markets at the last half of the week with dovish statements anchored on promises of more easing (redistribution or subsidies to stock markets).

In what seemed as a coordinated signaling by global authorities, ECB’s Mario Draghi opened the stock market bailout campaign with an assurance that policy rates would “stay at present or lower levels for an extended period", that there would be "no limits" to reflate the Eurozone and seduced the markets with “review - and possibly reconsider - monetary policy at the next meeting in early March”. In a meeting the press, Mr. Draghi’s encore slogan was “We don’t give up”. This only meant of the possibility of the implementation of moar and moar of the failed inflationist policies. Yes, despite ongoing QEs (LTROs, Covered bonds and Asset Backed Securities) and negative rates, European markets have been sinking, inflation numbers has been way below the ECB target, and importantly, there has hardly been any meaningful improvements in bank lending to the economy. As a side note, Europe’s major equity bellwethers have recently entered the bear market but the Draghi put has lifted them away from the bears

Meanwhile, in a media interview, the Chinese Vice President Li Yuanchao asserted that the government is “willing to keep intervening in the stock market to make sure a few speculators don’t benefit at the expense of regular investors”. Yes their sustained interventions has led Chinese stocks into a second major bear market in less than a year! And words turned into deeds, last week, the Chinese government injected 400 billion yuan ($61 billion) into the financial system the largest in 3 years via repos.

The Bank of Japan, which will hold this meeting this week, has reportedly been under pressure to expand its current easing programs, in spite of growing internal opposition or division within the BoJ’s ranks to present policies.

Yet like the ECB, hardly any of the objectives by the BOJ has been met. Even stocks have lately been under sustained selling strains. The Nikkei and the broader benchmark the Topix fell into bear markets this week. But promises of rescue have only pushed the Nikkei off the bear market with Friday’s magnificent 5.88% pump. As I have noted here, even the more astounding 7.7% surge in September 9th 2015 has not prevented the Nikkei from tumbling back to test the recent bear market. And much like in 1989-1992, increasing frequency of market volatility (sharp upsides and downsides) have likely been symptoms of a ‘topping’ market.

US stock markets have also been under severe pressure, with some of the benchmarks trading at (S&P 500, Dow Industrials and NASDAQ) or below the August lows (Russell 2000, Dow Transports, and NYSE Composite). Hence, expectations have been weighted towards a dovish Fed during next week’s meeting (January 26 to 27) to sustain recent gains.

So with central banks behind their backs, and provided that the central bank magic can be sustained, then this should be a big week for the bulls.

Yet since whatever gains today will only compound on the imbalances, this means that over the longer term, present gains will only be temporary, and eventually, bears will likely retake command.

Phisix 6,200: Will the Taper Tantrum Levels be Tested Soon?

For the third consecutive week of losses, the PSEi stumbled by another huge 3.74% this week. Since 2016 started, the index has now accrued a stunning 10.74% deficit.

At 6,200, the PSEi has plumbed to its lowest level seen in early 2014 or during the post taper tantrum shock. At 5,762.53, the taper tantrum low now serves as the most critical support. And this level has now been just 7.2% away.

A breach of this crucial level would mean a transition from a technical bear market to a full scale or full blown bear market.

And on an historical basis, the odds are low for the PSEi to recover from here. Only once in half a century has the PSEi bounced back from such level (that was in 1995).

And speaking of bear market, as of Friday’s close, the PSEi was off 23.62% from the April record at 8,127.48. Friday’s 2.03% rebound mitigated the PSEi’s bearish predicament, which found a momentary climax last Thursday on a depth of 25.65%

Over the interim, given the FOUR consecutive weeks of decline (this includes the last week of December 2015), the PSEi has dramatically been oversold, so a technical bounce may be on the immediate horizon. Friday’s 2.03% gain may herald on such a bounce.

Besides, speculation on 4Q GDP and 2015 GDP, which is slated to be announced next week, may provide rationalizations to the rally.

That’s aside from the sudden appearance of RISK ON conditions around the world sparked by the jawboning of central bankers.

As an aside, any downside print by the GDP numbers could be an obstacle to the rally. But given that the government has ensured that such critical statistical number has aligned more or less with the consensus expectations for the past three quarters, there will unlikely be a substantial deviance for the coming announcement. As I have pointed out here, 3Q GDP was a RECORD, or a first ever, surge of constant (real) GDP over current (nominal) GDP. The anomalous constant GDP pump came from the base effect of price deflators. This has little to do with the real economy.

Or simply said, any significant downside surprises will barely be the outcome. GDP signifies principally a political construct more than it represents the state of the economy. And since it is election season, the likelihood is an upside print, or at least a number that falls within the range of consensus expectations. The last time presidential national elections were held in 2010, GDP printed an incredible 8.4% and 8.9% (constant based) in Q1 and Q2. But this hasn’t entirely been due to elections as the BSP’s pivot towards enhancing ‘domestic demand’ via monetary accommodation in 2009, fired up the initial boom phase of the Philippine credit bubble.

Will the PSEi tumble to test the taper tantrum levels in the coming months? We shall see.

The 2016 Bear Market Represents an Offspring of the Past Bear Markets

As I have repeatedly been saying here, the PSEi bear market will have real consequences to domestic financial conditions and the economy.

To help understand this, allow me a short narrative of the past and present conditions, its linkages, as well as, identify the differences between them.

The present is a product of the past.

The incipient boom phase in stocks (2004-7) came mostly in response to a 7 year post Asian crisis drought (1997-2003). Then the Philippine economy had little balance sheet imbalances. Debt levels were relatively substantially low.

Then the Great Financial Crisis came. The domestic bear market of 2007-2009 was largely in response to the capital outflows from the US financial crisis. Although the Phisix bear market of 2007-9, which constituted a 54% loss peak to trough, dragged down with it the statistical GDP, the Philippines escaped recession. Statistical GDP bottomed at .5% (constant GDP) or 1.4% (NGDP) in 3Q of 2009.

