Putin vs. Marcos: Who is the Bigger Kleptocrat?

Bill Browder, the former CEO of the hedge fund Hermitage Capital Management and who was once Russia's largest foreign investor, told Fareed Zakaria of CNN that he believes that President Vladimir Putin of Russia is the world's richest man, with an estimated net worth of US$ 200 billion.  This would make Putin more than twice as rich as Bill Gates, the world's richest man, with an estimated net worth of US$79 billion.  Bill Browder would be in a strong position to know.  He once conducted a "stealing analysis" of Gazprom, Russia's largest oil company, and concluded that "only 10%" of Gazprom's assets were being stolen, instead of 99% as indicated by Gazprom's market price, hence Gazprom's gross undervaluation.

Given that many of Russia's billionaires have strong ties to Putin, particularly in the oil and gas industries, Russia's main export and one of its largest natural resources, it is unsurprising that Putin, the one with the actual power to distribute Russia's biggest exported commodity, would have the biggest share of the Russian economic pie.

This is not hard to believe at all.  One just has to look at the cost overruns of 2014 Winter Olympics in Sochi, Russia. With a revised budget of US$ 51 billion, the 2014 Winter Olympics in Sochi costs more than three times the 2012 Summer Olympics in London, roughly $14 billion. But the Sochi Winter Olympics was a much smaller event, with only 2,873 athletes representing 88 countries.  In contrast, the London Summer Olympics was a much more massive affair, with around 10,700 athletes from over 205 countries.  This is just one event in the course of Putin's 14 year reign.  Multiply this by all the transactions that go through in Russia's US$ 2.1 trillion economy and US$ 200 billion in plunder sounds pretty darn realistic.

Bill Browder went on to claim that during "the first eight or 10 years of Putin's reign over Russia, it was about stealing as much money as he could."  Sound familiar?

In absolute numbers, the size of Putin's loot would dwarf the US$ 35 billion that President Suharto was reported to have amassed in his 31 years in power.  But Putin's rapaciousness ranks only 5th in the world, behind Mobutu Sese Seko of Zaire, Sani Abacha of Nigeria, our very own President Marcos of the Philippines, and President Suharto of Indonesia.  Why?  A robber's ability to rob is determined by the size of the vault he is robbing.  It just so happens that Putin's vault, namely the Russian economy, was so much bigger than the others. With a cumulative GDP of US$ 15.88 trillion from 1999 to 2014, Putin's vault is almost 6 times President's Suharto's cumulative GDP of $2.66 trillion from 1967 to 1998.  But in terms of amount stolen as a share of the economic vault, Putin's loot amounts to only 1.26% of the cumulative Russian GDP in the 14 years that Putin has been in power.

So who was the bigger kleptocrat: Putin or Marcos?  In this case, Macoy still comes out on top!

Singapore, Malaysia, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 3rd Qtr 2014

Almost all countries discussed in this blog post, with the exception of Thailand, have been experiencing rapid growth in home prices that have outstripped inflation by a wide margin.  The gap between home prices and their inflation adjusted levels are at the widest ever, particularly in Singapore and the Philippines.

Singapore


Singapore's home prices slid for four straight quarters, which, according to Bloomberg, is the longest losing streak in five years.  Home prices are still  81% above their year end 2004 levels. Overall prices levels, as measured by inflation have just increased by 30.37% since year end 2004.  In other words, for the past ten years, Singaporean home prices have outpaced inflation by more than 50 percentage points.

Malaysia

Neighboring Malaysia's House Price Index actually topped out at 135.44% in the second quarter of 2011 and has posted a 3.37% decline since then to 130.87% as of the fourth quarter of 2013.  In the first quarter of 2014, home prices rebounded to 133.03% and have continued to march higher to 134.22% as of the third quarter 2014, reducing the overall decline from the peak to just 1.02%.  Home prices are just 34.22% above their year end 2004 levels.  General price levels are only around six percentage points lower, at 28.26% above their year end 2004 levels.

Thailand


In Thailand, which has been experiencing political turmoil for some time, home prices have remained essentially flat since the end of 2004. Home Prices ended 2013 with the index at 100.54%, just 054% higher than the end of 2004, but showing a substantial recovery since the recent low of 74.08% posted in the third quarter of 2009. In the third quarter of 2014, home prices have rebounded to 106.23%, or 6.23% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 34.68% above their year end 2004 levels.

