Wednesday, 6 June 2012

June 1, 2012: Remember it

John Mangun

IT is now early morning Manila time, Saturday, June 2nd. The global financial markets just closed for the weekend. Filipinos—from Malacañang to the most humble provincial dwelling—are fast asleep or perhaps finishing the last “one for the road,” unaware that when they next see the light of day, the world will have changed.

The release of economic numbers and the global financial markets performance yesterday tells the global performance for the first half of 2012. It is worse than not good.

US unemployment numbers proved that anyone who believes the US economy is improving needs serious psychiatric intervention and heavy medication. There is no significant job creation. One quarter of all US home sales are foreclosed pieces of property. An important predictor of future economic activity is the PMI or Purchasing Managers Index. This survey tells if companies are going to spend money in the future. Germany’s just-released (on Friday) PMI dropped at the fastest rate in three years. For all of Europe, the PMI is at the lowest level in three years.

US consumer spending is up. However, personal income is not up, meaning that new spending is coming from new debt, the last thing the US consumer can handle. When you are borrowing money to buy food, shoes and to pay bills, you are in deep trouble.

Western stock markets collapsed on Friday. Germany’s (economic star of Europe) market closed down 3.42 percent. The US Dow Jones fell 2.22 percent and has given back all the gains made in 2012.

Crude oil was down over 3 percent and wheat prices fell more than 4 percent. Gold was 3.7 percent higher.

Looking for safe haven? Investors can loan their money to the US government for 10 years at the lowest interest rate in history, 1.47 percent, guaranteeing an annual purchasing power loss to inflation of over 1 percent. The PHL 10-year bond rate is 5.5 percent.

All this current financial carnage is not about Greece or Spain. They are the symptom, not the disease. Note this fact. The 10 largest debtor nations have total debts of over 300 percent of the total global GDP, which means that debt can never be repaid. Investment guru Marc Faber says there is 100-percent chance of a global recession within six months. That clock started on June 1.

While ignoring the somewhat manipulated government data, PHL can experience sustained economic activity.

UBS bank out of Switzerland analyzed the balance sheet of 22 emerging markets. A balance sheet measures assets and liabilities; in other words, financial quality and stability. Uniquely, they measured not only government and corporate, but also personal financial soundness. Of the nations examined, including China, Brazil, Mexico, Thailand, South Korea, Turkey and Taiwan, only five countries were considered low risk: Indonesia, Malaysia, the Philippines, Peru and Russia. Then projected economic growth was factored in leaving two “winners”—Indonesia and the Philippines.

Nations where economies are freezing again have no choice but for governments/central banks to provide more stimulus, more bailouts, more low-interest rates, and more money printing to avoid immediate and total financial failure.

But there are going to be a few favorable economic and investment hot spots. UBS told us where to look.

After months of verbal LBM from governments, policy-makers and bankers in the US, Europe, Japan, China, India and others, the hard wall of economic reality came crashing down and the financial markets responded properly.

Loan money at 1.5 percent to debt-burdened Western governments in fiscal decline or to an improving and net-lender PHL government at 5.5 percent? Buy the stock of companies struggling to survive or PHL companies that are continuing to show double-digit profit growth?

You figure out where the money is going to go. All stock markets will go up and down. Most economies sputter and jump. But June 1, 2012, is when the large economies started back down and PHL received the advantage.

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