With relatively clean books, the economy was warmly receptive to the BSP’s adaption of the US FED’s easy money policies. Hence, the quick recovery and the ensuing headline boom of the coming years.

BSP’s 2009 bailout resulted to the 2013 bear market

From 2009, the principal conduit of the BSP’s trickle down policies via negative real rates had been the asset markets. This means that subsidies to creditors inflated asset prices like stocks, bonds and properties that percolated to the real economy in the form of inflated profits/earnings, incomes, investments, wages, and consumption. This boom benefited primarily those few with access to bank credit and or to capital markets.

This also marks the year where the BSP inflated corporate earnings became the staging point for the current stock market boom bust cycle.

The initial effects of the zero bound had been an asset-economy boom.

And given the extra loose financial conditions, the reflexive feedback loop of soaring prices and bullish expectations and actions sent the Phisix to a record in May of 2013. During the same year, the Philippines had been gifted by major credit ratings agencies with credit rating upgrades.

Additionally, easy money policies represented indirect and direct subsidies to the government via soaring tax receipts, lower debt payments (via subsidized interest rates) and inflated GDP. The credit rating upgrades virtually amplified such dynamic, which then, had been manifested via record low interest rates. Philippine interest rates even fell lower than her ASEAN peers and interest spreads relative to many developed economy nations have narrowed to record levels. I called this then the convergence trade.

2013 bear market as forebear to 2016

In May 2013, the Phisix suffered its first bear market since the GFC.

Like the GFC, the bear market has been triggered by external anxieties, primarily, the FED’s proposal to taper her monetary easing subsidies. Unlike the GFC, Philippine balance sheets were bloating to excessive levels.

Nonetheless those RECORD low interest rates, which were likewise reflected on record low yields at 3.48% (April) of 10 year bonds in 2013, inflamed on the 10 successive months of an astounding 30%+++ in M3 growth that virtually saved the Phisix from a full blown bear market!

Differently put, along with skyrocketing M3, sizzling bank credit growth stopped the bear market dead in its tracks! (see upper window)

But the reversal of the bear market with M3 growth came with an enormous cost or a tradeoff. CPI soared! And the upsurge in CPI became a political event. As such, the Philippine central bank, the BSP, panicked. The BSP ordered twice increases in reserve requirements, SDA rates, and interest rates. The BSP also mandated a stress test on the banking system, as well as, to require banks to raise capital, using the ASEAN integration as a smoke screen.

The combination of high inflation and mild tightening efforts by the BSP eroded on the disposable income of consumers, put pressure on profit margins, narrowed yield spreads which subsequently began to chip away on bank credit growth. And since GDP had largely been inflated by credit growth, the slowdown in credit growth eventually reflected on the government’s GDP. This became evident by 2015.

Also in 2015, as bank credit growth fell, M3 growth collapsed. The effects of the M3 crash had been manifested on money prices in the real economy. The various price measures of the BSP (producers prices, wholesale and retail prices, construction wholesale and retail prices) were ALL headed downhill. Some even posted DEFLATION, some registered sharp slowdowns. For instance, the BSP’s CPI (see lower window) plummeted to a record low .4% in September and October before its sharp upswing in November.

Moreover, manufacturing went into a contraction mode in April to October. As seminal signs of recession, loans to the manufacturing sector even contracted in September. Manufacturing showed partial recovery only last November. Additionally, populist fire safety mandates on manufacturing firms added to the industry’s woes.

Meanwhile, the PSE reported a sharp slowing of 1H profits and a downturn in the NGDP of listed companies. The PSE censored 2Q performance because 1H activities had mainly been due to 2Q’s material deterioration.

On the real estate sector, despite the media’s campaign to whitewash deteriorating performance, signs of fissures on the sector emerged in 3Q.

So the collapse in M3 resonated in the real economy.

Yet one of the lagged effects from the M3 inflation has surfaced via a record Phisix high last April 2015. Aside from M3, the Phisix record had been a product of a manipulated pump. Phisix raced to record highs even when fundamentals were in corrosion. Now events at the PSEi have turned to align with reality.

Another legacy sign of M3 inflation has still been raging property prices. Despite signs of slowdown, frenzied property speculation has resulted to 3 bdr condo units in Makati soaring by 5.41% in Q3 2015 year on year according to Global Property Guide. This is a sign of widening divergence which, like stocks, is about to converge. (see below)

Ostensibly the 2016 bear market has signified an offspring of the 2013 bailout of the Phisix through record low interest rates that was manifested in the surge in credit activities. The extension of imbalances, through the postponement of the market clearing process, had led to its worsening. Now the violent response.

In addition, the policy response by the BSP to the 2007-2009 bear market mainly caused both the bear markets of 2013 and 2016. Deflating bubbles are products of previous policy induced inflationary booms. No phony booms, no economic bust.

The Real Economic and Social Consequences of Bear Markets

Unlike in 2007 were bear markets had been cyclical, the 2016 bear market looks secular. That’s because the latter represents the surfacing, the gradual to accelerated recognition and the eventual agonizing market clearing phase of the malinvestments accumulated from the BSP’s zero bound rates.

Since this looks likely a secular bear market, then it entails real economy consequences through intertwined factors of balance sheet losses, debt liquidations, loss of confidence, and the narrowing, if not reversal of the invisible redistribution platform from the BSP’s policies.

Since many firms have used the boom phase to generate earnings/profits or cash flows through rampant yield chasing activities, then the bust phase would translate to balance sheet losses as well as reduced cash flows for the same firms. And sustained balance sheet losses would entail possible write downs on impaired assets, thus leading to balance sheet compression.

