BLOG: Do We Really Have the Fundamentals?

Over the past week, we have seen our local stock market “bleed” profusely trading day after trading day. Of course, the main reason for the massive decline is that foreign investors have been taking out their money out of the equities market in emerging (or developing) regions in Asia because of fears—caused by the frenzy in the media, which have been analyzing or providing their forecasts on when or how the U.S. Federal Reserve will stop its quantitative easing (QE) program.

But first, what is this QE or quantitative easing anyway?

This article describes what quantitative easing is. Quite simply, the program goes like this:

• Central banks—by crediting its “bank account” with more money—buy government bonds from banks and other private institutions such as insurance companies and pension funds.
• Because of this bond-buying, prices of such bonds become more expensive, making them unattractive to buy.
• On the other hand, these institutions that have sold these bonds will have extra cash. The central bank expects that because of this extra cash, they will be more enthusiastic to lend money to companies (who would be investing needing the cash for whatever purpose it may do, such as expand or hire more) or individuals (who would be using the money to spend, or will get loans) so that they (these banks and other institutions) could make more money. Of course, to grab more customers, they will lower their interest rates.
• Because of more money moving (lending, spending) in the economy, ideally the economy will improve.
• Finally, when the economy has recovered, then the central bank will sell the bonds it has acquired in the first place, and then destroy the money it gets out of this so that technically, no extra money was created in summation.

Of course, the United States has been doing that to revitalize its economy. That is why over the past few months, we have seen the S&P and Dow Jones indices hitting record highs – because of the extra money in the economy. Of course, all the “experts” are saying that this is because of the QE (which is true)—but there is irony in the way they are saying that, or the way the media has presented their perception of what these experts really meant. Anyway, I don’t know.

It’s just that, first, these experts are like saying, “Oh yeah right, so economy is growing, stocks going up and hitting record highs… So what, it’s because of QE.” Of course, media sensationalized these comments, making it look like the economy doesn’t need the QE and that it’s just presenting an unreal economic growth.

And here comes Ben Bernanke, saying that the Fed may review the QE program. Because he hinted on it—the media became in frenzy. Forecasts here and there, “expert opinions” left and right—a circus where everyone’s speaking their minds out but not really thinking. Even though Bernanke noted that the Fed will not be reducing the QE program anytime soon.

Still, the word is out there that there is UNCERTAINTY on whether or not the QE program will soon stop. “UNCERTAINTY”. Even though Bernanke said so that they don’t have any plans to stop QE anytime soon. But the word continues to reverberate. UNCERTAINTY.

So what’s the connection?

This is one of the main reasons why these foreign investors became pretty shook up and uncertain on what their initial plans were anyway when they invested in these emerging countries (let’s just limit the talk to the stock market). So, they took out their money – resulting in stock markets all across the region plunging.

Of course it is not just that. Another factor is Japan’s current monetary policies; and that plan called Abenomics. It’s all mumbo-jumbo to me, but the way I see it, or the way I process what I am reading in the media, is that these “experts” out of Japan are not happy with the way Japan is minding its own business of trying to revive its own economy. (They think they’re better than the Japanese in trying to revive the Japan market.) Anyway, because of their unhappiness, the yen fell (well, has been fluctuating, actually. As you know, the FX market has been the most volatile environment to play in.), and so does the Nikkei. Which then, these experts said, rippled through the rest of Asia, especially the emerging regions. And the rest is history. (Historical rate of drop for the PSEi, for instance.)

Anyway, so that’s that. Because of UNCERTAINTY on the Fed’s QE, and because Japan is sticking to its own guns in running its economy—despite the challenges and the “noise”/unhappiness of outside investors/markets in its plans, the stock markets were down.

DISCLAIMER: AGAIN, I would like to say that I am no expert in the economy; and I don’t even have a financial or economics background. Well, engineering economics, if I remembered correctly, but what the heck, my instructor sucks. Sad but true.

Where were we? Oh. The reason the stock markets are down this week. Okay. I am pretty sure that there are still a lot of reasons. So go on, write it if you want. Blog it if you want. I just included here what I think are some of the top ones.

So, going now into the supposed topic of this piece, and why I titled this piece as such.

Do we really have the fundamentals?

Will it be for growth or decline?

I mentioned how the central bank created money out of nothing just to revive its economy. Now, the blow-up here is that people are now getting their investments out of the equities markets in the emerging regions of Asia—Philippines included.

In return, the local investors followed due to unfounded fear. They saw these big selloffs, so what to do? Follow the freaking herd. Mga duwag. Hahahaha.

Just kidding. Ok, seriously. Have we ever stopped to wonder whether or not our central bank – the Bangko Sentral ng Pilipinas (BSP) – is creating more money out of nothing? Or printing more money out of nothing, just to encourage more spending and lending in our economy? What the heck. Even those who got no money in the Philippines are spending! (Kidding again)

I mean, really? Is BSP doing that?

The Philippines has a yearly budget. This year, infra budgets have already been approved, and building for progress is already in progress. Okay, never mind that. But wait, just think about all the constructions happening right now, all the major highways and expressways and numerous schools approved and set to be built starting this year. Now stop. Leave it be.

Think about the hordes of overseas Filipino workers (OFWs) sending money worth billions of pesos – mind you, money not printed or created by our central bank – to the Philippines. Imagine that amount of money being spent for food, shelter, clothing, education, utilities, services, luxuries, etc. Money is flowing in our economy. The BSP doesn’t need to implement QE. There’s just so much money moving in the country. Of course there will be those Pinoys that are financially challenged AS OF THE MOMENT, but I am not talking about them here. I am talking about the amount of money moving around. I’ll devote another article on them. Because what heck, I came from a very, very, very financially challenged family.

Moving on. So we got infrastructures coming up. We got money coming into the Philippines without BSP needing to create them out of thin air. What else?

The manpower. We are entering our period of high productivity potential. There are a lot of 20-something- and 30-something-year-olds now in the manpower section of the economy. Compare that to Japan where, according to someone I heard during a panel discussion at the recent World Economic Forum – the topic of which is the ASEAN region, integration and harmonization (if I am not mistaken; and just making it clear, I’ve seen it only on TV) – the majority of the age of the population is 60-something or 70-something.

So we got three things; engines or factors that could help drive or drag the economy. There are many other factors that any economist in their proper mind could think of to support my optimism that the Philippines is entering its “golden age”. Or, there are many other factors that would refute my claims.

Either way, in the near term, I am just saying that we should be wary of the fluctuations in the stock market. (This is just my answer to some of my friends at Twitter, who have been asking about the performance of the market this week.) I do think that we got the fundamentals (although I may have missed a lot more here). Not just for stock market growth, but for the growth of the overall economy.

So don’t worry. This is but a minor bump in our long road to progress—but progress nonetheless.

As always, email me with your violent reactions.

richard@phstocks.com