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Prudent Investor Newsletters Will Go Into Hibernation…

It seems time to go into deep meditation.

So this blog will go into hibernation.

First I will set blog to private,

Then updates will cease...until perhaps the time will be ripe.

Nevertheless, thank you very much for patronage.

I offer a farewell prayer for us all. From Psalm 23:

The LORD is my shepherd,

I lack nothing.

He makes me lie down in green pastures,

he leads me beside quiet waters,

he refreshes my soul.

He guides me along the right paths for his name’s sake.

Even though I walk through the darkest valley,

I will fear no evil, for you are with me;

your rod and your staff,

they comfort me.

You prepare a table before me in the presence of my enemies.

You anoint my head with oil; my cup overflows.

Surely your goodness and love will follow me all the days of my life,

and I will dwell in the house of the LORD forever.

Yours in liberty,

Benson

Vote Buying, Election Spending and Money Supply Growth

At the Library of Economics and Liberty, Ms Emily Skarbek cited an interesting study that correlates vote buying with money supply growth: (bold mine)

Traditional theories of political business cycles - Nordhaus (1975), MacRae (1977), Persson and Tabellini (1990) - predict monetary expansions in the run up to an election. Stimulating the economy, they argue, can help the incumbent politicians win elections. These theories suggest that the growth in M1 is a result of deliberate manipulation of the money supply leading up to the election as a means of gaining support.

But what if that isn't the story in countries with weak institutions? What if the increase in the monetary aggregate occurs actually as a by-product of outright vote buying, which happens concurrent with the election because of increased cash demand? This is the hypothesis for democracies outside the OECD put forward by Toke Aidt, Zareh Asatryan, Lusine Badalyan, and Friedrich Heinemann in a recent working paper.

The paper looks at month-to-month fluctuations in the growth rate of M1 in 85 low and middle-income democracies. The evidence shows a sizeable increase in the growth rate of M1 in election months. Their mechanism to explain this is vote buying in machine politics, where vote buying means outright payments or gifts in exchange for voting in a particular way or for showing up to vote.

The idea is that vote buying requires significant amounts of cash to be disbursed right before the election is held. This increases the demand for liquidity and affects M1 in several ways. First, resources to buy votes could come from converting illiquid assets into cash. This substitution from broad money into cash or deposits directly increases M1. Second, vote-buying funds may come from the shadow economy. Once this is used to buy votes, a fraction of it ends up in bank deposits. Third, incumbent governments may simply run the printing press. Each of these would result in a spike in M1 very close to the election date.

What they find is that systematic, large-scale vote buying has short-run effects on aggregate measures of the money supply. But to be an effective electoral strategy, vote buying requires weak democratic institutions, poorly monitored elections, and an electorate willing to "sell" their votes. Their pattern of evidence supports this, finding no effect of this mechanism in established OECD democracies.

I'd expand the issue as not just direct vote buying but also indirect vote buying or overall election spending; particularly campaign materials (shirts, tv ads, wrist bands etc), campaign spending (travel expenses, food lodging, etc), cost of mobilization of campaign machinery and more.

Let us see how this applies to the Philippines. Below are changes in M1* 1 year prior to national elections

* note M1--consists of currency in circulation (or currency outside depository corporations) and peso demand deposits (BSP).

2004 national elections (presidential and senatorial)

2007 senatorial elections 

2010 national elections (presidential and senatorial)

2013 senatorial elections

2016 national presidential and senatorial elections

Hmmmmm

Phisix 7,450: The Duterte Regime in the Shadow of Team PNOY; The Coming Failure of Prohibitionist Statutes

The element of rule begins—and with it exploitation—when someone, or a group, gets hold of the state and starts to operate it. It could be a big businessman—often it is—or some groups of big businessmen. And it also could be members of the Communist party or whatever. In other words, any group—whether businessmen, labor union, or a king and his retinue—any group that manages to get control of the state naturally becomes a ruling class because of that overall control.—Murray N. Rothbard

In this issue

Phisix 7,450: The Duterte Regime in the Shadow of Team PNOY; The Coming Failure of Prohibitionist Statutes

-Protest Vote? Why the Duterte Regime Will Likely Work Under the Shadow of Team PNOY

-The Coming Failure of Prohibition Statutes; Why Populist Politics Underwrites Its Own Demise

-Watch the Cabinet Appointments: The Plus Ça Change, Plus C'est La Même Chose

-Duterte’s Regime Major Challenge: How to Deal with Bursting Bubbles

-Phisix 7,450: Will the New Administration Justify the Escalation of the Mispricing of Philippine Risk Assets?