For buy side institutions that had anchored their liability matching process with asset chasing through stocks, the bear market will translate to growing balance sheet deficits that may lead to negative equity. This increases the risk of failure to comply with outstanding liability schedules.

For loan or margin portfolios collateralized by stocks or equities, bear markets translates to lower value of collaterals. Such may prompt creditors to demand additional collateral requirements. If the latter can’t be complied with, then margin calls will lead to forced liquidations, thereby amplifying downside volatility.

This I suspect could be one major reason behind the latest brutal unwind

In terms of psychology, bear markets represents a loss of confidence. Since markets can be characterized as operating under reflexive feedback loops, where prices influence expectations and thereby actions and vice versa, bear markets extrapolates to magnified risk aversion and its ramifications. To be specific, risk aversion will lead to heightened demand for cash at the expense of economic activities. Risk aversion may also lead to reduced credit exposure or require higher interest rates to compensate for increasing perception of risks (or a risk premium)

Such will eventually get reflected on the headlines as lesser investments, reduced capital expansion, job layoffs, reduced earnings and consumption that will be manifested on headline GDP.

Additionally, the BSP’s artificially fueled bullmarket has previously enabled and facilitated the transfer of resources and risks from listed companies to the public through various fund raising activities (equity placements, IPOs, bond issuance and etc.). The reversal of which essentially reduces or takes away such resource transfer process.

And with smaller access to funds, listed firms will have to pay higher yields to attract financing, or depend on banks for access to money or downscale on economic activities. Given that balance sheet pressures compounded by heightened risk aversion will likely spur a constriction of credit conditions (via reduced supply of credit) even in the banking system, higher interest rates will also put a squeeze on profits, investments, earnings and curtail consumption activities

In summary, increased risk aversion, ballooning balance sheet deficits, tighter credit conditions and reduced access to financing except through substantially higher rates will likely lead to escalating losses, intense debt liquidations, compression of economic activities and exposure of excess capacities in bubble industries.

And the government may not be able to conceal via its statistical mirages.

As author Bill Bonner wrote in a recent essay¹

In a bull market, investors are content with hope, hype and earnings tomorrow. They are patient and don’t ask too many questions. But in bear market, hope goes into hiding, patience fades… and the question marks come out in the open.

And once the bear markets spreads to real economic activities, then this will likewise permeate into amplified social frictions or even political tensions.

Finally, since the elites have greatly benefited from the BSP inflationary boom, then I expect some of them to try to put up a passionate last stand to prop up the sham boom.

Oversold Conditions: Sectoral Performance and Market Breadth

Last week’s activities have been quite revealing.

Outside the mining sector, among major industries, the property sector was once again the object of the selling carnage this week (see upper pane).

The property sector has been accompanied by the holding sector to drag the benchmark to its substantial weekly loss.

The service sector defied the gloomy mood with the remarkably oversold PLDT (+4.56%), GLOBE (+1.36%) and BLOOM (+11.04%) providing most of the bounce or a booster to the benchmark.

On a year to date basis, among the major industries, aside from the mining sector, the property sector has led the losses, followed closely by the holding sector. (lower pane)

It’s been interesting to observe that last year’s two industry outperformers or the two industries which has flouted on the bears have now become the selling fixation.

The commercial-industrial (blue) and the services (black) were the two industries that peaked out first from the record highs. Interestingly, both industries inflected on February or ahead of the PSEi’s April record high.

The other three, the property (red) holdings (orange) and banking & finance (green) climaxed along with the PSEi’s milestone.

The components of sectoral indices include both PSEi heavyweights and non-PSEi issues. Albeit the PSEi heavyweights, which constitute the largest market cap share of the sectoral basket, basically dictate on the direction of the index. As example, when the PSEi, along with the banking index, soared to record highs, 9 out of 13 issues in the banking index were in bear markets! So the index had been pushed up even as the general issues had been weighed down. Such divergence eventually dragged the outperformers to join the majority.

The above charts tell us of the contagion process. The service and commercial indices deteriorated first, which means major caps of these issues were the first affected, then the decay spread to the darlings which constituted the bubble industries. In 2016, the darlings have more than caught up with the early decliners as they profusely hemorrhaged.

Now to the general markets.

Among the 30 PSEi issues, for the week, 7 advanced, 21 declined while 1 was unchanged (SMC).

And there had been NO reprieve yet to the bloodletting as declining issues swamped advancing issues by an enormous margin of 155 this week.

The 3 consecutive weeks of severe broad market losses may be a record of sorts. And they likewise could be indicative of the substantially oversold conditions.

Realize that no trend goes in a straight line. The question is whether the coming bounce would be tradeable or not. Or will attempts to trade them become equivalent to catching falling knives.

Divergence to Convergence: Price Levels, Market Breadth, Volume and the Peso

With the intensity of the selloff in sectoral performance and market breadth almost on the extremes, there have been little signs of any reversal to the positive even in the context of volumes.

Peso trading volume remains lackluster. And worst, volume builds on the selling side as against the buying side.

For instance, in two days where the PSEi gained January 19 (+.34%; Php 3.693 billion) and January 22 (+2.03%; Php 6.167 billion), peso volume had been significantly less than days where the PSEi slumped January 18 (-1.77%; Php 5.579 billion), January 20 (-1.53%; Php 5.33 billion) and January 21 (-2.8%; Php 7.4 billion).

Seen from the average, the up days posted Php 4.93 billion as against the down days at Php 6.103 billion. Or there had been 24% more volume during the downside or during the selloffs. And this is why the selloffs have happened: There has been little volume or bids in support of prices levels during the previous week and or weeks.

Peso volume, market internals (breadth) and price actions have to show massive improvements. Otherwise any increase in the index, but unaccompanied by volume and market breadth should likely indicate of a ‘bull trap’. In other words, the markets have remained unconvinced that the selling pressures have abated.

