To try to create our own reality is both futile and destructive. You certainly have the right to go on believing whatever you want to believe, but reality doesn’t care about your wants or beliefs. Reality will deliver negative consequences to the well-meaning, ignorant individual as surely as it will to the most malevolent, stubborn person. Not once has reality excused anyone for good motives, so consistency is essential when it comes to an accurate perception of reality—Robert Ringer
In this issue:
US Prez Trump: Fed’s Gone Crazy! DOF Chief: We’re Being Punished by the Fed! Prez Duterte: Public Should Brace for Tough Economic Times!
-US President Trump: Fed’s Gone Crazy; DOF’s Dominguez Finds the FED as a Convenient Scapegoat!
-Tightening is a Global Phenomenon, Asian Equity Boom Morphing into a Grand Bust!
-Falling Currencies and Rising Rates Triggers Cracks on ASEAN’s Fundamentals
-Don’t Fight the FED: US Markets have been Fighting the FED! IMF Warns of the Growing Risks of a Great Depression!
-Stock Market Manipulation Backfires: China’s SSEC Crashed by 7.6%! Will Xi Jinping Put 2.0 Emerge? What Tools Left for the BSP?
-Duterte: Public Should Brace for Tough Times, A Fiscal Crisis Not Oil Prices Will Be its Cause; Trade Deficit? NEDA Proposes More Money Printing!
US Prez Trump: Fed’s Gone Crazy! DOF Chief: We’re Being Punished by the Fed! Prez Duterte: Public Should Brace for Tough Economic Times!
US President Trump: Fed’s Gone Crazy; DOF’s Dominguez Finds the FED as a Convenient Scapegoat!
Because Mr. Trump has owned repeatedly the record-breaking feat of the US stock markets, it would be natural for him to defend what he sees as his “trophy”. Also, the US mid-term election is less than a month away, and an upheaval in financial markets may harm the prospects of the GOP/Republicans maintaining control of both houses of the Congress.
More importantly, Trump’s record deficit spending would require immense financing. Thus, President Trump’s rants essentially signaled to the FED of his administration’s requirement of sustained access to free money.
Mr. Trump hasn’t been the only political personality who opposed the FED’s actions. Overseas, since the draining of US dollar liquidity has been felt most by emerging markets, officials from several nations have aired concerns of the US Federal Reserve’s actions on them.
Last June, Reserve Bank of India’s Governor Urjit Patel, writing in the Financial Times, warned that the US Fed’s balance sheet contraction “proved to be a “double whammy” for global markets. Dollar funding has evaporated, notably from sovereign debt markets.” India’s rupee hit a record low last October 9.
In the same month, Governor Perry Warjiyo of Bank Indonesia seconded India’s Patel call stating that the Fed should consider “slowing the pace of stimulus withdrawal would support global growth”. Indonesia’s rupiah dropped to Asian Crisis low the other week.
This week, the Philippines joined the bandwagon of emerging market officials resisting the US Fed's actions.
In speaking to the CNBC at the IMF and World Bank meetings in Bali, Indonesia, Finance Secretary Carlos Dominguez said thatthe U.S. (Federal Reserve) should consider its actions because "it affects the entire world, capital flows back to the U.S., and we're trying our darndest here", and we’re "being punished for something we're doing right."
"Being punished for something we're doing right." Truly?
Excessive domestic money printing to finance "spend, spend and spend" and the race to build supply IS Chairman Jerome Powell led Federal Reserve’s fault?
And wouldn't it be cool to use the Fed as a convenient scapegoat for the unforeseen consequences of the massive corralling of resources from the private sector to the Neo-socialist crony state?
And that’s not all.
“Spend, spend and spend”, said the DOF chief won’t be hindered by tightening: “The Philippines will not cut its infrastructure spending just to be cautious about its deficit spending, he said, but instead may look into dialing down on non-infrastructure expenditure. "Infrastructure for us is a real critical investment that we have to make," he said, adding that the Philippines only averaged 2.3 percent of GDP in infrastructure spending in the past 50 years. "Our economy's choking. We have very bad traffic situation, our ports and airports need to be upgraded ... Some time in the future, we will have to re-think that this is the last thing we are going to cut," Dominguez said.”
How about instead of choking from the lack of infrastructure, choking from debt, inflation and a surge in financial costs?
So the National Government will push its deficit spending to the edge of a fiscal crisis then blame the FED for it!
The FED has become a favorite whipping boy.!
Tightening is a Global Phenomenon, Asian Equity Boom Morphing into a Grand Bust!
Here’s the reality
Figure 1
There is no free lunch. The huge demand for access to free money in the face of low savings rates, balance sheet constraints of the banking system, and central banks have been pressuring yields higher.