Indonesia

Meanwhile in Indonesia, home prices have showed no signs of slowing down their upward trajectory.  In fact, prices seem to have gone parabolic, climbing 4.63% in the last quarter of 2013, from a base of 121.49% as of the third quarter of 2013 to 127.11% as of year end 2013.  In the third quarter of 2014, home prices have climbed an additional 6.64% to reach 133.75%.  Since the first quarter of 2007, home prices have risen 33.75%. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Philippines

Philippine house price index stands at 208.08% at the end of the third quarter 2014 or over 108.08% above their year-end 2004 levels.  Philippine home prices have posted the largest 10 year gains among all the countries considered in this blog post.  Like Singapore, Philippine home prices have outstripped inflation by more than fifty percentage points.  Like Indonesia, Philippine home prices have so far no signs of slowing down their upward trajectory for the foreseeable future.   The question is, is this momentum sustainable?  Or will the Philippines and Indonesia follow its ASEAN neighbors, Singapore, Malaysia, and Thailand, in exhibiting plateauing or declining house prices?  That remains to be seen.

Source: Global Property Guide, World Bank, Trading Economics

Great Depression vs. Great Recession: Unemployment

The reported unemployment rate during the Great Depression was significantly higher than the reported unemployment rates of the Great Recession.

But are the two rates comparable? Before 1938, children were a significant part of the labor force.  In 1900, children younger than sixteen made up as much as eighteen percent of the labor force.  It was only when the Fair Labor Standards Act of 1938 became law that children younger than sixteen were barred from working in manufacturing and mining but not agriculture.

To make the numbers more comparable, it is better to get the ratio of Employment to the Total Population (which includes children). When we do this, the two measures are not so far apart.  In 1929, the year "0" for the Great Depression, 54.41% of the total population was employed.  By 1933, year "4", only 41.97% of the population was employed. But the rise in employment was dramatic.  Four years later, 47.63% of the population was employed, almost six percentage points higher. The employment momentum only stalled when the tax hikes of 1937 induced another recession in 1938 and new child labor laws barred children from the labor force.  If the momentum had continued, the employment ratio would have recovered in less than five years.

In 2007, the year "0" of the Great Recession, 48.42% of the population was employed.   Four years later, only 44.89% of the population was employed, a drop of less than 4 percentage points.  By October 2014, roughly three years later, only 46.14% of the population is employed, an increase of only 1.25% percentage points.  The growth rate of employment was less than a fourth that of the Great Depression.  At this rate, it will take six more years before employment recovers to that of Year "0".

"Great Depression vs. Great Recession"


Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

Great Depression vs. Great Recession

Why does the US Recovery from the Great Recession feel so sluggish?  That's because it is!

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak in 2011, only four years after the Great Recession started in December 2007.   In 2014, the US economy is only 10.9% larger than the bottom in 2009, averaging only 2.1% growth every year since the Great Recession bottomed out.

The overall economic contraction during the Great Depression was much more severe (-26.7% from peak to trough) and took much longer (four years from 1930 to 1933).  Economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years for the US economy to reach parity with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the five years since the US economy bottomed out in 1933, the US economy was 38.6% larger than the bottom in 1933, averaging 6.7% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"


Why was the recovery during the Great Depression a lot more robust than the Great Recession?  That is the subject of future blog posts.

What Happens When the Boom Turns to a Bust?

Another sign that the Philippines is in the middle of one of the biggest real estate booms in the past twenty years is that employment in the construction industry as a percentage of total employment is at an all time high.  As of April 2014, the construction sector now employs 6.8% of all employees, surpassing the peak of the previous boom of 6.2% posted in July 1997, right before the bottom fell out of the market.  The current percentage is more than three standard deviations above the sector's long-term historical average of 5.54% (the average from January 1996 to April 2014).  The probability of this occurring is low, as in very low - less than 0.3%.

In previous blog posts, we talked about how the Philippine Real Estate Bubble might have already peaked.  What we haven't dealt with is the aftermath of that boom, when the boom turns to a bust.

For that, we can turn to the US Construction Industry, which, at its peak, employed 5.0% of all US Workers as of May 2006.  This is only slightly above its long term historical average of 4.5% from May 1999 to May 2013.  When the US Real Estate Market collapsed, employment in the construction industry collapsed as well.  Employment in the sector did not only revert to the mean, it went way beyond it, to compensate for the sector's exuberance during the boom.  Today, the sector employs only 3.8% of all US employees.  On an absolute basis, the number of jobs in the sector collapsed as well.  From a peak of 6.7 million employees as of May 2007, the number of jobs dropped by 1.6 million or 24% to just 5.1 million employees as of May 2013.

Will this happen in the Philippines?  We don't know.  But if it does, it will be disastrous for the country as a whole.

If employment in the sector merely reverts to the mean, meaning a drop from 6.8% as of April 2014 to its long-term historical average of 5.54%, this will mean 1.26% or 486 thousand people will lose their jobs.  If employment in the sector drops to the low end of the range (like 5.0%), this will mean a drop of 1.80% or or a loss 696 thousand jobs.

This just covers the construction sector.  It does not take into account how the sector interacts with the rest of the economy.  Given that the real estate sector has been one of the major drivers of economic growth, it will not be surprising to see how massive the aftershocks of the real estate bust will be.  The US has been through it post 2009 and so has the Philippines after 1997, when the Asian Financial Crisis took hold in the country.

