OUTSIDE THE BOX
ONE of the most disturbing pieces I have read in a long time was a speech given by the President of the Dallas Federal Reserve Bank, Richard Fisher. Mr. Fisher has been in that position since 2005 and is an important member of the US Federal Reserve.
He said, “We are blessed at the Fed with sophisticated econometric models and superb analysts. The truth, however, is that nobody on the committee [Federal Open Market Committee], nor on our staffs at the Board of Governors and the 12 banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves.”
If the members of the most powerful government financial body in the world are clueless about a solution to the global economic meltdown, maybe the world is in more trouble than we think.
But never fear. Two Federal Reserve research economists, Sylvan Luc and Zheng Liu, just released a study that quantifies with hard evidence that the crucial factor is uncertainty. It is uncertainty about the government that inhibits investment and therefore economic activity. Individuals as well as businesses will not reach into their bank accounts and spend and invest to grow the economy if they fell unsure about what the government is doing. “When people don’t know what the government will do next, they’re less willing to invest and spend.”
We often hear that “politics” is the problem for PHL. Someone reminded me that “committees” do not make decisions; the people on the committees do. It’s the politicians not the politics.
It is always easy to blame the Office of the President but the Philippines has a strong political class throughout the government that is as much to blame either directly or indirectly for the uncertainty.
The legislature as well as the executive takes credit for every positive economic number that it can and spins the number in a way that is most favorable in order to retain power. All the politicians want to take some credit for foreign direct investment (FDI) being up by 10 percent in the first half. No one mentions that Thailand’s increase in FDI between 2011 and 2012 was greater than the total FDI coming to PHL for 2011 and 2012 combined.
According to one investment banker, the Philippines is now a “darling” of global investors. So how come Thailand gets as much FDI in one month as we do in about one year?
The Philippines is often cited as being politically stable. True. It has been several years since military officers tried to overthrow the government. However, the Luc and Liu analysis is accurate. Government policy is creating uncertainty.
What exactly is the government’s position on China? Is Scarborough Shoal Philippine territory and China has invaded? Or is the area in dispute and sovereignty needs to be decided at the global level? Or is it that no one cares about sovereignty as long as guns are not fired in anger?
What is the real policy on mineral development? Should investors just wait for the legislative process to run so that a new taxation scheme will be unveiled and new mining permits will be approved? Or is it the intention of the government to ban mining for a prolonged period without actually repealing the Mining Act of 1995? There is a precedent for that as the Executive Branch indefinitely banned all logging activities without the benefit of public consultations or changes in the national laws.
However, uncertain public policy may be, there is a more sinister kind of uncertainty that runs through the political and governing system. Who can honestly say that any election from barangay to national level is guaranteed to be without any type of fraud or violations of the Election Code?
The recent “Anti-Epal” movement to highlight elected officials that use taxpayer funded public works projects to take credit in advancing their political careers would be completely ridiculous if the epal problem was not a clear indication of the uncertainty in the political process.
The government, through its political leaders, creates uncertainty by: a double standard in law and rule enforcement, changing regulations and policy too often, multiple voices speaking on policy, different branches of the government and departments within the government seemingly having different policy priorities, and the government focusing on short-term gains rather than long-term objectives.
You cannot expect to have the amount of private investment and spending necessary for constant economic expansion in an environment where uncertainty is “business as usual.” Uncertainty is the product of poor leadership by the politicians.
E-mail to firstname.lastname@example.org, web site is www.mangunonmarkets.com, and Twitter @mangunonmarkets. PSE stock market information and technical analysis tools provided by COL Financial Group Inc.
Wednesday, 26 September 2012
Monday, 24 September 2012
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?