Phisix 7,450: The Duterte Regime in the Shadow of Team PNOY; The Coming Failure of Prohibitionist Statutes

Protest Vote? Why the Duterte Regime Will Likely Work Under the Shadow of Team PNOY

The political environment plays a very significant role in shaping economic, financial and social outcomes. For instance, if the thrust of a political regime is to abolish property rights to pave way for a collectivist society, then markets, including stock markets, would cease to exist. So it would be of primary importance to understand the political process that would underpin the direction of governance.

The Philippine political season is over. The voting public has decided on a new set of leaders at the national level; namely the president, the vice president and 12 senators, and at the local levels.

Nonetheless, how the process took place would provide likely clues to the direction of the governance by the incoming political regime.

Media backed by the many political experts claim that the incoming populist president, former Davao Mayor Rodrigo Duterte, who won via a landslide*, was a product of an ‘angry’ or ‘protest’ vote. The angry or protest vote supposedly had been in response to the myriad expectations failures in governance by the administration, e.g. inequality, criminality, high taxes and etc…

*Based on GMA network’s unofficial numbers, Mr. Duterte beat the nearest rival, administration candidate, Mar Roxas by 36.5% to 22.1% based on 96.06% election returns processed. The PPCRV has Duterte up at 38.59% against Roxas at 23.45%. As for % of votes cast relative to registered voters, GMA showed 81.62% while PPCRV estimated at 81.92%.

Curiously, the angry or protest vote would appear as glaringly inconsistent when seen from the overall election results.

Apparently, voters forgot their ‘anger’ and ‘protest’ on the administration’s vice president candidate Leni Robredo. Ms Robredo leads the independent bet, son of the former president Ferdinand Marcos, Bong Bong Marcos—by only a neck. GMA numbers show that Robredo has 32.07% of votes as against Marcos at 31.6%.

Even if Ms Robredo should lose the elections, the very close margin only translates to the cognitive dissonance of the voting public.

Actually history seems to rhyme.

Rewind to 1998. Former San Juan City major and Senator Joseph Estrada (39.86%) trounced the administration bet Jose de Venecia (15.87%) to claim presidency by the largest margin at 23.92% in the presidential elections based on the 1987 constitution.

Then Mr Estrada rose to the occasion carrying the banner Erap para sa Masa (Erap for the masses) under his party Pwersa ng Masang Pilipino or PMP (Forces of the Filipino Masses). Like Duterte, Erap spoke in colloquial and street language to connect with voting populace.

And again like Duterte, given the size of the margin, the Erap victory revealed how his votes cut across the different income class.

Meanwhile, the vice presidential slot was won by a female administration candidate, Gloria Macapagal Arroyo. The difference was that Ms Arroyo won by a landslide with 49.56% as against nearest rival senator Ed Angara 22.11% or a margin of 27.45% (which was larger than the votes for Mr Angara).

There have only been two female vice presidents, that’s if Ms. Robredo’s victory will be included.

Interestingly, vp GM Arroyo took over the presidency when Mr. Estrada was ousted during the Second People Power Revolution in 2001.

So if Mr Duterte ceases to function as president anytime during his term for any reason, and if Ms. Robredo will win and assume the vice presidency then the PNoy administration will have extended or retained its hold on power via Ms Robredo. The protest vote would lose its very essence!

See the contradiction?

And here is more.

In the latest elections, 5 of the 12 or (42%) of the contested senatorial positions had been won by administration candidates. The independents took three seats (25%) while scattered opposition parties took the rest (33%).

So the administration senators remain as the plurality under the 2016-2022 batch. This means that the administration’s influence on the Senate will remain significant.

So once again, voters have been oblivious of the protest or angry votes when it comes to senators.

It’s no different in 1998 where the same 5 of 12 (42%) seats had been won by the Lakas administration party. The opposition seats was split with LDP 4 seats (33%), NPC, PDP Laban and PMP had one each (8.33%).

Professor and author Bryan Caplan rightly sees through the voter’s irrationality¹

Voters typically favor the policies they perceive to be in the general interest of their nation. This is, however, no cause for democratic optimism. The key word is perceive. Voters almost never take the next step by critically asking themselves: “Are my favorite policies effective means to promote the general interest?” In politics as in religion, faith is a shortcut to belief.

