A couple of days ago, a good friend whom I regularly call to check what his crystal ball is saying on the financial market, warned me that something will happen and the formation is really bad (he is a chartist and does not really rely much on company news but on the charts). I have always been pessimistic about America, which is why I keep away from U.S. stocks. Well, a week after, we now see the Dow Jones start from a high of 12,700 to now at 10,900 levels in just a week. And there is a good chance that we will see this back to the 6,000 levels in the near to medium-term. He sees it that way and I quite agree with him, but maybe not in the immediate future, hopefully.
The bright side in all of this is that the prices of commodities such as crude oil, wheat, corn and milk should start to come down due to the fear of a double dip that may happen. This has some good implications for the Philippines as with consumer goods companies like RFM Corporation, since we buy a lot of milk for ice cream and our ready-to-drink milk, as well as a lot of flour products and other commodities. This will also be good for transport industries now that crude oil has broken the 80 dollar level. With inflation kept low, interest rates will also be low for quite some time, which is good for business. It’s quite early to say if commodity prices will hit the levels of 2008 when greedy hedge fund managers placed huge bets on commodities, pushing prices to go even higher. As things improved in 2009 and 2010, people forgot the problems of America as greed took over fear again. Balancing fear and greed is usually the problem and is the reason for all this exaggeration in the market.
America’s problem is still there. The IMF prescription, if you remember, to nations like us was to devalue our currency, to manage our budget, and to improve our trade balance. In fact, this was a condition set while we were in the IMF watch. For America, it may be different. The dollar is still the world’s currency, and from what I see, this will always be the case, at least in our lifetime. So how does America get out of this mess? The U.S. finds itself in quite a challenging situation.
Despite America’s two-trillion planned reduction to get the debt ceiling adjusted by the legislators, the S&P still downgraded, since they don’t believe that this will help them have a balanced budget in the near to medium-term. I quite agree with this view, but it would also be difficult as they need to manage the recovery process. America is still in the ICU. The job market is still bad and consumer spending is weak. The Chinese and Indians are taking labor away from America, since most American products are made in China, and most of the backroom operations are located in India and the Philippines. Quite a difficult situation, but the right way is to really manage the budget. It’s just like a family that is not earning enough but spending more than it can afford, borrowing and borrowing money for many generations. In the end, what happens is the family loses the car and the house.
The US dollar has to weaken, and this is the only chance the US has to become competitive again. But will the other nations allow this to happen? Well, we have no choice. In America’s case, they can print more dollars since the dollar is the world’s currency. You can see that, despite this USA sell-off, people will still hold dollars. So as they print more, the dollar will weaken further, and the price of gold will also go higher since people will also start to hold more gold. We are coming close to a 2,000 level for gold. I never thought we would ever reach that level. Some three years ago, someone told me that gold will hit 3,000. If that happens, we would have a serious situation. This could mean another financial crisis which will lead to the dollar losing its value, and this would spread to Europe as investors have no other alternative but to invest in gold.
We should have all learned from 2008. Many Pinoys got burned with their money in foreign bonds; from which country the bonds were from, they never even knew. So they decided that it is best to invest in hard assets in the Philippines. This is why real estate and Republic of the Philippines Bonds, among other Philippine bonds, have become so popular to Filipino investors. Now, with the current global financial situation, are we going to let excessive fear cause a collapse? Whoever is able to control fear and greed will make better investors or entrepreneurs.
So what do we do in this situation? I am still bullish and optimistic with our country. We are witnessing a moral transformation under new leadership. This will definitely better help our macro environment, as investors put a lot of importance in good governance, a must even in the private sector as with public companies. I believe Asia is the place to be for now while America and Europe is having huge problems.
So as these markets continue to correct itself on a downward basis, we should be ready to see great opportunities for a long-term buy. I would continue to hold pesos over dollars as our country will be rerated to investment grade. Hopefully, the good that we can get from all of this is that commodity prices will continue to go lower. With oil prices going down, we do hope to also see power rates come down, as power rates in the country are now the highest in Asia. Let’s all hope that this is not yet the big one.