Monday, 8 August 2011

S&P, the Peso, the PSE

Business Mirror

Standard and Poor’s US debt downgrade

The United States is the Amy Winehouse of national governments. Their national anthem is now “Spending Rehab” with these lyrics:

“They tried to make me go to spending rehab, I said, ‘No, no, no.’

My finances used to be in the black but now the ceilings’s raised and know, know, know.

I ain’t got the political will and if my daddy China thinks I’m fine, S&P’s tried to make me go to spending rehab, I won’t go, go, go.”

The “experts” and the politicians refuse to understand what the issue is about. It is not about the ability to repay the US debt, as such. It is not really about debt. It is about government deficit spending funded through debt. Former Federal Reserve Chairman Alan Greenspan said on Sunday about the chance of a US default following S&P’s decision to downgrade the credit rating: “The US can pay any debt it has because we can always print money to do that. So there is zero probability of default.”

Printing US dollars causes global inflation. Brazil’s inflation rate is 6.7 percent and increasing each month. Their currency is up 47 percent since 2008 and 11 percent in the last 12 months. From a 7.5-percent gross domestic product increase in 2010, the forecast for 2001 is about 4 percent. And Brazil imports zero percent of its oil needs. Brazilian Finance Minister Manteca said last week, “We seem to be entering a new stage of the currency wars.”

The US refuses to stop spending money that it does not have. The world will not buy all the debt the US wants to borrow so it will move into more Quantitative Easing, with the Federal Reserve creating new money to buy US government debt. QE3: Money printing for as long as it takes and as much as it takes to devalue the dollar to pay for the deficit spending.

The Philippine peso

I feel sorry for Manila bus drivers. They have too many priorities. Stop exactly where the passengers want to get off no matter how difficult. Stop where the passengers want to board no matter how illegal. Follow the MMDA rules. Get to the terminal before the other buses. Go as fast as possible to increase revenue. Pray that robbers do not strike. And if possible while tending to all these important issues, try not to crash the bus.

The government’s peso and monetary policy may be secretly being created by a Manila bus driver.

Keep the peso low to please the exporters, overseas workers and the call-center companies. Keep the peso high to keep imported product prices like oil low. Put interest rates at a higher level to help keep inflation low. But that strengthens the peso and may hurt economic growth. Drop interest rates and the peso devalues, raising inflation because of the higher cost of imported products. And, if possible, while tending to all these important issues, try to keep the peso stable. This is thinking just like a bus driver.

The most practical measure of a currency’s relative value to other currencies is the Big Mac index created by the Economist magazine in 1986. As of July 2011, the peso is undervalued by 32 percent. That means the peso should be trading at 29 to one dollar. Please don’t go crazy yet.

Taking into account the lower labor costs in the Philippines and the work time that it takes an average Filipino to be able to afford a Big Mac, the peso is overvalued by about 30 percent. In other words, the peso is right where it should be without artificial manipulation. However, currencies are relative and as the dollar depreciates, the peso must be allowed to appreciate. Otherwise, we will wind up with a currency grossly undervalued. That’s good for the exporters and call centers and bad, very bad for the other 90 million Filipinos who buy locally.

The peso predictably will appreciate through the year.

The stock markets

It has been a rough ride for market investors these last few days. The PSE is reacting like a child who sees his kuya passed out on the floor from too much gin and pretends to be drunk just like the big boys. PSE buyers are sitting on the sidelines waiting to buy heavily at Support levels, now around 4,350. The PHISIX index can go as low as the 4,150 area before long-term damage occurs. Markets like the PSE including Thailand, Indonesia and Malaysia will soon turn higher with great profit opportunities.

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