Well, elections have always primarily been about emotions.

And there was a genuine protest vote in the past something which media talking heads has largely failed to address.

Flashback to the 2004 presidential elections. President GMA won an extended term and was eventually accused of electoral fraud through the Hello Garci Scandal in 2005.

In the 2007 senatorial elections, the administration team was humiliated with crushing defeat. The administration ticket under ‘Team Unity’ won only 2 out of 12 seats (17%). The Unified Opposition team running under ‘Genuine Opposition’ snared 8 seats or 67% while the independents took 2 spots or (17%). That was clearly a protest vote.

The reason why I had to emphasize on the grave populist misperception is that under a protest vote there is a predilection for the victors to isolate or to keep their distance with the losing political agents.

For instance, ex president GMA never recovered from the 2007 senatorial debacle.

Based on polls prior to the 2010 presidential elections, 4 out of 5 surveyed people in December of 2009 said that they would not support any candidate endorsed by outgoing GMA. So GMA’s endorsement then was likened to a “kiss of death”. Then administration candidate, Gilberto Teodoro was a virtual no contest because he was walloped in the 2010 elections where he garnered only 11.33% of votes compared to PNoy’s 42.08%

Whereas an electoral victory with little antagonism among contenders would allow past and present or winning and losing powers to most possibly forge an implicit coalition.

This will be particularly important considering the distribution of political power between Mr. Duterte and Team PNoy.

Team PNoy will remain a mighty force to reckon with especially if Ms Robredo wins the vice president slot. Ms Robredo will reinforce the 9 of the 12 incumbent senators whom will be bolstered by the inclusion of 5 of the newly elected administration senators for a total of 14 of 24 or 58% of senate seats under Team PNoy.

All things being equal, should there be a serious rift between Team PNoy and president Duterte, under the right circumstances, Team PNoy would need only 2 more senators to generate the two thirds of the votes required to impeach the president and install Ms. Robredo!

Yes Mr Duterte may have won by a landslide alright. But the cognitive dissonance by the voting public effectively placed a kibosh on Mr Duterte. Mr Duterte can hardly freely work to promote his political agenda. But as I have noted here, ALL candidates are from the ESTABLISHMENT. So wheeling and dealing will not be a surprise to Mr. Duterte. Contra mainstream analogies; Mr. Duterte is NO Donald Trump.

This means that the Duterte regime will have to, or be compelled to work WITH, or work UNDER the shadows of the well-entrenched Team PNoy.

Expect that there will be lots of horse trading, log rolling, and comprises between the two.

So Duterte regime will essentially be counterbalanced by Team PNoy. Or Mr Duterte will have to work along with the interests of Team PNoy!

Again Mr Caplan on voter’s ignorance² of how political system works.

The flip side of public ignorance is insider expertise. While the voters sleep, special interests fine-tune their lobbying strategy. Just as voters know little because it doesn’t pay, interest groups know a lot because—for them—it does; hence the mantra of “concentrated benefits, dispersed costs.” As Mancur Olson proclaims, “There is a systematic tendency for exploitation of the great by the small!”

As I noted above history may rhyme.

And could this be the reason for the sudden change in the stance by Mr Duterte from a self-proclaimed socialist to supposedly a business friendly leader????

Or could it have been that Mr Duterte was after all, the double entry bet by the outgoing administration???

All the administration needed was the marketing humdrum called ‘protest votes’ which the 16.5+ million people easily took the bait.

Funny, but whatever happened to the protest votes? Most importantly, what happened to C-H-A-N-G-E???

The good news is that the current arrangement will mean the likely dilution of Mr Duterte’s leftist agenda. The bad news is that oligarch crony capitalism will be retained. While I disdain oligarch crony capitalism, I DREAD a socialist society.

People have vastly underestimated the risk of ruthlessness from socialist governments (particularly the hardcore ones). Just observe what’s going on in socialist Venezuela where economic collapse has led to starvation, looting and violence. Maduro’s government just declared a state of emergency.

The Coming Failure of Prohibition Statutes; Why Populist Politics Underwrites Its Own Demise

Contradictory to the public’s simplistic impressions, politics tend to be much more complicated. And such complications will lead to expectations failure and the eventual loss of political capital through the decline in popularity for the incoming president.