The prolific Doug Noland of the Credit Bubble Bulletin has the numbers: “Global bond yields are much higher than in early-February. Argentine 10-year yields have surged 360 bps to 9.66%. Yields are up 685 bps in Turkey (21.1%), 340 bps in Pakistan (11.56%), 326 bps in Lebanon, 250 bps in Indonesia, 157 bps in Russia, 152 bps in Hungary, 114 bps in Brazil, 112 bps in Philippines, 105 bps in Peru, 82 bps in South Africa, 72 bps in Colombia and 56 bps in Mexico. And these are sovereign yields. Corporate debt has performed even worse, with notable weakness in Asian high-yield and dollar-denominated corporates more generally. And it's not as if European finance is sound. Italian 10-year yields have jumped 160 bps to 3.58%. This ongoing spike in global yields has certainly placed intense pressure on leveraged speculation.”
Indeed. Intense pressure on leveraged speculation has blighted Asian risk assets.
China’s Shanghai Composite, down 7.6%, suffered the most. The other major losers were the national bourses of Japan (-4.58%), Australia (-4.67%), South Korea (-4.66%) and Taiwan (-4.48%). The region’s average return for the week was -2.84%. Only four of the 19 bourses eluded the Risk OFF. (figure 1, middle window)
This week’s meltdown has aggravated on the persisting weakness of the region’s equity performance.
The average year to date performance of 19 national benchmarks was -7.43% where only India and New Zealand have defied the region’s dominant sentiment. (figure 1, lowest window)
China (-21.17%), Philippines (-18.15%), Laos (-16.55%), Bangladesh (+.31%), Hong Kong (-13.76%) and South Korea (-12.39%) spearheaded the region's losers.
So Asia’s financial assets (stocks, bonds, and currencies) have been smacked hard from the ongoing tightening process.
Falling Currencies and Rising Rates Triggers Cracks on ASEAN’s Fundamentals
Prices reflect on underlying concerns over fundamentals and the real economy.
The Nikkei Asia reported that Indonesia’s largest developer, along with 15 others, has been penalized for late reporting: “Indonesian stock exchange authorities have rebuked the country's largest property developer, Lippo Karawaci, for failing to file financial reports on time, as concerns mount over deteriorating cash flow and the plunging rupiah. Lippo Karawaci was one of 15 companies to receive a warning from the Indonesia Stock Exchange on Friday for missing its reporting deadline. Its main subsidiary, Lippo Cikarang, was also warned over its failure to file. This is the second time in recent years that the property developer has failed to submit its financial report on time, according to an IDX official. (bold added)
And this dynamic should be expected throughout ASEAN. Reason? Intensifying leveraging or Record Debt levels!
From the TheStarOnline (September 18, 2018): [bold added] “The credit quality of Asean’s corporate sector is weakening again as capital spending resumes after three years of decline. “That spending growth coincides with slowing earnings growth, pushing debt at listed companies in Asean to an all-time high of nearly US$700bil,” said S&P GlobalRatings credit analyst Xavier Jean in a statement. The findings are based on two articles published by S&P Global Ratings, titled “Credit FAQ: Asean Companies Maintain Good Liquidity Despite A US$700bil Debt Load” and “Asean Conglomerates Continue Investing In Growth At The Cost Of Leverage.” The FAQ article is based on the analysis of nearly 2,400 listed companies in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.”
More from the same article: “Companies are now spending an average of 80 cents for each dollar of cash they generate, compared with about 60 cents in 2016. However, more spending is buying less growth, with returns on capital now in their seventh consecutive year of decline across the region. It added that leverage in the corporate sector has increased in almost every country, except Indonesia, where it is slightly decreasing amid higher earnings in commodity-related sectors. Corporate leverage as a proportion of profits is at multi-year highs in Vietnam, the Philippines, Singapore, and Thailand.
To consider Indonesia has one of the lowest leverage in the region. Yet, relatively having low leverage hasn't been enough to stave off financial instability! (see figure 2, upper window)
Don’t Fight the FED: US Markets have been Fighting the FED! IMF Warns of the Growing Risks of a Great Depression!
Figure 2
Well, Asia’s grim performance hasn’t been in isolation, it has resonated with the world.
Since the first bout of downside volatility emerged at the end of January 2018, US markets have “decoupled” with the world. (figure 2, middle window)
Last week’s turmoil simply “recoupled” or brought back the US equity markets in line with the actions of the world markets. US benchmarks Dow Industrials, S&P 500, tech-heavy Nasdaq and the small-cap Russell 2000 fell steeply by 4.19%, 4.1%, 3.74%and 5.23%, respectively.