And I believe that they will not only remain unconvinced but ultimately join in the transition towards fear and depression or a full scale bear market.

The conspicuous divergence during the April record highs was a fantastic harbinger to the current activities. The PSEi rose to a record alright, but this emerged in the face of declining volume and deteriorating market breadth which had been generally in favor of decliners and where half of the listed issues were slumping into bear markets.

And the important lesson: the current developments have only converged with the previous divergent trends. Or simply put, the previous internal frictions within the market have been unified or harmonized. Unfortunately the result has been the bear market.

And it is not just peso volume, market internals (breadth) and price actions, for the PSE to improve, the domestic currency the peso must rally.

Thanks to the promises of more stimulus from ECB’s Mario Draghi and speculations that the BoJ will compliment the ECB and the Fed’s coming two day meeting January 26-27, the pesos’ plight has been partly eased.

The USD-Php increased by only .13% to Php 47.805 from last week’s Php 47.74.

Nonetheless the central bank risk ON will likely spillover to as an ephemeral firming of the peso.

This should be a buying window for the US dollar or USDPHP.

Imploding Real Estate Bubble: Gradually And Then Suddenly

As noted above over the past three weeks or since 2016, the property sector has been in the forefront or the raison d'etre for the present bear market.

The holding sector has heavy exposure on the property sector which is why they have been equally slammed. Many of the listed property firms signify as subsidiaries to their similarly listed parent holding companies. And this includes holding firms with unlisted property subsidiaries such as GTCAP with unlisted subsidiary Federal Land and Property Company of Friends.

As of Friday, the property sector represents 16.57% share of in terms of market cap while the holding sector has 37.31% or the largest market cap share. Combined, these industries command over half 53.88% of the market cap. So when both got toast, both brought down the index and most of the PSE universe with them.

While current developments have been worrisome, they have been moving in the direction as I have been anticipating.

This week’s selloffs have not only been dramatic but widespread.

Importantly its been a succession of the violent or intense selling or a wave of selling: 16.15% of Property sector's market cap dissipated in THREE weeks!

All major property components of the PSEi and the Property index have been severely buffeted.

Friday’s 2.03% ramp only eased some of their benighted conditions.

The coming rally should help alleviate present conditions but these may not be enough to amend or restore the major damages seen from the recent underlying price actions of the said stocks.

The PSE’s property issues reveals of an asymmetric topping phase. Megaworld (violet) has been the first to reach a zenith in April. ALI (green) followed suit in May 2015. Both have been on an incremental downside path, until the August meltdown. Both rallied fiercely off the August lows. Unfortunately their rallies lost momentum. And from November, both issues lost altitude fast…real fast!

Curiously, Robinsons Land (red) reached a peak in late October even as both MEG and ALI had long flipped over. RLC then joined MEG and ALI in late November with a stunning crash!

And the most eye catching of them all, SMPH (blue).

SMPH’s equity prices pinnacled last December 14, and was principally shaped by a last minute or marking the close pump. During that day, 58.2% of the incredulous 8.25% pump to the record Php 22.95 came from marking the close. Fascinatingly, the December 14 acme was etched even as all her three contemporaries (ALI, MEG, RLC) were already in the process of crashing!

Gosh. Perhaps an entity or some entities must have been so desperate as to push up the headline index or just wanted to show the markets that SMPH was beyond the force of gravity.

And I wonder whatever happened to those who deliberately spiked SMPH to Php 22.95? Are they still long or have they cut losses?

The ALI-MEG story has echoed on the price actions or price trends of the other major issues of the property index. VLL (red) topped out just a few days before the PSEi record in April, while FLI (blue), which failed to surpass the May 2013 record, likewise climaxed a month after the PSEi record. On the other hand, BEL (green) inflected as early as September 2014 when casino stocks began their torturous march towards hades. Bel owns Premier Leisure Corp which in partnership with Melco operates the City of Dreams.

Current price actions represent a demolition of the one way trade. If everyone thinks the same, then NO ONE is thinking.

As I recently noted, panics are created by reality overwhelming embedded or entrenched misimpressions, misperceptions and deceptions.

Realize that the property sector represents the most interest rate sensitive non-finance industry. That’s because the property sector’s business model from the frontend (sales via vendor financing) to the backend (construction of inventories for sale or for rent) have been heavily dependent on leverage or credit.

Based on BSP’s data, the property sector accounts for a 19.63% share of banking loans to the production industry, as of November.

I believe that the reported banking loans to the property sector has been grossly understated because banks have surely gone around, the BSP’s regulatory ‘macroprudential’ limits, through manifold loopholes or regulatory arbitrage. You can add to possible regulatory capture dynamics to circumventing regulations.

Yet for now, the markets seem to have overlooked the important link between banks and the property sector through such loan exposure.

Considering that bond yields have been rising (which implies interest rates has been rising), that has led to the intense flattening of bond spreads (with sporadic accounts of inversion or negative yield) the consequence has been a decline in banking credit growth. Such decline in bank credit activities has been mirrored through the collapse of (money supply) liquidity growth from the 10 straight months of 30%+++ to just the current range of 8-9%.

And the crash of M3 has percolated to the general economy, which have been falling for most of the year (as noted above) as reported by the BSP

All these suggest that liquidity or leverage conditions, which the real estate industry breathes on, has been significantly tightening.

BSP surveys don’t reveal of actual financial conditions. Prices do.

And the tightening of liquidity would be baneful for the symbolic property industry. I say 'symbolic' because the property sector has epitomized and has been sold by the establishment as the mythical domestic demand story which has underpinned the phony boom.

And such fable has been crumbling right before our very eyes!

