WELL into the 20th century, miners—particularly coal miners—carried cages with canaries down into the mines. Birds are unique in that they are continuously inhaling at a much faster rate than humans. Their fast metabolism makes them almost immediately vulnerable to airborne poisons.
The miners knew that, if the birds suddenly keeled over, they had to exit the mine or face certain death. The phrase “canary in a coal mine” has come to express an advanced warning of some danger.
While I am optimistic about the future of the Philippines, I did write on March 24 that the coming months could bring some difficult times. That column spoke specifically to oil prices. I still believe that the “bubblers,” “hyperinflationists” and the members of the “Church of the Financial Armageddon” have it wrong.
However, I have also written that this coming end of the third quarter is going to see some unpleasant events.
The 2012-and-2013 Cyprus banking crisis was the first “canary” to drop dead. The details of the cause are not as important as the result when depositors in “guaranteed” bank accounts saw half of their funds stolen by the government to save the banks.
Through 2013 and early 2014, Greece was given new credit lines, and all was good. The crisis was obviously over, as the interest rate on the Greek government 10-year bond fell from 40 percent to 6 percent. But now, that interest rate has more than doubled to 14 percent and the Greek government is fighting for its financial life.
The Greek government recently raided pension funds to raise money. They “borrowed” the money, but when they intend to pay it back is unknown. Last week the central government now requires that all local government units immediately remit to Athens all money that they collect. So if a Greek citizen pays €10 for a marriage license, those funds go directly to the national government treasury. The Greek canary is coughing badly.
Before the end of the year, we are going to see, if not the actual, at least the beginning of sovereign debt defaults from countries that cannot print their own money or devalue their own currency. This will create a downturn in the global economy not seen since 2008 and 2009. Currently, there has been issued $2 trillion of European government debt at a negative interest rate.
Sovereign debt default and negative interest rates will cause a massive capital flight out of Europe and first into the United States. The US cannot afford to absorb that cash, as it will create asset-price bubbles, particularly in the stock market. That is why I see the strong possibility that some US rates may also go negative. But that capital flow carries toxic fumes that will kill some other canaries.
Initially, there will be a rally in stock markets in Europe and the US that may last for some time, until capital finds another home to move to with less risk.
The local stock market is already showing some early warning signs, not so much about the Philippines but about the potential troubles, in general, that lie ahead. Filipino investors, unlike their counterparts in the West, are more globally smart with an understanding of currency exchange rates and the like. A weakness in local share prices will be externally driven, and not by domestic problems.
The Western mind, unlike in Asia, cannot conceive of cycles, in general, and, when they do, firmly believe that these cycles can be controlled. The US state of California is in a drought. It is part of a long cycle. When the Spanish first settled the area, it was during the middle of a 50-year drought. Most of central California was a desert. But, we are told, the current condition is because of man-made global warming, not a natural cycle, and we can break nature’s patterns simply by buying an electric car.
Cycles have applied to economies throughout history, and trying to break them only causes more misery. A short-term economic-cycle uptrend that started in June 2011 will peak and turn down in the third-quarter 2015, until it bottoms out one year later.
The West will try to fight this cycle and will lose. It will not be financial Armageddon, except for those that keep their money in Western banks and real estate.
Prepare to travel on a bumpy road for the next months. Then be prepared for “surprising” strength in the Philippines—and Southeast Asia—while the West scrambles to protect its wealth amid dead canaries.
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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.
2 comments
Sell?? Sell?? Sell?? Then Buy! Buy! Buy!
Western real estate or here? Why?