Thursday, 17 January 2013

More smoke and mirrors?

John Mangun
OUTSIDE THE BOX
Business Mirror
http://businessmirror.com.ph/index.php/news/opinion/7806-more-smoke-and-mirrors


IT is instructive to note some of the global news stories over the past two weeks.

France: “A crowd of more than 300,000 took the fight to the iconic Eiffel Tower in Paris to protest the president’s plan to legalize gay marriage and allow same-sex couples to adopt and conceive children.”

Ireland: “The violent flag riots in Belfast have shown just how delicate relations between sectarian groups in the British province remain. They also reveal the frustrations of a generation that has grown up feeling misunderstood and disadvantaged.”

United States: “A Texas congressman vowed to try to impeach President Obama if he moves ahead with plans to control guns by executive order.”

Japan: “According to the Chinese military’s news source, documents dated January 14  lay out the goals for this year. These include ‘making firm preparations for war.’ Some Japanese media outlets have been interpreting these orders as ‘prepare for war…presumably against Japan.’”

China: “A journalists’ strike and protests by supporters last week against blatant government censorship of a newspaper editorial in southern Guangdong province attracted wide attention in China.”

United Kingdom: “The leaders of three Labor Party-controlled city councils are warning that the scale of the austerity agenda could lead to ‘the break-up of civil society.”’

There are undoubtedly dozens more than these. But perhaps the most important and to which all the others may be related comes from Washington, D.C.

“A frustratingly slow economic recovery in developed nations is holding back the global economy, the World Bank said on Tuesday, as it sharply cut its outlook for world growth in 2013.”

Historically, governments have always tried to divert the public from economic problems by focusing attention on so-called social problems and affairs. The Roman emperors devised a clear plan of giving the people “bread and circuses” as the colonial wealth that was the foundation of Rome’s economy dried up. What better way to keep Roman citizens occupied with something other than their failing economy than free wheat and grand spectacles in the Coliseum.

France is headed into a recession but the government pushes for the legalization of same-sex marriages knowing that this is a contentious, emotional issue that will dominate the front pages of the newspaper and push economic issues to the back pages.

As China censors and cracks down on any dissent in the face of an economy barely keeping inflation and employment growth at acceptable levels, it rallies nationalism and warmongering as a good alternative. But the same territorial dispute works as well for the Japanese that are facing a declining population and zero economic growth.

The United States faces another credit-rating downgrade as the government borrowing limits are raised and the number of underemployed grows every month. But today the critical issue is gun violence, not poverty and the economy.

It is a fact of society that citizens can be easily distracted particularly if the distraction is emotional and easier to think about than genuine longer-term problems that carry with them difficult decisions.

While the Philippines is being spared the economic turmoil of many other nations, are the people being led to divert focus from the economy?

A year ago, the Corona impeachment trial was critically important to the nation. The government said that this trial was a major step forward toward political and economic reform. But what has been the broader national impact other than a single person being removed from office?

The last months have been dominated by the debate leading up to the passing of the reproductive health law. While the people have been told that this, too, will have a beneficial economic impact, nothing was ever mentioned about specific, measurable benefits. And there was really no reason to talk about the law in pragmatic terms since the emotional arguments were all that seemed important to both proponents and opponents.

This week we are returning to the cybercrime law. Here again, the arguments are emotional between those who see a need to shelter the public from potential harm and those who see government curtailing the freedom of speech.

Where is the front page and emotional discussion about the fact that poverty and hunger in the Philippines are still going higher? Where are the street protests about the fact that the Philippines is a total disaster area in terms of foreign investment?

The traditional and new online media in the Philippines pride themselves on being vocal, outspoken, diverse in opinion and uninhibited. But never do they ask who is creating and driving the agenda and topics of discussion.

Is the Philippines that different from the rest of the world? Has anything changed much since before 1987?



E-mail to mangun@gmail.com, web site is www.mangunonmarkets.com, and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.

