In the interest of furthering “financial literacy” and a greater understanding of the financial and hard-asset markets, here is today’s question.
Which of the following is true: “High asset prices are the result and reflection of economic prosperity” or “Economic prosperity is the result and reflection of high asset prices”? We will get back to the answer later.
The markets must always be viewed in the current context, and that can only be done if you have an historical perspective. That is why it is difficult to interpret what government economic data is saying. Every time the GDP numbers are released, there is a debate about whether this genuinely reflects the performance of the economy.
The problem with the GDP is that it can easily be manipulated for political purposes. But that is not the point. Over time, if the GDP uses the same factors, it gives us a snapshot of the economy at different times that should be comparable.
During the first quarter of 2016, the Philippine GDP grew 6.9 percent from the first quarter of 2015. In 1988 the Philippine GDP grew 6.8 percent over 1987. But what is the “current context”?
In 1988 the agricultural sector contributed at least twice as much to the GDP as today. At that time, 45 percent of the labor force was employed in agricultural production. Today that percentage is 30 percent. Theoretically, you could say that the 1998 GDP growth was better for the rural farming class because they made more contribution to, and therefore, had more participation in the economic growth.
You could also make the argument that the large drop in agricultural employment is because of these people moving to better-paying employment. Maybe these former agricultural workers are now employed in the provincial shopping malls and even call centers, which did not exist in 1988.
If that all sounds like intellectual or academic nonsense, you are absolutely right, as is true with most discussions about economics.
Remember three years ago, when the “bubble” experts were confidently predicting that the Philippine stock market would probably crash and that the economy was unquestionably headed for disaster?
Their answer to the question I asked earlier is that asset prices go higher because of more economic prosperity. People get richer and then can afford to buy more expensive houses and more expensively priced stocks. That is what history shows us.
But the “current context” for the past 20 years is the opposite that “higher asset prices” is the reflection of economic prosperity. This is “bad,” since we know that people can buy expensive stuff without having the personal economic prosperity, thanks to money lenders.
The largest home-loan lender in the US—Wells Fargo Bank—is now offering mortgages with a 3- (yes, 3) percent down payment. That will raise the demand and prices for housing, thereby “proving” there is greater economic prosperity.
Except that is not true for the Philippines, which makes us different and better, and also the reason the economy keeps rolling higher as will the stock market.
In the Philippines the answer is the second one, where rising prices reflect economic prosperity. That is why we are not in any stock-market or economic bubble. Buy the Philippine economy. Buy the Philippine stock market.
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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.
3 comments
Maybe they are not moving to better paying jobs but they are either retiring or leaving the agricultural sector. And that’s a fact.
Let’s not confuse the stock market with the real economy. Only a small proportion of GDP is represented by companies listed and actively traded on the stock exchange. Foreign companies are not listed; farmers are not listed; the self-employed are not listed. Government policy needs to focus – not on the stock exchange – but on what affect the masses. Why is there not a major focus on housing (not high-priced condos), to rid the cities of shanty towns and provide construction jobs (and skills) for poor people? Why is public education of such poor quality that those who can afford to do so (and many people who cannot afford to do so) send their kids to private schools? Why are huge companies owned by the wealthiest families protected from competition from foreign firms, thereby making consumers – the guy in the street – pay higher prices for a wide range of goods? Let’s hope that President Duterte is a man of the people, who will ensure that government acts in the interests of the common man and woman, not of the wealthy, who for far too long have been disproportionately represented in the Philippine Senate and Congress.
i AGREE 110%. The free float of listed companies is maximum 15%. The PSE stocks are overvalued, simply because a lot of buyers are chasing low supply of stocks. The Stock-Market is not a real gauge for the ECONOMY. Hot money from foreign investors flows in and out of Stock Markets. Even the President-elect Duterte does not care about stock market. He wants FDI which is the real test of whether the economy is doing well or not, which means that the Big Investors are willing to put their money to improve the economy further.