OUTSIDE THE BOX
‘Holy Week 2011’
The Holy Week is sort of a calendar turning point for me being in the financial markets, especially in the Philippines. While the markets are slow trading and closed during the Christmas/New Year time, the Easter season is different; we have a much shortened trading week locally, it usually comes right after the end of the first quarter of the year, and it is a transition period in the West from winter season to spring. It marks the last break in the action until the month of July.
Because Philippine businesses virtually shut down for a week, it is a good time to look at where we have come from and think about where we are going in the next 12 months. Let me share with you the performance of various financials since around April 25, 2010.
The Dow Jones Industrial Average progressed upward by about 14 percent. That is less than half the increase of the Philippine Stock Exchange Index that has risen by more than 30 percent in the same period.
If there is one story that would be looked back on for this time period, it would be the commodity markets. All of these are “priced” in US dollars. Crude oil has gone up 35 percent, just about matching our stock market. Gold has also increased by around 35 percent. However, the huge winner is silver, which has more than doubled in price with a 150-percent increase. But silver is not the only big mover; cotton also has seen the price rise 150 percent.
Food commodity prices have also gone through the roof: Corn up 75 percent, soybeans up 40 percent, wheat up 45 percent, and the prices of coffee and sugar have nearly doubled.
Are you noticing a trend here? The US dollar, the world’s reserve currency, just cannot buy what it could a year ago.
In relation to the exchange rate of other major currencies, the US dollar has fallen almost 10 percent and against a larger group of 30 currencies, including the Philippine peso, the US dollar is down 7 percent.
The one financial instrument that might be of importance to you and me has only appreciated less than 3 percent against the US dollar: the Philippine peso. You might think, based on how the value of the US dollar has dropped so dramatically against metals, commodities and other currencies, someone must be manipulating the value of the peso to keep it low in comparison to the dollar. And, of course, you would be absolutely right. As a comparison, the Thailand baht and the Malaysian ringgit both have appreciated by over 7 percent and the Indonesian rupiah by nearly 5 percent.
If the current administration continues to “lock” the peso to the US dollar the way it did in the last year, the Philippines might, as well, apply for US statehood because all of those price increases mentioned above are eventually going to take this economy down the way it has in the United States. At least then, 100 million Filipinos could get US food stamps, welfare and unemployment handouts.
China has announced that it will (if it has not already) sell $1 trillion of its holdings. From Bloomberg: The University of Texas Investment Management Co., the second-largest US academic endowment, took delivery of almost $1 billion in gold bullion and is storing the bars in a New York vault, according to the fund’s board.” All the smart money in the world is dumping dollars, even in America.
So how bad is it in the US? “Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama’s first two months in office, when the country was still officially ensnared in the Great Recession, according to the latest New York Times/CBS News poll.” If the US government had not changed the way they measure both unemployment and inflation from the method used in the 1990s, (from Shadowstats.com), unemployment would be in excess of 20 percent and inflation well over 6 percent.
Housing prices in the US will continue to fall by at least 5 percent, while 40 percent of all homes being sold are from foreclosed inventory from the banks. Over 10 percent of all houses in the US are empty and 25 percent of all homeowners owe more on their mortgage than their house is worth.
The driving factor between the US stock-market increase and rocketing commodity prices is Quantitative Easing or money printing, and it will not end. If the US stopped printing money and tried to raise interest rates to increase the value of the dollar, the US stock market would drop 50 percent, and 500 banks or more would close their doors. Government money printing is all that is keeping that economy alive.
The US economy is like a company that cannot stay afloat through internally generated business and must borrow funds to survive. But foreign creditors are not willing to lend to the US the money it needs, so the only alternative is to print money and use these “created funds” to buy the US government debt.
During the next 12 months, the dollar will continue to depreciate. Commodity prices will continue to go up. Gold will reach $1,650 from its current price of $1,500, and then go to $2,000 per ounce. Our local stock market will continue to rise to the 4,800/5,000 level.
The Philippine economy will hit a wall of stagnation and inflation in a few months unless the peso is allowed to appreciate as the dollar falls. That is not a prediction. That is a fact as surely as day follows night.
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Tuesday, 26 April 2011