Real world signs of such tightening have emerged. ALI cut capex by 20% in the 3Q of 2015 to supposedly implement “tighter cash management”. Security Bank sold its property arm in the 4Q. Despite a two week media blitz to camouflage property weakness in late October there were crashes in sales for some property issues during the 3Q: Philippine Realty, Rockwell Land and Century Properties. Some industry people have admitted that sales on the property sector have slowed in the 4Q.

The recent crashes have only opened the Pandora’s Box of malinvestments.

Such malinvestments will be exposed in an interlocking feedback mechanism of declining equity prices, financial losses, excess capacity, cash flow shrinkages, debt problems and restrictive access to credit and vice versa.

And despite popular conviction of the boom, which became a politically correct theme, and consequently the vehemence to any opposition of the boom…

I predicted the casino bubble in April 2013, the collapse began in late 2014

I predicted the shopping mall and property bubble in January and October 2013 respectively, the implosions have begun in late 2015.

Pieces of the jigsaw puzzle have been falling into place.

In a conversation between two characters in Ernest Hemingway’s The Sun Also Rises.

One asked 'How did you go bankrupt?' 

The other replied 'Two ways. Gradually and then suddenly.'

Applied to the imploding Philippine real estate bubble: Gradually and then suddenly

Debunking Objections of Overdone Selling and the China Bogeyman

My terse comments on two popular objections on the current stock market crash: the selling have been ‘overdone’ or ‘excessive’ and the China bogeyman.

Selling Overdone.

Even at current 6,200 level, many of the top 15 issues of the PSEi remain ridiculously overpriced (see above).

And we are talking of PAST performance where the E in the PER was valued in a still economically strong environment. How about when the E in the PER falters as the economy stumble? Won’t happen?

And what has led to ‘excessive’ selling? Do these people know? Has it not been from excessive mispricing? What has led to excessive mispricing? Has it not been to because of excessive buying?

So excessive buying or greed is rational while fear or excessive selling is irrational? Or could it be instead that excessive buying (greed) leads to excessive selling (fear)? Or that both are causally linked to signify boom bust cycles?

Let it be understood that in boom bust cycles, the economic bust will almost be in the same the proportion to the imbalances acquired from the inflationary boom

As the great Dean of the Austrian School of Economics, Murry N. Rothbard explained².(bold mine)

The recession or depression is then seen as an inevitable re-adjustment of the production system, by which the market liquidates the unsound “over-investments” of the inflationary boom and returns to the consumption/investment proportion preferred by the consumers.

In stock market lingo, the obverse side of every mania is a crash!

Next, China.

Unless Chinese nationals have been the key buyers of the inventories of major domestic property developers, just what has China got to do with crashing property stocks?

Has it not been popularly held that robust domestic demand has pillared the Philippine boom? So where have such domestic demand been now to support fundamentals and prices of the property sector? And if true, should this not serve as a shield or a cushion to any negative impact from China? Or could domestic demand really have come from Chinese consumers?

Or could distortions, brought about by the farcical boom, have been uncovered by some market participants to have sparked a stampede but opted blame China instead?

Tremors from China’s dynamics would only account for as an aggravating factor to an internal malaise or maladjustment.

If bull markets create geniuses, apparently bear markets spawn clowns.

___

1 Bill Bonner Beware… This Tech Darling Is Due a Big Fall

2 Murray N. Rothbard Mises’s Contribution to Understanding Business Cycles Mises Institute September 29, 2014

Quote of the Day: The Global Bubble has Burst

Central banks around the world abused their newfound power and the power of financial markets. And for seven years egregious monetary inflation has been used specifically to inflate global securities markets. And “shock and awe,” “whatever it takes,” and “push back against a tightening of financial conditions” all worked to ensure the markets that central bankers would no longer tolerate crises, recessions or even a bear market.

For seven long years, risk misperceptions and market price distortions turned progressively more severe. Inflating securities markets around the globe became, as they do, self-reinforcing. “Money” flooded into the markets – especially through ETFs and derivatives. Trillions flowed into perceived safe equities index and corporate debt instruments. With central bankers providing a competitive advantage for leveraging and professional speculation, the hedge fund industry swelled to $3.0 TN (matching the $3 TN ETF complex). Wealth effects and the loosest financial conditions imaginable boosted spending, corporate profits, incomes, investment, tax receipts and GDP – not to mention M&A, stock repurchases and financial engineering.

But this historic wealth illusion has been built on a foundation of false premises – that central bank monetization can inflate price levels and spur system inflation necessary to grow out of debt problems; that securities markets should trade at higher multiples based upon contemporary central banker capacities to spur self-reinforcing economic recovery and liquid securities markets; that 2008 was “the hundred year flood.” In reality, central bankers inflated history’s greatest divergence between global securities prices and economic prospects.

Global markets have commenced what will be an extremely arduous adjustment process. Markets must now confront the harsh reality that central bankers don’t have things under control. Risk premiums must rise significantly – which means the destabilizing self-reinforcing dynamic of lower securities prices, faltering economic growth, uncertainty, fear and even higher risk premiums. This means major issues for global derivatives markets that have inflated to hundreds of Trillion on misperceptions and specious assumptions. I’ll assume Draghi, Kuroda, Yellen, the PBOC and others resort to more QE – and perhaps they prolong the adjustment period while holding severe global crisis at bay. But the global Bubble has burst. And if QE has been largely ineffective in the past, we’ll see how well it works as confidence in central banking withers. Perhaps this helps explain why global financial stocks now trade like death.

This excerpt is from the ever sagacious Doug Noland of the Credit Bubble Bulletin Blogspot

Dead Cat's Bounce: Embattled Bulls Push Back Bears on Central Bank Stimulus Hope: Japan Nikkei Soars 5.9% Leads Asia

As always, bulls will not let the bears dominate without a fight. 