History provides us hints or indications.

Once again the biggest voting margins on presidential elections under the 1987 constitution were from the double digit lead in the electoral victories of Joseph Estrada, and the outgoing Benigno Aquino.

As a side note, the most lopsided victory in presidential elections was during the Batasang Pambansa elections in 1981, where President Ferdinand Marcos was reelected with a stunning 79.77% lead (mainly due to electoral fraud). Recall too that the Philippines had a balance of payment crisis in 1984.

In 1998 Joseph Estrada won by landslide from the backdrop of the Asian crisis. Unfortunately he was ousted three years later.

Benigno Aquino benefited from a protest vote against GMA which at the same time was buttressed by a sympathy vote coming from the unfortunate death of his mother ex president Cory Aquino a few months before the elections or in August 2009.

President Aquino’s exit and replacement by incoming president Rodrigo Duterte was sold to the public as an ‘angry vote’.

In short, popular votes moored on large margins have failed to please voter’s expectations. Even more, popular votes can lead to worse outcomes such as in the case of Mr Estrada/ Mr Marcos.

There are reasons for these.

One, large margin votes can be a manifestation of TOO HIGH or EXTREME (mainly chimerical) expectations by the public on the elected politicians to deliver political goodies even if these electoral promises are politically and economically unfeasible.

Two, popular votes may provide the carte blanche rationalization for the winning candidate to abuse the system.

Three, crowd psychology matters. The current popular sentiment which seems to favor the sidelining of the rule of law and due process in exchange for judge-jury-executioner political management with increased use of arbitrary violence may in fact lead to violence in both directions.

And once real blood spills over on the front pages or in TV screens or in youtube, such may alter the populist outlook.

And just consider this thought: given that the military has fought NPA through the decades (where thousands have been killed on both sides), how will the military institution, which sports a right wing ideology, react to a leftist president who might impose a rigid leftist ideology based regime? Will the military be pliable? Or will there be a black swan event?

As said above, I am pleased that Mr. Duterte has shown less inclination to his leftist values. But the risk remains.

Let me provide more examples.

The incoming president is a self-professed prohibitionist. So he desires to implement a selective ban on liquor as one of his first populist acts to feed on the strong man rule bubble. That’s aside from the tightening of the noose on the war on drugs. Based on his campaign rhetoric, Mr Duterte will not hesitate to use of extrajudicial violence to implement the latter.

Mr Duterte’s problem is that the chart above ensures that his program will fail even before it starts.

Prohibitionists think that populism will be enough to subvert the law of economics through good intentions backed by strong arm tactics.

Prohibitionist policies are applied not only to drugs or alcohol but also on other social vices as prostitution, smoking, gambling and etc…

Prohibitionists think in terms of what is seen. They ignore the rest. This means that they have always attacked the supply side WITHOUT considering the DEMAND side factors and the pricing system which coordinates the balance between demand and supply.

Yet for as long as there will be demand, there will be supply.

Where everything is supposedly collectively owned, not even the North Korean cold blooded communist dictatorship has stopped the proliferation of trade in what constitutes as the underground economy. Where there is demand, there is supply.

And the restriction of supply only increases the price and profits which allows suppliers to buy protection from within the system.

Additionally, black markets for these products will swell. Moreover, innovative bootleg products will emerge. Yet the more the restrictions, the deadlier the products offered. That’s because quality will be substituted for quick illicit transactions.

Yet the imbalance brought by supply side repression will only translate to the perversion of the political system through the erosion of the rule of law which leads to social instability.

As economist Mark Thornton pointed out³

Prohibition is the major cause of crime. There are the crimes associated with buying and selling prohibited products like heroin and services like prostitution. Then there are crimes and violence associated with prohibition like those related to street gangs and organized crime, such as drive-by shootings, mafia “hits,” racketeering, etc. Violence basically replaces the rule of law when markets are prohibited.

That’s aside from the effects of prohibition on the balance sheets of the government. Effecting larger scale of prohibition enforcement will require more resources, people and logistics (armaments, uniforms, radios, vehicles, office spaces and etc..). Such policies are not for free.

For instance, in the US, over 50% of inmates are from drug offenses. Since there is no free lunch, taxpayers will have to pay the burden of sustaining the welfare of incarcerated drug offenders through debt, taxes and inflation.

