ALLOW me to start by pointing out that the year is 2015. Now, that seems obvious to you and me. But for most of those writing commentary about asset bubbles and valuations, they are at least a few years up to a few decades behind the real world.
The other day I read that Philippine stock-market prices are too expensive because the price-earnings-ratio (PER) is at 20. Of course, I read the same thing when the PER was 18, and before that at 16.
But the bubblers will say, “‘historically’ when the PER gets so high, stock prices are overvalued. As they say on the internet, ‘Your argument is invalid.’” Here is why.
Previously, money was borrowed into existence in order to bring consumption forward and, by so doing, to stimulate economic growth. Take out a car loan; get to drive the car today. However, most people actually paid for the things they bought.
But now money has been replaced by debt. You no longer need to create wealth by adding value to raw materials, but now just borrow and the money you borrow can be free. In Denmark take out a car or housing loan, and the bank will pay you.
What is the price of da Vinci’s painting The Mona Lisa? One might say it is priceless. Then, the price is effectively zero. You cannot place a monetary value on that painting. What is the price of a bag of used cat litter? One might say that it is worthless. You cannot place a monetary value on that kitty litter. So, if you cannot make a monetary valuation of either, they really do not have any “value.”
Any commodity, including “money,” has a price, and for money, it is the cost of borrowing it; interest rates. Note that world interest rates going back to 3,000 B.C. have never been this low. Yes, we have records of that long ago.
French government-bond yields are currently negative out to five years. My money is so “priceless” that the French government wants me to pay them to use it. In fact, to get even a 1.5-percent interest on French debt, you have to buy a bond that matures in 50 years.
Therefore, if money is so “cheap” that people will actually pay the French government, as only one example, to borrow it, what is the value of money anymore?
Assume, instead, of a P15-a day minimum-wage increase, the government mandated that all wages, salaries, commissions and whatever be doubled starting Monday, and everyone gets a 20-percent increase every six months.
That would be paradise on earth. But the price of everything would also double. One of our foreign experts would look at the situation, and say there is an asset-price bubble that is unsustainable because the price of a car and condo just increased by 100 percent. But the “price” of those goods did not increase, except for the fact that the “value” of money collapsed.
Shares of stocks are priced in money. As the price of money goes down, the price of stocks goes up. The experts tell me that Philippine stock shares are too expensive. Well, since they are experts, instead of buying shares, I will go pay the French government to borrow my money.
The global financial system has the ability to absorb trillions more in zero and negative interest-rate money, and those rates will continue for some time. But mark this.
Money always flows between investing in the government and investing in the private sector, and for the last decades, money has gone into the public sector. That cycle will change in the next few months, with money flowing back into the private sector like stocks. The stock-price increases of the last few years are but a shadow of the total amount of money created. In other words, “You ain’t seen anything yet.”
Unquestionably, there will be government debt defaults. But governments will write off those defaults by bailing out the lending banks, as they have done repeatedly. The only other choice is government collapse, which has also happened many times before.
Over the last years, governments have been curtailing and suspending every type of economic and personal liberty to make sure an “Arab Spring” does not happen in New York, Berlin, or even Beijing.
Financial confidence in government is in Intensive Care. Eventually, it will die, and money will become real again in the private sector. For now, though, call me when the Philippine stock market gets to 10,000.
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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.