So on the back of speculation of political support, Japan's Nikkei 225 roared by an incredible 5.88% to push the bears back today...

Here is a sample of how media sees today's massive stock market rally in Japan

From Bloomberg (bold mine)

Japanese stocks surged by the most in four months as investors weighed prospects for central bank stimulus and bought back into a bear market to cover short positions.

The Topix index jumped 5.6 percent to 1,374.19 at the close in Tokyo, the most since Sept. 9 and paring its worst monthly loss since October 2008. The Nikkei 225 Stock Average soared 5.9 percent to 16,958.53, also supported by a report the Bank of Japan is considering extra monetary easing. Global equities halted losses on the brink of a bear market as oil rallied and the European Central Bank signaled it may boost stimulus.

“We’re seeing short squeeze galore,” said Mikey Hsia, a trader at Sunrise Brokers LLP in Hong Kong. “Much of this is technical. Japan has had big moves for three days in a row now -- it’s becoming common.”

The monster rally has not been limited to Japan, as most of Asia closed significantly higher (as shown above). But it was Japan's equities that stole the show.

Meanwhile, Europe's stocks has likewise been strong.

From another Bloomberg report (bold added)

Stocks rose around the world, extending Thursday’s rebound from a 2 1/2-year low, on speculation that central banks will expand stimulus measures to counter turmoil in financial markets. Oil surged with emerging-market currencies, while haven assets retreated.

European shares headed for the best week in two months, the euro approached a two-week low and Spanish and Italian bonds rallied after European Central Bank President Mario Draghi indicated he may bolster economic support as soon as March. Crude was poised for its steepest two-day rally in five months and the Russian ruble rebounded from a record low. Asian stocks climbed the most since September on speculation Japan and China may also take steps to calm markets.

The turnaround in sentiment came amid signs central banks may be prepared to act after $7.8 trillion was erased from the value of global equities this year on China’s slowdown and oil’s crash. Diminished inflation expectations and a strengthening yen are seen as increasing pressure on the Bank of Japan to enlarge stimulus at its meeting next week. China will keep intervening in its equity market to “look after” investors and has no intention of further devaluing the yuan, Vice President Li Yuanchao said.

“It’s a classic oversold bounce after Draghi’s comments yesterday and the noise on Japanese stimulus overnight, the question is where do we go from here,” said Veronika Pechlaner, who helps oversee $10 billion at Ashburton Investments, part of FirstRand Group. “It’s become harder and harder for stimulus to really support the economic fundamentals so it doesn’t mean a medium- and long-term change, but at least we have a bit more stable trading environment for a couple of days.”

Emerging market currencies like Philippine peso has likewise rebounded considerably due to the Pavlovian effect on the prospective central bank stimulus.

From the Businessworld,

HIGHER-yielding emerging market currencies rose against the dollar in Asia on Friday, after a jump in crude prices and hints the ECB could unleash more stimulus helped cheer traders.

The South Korean won and the Malaysian ringgit were among top gainers, after taking a battering over concerns of slowing global economic growth, the impact of a US rate rise and a slump in oil to below $30 a barrel.

European Central Bank chief Mario Draghi helped contain the pessimism clouding markets on Thursday when he said the eurozone central bank would "review and possibly reconsider" its monetary policy in March.

Now back to the Nikkei. Last September 9, 2015, the Nikkei made a titanic 7.7% rally which was much bigger than today

I showed this

And with the above, I pointed out the following: (bold added)

Of the 9 incidences (excluding today’s fantastic rip) only two 1,000+ points rally represented a tailwind for a continuing run-up. That was in 1987 and in 1988.

For a terse background, Japan’s Nikkei topped in December 29, 1989. This was then followed by a horrific more-than-a-decade long crash.

The next 6 one day sprints were all bear market bounces!

In sum, all eight giant one day spurts occurred during the Nikkei’s boom-bust cycle with a bias for bear market bounces. Most of them transpired during the climax or during the transition from boom to bust.

While the October 2008’s big move was followed by a 38% rally, it hardly brought a major bullmarket. It was in the late 2012, or four years after, when a resurgence of a quasi bullmarket occurred—mostly due to ABENOMICS.

As part of the Abenomics program, the Bank of Japan (BoJ) has been mandated to include stocks (ETFs) in her large scale asset purchasing program. In November 2014, Japan’s pension fund, the GPIF, was also enlisted to participate in the asset shift favoring stocks.

This means that whatever bull market Japanese stocks have recently experienced have been mainly owed to the BoJ and to the GPIF. Or said differently, without the BoJ and GPIF, today's bullmarket may not have existed.

Perhaps even today's blitzkrieg may have been inspired by these institutions.

The point is, today’s run hardly guarantees of a reversal in favor of the bulls.

If today should serve as a tailwind for an upside momentum, then probably like 1987-8 it could mark a near climax for the bullmarket.

Now the above represents the updated chart (including today's 5.9% rip)

The level when the bulls made the 7.7% September 2015 charge has been much higher than today. This means that the one day 7.7% ramp hardly inspired a sustained run.

So what the above has signified have been the following: 

One the Abenomics 2.0 stock market run has been fading. And the ramification has been outsized volatility characterized by huge price swings. 

Second, big moves like today resonate on 1987 to 1992. 

Third, take a look at the recent actions, the Nikkei has just collapsed. And since no trend goes in a straight line, today's 5.88% jump represented a natural reflexive reaction from a severe drop. 

Fourth,  experts quoted by media sees them too, "short squeeze" and "oversold bounce" equates to a dead cat's bounce or a sucker's rally

All these seem to indicate that Japan's bear market has just taken a pause.

Blog Advisory: FeedBurner’s Email Services Down

To my valued email subscribers,

I would like to apologize for the non delivery of my posts during the past two days. 

