OUTSIDE THE BOX
ON June 7, I wrote, “It is unlikely that the Fed will do anything more than ‘talk’ the markets over the next two months. It needs to save its ammunition until September. However, the most critical time is after September 30. We can expect little action and a lot of positive spin through July and August which should keep the markets stable with an upward bias.”
The US Fed, the European Central Bank, and the Bank of Japan are now beginning an almost simultaneous money creation exercise unprecedented in economic history.
Since early June, the hard asset markets that include stocks, commodities, and precious metals have soared while the US dollar has fallen. Look at the numbers: silver up 20 percent, gold up 11 percent, global commodity index up 12 percent, crude oil up 11 percent, US stock markets up 11 percent, European stock markets up 20 percent, Asian markets up 13 percent and the US dollar is down nearly 10.
Meanwhile, the Philippine Stock Exchange Index is up only 6 percent.
However, in spite of that strong price appreciation of hard assets, you have not seen anything yet. Why?
The mandate of every central bank is to keep a balance in the supply and demand of money and thereby keep inflation low. As of QE3, the Fed will no longer focus on low inflation. The Fed’s goal is keeping interest rates low. They will do this by being the primary lender to the economy, in this case, for housing loans. There are those that say this is not inflationary as there is no net increase in the money supply. That is true. However, the problem comes in that the Fed and the other central banks are pushing private lenders out of the market forcing that cash to look to other investment vehicles. Further, low-interest rates also forces idle cash into other vehicles.
How low are US interest rates? Loan your money to the government for a year and get 0.17-percent interest. Put your funds in a one-year bank time deposit and they pay you 0.73 percent.
During the next three months, the effects of QE3 will kick in and we will see a continuation and acceleration of what has happened to prices since June. It is inevitable. The three central banks are pushing the private sector out of certain lending markets. The Fed wants to fund housing loans. The ECB will buy the bonds of distressed countries at lower than market interest rates. The Bank of Japan will buy not only government debt but also corporate debt instruments. This will flood the global economic system with new money because previously the limited funds in the private sector would be funding this debt.
With the asset prices going higher, what’s the problem in PHL? The Stock Exchange of Thailand is up 13 percent as is the Jakarta exchange while the PSE is up only 6 percent.
The Philippines has been blessed (I do not use that term lightly) with some of the best central bank governors on the planet. These men were global bankers that understood the way governments and central banks operate and what their actions can do.
The Department of Finance has too often been headed by economists, accountants, lawyers and academics instead of by people qualified to be the chief financial officer (which is what the office is for the nation) of a global producing corporation (which is what the PHL is). Thailand’s minister of Finance is the former chief executive officer of the Stock Exchange of Thailand. Accountants want to see a strong balance sheet and growth of the business; corporate CEOs want to see stronger profits regardless of overall corporate growth.
The Bangko Sentral is doing everything it can to prepare PHL for the months to come. The Executive Branch is not. The Bangko Sentral ng Pilipinas understands the realities of 2012. The Executive Branch may not. The policies of 1987, or 1997, or even 2007 will not work now.
Thailand is less concerned about economic growth than foreign direct investment (FDI) that has already reached over $10 billion in 2012. The PHL may see $1.2 billion in 2012. Thailand’s executive branch is less concerned about today’s GDP numbers and more concerned about building a base for the future. Bangkok newspapers report the FDI numbers on a weekly basis. That would be a blank space for weeks or months at a time in the PHL. Here, the press reports on which industries (like mining) are being closed to FDI.
Global money is looking for new places to go and this will increase. Is the PHL the place where the lights are on but nobody is home?