Furthermore, prioritizing enforcement of prohibition means lesser attention to other socio-political-economic goals. So while the Duterte government tries to curb alcohol/drug usage, other segments of the political economic system will likely be deprived of the attention, efforts and resources. So this will translate to dissatisfaction from many other interest groups. As a reminder, this is called opportunity costs.

Additionally, the war on alcohol would affect the economy and government financing. Mainstream industries attached to the production, sale, distribution and consumption of alcohol will suffer (think convenient stores, restaurants and bars) as economic activities will move to the informal or the underground economy.

And slower economy means lesser taxes for the spending hungry Duterte regime as noted from his 8 point agenda, e.g. accelerate infrastructure spending, provision of support services for farmers, provide more tertiary scholarships and increased conditional cash transfer program. There is a lot to discuss here but this is for another issue.

Yet there is no greater example or demonstration of the failure of prohibition policies than the 13 years botched experiment by the US government to BAN Liquor sales via the Volstead Act or the National Prohibition Act of 1919.

Then 29th US president Warren Harding (1921-23), who was an alcohol aficionado, openly flouted the Prohibition.

From 1920-30.com⁴ (bold added)

Even prominent citizens and politicians later admitted to having used alcohol during Prohibition. President Harding kept the White House well stocked with bootleg liquor, though, as a Senator, he had voted for Prohibition. This discrepancy between legality and actual practice led to widespread comtempt for authority. Over time, more people drank illegally and so money ended up in gangsters' pockets. Arguments raged over the effectiveness of prohibition. It appears to have been successful in some parts of the country but overall led to an increase in lawlessness.

The US government even resorted to the deliberately poisoning raw materials or the alcohol used for bootleg liquor which eventually backfired. Not only alcohol users were harmed but caused a public outrage against the government as the main victims of alcohol poisoning were the poor.

From Slate.com⁵

Norris also condemned the federal program for its disproportionate effect on the country's poorest residents. Wealthy people, he pointed out, could afford the best whiskey available. Most of those sickened and dying were those "who cannot afford expensive protection and deal in low grade stuff.

And the numbers were not trivial. In 1926, in New York City, 1,200 were sickened by poisonous alcohol; 400 died. The following year, deaths climbed to 700. These numbers were repeated in cities around the country as public-health officials nationwide joined in the angry clamor. Furious anti-Prohibition legislators pushed for a halt in the use of lethal chemistry. "Only one possessing the instincts of a wild beast would desire to kill or make blind the man who takes a drink of liquor, even if he purchased it from one violating the Prohibition statutes," proclaimed Sen. James Reed of Missouri.

Such reveals how prohibition is really a war against the poor!

Thirty second US president Franklin Delano Roosevelt, who was also an alcohol consumer, eventually worked for its revocation. The repeal of the Volstead Act became instrumental to his winning presidential bid in 1932.

The Volstead Act was annulled in March 22, 1933.

Here is the Wikipedia narrative of abrogation of the Volstead Act⁶ (bold mine)

Prohibition lost advocates as ignoring the law gained increasing social acceptance and as organized crime violence increased. By 1933, public opposition to prohibition had become overwhelming. In March of that year, Congress passed the Cullen–Harrison Act, which legalized "3.2 beer" (i.e., beer containing 3.2% alcohol by weight or 4% by volume) and wines of similarly low alcohol content, rather than the 0.5% limit defined by the original Volstead Act.

Congress passed the Blaine Act, a proposed constitutional amendment to repeal the Eighteenth Amendment to end Prohibition, in February. 

Was the Volstead Act a problem of enforcement? The answer is clearly NO. Because the Volstead Act defied the essence of the law of economics, it spawned unintended consequences, in particular, social monsters through major gangsters as Al Capone and Tom Dennison which contributed to the escalation of societal violence.

The US government belatedly awakened to this reality only after suffering a huge cost. So they repealed the uneconomic and immoral statute. And alcohol liberalization paved way for FDR’s presidency.

So whatever peace and security through reduction of criminality intended from the rigid imposition of Prohibition statutes by the Duterte regime has already been fated for doom even before it begins.

And this just shows how voters really do not realize what they are asking for, so they vote for social signaling, bandwagon influenced preferences and “feel good” personalities and policies.