My feedburner email distribution platform seems to have malfunctioned. I cannot even locate the database, which seems to have just vanished. The sharp drop in the reader counter seems to reflect on this. 

I am not a techie so it will likely take time to search for solutions for its restoration. 

For the meantime, kindly pls just visit this site for updates. 

Anyway thanks for your patience and patronage. 

Yours in liberty

Benson

Asian Bears Maul China’s Shanghai, Japan’s Nikkei and the Philippine PSEi!

Rampaging bears continue to wreak havoc on a growing number of Asian equities

Chinese stocks represented by the Shanghai index went into a wild intraday rollercoaster ride before succumbing to the bears. The Shanghai index sank 3.23%

Yet one of the biggest cash injections in three years by the central bank today has only had a momentary effect. This failed to stop bears from dominating the day's session.

From Bloomberg

Chinese stocks tumbled as the central bank’s biggest cash injection in the financial system in three years failed to ease concern that the nation’s economic slowdown will deepen.

The Shanghai Composite Index slid 3.2 percent to 2,880.48 at the close. Hong Kong’s Hang Seng China Enterprises dropped 2.2 percent to the lowest level since March 2009. Hong Kong stocks fell below the value of their net assets for the first time since 1998. Property developers led declines on concern higher borrowing costs will crimp earnings after the three-month Hong Kong Inter-Bank Offered Rate climbed to the highest level in more than six years.

China cranked up cash injections in its money-market operations after a gauge of interbank funding availability in the mainland jumped the most in 13 months on Wednesday. The government is trying to hold borrowing costs down to support its economy without spurring an exodus of funds that drove the yuan to a five-year low this month. The People’s Bank of China said Thursday it conducted 110 billion yuan ($16.7 billion) of seven-day reverse-repurchase agreements and 290 billion yuan of 28-day contracts.

Part of the reason for today’s loss may likely be due to the ascent by the USD CNH.

Today’s loss essentially erased the 3% jump predicated on the bad news (lower GDP) equals good news (MORRREEE stimulus) last Tuesday. Today's loss dragged the Shanghai index to its lowest level since December 2014.

Meanwhile, Japan’s benchmark, the Nikkei's entry to the bear market yesterday was followed up today by another selling spree.

Like China's Shanghai, the Nikkei 225 had a tumultuous intraday action. The Nikkei soared at the early going, to reach almost 2%, and unfortunately in seeming coincidence with the Shanghai, plunged towards the close.

The Nikkei has now fallen to late 2014 levels.

Asian equities were mostly red today as shown by the Reuters monitor

Among emerging Asia, the Philippine PSEi suffered the largest drubbing; down 2.8%.

Since the record high last April 2015, as of today the PSEi has shed a remarkable 25.14%! The PSEi seems to be having a China's Shanghai index moment.

One Philippine official indirectly blames 'irrationality' to the ferocious bear market activities. He stated that current actions “did not arise from a careful evaluation of corporate returns”, so he concludes that "Eventually, investors will begin differentiating emerging economies as the dust of uncertainty settles down"

Stock markets are supposed to work as forward discounting mechanism, so whatever G-R-O-W-T-H that had happened in the past may not be the future—which is what the current bear market seems all about.

Yet today's performance, as indicated on the table above, already suggests that markets have been differentiating. Unfortunately, they are pointing to the opposite direction than the one suggested by the official. 

Of course, the official’s perspective could most likely be the sentiment of establishment consensus.

Oh by the way, I forgot to add another Asian bear market recruit: as of yesterday, Taiwan's equity benchmark, the TWSE, enlisted to became a member. 

The entry to the bear market by the TWSE suggest that there won't likely be a post election honeymoon for first female president Tsai Ing-wen, who represented the opposition and won by a landslide last weekend.

Infographics: The World’s Most Famous Case of Hyperinflation: Weimar Germany (Part 1 & 2)

The World’s Most Famous Case of Hyperinflation (Part 1)

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.

From the Money Project/Visual Capitalist

The Great War ended on the 11th hour of November 11th, 1918, when the signed armistice came into effect. 

Though this peace would signal the end of the war, it would also help lead to a series of further destruction: this time the destruction of wealth and savings.

The world’s most famous hyperinflation event, which took place in Germany from 1921 and 1924, was a financial calamity that led millions of people to have their savings erased.

The Treaty of Versailles

Five years after the assassination of Archduke Franz Ferdinand, the Treaty of Versailles was signed, officially ending the state of war between Germany and the Allies.

The terms of the agreement, which were essentially forced upon Germany, made the country:

1. Accept blame for the war

2. Agree to pay £6.6 billion in reparations (equal to $442 billion in USD today)

3. Forfeit territory in Europe as well as its colonies

4. Forbid Germany to have submarines or an air force, as well as a limited army and navy

5. Accept the Rhineland, a strategic area bordering France and other countries, to be fully demilitarized.

“I believe that the campaign for securing out of Germany the general costs of the war was one of the most serious acts of political unwisdom for which our statesmen have ever been responsible.” – John Maynard Keynes, representative of the British Treasury

Keynes believed the sums being asked of Germany in reparations were many times more than it was possible for Germany to pay. He thought that this could create large amounts of instability with the global financial system.

The Catalysts

1. Germany had suspended the Mark’s convertibility into gold at the beginning of war.

This created two separate versions of the same currency:

Goldmark: The Goldmark refers to the version on the gold standard, with 2790 Mark equal to 1 kg of pure gold. This meant: 1 USD = 4 Goldmarks, £1 = 20.43 Goldmarks

Papiermark: The Papiermark refers to the version printed on paper. These were used to finance the war.

In fear that Germany would run the printing presses, the Allies specified that reparations must be paid in the Goldmarks and raw materials of equivalent value.

2. Heavy Debt

Even before reparations, Germany was already in significant debt. The country had borrowed heavily during the war with expectations that it would be won, leaving the losers repay the loans.