From this perspective, the over-liquefied, over-leveraged, over-extended, and overvalued global markets, nurtured from an extended environment of free money, reacted naturally to the transition brought about by the US FED’s normalization or the removal of monetary accommodation.
In the context of asset prices, if (monetary) inflation is about more money chasing too few securities, then shouldn’t the opposite hold true once such conditions have stopped or reduced? So why should this come as a surprise? For example, M3 has been correlated with the Philippine PhiSYx: it leads the former with a time difference. (figure 2 lowest window). The slumping M3 has been accompanying the decline of the Phisix.
That said, tightening liquidity has been a global phenomenon which has begun to impact the US.
It affected first the “periphery”, the emerging markets, then spread to the “core”, developed economies. As the largest financial market, the US represents the core within the core.
After all, a globalized world means entrenched interconnectivity; enhanced and deepened by technological advancements. Sopolicy transmission effects from the US Federal Reserve come as a process that operates on a time lag.
This is the “periphery to the core” transmission mechanism.
And please do note that last week’s magnified global volatility marks the second episode of in eight months! And atestament to a disorderly transition has been the increasing frequency of market convulsions and the narrowing breadth of positive returns in global markets.
The traditionally blind IMF warned a week earlier of the escalating risks of a “second great depression”. From Express.co.uk (October 4, 2018): “THE world economy is at risk of another financial CRASH, the International Monetary Fund (IMF) warned as the international organisation spoke of “large challenges” ahead “to prevent a second Great Depression”. In a new report, downcast predictions pointed to cheap interest rates and surging debt levels as potential triggers for economic chaos”.
The IMF repeated their admonition this week but alluded to trade war as a possible trigger: From Express.co.uk (October 10, 2018): “THE world’s economy is at risk of being crippled by “dangerous undercurrents” in the global financial system, a new report by the International Monetary Fund (IMF) has warned. The IMF detailed how further escalation in the burgeoning trade war could see investors spooked and “significantly harm global growth” with a sudden sell-off in financial markets.”
Everyone seems to be looking for excuses for the coming fallout.
This brings us back to Mr. Trump’s yammering against the FED.
In essence, the US Federal Reserve led by its Chairman Jerome Powell may have taken a page from predecessor William McChesney Martin who famously took “the punch bowl away just as the party gets going”.
And President Trump may be worried that this may expose the fragile underbelly of the stock market. Ironically, a presidential candidate named Donald Trump lampooned the stock market as a “fat ugly bubble”!
And while President Trump and emerging market officials have been railing against the FED, it has been the US stock market that has been “fighting the FED”.
As a popular Wall Street axiom says, “Don’t fight the Fed!”
Unsustainable relationships won’t last. Something is about give.
Stock Market Manipulation Backfires: China’s SSEC Crashed by 7.6%! Will Xi Jinping Put 2.0 Emerge? What Tools Left for the BSP?
Figure 3
Aside from the Philippines, manipulating stock markets have been pervasive in China.
The most interesting reaction from the week’s global turmoil has been the Chinese bellwether, the Shanghai Composite, which crashed (-7.6%) to 2014 lows.
On the supply side, interventions included imposing various limits in selling, repressing sellers, arresting people who spread were “spreading rumors” and more.
On the demand side, state enterprises, along with financial institutions, were mobilized to buoy the stock market, by bidding up shares of index sensitive firms. The “National Team”, as labeled by media, has done so to date.
Looks familiar?
But instead of a market-based recovery, the imbalances brought about by such interventions, through the misallocation of funds, have only mounted.
Naturally, diversion of funds from operations or capital expenditures would lead to financial constraints. To sustain operations and or implement the national government’s behest, balance sheets of the participating firms would have to swell via increased leveraging or transfers from taxpayers.
So not only were funds diverted for unproductive use, interventions amplified systemic credit risks, effectively nationalized listed firms, widened the discrepancy between prices and health conditions of capital and compounded on capital consumption.
And by promoting manipulation, systemic corruption became entrenched into the system.
Yet, to kick the two-year can down the proverbial road imply a limit on such actions. And that end may have been reached. Repercussions from these were ventilated this year.
Last week’s crash punctuated its current downside trend. Retribution is here.
The moral: because the pricing system’s fundamental function is the coordination of supply and demand, deliberate distortions of the prices result to unintended consequences. More pointedly, desecration of the market’s pricing system will boomerang. And it has, in the case of China.
Unknown to most, China’s stock market bust in 2015 has had widespread political and economic ramifications.