Again Mr Caplan⁷

Brennan and Lomasky point to the expressive function of voting. Fans at a football game cheer not to help the home team win, but to express their loyalty. Similarly, citizens might vote not to help policies win, but to express their patriotism, their compassion, or their devotion to the environment. This is not hair-splitting. One implication is that inefficient policies like tariffs or the minimum wage might win because expressing support for them makes people feel good about themselves. The same holds to some degree for consumer products. Even if generic perfume smelled as good as Calvin Klein, some shoppers would pay extra for the glamorous image of the name brand. In politics, though, Brennan and Lomasky point out that voters’ low probability of decisiveness drastically distorts the trade-off. If your vote does not change the outcome, you can safely vote for “feel good” policies even if you know they will be disastrous in practice

The chart above I have posted when I predicted that President Aquino’s jueteng prohibition would fail. So what happened to jueteng? Has it been stopped? I went to a rural area for a week long vacation during the election week and learned that jueteng operated rampantly not only in the particular municipality, but has been widespread in the region.

The legendary Danish King Cnut or popularly known as King Canute once ordered the sea “to stop the tide”. He did this in order to show his courtiers the limits of his power. Mr. Duterte must learn of the limits to his power.

Apparently, populist politics, which is blind to both history and economics, has underwritten its own demise. Or populism will likely see the unintended effects from their preferred ‘feel good’ policies which eventually will prompt them to reverse their opinions.

Sad to say, they never learn.

Nevertheless, given that Team PNoy will hold a significant segment in the political balance of power, Duterte’s prohibition policies will probably be for exhibition purposes designed to please his voters rather than for serious implementation.

Cabinet appointments should give us a clue to how serious he will be.

Watch the Cabinet Appointments: The Plus Ça Change, Plus C'est La Même Chose

To reiterate, in order to get a hint on the direction of the governance by the incoming regime, all one needs to look at is the composition of the cabinet members

Understand that the character of the governance by the Duterte regime will be reflected by his cabinet. A socialist regime will see a bevy of left leaning people on various if not a majority of key bureaucratic positions.

And the most important appointments will be the military (Defense secretary, Chief of Staff), police (Chief) and local government (DILG). That's because national policies will have to be implemented by police and military power at the grassroots level.

Besides, Philippine politics have long been about patronage-client or clientism. The layman lingo for such symptom: it is not what you know, but who you know.

In the present political system, the patronage-client relationship means that choices for political appointments are fundamentally the winning administration’s payment or reward or compensation for allegiance. Or cabinet appointments will likely reflect on rewards for ushering Mr Duterte to power and for keeping him in power. It’s why “ex-classmate” or “from Davao” has reportedly been the floated qualities for some of his new recruits.

It’s the public choice theory in action.

Thus, the personalities behind the Mr. Duterte’s appointments will likely manifest on the who’s who or those shadowy support groups instrumental or pivotal to his assumption as president.

At the end of the day, those who purport to change the system will eventually get consumed by the system. Or change may have never been the desire at all, but a catchphrase used in the goal to acquire political power at the expense of the people.

I just love this French quote which vibrantly resounds under the present political environment:

Plus Ça Change, Plus C'est La Même Chose (the more things change, the more they remain the same.)

Duterte’s Regime Major Challenge: How to Deal with Bursting Bubbles

Besides, I doubt that the Duterte regime will have much time to impose his fancied policies.

Why?

Because problems in the real economy have been surfacing.

The agriculture industry suffered a near collapse down by a staggering 4.53% in the 1Q, according to the Philippine Statistics Authority PSA. 

4.5% Wow!

Considering that the agriculture industry accounts for about a third of the Philippine labor force, the industry’s sharp downturn would imply that it won’t take long for farmers, fishermen, livestock and poultry operators to go seek a bailout from the incoming president.

Mr Duterte will have his hands full. And this would signify only the tip of the iceberg.

Additionally, Philippine exports crashed by a huge 15.1% last March according to the PSA. The export industry has been contracting for 12 straight months or in four quarters. This means an extended recession in the export industry.

Seven of the 10 subsectors reported declines.

Exports to the top trading partners were sharply down, namely Japan (-13.6%), US (-23.6%) China (-23.4%) and Singapore (-4.8%). Only exports to Hong Kong registered a sharp increase of +11.6%.

The slump in exports may have likely weighed on industrial production which growth has slowed to 1.9% in March.

The downturn in agriculture and exports and stagnating industrial production will eventually have spillover effects or will be transmitted to the rest of the economy.

