Thursday, 12 August 2010

Prospering from the failure of the US

Written by John Mangun
Outside the Box
Business Mirror

The Philippines is going to enjoy a favorable economic situation for the rest of the year, probably extending into the second quarter of 2011.

An important barometer of business activity and confidence is advertising. Yesterday ABS-CBN announced earnings for the first half of 2010. This is the key: Recurring advertising revenue grew by P2.45 billion, or 36 percent, to P9.17 billion. Newspaper headlines that talked about the company’s earnings being a result of election spending were misleading. A 36-percent jump in recurring advertising means that private Filipino companies are willing to advertise to increase their exposure with the promise of increasing sales because they believe in a positive future.

For some time I have been saying, “Buy the PSE, buy the peso, and buy the Philippines.” This trend is going to continue for the rest of the year, assuming that targets are not hit sooner. As far as the Philippine Stock Exchange (PSE) goes, the historic high will be reached, but beyond that it is anyone’s guess.

The Philippine economy is going to show exceptional growth for 2010. The peso will continue its run higher, corresponding to strength in the major currencies.

However, the time of “plenty” for the Philippines will come to an end before 2011 is over.

The Philippines is riding the crest of the calm in the global financial markets and economies. Although business activity in the West, particularly in the US, is still poor, things seem better because of comparisons with 2008 and 2009. There is a false sense of ease and quiet in the West because things are not that much worse than before.

However, the worst is yet to come.

The US should be enjoying a strong 2010 and should be coming out of the problems of 2008/2009. It is not. The policies of the Obama economic team and the Obama-led Congress are a dismal failure.

The US government policies throughout 2009 and 2010 are similar to a man who has fallen on hard times, borrowing all the money he can and then going to the casino. The trillions of dollars of government spending have not created jobs or business activity. But what those policies have created is a debt burden unseen in the history of the US or the world. When you think that banks have been able to borrow money at a zero interest rate from the US Federal Reserve, bank leading is at the lowest levels in history. Bank failures are running higher in 2010 than they did in 2008 or 2009 and in 2010 the financial crisis is supposed to be over.

The Federal Reserve has made clear that it has no other option than to continue to borrow, keep interest rates at zero, and spend all the borrowed money. It is becoming more obvious every month that the US government cannot ever repay its debt.

The only alternative is to print dollars to pay that debt, and the result will be a collapse of the dollar and skyrocketing inflation.

I know that I have said that often before but the indicators of that hyperinflation happening are increasing in intensity and in more sectors of the US economy.

US companies are holding some $2 trillion in cash. If the economy and the outlook for the future were improving, companies would be starting to spend that money for hiring new employees and getting their businesses ready for a strong economic recovery. Instead, worried and fearful, they are sitting on their cash.

Further, food prices in the US, the most basic of all indicators of debased money and currency-caused inflation, are rising strongly. Food prices rose by 2.4 percent in March, the highest monthly increase since 1984. Between June and July, Wal-Mart, the largest retailer in the US, increased food prices by 5.8 percent.

The US has the most diversified agricultural-food-producing system in the world and the US is a major net exporter of food. Rising food prices is not caused by any supply-demand imbalances. It is caused by a growing lack of confidence in the purchasing value of the currency.

There is a great shortage of nurses in the US and most hospitals get a significant part of the revenues from government- and insurance-subsidized health-care programs. Yet Philippine deployment of nurses is down 50 percent this year. Private expenditures continue to drop even as money is becoming worthless in terms of what that cash can buy.

As the economic situation in the US continues to deteriorate, and it will, the Philippines, with its close psychological ties to the US, will be negatively affected. We have not broken the “they sneeze, we catch a cold” mindset…yet.

The US has dug itself into a very deep, black hole of debt, not unlike many Asian countries in the runup to the 1997 Asian crisis. The US is poised to become an economic “basket case.” But unlike Asia, the US is also burdened with huge required spending for government giveaways, and there is no foreign investment standing by to help with recovery.

However, problems for the Philippines will be more imagined than real. Business activity will slow and then the realization that this is not the US will kick in and the economy will continue to flourish. In addition, investment and money will flee to nations like the Philippines, further boosting the economy.

The personal and business strategy for the next year to 18 months is this. Get onboard the speeding train of economic activity while keeping a cautious eye on the coming slowdown. Maximize your wealth creation, whether in the stock market or your business, but be prudently looking ahead. Conserve assets and build cash reserves anticipating several lean months. Those cash reserves will be doubly valuable when the US begins to accelerate downward and the Philippines finally and robustly begins to disconnect from the US.

Buy the PSE. Buy the Peso. Buy the Philippines. The best is yet to come.

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