The Philippine Consumer Has Not Peaked - Yet

Quite a few previous blog posts have detailed how the Philippine Real Estate Market may have already peaked in terms of sales volume and loans to the residential real estate sector.  The Philippine Real Estate Market has yet to peak in terms of price, although some of our ASEAN neighbors have already showed signs of plateauing to declining prices for residential real estate, notably including Singapore and Malaysia.

The two charts below indicate a slowdown in terms of loan growth in the real estate sector.

Since home prices have still continued their relentless climb, this  has not yet translated to a sharp uptick in Non-Performing Loans (NPLs) in the sector.

However, there was a slight uptick in NPLs from 3.15% of residential real estate loans in 2013 to 3.34% as of March 2014.

Negative Real Interest Rates

The persistence of negative real interest rates in the Philippines has led, unsurprisingly, to a sharp drop in Gross Domestic Savings Rate as a percentage of GDP since 2010.

Uptick in Consumer Loans

With negative real interest rates, it makes sense for consumers to buy tangible goods, such as real estate and cars, as a store of value.  Correspondingly, there was a sharp uptick in total consumer loans both as a percentage of GDP and as a percentage of the Total Loan Portfolio.

The uptick seems to have leveled off since 2012. Most of the increase, it seems, can be attributed to residential real estate loans and auto loans.  Again, the leveling off has not yet translated to any notable increase in consumer loan NPLs - yet.

Another Sign that the Philippine Real Estate Bubble May Have Already Peaked?

In a technical analysis of the price trends of financial securities, volume is a very important technical indicator. If the volume moves with the trend, the volume confirms the trend.  When price and volume diverge, it is often indicative of a shift in the trend. For example, if an uptrending stock price is accompanied by lower and lower volumes, it may indicate that the price trend is weak and that prices may start to decline.

The same holds true for the real estate market.

US Real Estate Market

In the US, sales volumes peaked for US Total Home Sales (New and Existing Home Sales) at 8,4 million homes in 2005, a year before the US Median Sales Price peaked at US$ 225K in 2006.  By 2007, the US Median Sales Price slipped by only 1% to US$ 223K while sales volumes had already dropped an astonishing 30.58% from the peak sales volume in 2005, to 5.8 million in 2007.

From then on, the US Median Sales Prices continued to decline year after year, bottoming out at $170K in 2011, or some 25% below the peak price level.  By then sales volumes had already bottomed out a year earlier in 2010 to 4.5 million homes, or some 46% below peak volumes.

Sources: Realtor.org, St. Louis Fed
Median Sales Price is a weighted average of the median sales prices of New Home Sales and Existing Home Sales


The same dynamic played out in both segments of the US Residential Real Estate Market: New Home Sales and Existing Home Sales.

Here is the chart for New Home Sales:

And here is the chart for Existing Home Sales, the much larger market segment.

Philippine Real Estate Market

Might the same dynamic be playing out in the Philippine residential real estate market?  One problem bedevilling such an analysis is the dearth of data.

To my knowledge, the Philippines does not have adequate market data.  For instance, there seem to be no published figures for sales volumes for residential homes.  The best approximation of such data is HLURB's statistics for licenses to sell residential homes.  This statistic represents only new homes and only represents licenses to sell for each residential unit and not the actual sales volumes.

Another issue is that there seems to be no price data on residential sales.  The best data is assembled here, which in turn, is assembled from the Philippine Office of Colliers International, a global real estate agency.  These prices, in turn, are based on the average prices of a prime 3 bedroom condominium unit in the heart of the Makati Central Business District.  This is like basing nationwide US housing prices on the price of a prime 3 bedroom coop unit in Manhattan in New York, one of the priciest real estate markets in the US.  The data available in the Philippines is not representative of the true state of the entire national residential real estate market.  At best, it is an approximation of the Philippine Real Estate Market.  The BSP has stepped into the picture to overcome this deficiency by developing their own real estate index, which would be more comprehensive in scope. Here is a possible candidate for such an index.

But based on the data available, we arrived at this chart:

Based on this data, volumes (as indicated by Residential HLURB licenses to sell) may have already peaked in 2012, while prices have continued their upward climb to date.  Volume seems to have peaked at 264,237 units in 2012 and dropped 15% to 225,051 units in 2013.  In the first quarter of 2014, volumes declined further on an annualized basis, to just 189,668 units or 28% below peak volumes.

Prices though, have continued to climb since 2012, another 14% in 2013 and another 2% in the first quarter of 2014, representing a 16% increase over 2012 prices.

Is the same dynamic that played out in the US Residential Real Estate Market playing out in the Philippines?  It looks like it, but it may still be too early to tell.