Tuesday, 9 June 2009

The next six months

Outside the Box
John Mangun
Business Mirror
http://www.businessmirror.com.ph/home/opinion.html

The latest starlet sex scandal certainly makes for interesting news. And as the election looms closer, Cha-Cha becomes the center of political discussion. But it might be time for those in the local media and press to occasionally look beyond sex and politics.

Three weeks ago, a monumental (at least in my mind) event occurred in the financial world. The debt rating of the United Kingdom was lowered from “stable” to “negative” by Moody’s. You remember Moody’s rating service, don’t you? It is the ones that is always saying that the Philippine economy is going to fall into the South China Sea unless we do what we are told and follow the Western model.

Yet searching the local press and media, I was unable to find a major article or wise words from a local pundit about the UK story. I would think that this might be important enough to mention since now the Philippines has a better credit outlook than a member of the G-7 group of “great economies.” So much for the “basket case” economy, unless of course, you mean the West.

I know you are probably fed up with my ranting and raving about the economic collapse of the West, but it might be a good idea to start making some plans for the real “New World Order” that is going to come over us in the next 12 to 18 months. I am still getting email from politicians hysterically screaming about the global-warming myth, so you see that I am a little concerned that these same people might be making economic policy affecting the country.

But forget about the longer term. It is the next six months that look quite interesting and quite exciting, exciting in a positive way.

Although I disagree with Department of Finance and Bangko Sentral policies regarding interest rates and the peso, I do not think it is going to matter one way or the other. Much greater events are going to overwhelm what our policymakers do. A slight reduction in interest rates will mean nothing as the USA goes into a period of worse economic contraction combined with raging inflation and a dying dollar.

Realize the situation in the USA. Government debt by the end of 2009 will equal an unprecedented 80 percent to 90 percent of US gross domestic product. Future borrowings may be 12 percent of GDP annually. By comparison, the Philippines’ debt-to-GDP stands at 54 percent. Not good, but the Philippines’ ratio is falling; the USA’s is increasing.

In the third quarter, the USA will try to issue $1 trillion of new debt. Fingers are crossed to see if the world (read: China) will buy that debt at very low interest rates. If not, it is inevitable that the USA will massively devalue the dollar or US interest rates will go even higher than they are now, killing any economic recovery.

So what are the consequences on your own business if the peso moves to 40 to the dollar? Cheaper imported raw materials and goods? But what abut the peso purchasing power of dollar remittances?

The government is caught between a rock and a hard place on the peso. If they keep the peso artificially cheap to preserve its purchasing power, then we will see P50-a-liter gasoline as oil goes to the nominal dollar price of $80 to $100. Are you better prepared for either of these events than the government?

The government is also relying on the recent 3.3-percent inflation rate to hold. Not a chance, if the peso stays at 47 to the dollar and oil prices continue up. The business people I talk to are not going to get caught with lower inflation-caused profit margins like they were last year. Want an example from the grassroots that the government is clueless about? Already the price of DVDs (Yes, I know these are pirated copies) have just been increased at the local night market.

However, this is about the next six months, and during that time, the local stock market is going up, up, up. My peso/inflation gloom and doom is going to take some time to potentially kick in. Right now, there is a tremendous amount of cash, liquid cash, in the system. This, combined with low inflation and a little fear, is creating an incredible amount of financial fuel to raise stock prices.

Someone called this a “budding bull market.” I guess the fact that the market is up nearly 40 percent from 2008 lows was ignored. This is a full-blown rampant bull market. The “budding” part was two months ago when we moved from 1,800 to 2,000. Would you be happy with a fairly easy 20-percent stock profit? Ok, just this once. Send me an e-mail.

So I anticipate a rising peso, a rising stock market, and also a significant increase in economic activity. But be cautiously prepared because the greatest threat to our economic well-being rests in the fancy conference rooms, here and abroad, where government economic policy is formed and implemented. We all have a great wealth-building opportunity during these next six months if we are aggressive in our actions to take advantage of it.



PSE stock-market information and technical-analysis tools were provided by CitisecOnline.com Inc. E-mail comments to mangun@email.com.

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