Outside the Box
Philippine Stock Exchange (PSE) trading has been very bumpy as 2011 begins. The heavyweight issues on the Phisix index are the ones that are taking most of the selling pressure and if you own these, life has become very disappointing. However, take courage; it could be worse, much worse.
From The Associated Press: “Bangladesh suspended trading at its main stock exchange Monday and security officials used batons to disperse thousands of angry investors upset over a market plunge.
“The benchmark Dhaka Stock Exchange general index rose 80 percent in 2010 but has fallen several times over the last few weeks. It tumbled 7.8 percent Sunday and 9 percent in early trading Monday, prompting an indefinite suspension on trading. After the protesters began gathering Monday morning, authorities used batons to try to keep the demonstrations from spreading. But protesters continued to demonstrate at several busy intersections in Dhaka’s Motijheel commercial district, where the stock exchange is located, smashing vehicles, burning tires and chanting antigovernment slogans.
“A government web site said trading in Dhaka and Chittagong would remain suspended until further notice.”
You see how lucky we are.
The Bangladesh stock market was one of the best performing in the world last year. But it was a false wealth-creation machine because of government policy. I know the complaints about the Philippine government come fast and furious at times. However, the basic free-market policy of this government eliminates false boom-and-bust periods of the business cycle.
Every business owner understands the reality of boom-and-bust periods of the business cycle. For example, say, you own a restaurant. Business grows slowly after you first open until you build a regular customer base.
After some time, you notice that business is starting to fall off. Not as many old customers as before and the few new customers you pick up are not enough to replace your base.
The quality of your service and food is just same, if not better, than when you opened. But people get bored eating at the same restaurant over and over. Now one owner in this situation immediately does a buy-one, take-one promotion and, for the short term, business picks up again. But when the results of that promo slack off, he goes for another price discount. Eventually, the restaurant closes because he is trying to solve systemic problems with short-term solutions.
The wise owner changes the menu, adding new items. Or redecorates to give a new ambiance to his place. Perhaps, this owner even goes so far to change the restaurant theme.
Acknowledging the reality of boom-bust periods, the smart owner adjusts and adapts sort of like knowing that there will be rainy days so you must own an umbrella.
Government “experts” think they can cheat the business cycle by artificial means much like the owner who thinks price reductions solve all business problems.
The Bangladesh stock-market price increase during 2010 was artificial. The government, in an attempt to foolishly fight normal business cycles, hugely inflated the money supply, a large portion of which went into the stock market. Banks were loaned cheap money by the government and encouraged to loan to anyone who wanted to borrow at very low interest rates. With all the newly printed money circulating in the economy, the number of investors in the stock market grew enormously. Everyone was a stock-picking expert. And unlike the PSE, foreigners stay away from this market. Less than 1 percent of the trading is made by foreign money.
Over 3 million Bangladeshis were stock-market investors during the 2010 boom market. By population comparison, Bangladesh had three times as many investors as in the Philippine stock exchange. Also to note, the Philippines per-capita gross domestic product is more than twice that of Bangladesh and per-capita income is 2.5 times as high here. Inflation in Bangladesh averaged 5.4 percent in 2010. Philippine inflation was 3.2 percent in 2010.
So the Bangladesh government does everything it can to boost its stock market during 2010. But reality always catches up with government foolishness. Food prices have gone through the roof recently in South Asia. India has experienced almost a 20-percent increase in food prices over the last three months. On December 19th, the Bangladesh stock market fell 6.7 percent. The government immediately rushed into action allowing banks to loan even more money on stocks, 50 percent more. The market recovered slightly.
2011 comes and the market is hit with a selling wave. Banks are now holding loans that cannot be repaid and are losing value as the collateral, stocks, go down.
Now the government rushes in again, forcing the banks to raise the margin requirements for stock loans and the market falls nearly 15 percent in two days this week. And they close the exchange. But wait. If the exchange is closed, the banks’ loans are worthless because a stock market depends on liquidity. So they reopened the market after the rioting in the streets and prices went up 15 percent yesterday. And we complain about the trading on the PSE?
It seems like the Bangladeshi government imported one of our worst, wild and crazy bus drivers to steer their economic policy.
The ups and downs of the business cycle are normal and necessary. Down periods result from weak businesses being forced to close and from changing consumer habits that business must adjust to. If it were “up” all the time, we would have a litson manok stand and a pearl-shake outlet on every street corner. But that is not economically efficient or effective. Over the years we have seen both of these businesses reduced in the number of players so that these two example businesses can function efficiently and profitably.
The Philippines is in the boom phase of a normal long-term business cycle, and our stock market will respond accordingly, despite any short- term downtrends.
Looking at the PSE as an indicator of the business cycle, we can see the boom started in 2003 and should continue for several years at the least. 2011 is not the end by any means.
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Thursday, 13 January 2011