So more problems for the incoming Duterte regime.

So far what has been keeping the statistical GDP afloat has been the government’s statistical stratagem of applying the GDP deflator, and of activities in the bubble industries which continually have been funded by bank credit expansion.

Yet bubble activities have been emitting signals of considerable slowdown.

Proof from PSE listed companies.

1Q 2016 real estate sales by Shang Properties collapsed by 22.6%! The company attributes this on lower inventory “mainly due to fewer available units for sale of One Shangri-La Place” because “most units already sold in 2015” although they appear to contradict themselves with “other condominium projects are still ongoing”. (p.1)

What’s even more striking has been the near stagnant growth in rental income which only went up by Php 6.6 million. This was reportedly due to “rental escalation and higher rental yields of The Enterprise Center this year”. It’s a curiosity because SHNG has been silent on its malls. Besides, because “Shangri-La at the Fort commenced its hotel operations” which contributed to the hotel income, those new stores at the lobby of the hotel should have contributed to the gains in rental income growth. But it seems that these stores existed in a vacuum.

Or could it be that rental gains from the Enterprise center and Shangri-La at the Fort only offset losses from Shangri-la Plaza to post such a meager growth?

And it’s not just SHNG.

Empire East reported their 1Q FS and they show that real estate sales slumped by 9.6% over the said period.

Interestingly, sales of vertical projects soared by 1,822% but this wasn’t able to fill the gap from the 79.3% collapse in the sales of horizontal projects. The company barely explained the changes in sales performance except to enumerate where they came from “The sales generated were derived from various projects including, The Cambridge Village, The Sonoma, San Lorenzo Place, Pioneer Woodlands, Kasara Urban Resort Residences, The Rochester Gardens, Little Baguio Terraces, California Gardens Square, Greenhills Garden Square and San Francisco Gardens.” (p 21)

While I’d give the benefit of doubt there might have been a shift in focus in the marketing, I suspect that this may be more about the industry conditions than just a shuffle in the mix of sales.

Empire East must have weighed down on the real estate sales of parent Megaworld. MEG’s sales growth dropped to 9.91% in the 1Q 2016 compared to the same period at 14.4% in 2015 and 13.83% in 2014.

Meanwhile, real estate sales growth rate by Ayala Land tanked to just a single digit or 8% in the 1Q of the year from 12.89% and 17.07% over the same period in 2015 and 2014 respectively.

Meanwhile, real estate sales growth by SM Prime Holdings inched up by 3.58% in 1Q 2016 but that’s down compared to 6.75% in 2015 although higher compare to -16.58% in 2014. Recall that SMPH ended 2015 with flat sales (due to negative 4Q)

Mind you, the aforementioned companies continue engage in massive supply side expansions. This means that the slowing growth rates actually mask the actual rate of decline. And those supply additions only postulates to the inefficient use resources because they have hardly been contributing to top line growth.

Add to the massive supply side expansion-slowing top line has been SMPH parent SMIC whose growth rate appears to have plateaued.

All the major business segments of SMIC have demonstrated considerable slowing or stagnant growth rates even as they keep adding stores and malls nationwide financed by credit.

Curiously, regardless of evidence of decay, panic buying continues to be seen in the above stocks. The more the evidence of deterioration, the more ferocious the panic buying!

Phisix 7,450: Will the New Administration Justify the Escalation of the Mispricing of Philippine Risk Assets?

It’s really amazing how media gushes over the elections as if the Philippines have hit a jackpot that will translate to an eternal paradise.

But it’s really been the same in 2010 except that the victor in 2010 supposedly is the loser today. That’s what’s been portrayed.

Media’s talking heads continue to rave by saying ‘historic’ here and ‘historic’ there. Of course, while it would be natural for people to be elated over something new, distortion of truth will be do no help to the public.

For instance, 2016’s voter turnover will be historic if compared to 2010 and 2013 as this media report says. But based on all nations elections from the 1987 constitution, today’s turnover ranks third only compared to 86.5% in 1998 and 86.39% in 2001. So historic was a matter of cherry picking of the baseline. In behavioral finance this called the perceptual contrast effect.

In fact, to stretch way back when the elections began based on the 1935 constitution, the biggest turnover would be in the 1946 where President Manuel Roxas won the presidency on a voter turnout of 89.6%!