Adding together previous debts with the reparations, debt exceeded Germany’s GDP.

3. Inability to Pay

The burden of payments was high. The country’s economy had been damaged by the war, and the loss of Germany’s richest farmland (West Prussia) and the Saar coalfields did not help either.

Foreign speculators began to lose confidence in Germany’s ability to pay, and started betting against the Mark.

Foreign banks and businesses expected increasingly large amounts of German money in exchange for their own currency. It became very expensive for Germany to buy food and raw materials from other countries.

Germany began mass printing bank notes to buy foreign currency, which was in turn used to pay reparations.

4. Invasion of The Ruhr 

After multiple defaults on payments of coal and timber, the Reparation Commission voted to occupy Germany’s most important industrial lands (The Ruhr) to enforce the payment of reparations.

French and Belgian troops invaded in January 1923 and began The Occupation of The Ruhr.

German authorities promoted the spirit of passive resistance, and told workers to “do nothing” to help the invaders. In other words, The Ruhr was in a general strike, and income from one of Germany’s most important industrial areas was gone. 

On top of that, more and more banknotes had to be printed to pay striking workers.

Hyperinflation

Just two calendar years after the end of the war, the Papiermark was worth 10% of its original value. By the end of 1923, it took 1 trillion Papiermarks to buy a single Goldmark.

All cash savings had lost their value, and the prudent German middleclass savers were inexplicably punished. Learn about the effects of German hyperinflation, how it was curtailed, and about other famous hyperinflations in Part 2. 

Courtesy of: The Money Project

Part 2

Again from the Money Project/Visual Capitalist

Slippery Slope

“Inflation took the basic law-and-order principles of loyalty and trust to the extreme.” Martin Geyer, Historian. 

“As things stand, the only way to finance the cost of fighting the war is to shift the burden into the future through loans.” Karl Helfferich, an economist in 1915.

“There is a point at which printing money affects purchasing power by causing inflation.” Eduard Bernstein, socialist in 1918.

In the two years past World War I, the German government added to the monetary base of the Papiermark by printing money. Economic historian Carl-Ludwig Holtfrerich said that the “lubricant of inflation” helped breathe new life into the private sector.

The mark was trading for a low value against the dollar, sterling and the French franc and this helped to boost exports. Industrial output increased by 20% a year, unemployment fell to below 1 percent in 1922, and real wages rose significantly.

Then, suddenly this “lubricant” turned into a slippery slope: at its most severe, the monthly rate of inflation reached 3.25 billion percent, equivalent to prices doubling every 49 hours.

When did the “lubricant” of inflation turn into a toxic hyperinflationary spiral?

The ultimate trigger for German hyperinflation was the loss of trust in the government’s policy and debt. Foreign markets refused to buy German debt or Papiermarks, the exchange rate depreciated, and the rate of inflation accelerated.

The Effects

Hyperinflation in Germany left millions of hard-working savers with nothing left.

Over the course of months, what was enough money to start a stable retirement fund was no longer enough to buy even a loaf of bread.

Who was affected?

-The middle class – or Mittelstand – saw the value of their cash savings wiped out before their eyes.

-Wealth was transferred from general public to the government, which issued the money.

-Borrowers gained at the expense of lenders.

-Renters gained at the expense of property owners (In Germany’s case, rent ceilings did not keep pace with general price levels)

-The efficiency of the economy suffered, as people preferred to barter.

-People preferred to hold onto hard assets (commodities, gold, land) rather than paper money, which continually lost value.

Stories of Hyperinflation

During the peak of hyperinflation, workers were often paid twice a day. Workers would shop at midday to make sure their money didn’t lose more value. People burned paper bills in the stove, as they were cheaper than wood or other fuel.

Here some of the stories of ordinary Germans during the world’s most famous case of hyperinflation.

“The price of tram rides and beef, theater tickets and school, newspapers and haircuts, sugar and bacon, is going up every week,” Eugeni Xammar, a journalist, wrote in February 1923. “As a result no one knows how long their money will last, and people are living in constant fear, thinking of nothing but eating and drinking, buying and selling.”

A man who drank two cups of coffee at 5,000 marks each was presented with a bill for 14,000 marks. When he asked about the large bill, he was told he should have ordered the coffees at the same time because the price had gone up in between cups.

A young couple took a few hundred million marks to the theater box office hoping to see a show, but discovered it wasn’t nearly enough. Tickets were now a billion marks each.

Historian Golo Mann wrote: “The effect of the devaluation of the German currency was like that of a second revolution, the first being the war and its immediate aftermath,” he concluded. Mann said deep-seated faith was being destroyed and replaced by fear and cynicism. “What was there to trust, who could you rely on if such were even possible?” he asked.

Even Worse Cases of Hyperinflation

While the German hyperinflation from 1921-1924 is the most known – it was not the worst episode in history.

In mid-1946, prices in Hungary doubled every fifteen hours, giving an inflation rate of 41.9 quintillion percent. By July 1946, the 1931 gold pengõ was worth 130 trillion paper pengõs.

Peak Inflation Rates:

Germany (1923): 3.5 billion percent

Zimbabwe (2008): 79.6 billion percent

Hungary (1946): 41.9 quintillion percent

Hyperinflation has been surprisingly common in the 20th century, happening many dozens of times throughout the world. It continues to happen even today in countries such as Venezuela.

What would become of Germany after its bout of hyperinflation?

A young man named Adolf Hitler began to grow angry that innocent Germans were starving…

“We are opposed to swarms of Americans and other foreigners raising prices throughout Germany while millions of Germans are starving because of the increased prices. We are equally opposed to German profiteers and we are demanding that all be imprisoned.” – Adolf Hitler, 1923, Chicago Tribune

Courtesy of: The Money Project