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The coming peso storm

ON July 1, 1979, Sony Corp. began selling the Walkman cassette tape player. Portable music had been around since the transistor radio of the 1950s. What made the Walkman particularly revolutionary was the built-in headphone.

Music had always basically been a shared social activity among listeners. But with the Walkman, people began listening to music “alone.”  No more fighting over which tape would be played on the car stereo. Now everyone could listen in private to whatever music they desired.

The iPod and the music player on your cell phone is nothing more than a technological advancement of the Walkman. The private and personal music concept is exactly the same today as it was with the Walkman 34 years ago.

Had the world not accepted “private music” back then, the world might be different today.

There are events that happen that change the world. But not all events with far-reaching consequences are necessarily planned to produce the results that they do.

At the beginning of the Obama presidency in 2009, the US Federal Reserve began its stimulus program call Quantitative Easing (QE). The idea was to create enough money, put it into the economy through the banks, and get economic activity moving again. After creating $3-trillion new dollars and the US government going $6.5 trillion more in debt, the total policy is a failure at stimulating economic growth.

More significantly, this is what has happened.

For the first time in the history of the country, the majority of the increase in personal consumption spending since 2009 has come from government personal benefit spending. Considering that the US economy is driven by consumer spending, that economy would have grown only a little if at all in the last four years. Government spending paid for by borrowing is keeping the US economy alive. But the borrowing must be paid.

If the US raises taxes to pay for the debt, the economy stops. If the US cuts benefits to save money and reduce borrowing, the US economy stops.

Here is why you should care about all this.

The QE program is printing dollars to pay off the debt, flooding the global financial system with “cheap” dollars, which directly affects the exchange rate of the peso.

Last week David Kemper, CEO of Commerce Bankshare, and more important, a former president of the Federal Advisory Council of the Federal Reserve suggested that the Federal Reserve monetize all the US debt in the world at once, printing another $30 trillion (instead of the current $3 trillion in QE money) and buy back all the US government debt from China and everyone else.

This would create a massive devaluation of the US dollar as China, for example, would be forced to spend those dollars or sit on another trillion of devaluating greenbacks.

Without arguing the merits of a strong or weak peso, the truth is those arguments are worthless. Whether or not the US prints another $30 trillion, the dollar is going to continue to devalue and the peso will continue to appreciate.

One major global financial institution is forecasting a 38/39 peso to the dollar by year-end, partly of due to dollar weakness, part due to the Philippine economic situation.

The administration is all excited about a credit upgrade this year. That upgrade itself will strengthen the peso. Government dollar interest payments will be lower adding about 25 to 50 centavos to the value of the peso.

There are tens of billions of dollars in investments including foreign direct investments waiting to come into the Philippines but cannot because we are not investment grade. Once the upgrade occurs, that foreign money will flood into the country adding another P1 or P2 to the dollar exchange rate. There is your P38 to $1.

The Bangko Sentral ng Pilipinas (BSP) is currently acting like Harry Potter trying to learn the secret to the magic wand that is going to keep the peso from appreciating. What they should be doing is acting like Philippine Atmospheric, Geophysical and Astronomical Services preparing the people and the economy for the eventual peso appreciation storm.

As the BSP tries to keep the peso weak, more pesos through dollar buying flow into the local economy risking asset bubbles and inflation. That is why you keep reading comments worrying about real estate.

How can you protect yourself from peso appreciation? Buy the stock market; either way it goes higher. If the BSP weakens the peso, more pesos in the economy will flow to the market. If market forces bring the peso to 38, more foreign money will raise stock prices. The Philippine Stock Exchange is a good umbrella to protect you from the peso appreciation storm.

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E-mail to This email address is being protected from spambots. You need JavaScript enabled to view it. . My web site is www.mangunonmarkets.com and Twitter me @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.

 

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