OVER the last several months, I have described the global financial and asset markets in chaos using the traditional definition of “complete disarray and turmoil.” The price movement of crude oil in the last two weeks is an example of that.
An unmanipulated pricing mechanism should account first for basic supply and demand as the primary determinate of the price of any good or service. Then expectations of those two factors in the future would also be factored in to the price.
Yet demand for oil is not growing while supply is constant-to-rising. The nearly 9-percent increase in the oil price has been rationalized by the idea that lower prices have caused some oil production in the US to be cut back. Capital expenditures in the industry for 2015 are reduced and the amount of drill rigs being used is significantly lower than even a month ago. All of this is supposed to reduce supply in the future. But this is all speculation as no one can estimate how much oil production might go down or how much closer supply and demand will come together.
But this supports the idea of ‘chaos’; disorder and confusion.
The original Greek word meant a ‘gap’ or ‘hole’ from which something would follow, in ancient thought, the creation of the world. In our case, it may the creation of a “New World.”
Contrary to popular belief, the global “Great Depression’ was not a result of the 1929 US stock market crash. That event was a symptom but not the illness. Bank lending, allowing one dollar of cash to buy ten dollars worth of stocks, caused banks to fail when the market, as markets always do, went down.
The Great Depression actually started when one major bank in Austria, Creditanstalt (CA), failed. The bank went down because its major borrower could not pay its debt. The Austrian government forced CA to absorb the loss and then eventually bailed out the bank sometime after it went bankrupt.
Many times I have talked about the Philippine peso exchange rate and its relation to both the PHL economy and the local stock market. Global capital flows are the most important aspect of the world economic system. Nearly everything else is a result of these flows. It was as true 100 years ago as it is today.
The failure of bank CA and the resulting pressure on the Austrian government’s financial health caused money to flee first to Germany. But Germany was in no better condition because of the financial restraints from the World War I treaty. Capital then fled to Britain. Here also capital did not find a safe haven. It eventually moved to the US as sovereign debt collapsed in those countries.
The US stock market bottomed out from the crash at the same time foreign capital moved in. That foreign capital also marked the beginning of the US economic recovery with the gross domestic product growing from $57 billion in 1933 to $93 billion four years later. The Dow Jones Industrial Average moved from 41 to 195 in the same period.
Then the market crashed again losing 50 percent in one year-and this is important- as interest rates skyrocketed by 50 percent to stop the capital flight to the US which caused a strong dollar.
Here is the point of all this.
We are seeing a modest capital flight into the US Dollar. The US stock market is still going higher. But a real bull market bubble only happens when it is fueled by foreign capital flows targeting one nation. Capital poured into Japan after the 1987 US stock market crash creating the 1989 Japanese stock market bubble.
Greece may be the new Creditanstalt causing a domino effect of debt default in Europe. Money will flee to the US creating a stock market bubble and an eventual increase in interest rates as the bubble becomes obvious and then a crash will ensue.
The only accurate way to measure capital flows in the currency exchange rate. While it is true that central banks can manipulate rates, they cannot do it forever. Thailand’s stock market more than doubled between 1993 and 1994 and then crashed.
We watch the peso to see if too much foreign capital is moving in. Currently there is stability but investors–and the central bank–must not let the guard down.
The Philippine stock market is not in a bull market bubble as it is fueled with domestic funds and neither is the economy for the same reason.
****
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.