Not only did the Chinese government support the stock market, but it also unleashed trillions of credit, mostly via Total Social Finance, in the next two years (USD 1.84 trillion in 2016, USD 3 trillion in 2017)! (figure 3, middle window)
The government implemented a considerable fiscal stimulus as a stabilization tool against the stock market crash! (figure 3 lowest window)
And the ring-fencing against China’s stock market collapse had been worldwide.
In early 2016, the Bank of Japan embraced negative interest rates while the European Central Bank expanded its negative interest rate policy regime. Addressing both domestic and possibly external factors, the Bangko Sentral ng Pilipinas adapted its version of quantitative easing in late 2015.
Will there be a Xi Jinping Put 2.0? Will global central banks desist from further tightening or even reverse course?
But how will the BSP and the National Government respond to China financial meltdown?
Despite the 150 point rate increase, rates remain at a record low. BSP’s QE remains on a milestone high. Fiscal stimulus, which has now transformed into an economic developmental model, continues to grow at an unprecedented pace. Public and private sector debt has been rocketing. Gross International Reserves continues to sputter.
With monetary and fiscal tools utilized to the maximum, which has now been revealing diminishing returns, what remains for contingencies?
Duterte: Public Should Brace for Tough Times, A Fiscal Crisis Not Oil Prices Will Be its Cause; Trade Deficit? NEDA Proposes More Money Printing!
Because of massive rescues, during last week’s Powell Tantrum the Philippine national benchmark, the PhiSYx was among the least affected (-1.04%). The peso also rallied (+.19%).
However, the brunt of liquidations occurred in the domestic Treasury market.
Figure 4
Excluding the 3-month bill, yields of Philippine treasuries rose across the curve with the most significant increases coming from the 2-year and 5-year maturities, which jumped by over 100 bps (1%)!!! (figure 4, upper window)
Citing the rise of oil prices, this weekend the Philippine President asked the public to brace for tough economic times: “This is not the end of the story, guys,” he added. “You say we will suffer during my time. If things will move forward in accordance with the present calculations now, we will really suffer during my time.” (Italics added)
The coming “tough economic times” will hardly be brought about by oil prices. Instead, a blow out in the fiscal deficits will. Or a fiscal crisis will.
And that unwieldy public spending spree, financed partly by the BSP, has already contributed substantially to rising domestic prices, and the escalating effects of the crowding out syndrome in interest rates. (figure 4, lower window)
Skyrocketing yields have not just been manifestations of mounting losses of the financial industry, the rapid tightening of financial conditions represent its most important signal.
The swiftness of rate increases enhances the odds of an economic and financial accident. Remember the FSR’s 3Rs (repricing, refinancing and repayment risks)?
Figure 5
While the DOF can blame the FED for its dollar illiquidity, it has to explain why the supply of dollars continues to seep out of the country.
Despite the slowdown in import growth (11.04%) in August, it still outpaced the lackadaisical growth in exports (3.08%). The result? From the Philippine Statistics Authority: the country’s balance of trade in goods (BoT-G) expanded to a $3.51 billion deficit in August 2018, from the $2.74 billion deficit in August 2017. (figure 5, upper window)
Despite imports of capital goods, experts don’t even bother to ask how have these imports been financed? Well, the short answer is money printing by the BSP and by the banking system.
Not only does demand artificially created by credit expansion dilute on the purchasing power of the local currency, but it also drains the stock of USDs, through trade and current account deficits.
And The Fed IS the culprit here????
Oh, the slowdown in imports has echoed the actions of M3. With lesser money to buy stuff, import growth has been affected too! (figure 5, lower window)
Here is more proof why money is EVERYTHING to this government.
The NEDA proposes to mend the trade gap by making “financing more inclusive”. How so?
From the Inquirer (October 13, 2018), “Pernia said the Personal Property Security Act, among other government initiatives, would strengthen the legal framework for the use of personal property as collateral, and establishes a modern, centralized online collateral registry. This law was enacted on Aug. 17. “We expect this to make financing more accessible to Filipino SMEs, including export-oriented firms,” he said.”
Throwing money to exporters solves the problem? The banking system has been churning an incredible credit growth rate of 18-20%? If 18% to 20% of credit growth hasn’t been delivering the goods, will 30%, 40% or 50% do the trick?
And what if the external demand and not financing is the problem? How would credit money solve that? Demand exporters to extend vendor financing to overseas buyers?
You see now why the Philippines, day in and day out, is becoming increasingly vulnerable to a fiscal/banking crisis?
Abraham Maslow once said, "if all you have is a hammer, everything looks like a nail”.
To apply to the Philippine government, "if all you have is a printing press, everything looks like a spending problem”.
