Written by John Mangun
Outside the Box
“It is not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.”—Charles Darwin
In the next three to six months, we will witness major financial market and economic events that will severely test the Philippines.
The US economy is sinking faster day by day. After ”pump priming” $2 trillion into that economy earlier this year, the revised second-quarter US economic growth was only 1.6 percent. That is a disaster, and here is why.
Imagine you are expecting to get a raise in your salary. You anticipate that the amount of the raise will allow you to be able to afford the monthly payments on a new car or house. So you buy that house or car, knowing that you can afford it because of your upcoming raise. But when your boss talks to you, you find out that your expected “big” increase in salary is almost nothing.
You cannot afford the monthly amortization but you are now stuck with the monthly debt payment. This is what has happened in the US. The US government borrowed and spent, anticipating that all the spending would fuel the economy and create economic growth to a level that would allow the debt to be paid. It did not happen, and the US is faced with a monthly bill that it cannot pay.
The third-quarter economic-growth numbers will be released in October. When those numbers come out, disaster will follow. The signs are already there. The US housing market is dead. Sales of new and existing homes are at the lowest record in history. The US housing market is a critical economic driver and it has stopped.
There are now six unemployed Americans for each job available, and the trend is getting worse each month. The average unemployed American has been out of work nine months. But if you listen to CNN or read the major US newspapers, there is lots of hope and optimism, and it is also false. Here’s why. The unemployment rate for the average middle-class American is 9 percent. For those earning $150,000 and more, the rate is 3 percent. But for the lower 20 percent of the economy, the unemployment rate is 35 percent. Those numbers should only be applied to a country like the Philippines, not to the largest economy in the world.
In a speech last week, Federal Reserve Chairman Ben S. Bernanke made clear that the only option that the US government has is to borrow (and print) endless amounts of money. However, a major buyer of that government debt is the Federal Reserve itself. And the only way the Federal Reserve can buy that government debt is to print more money. For a personal comparison, this is like taking a cash advance on your Visa card to pay the monthly bill on your Master Card.
To put the US government debt in some kind of perspective, the daily interest rate payable by the US is $34 billion. That is equal to the total value of Philippine exports and overseas Filipino remittances for six months.
The US stock market has been in a minor rally in 2010 holding the belief that the stimulus effort and bailouts would work. This policy has been a failure. The US dollar has been strong in the belief that the US economy would recover, leading global growth once again. The US economy will not be a growth driver for at least another decade, and will never be a growth driver until it changes its debt-based prosperity model.
For several months I have bored you with many gloom-and-doom stories and forecasts about the US economy and the US dollar. However, the two events of the economic numbers released last week and Chairman Bernanke’s speech now change the theory to a close reality. Had the second-quarter US economic numbers been favorable, the future might have been different and more positive. But it did not happen.
Also last week, the price of silver jumped $1 to close over $19 an ounce. If this price holds as a support price, silver will move to at least the mid-$20 range. Based on the current ratio of the gold price to the silver price, that would put gold at over $1,600 an ounce from its current $1,240 level. That is very bad news for the US dollar.
The Philippines must adjust to prosper. If the government tries to keep the peso from appreciating, then it must buy dollars and sell pesos. That means that the Philippine central bank will increase its holdings of a currency, the dollar, that is losing value, and that does not make any sense at all. Further, this will stifle foreign investment that will seek to take advantage of a rising peso and a falling dollar.
The New York Stock Exchange is having trouble staying above 10,000. Technically, a break below 10,000 targets another 20 percent fall to 8,000. A break of 7,000 then forecasts 4,000. These are disaster-making numbers.
A falling dollar and a falling US stock market would see capital flight from the US and the West at an unprecedented level. There are four stock markets that are predicting that a large part of this capital will move into these markets: Indonesia, Bombay, Thailand and the Philippines (and to a lesser extent, Malaysia). What separates these countries from most of the other similar nations is less reliance on the US for economic growth.
Investor and local stockbroker focus must be on local companies and local share prices. Although very difficult, given the normal mindset, the PSE will eventually decouple from the Western markets. In fact, it already has, to the extent that the PSE is shooting for historic highs while New York is trying to avoid multiyear lows.
When one side of the earth is in darkness, the other side is in sunlight. The Philippines will continue to have sunny skies.
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Tuesday, 31 August 2010
Written by John Mangun