This is evidence of how media’s disinformation abets on the shortening of the memory of a big segment of the population. Such mind tricks has programmed the public to vote back to the political arena personalities whom they have previously ousted.

And it would seem that corruption and dictatorship (corruption, electoral fraud and repression) can easily be forgiven. This is based on how people voted during the past three elections. Whereas electoral fraud seems as less tolerable (see genuine protest vote above).

The same mind tricks apply to the media’s report on the recent runup in the Philippine stock market. International media raved over the metamorphosis or transformation of Mr. Duterte to a business friendly leader to have investors “spellbound” as to frantically bid up stocks and the peso. They never seem to ask why the transformation?

Philippine stocks have rallied furiously since the end of January.

Prior to the disclosure of incoming president Duterte’s surprise business friendly economic program last Friday, the PSEi soared by 2.62% a day after the elections, was further pumped higher by 3.08% in May 11 and had a muted -.96% profit taking session on May 12. So even prior to the business friendly disclosure, the PSEi was up by 4.74%. In short, gamblers were spellbound from the end of January and saw the landslide elections as justification to advance their gambling sessions.

This week’s election inspired stock market ramp has resonated with the post 2010 election where Benigno Aquino won by a landslide. The post 2010 election week saw the Phisix surge by 6% compared to this week’s 6.36%.

However in the 2010 version, the PSEi gave back 75% of its gains through a 4.54% decline in the following week.

Elections equal higher markets have not always been true. Returns during the election week of 2004 posted a NEGATIVE 2.1%. The election week where Erap had a HUGE landslide victory in 1998 recorded a NEGATIVE 3.7%. This is understandable because the Erap triumph came at the heels of the collapse of the Phisix due to the Asian crisis. So elections had little influence on the market.

And the Phisix nursed a post stress trauma disorder syndrome (pstd), following the torturous 7 years of bear market (1997-2003), hence the likely risk aversion in 2004.

On the other hand the Phisix had a huge 63% rally in 2009. Hence the anchoring from such huge rally helped buoy the risk appetite for the Phisix to generate 6% during the election week in 2010.

It’s no different today when the Phisix registered a near vertical climb over the past 3 months and saw the elections as further justifications for more destabilizing speculations.

Yet the 3 month rally has prompted the mainstream to call for a bullish outlook on the PSEi based on cyclical statistical comparison using post presidential elections.

The simple message: new leader equals stock market honeymoon.

Easier said than done.

Their studies focused ONLY on prices.

What such analysis has patently ignored has been that stocks markets are hardly just about % returns from prices but also about price levels (purchasing power of the peso relative to the stock market) and valuations.

Price levels.

During the week where the 2010 election was completed, the Phisix stood at 3,330.42 in May 14, 2010. At Friday’s 7,436.79, this means that a peso in May 14 2010 would require Php 2.23 to buy the current Phisix or Friday’s price level.

In short, the peso has depreciated against the Phisix by 55% from the said base periods. This means that it would take more pesos to buy the Phisix at current price levels than in 2010. How much if we compare to earlier periods say May 14, 2004 when the Phisix traded at 1,521.16?

So it would be apples and oranges to make comparisons of post election returns without considering the purchasing power of the peso.

Valuations.

It would be naïve to think that stocks have been programmed to go up forever and have no connection with fundamentals.

Here are the PERs of the years prior to the presidential elections (based on BSP data): In 1997 the PER was at 9.45, in 2003 PER was at 19.22 and in 2009 PER was at 12.59.

In 2015 PER was at 19.55 which makes today’s stocks the most expensive since 1996.

The week prior to the May 9 election the average PER was at 17.67 while index weighted average PER was at 23.04! This week’s euphoria has ballooned the average PER to 18.46 while the index weighted average PER jumped to 24.45!

So thinking stocks will go up just because of a new administration represents a hallucination.

In a not so distant future, reality will prevail again.

Asset bubbles will implode. And so with political bubbles.

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1 Bryan Caplan Myth of the Rational Voter p 19 Libertarinismo.org

2 Caplan op cit p .97

3 Mark Thornton Mark Thornton on Prohibition, Marijuana and the Loss of Elite Control March 3, 2014 Mises.org

4 1920-30.com 1920s Prohibition Enforcing the 18th Amendment

5 Deborah Blum The Chemist's War February 19, 2010 Slate.com

6 Wikipedia.org Repeal Volstead Act

7 Caplan op cit p . 137-8