AFTER a dismal two months of price action on the Philippine Stock Exchange (PSE), with the composite index down nearly 9 percent, October may be the turning point for prices going higher.
The end of September does not signal the end of the high volatility that the global and local financial and asset markets have experienced these past months. Wide swings in prices are going to continue and may even grow greater, because the world has a liquidity problem where there is massive hoarding of cash. That hoarding will grow even greater.
When money is not flowing around the economic system, prices will jump around. The way we can best measure this velocity of money on a macro global basis is by looking at the markets. In an individual economy, a lack of velocity and liquidity is almost the opposite at east at the begging of a loss of liquidity. Prices remain deathly stable, and that is what we are seeing in the very low inflation rates not only here in the Philippines but everywhere else.
But at some point, when money is not moving, then prices start fluctuating with a downside bias. We tend to think that prices are determined by some sort of magical negotiation between buyers and sellers of all goods and services, but that is incorrect. Buyers always determine the price. Go to a mall food court, and you will see signs that offer large discounts, say, 30 minutes before closing. At 8:30 p.m., there are not many buyers of food, and this creates a lack of liquidity in the food-court economy. So to attract buyers, move merchandise, and to increase the money flow, prices are lowered.
The type of price movement we have experienced in the last months is really unheard of, unless there are extraordinary events occurring, like natural disasters and wars. What kind of fundamental change in the supply or demand equation has caused the global price of crude oil to trade 4 percent higher and lower on consecutive days? The answer is none.
Because nearly all commodities are not attracting the amount of buyers in the size as a year ago, for example, prices are moving based on a small amount of buying or a small amount of selling. The same thing has been true on the Philippine stock market.
So why might October be a turning point for the local bourse?
The global economy, as led by the US, Europe and China, is going south for the winter and probably well into summer 2016. Any talk of an economic recovery is nonsense. In competition for the Guinness Book of Records’ “Most Fabricated Statistics” is a nation’s economic output, as measured by gross domestic product (GDP), and a country’s unemployment numbers. GDP, at best, is an educated guess and, at worst, is a political tool. The unemployment data means nothing. It does not matter how many people are looking for a job at any given time. The only thing that matters is how many people are actually working and the trend of job creation. These numbers are almost impossible to fake, as real money changes hands when a person has a job.
The only way that job creation is going to happen is with economies and companies actually investing in things like factories and shopping malls that create employment. And the only alternative the developed nations have left is more money-printing stimulus.
Etsuro Honda, a special advisor to Japan’s Prime Minster Shinzo Abe and who is often described as an “architect” of Abenomics, has proposed a new method of stimulus called QQE, or “qualitative and quantitative easing.” Honda offers a scheme that has the government buying bonds but that central banks directly fund government spending and even inject money directly into household bank accounts, if need be.
So if the government wants to build a bridge, it simply prints the money to pay for it. If the economy is stagnant, drop a few hundred dollars into “mid- and low-income households’ bank accounts,” and send them to the nearest department store. They are calling it the “People’s QE [quantitative easing]”. Think that is crazy and cannot happen? The European Central Bank is already buying bonds (and printing money) to finance and pay for infrastructure projects.
Has anyone ever thought of a better way to increase liquidity and money flow? And how many voters will go against a government that gives them free money?
Big money that is smarter than the rest of us will rush to buy the stock markets of a QQE regime system or even just more quantitative easing, but will also put a part of their funds in real economies that actually create wealth as insurance against the eventual collapse of QE and QQE.
Not to worry; PSE 8,000 is only a matter of time.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.