Wednesday, 16 January 2013

Tuesday, 15 January 2013

The Philippine peso problem


John Mangun
OUTSIDE THE BOX
Business Mirror
http://businessmirror.com.ph/index.php/news/opinion/7674-the-philippine-peso-problem

A NATION’S currency is the most important component of its economy. It is the blood of the economic body. No matter how strong the body is, without healthy “blood,” the organs of business, government spending and investments cannot function effectively.

The average person has little idea about currency because the symptoms of a currency problem can be subtle and take time to develop. But like an untreated cancer, it can one day explode, destroying individual wealth without mercy.

The most extreme symptom of a damaged currency is hyperinflation. During the German Weimar Republic, the German currency was stable at about 60 marks per US dollar in 1921. In June 1922 the mark traded at about 320 marks per dollar. The mark then fell to 8,000 marks per dollar by December 1922. The cost of living index was 41 in June 1922 and 685 in December 1922.

This event occurred because the German central bank printed all the marks possible to buy foreign currency.

The argument for the Bangko Sentral ng Pilipinas (BSP) intervening in the currency markets and for a weaker Philippine peso is to protect the exporters’ profits, give the overseas workers more buying power, and help the outsourcing companies. A very noble endeavor.

Let’s return to the good old days of 2009 when the peso exchange rate was 48 to $1. The exporters, outsourcers and overseas workers would all be happy.

However, in order to make those “winners” happy, gasoline will go up to at least P60 per liter. There are certainly some “progressive” thinkers that would say P60 gasoline is a small sacrifice to pay for the overseas workers, exporters and outsourcing companies’ financial benefit.

But those would not be the only winners. Balikbayan and foreigners would be given an instant 18-percent discount on the condominium they want to buy, as the dollar cost would fall. The property developers would be winners also. The stock market would soar too, as now stocks would be much cheaper in dollar terms. I like that last idea.

The commuting public would see transportation costs go up but they, too, have to sacrifice some of their wealth for exporters, overseas workers, outsourcers and stock-market investors like me. It is only fair.

There might be an end to any discounts for condos. Prices might even go higher, as foreign buyers would increase demand to take advantage of cheap prices. The young couple looking to buy their first residence might have to wait another year or two, but the overseas Filipino workers have families also. But you might say that a P48 is unrealistic. The peso at 42 is generally thought to be a good price. Fine. Let the BSP try to keep the peso around 42; a line in the sand.

Then watch the disaster unfold.

The Bank of England tried to fix a floor price on the British pound in August and September 1992, spending $27 billion and failing; the pound depreciated 30 percent. George Soros made $1.2 billion in one day on that idea. I know. I was there.

Modern currencies have no intrinsic value, such as a fixed exchange rate to a tangible asset like gold or silver. They are only “priced” in relation to other currencies as money flows in and out of economies. In the 1970s the Japanese yen/US dollar exchange rate went from 350 to 175 as money flowed from the US into Japan to buy goods. The US dollar has depreciated 80 percent against the Chinese renminbi since 1981 for the same reason.

Here is an example when central banks have tried to keep a currency artificially low. The Bank of Japan tried in the 1980s, intervening to make the yen “cheaper” to protect the exporters, moving the currency from 175 to 275. Notice that is the period of the Japanese bubble economy when land prices tripled and the subsequent “Lost Decade” of no economic growth after the bubble burst.

During the first Aquino administration, controlling the peso was a government priority with strong capital controls. A 10-percent daily fluctuation of the peso on the black market was normal. It took seven years to get a telephone because dollars were impossible to find as no one knew what silly currency policy would come next. The economy finally took off when President Fidel Ramos ended the currency-control policy.

The peso will move higher as foreign money comes into the country. Yes, it is “hot” money. Before long-term funds, hot money always comes to test the investment risk.

When governments try to pick economic ‘”winners” and “losers,” the winners always lose and the losers lose more.



E-mail to mangun@gmail.com, Web site is www.mangunonmarkets.com and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.