OVER the last nine months I said repeatedly that the US Federal Reserve (the Fed) would not raise interest rates. It is unlikely that rates will be raised in 2015 and almost definitely not in 2016.
The current Fed Board of Governors are all Obama appointees, and 2016 is an election year when Obama’s Democrat party is struggling to hold onto the presidency. Imagine if the Fed hikes interest rates in early 2016 and the US economy goes into a recession. The presidential election would almost certainly go to the Republicans.
I also said that there is a possibility that the US would move to negative interest rates as is being done in some European countries where the government actually pays back a lower amount when its debt matures than the original face value. Corporations are willing to lose money-lending to governments because they need a risk-free short-term investment and even negative rates are less risky than putting money on deposit with a bank.
In a speech two days ago, the Fed Chairman Janet Yellen said: “The federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.” She went on to say, “This limitation is a potentially serious problem because severe downturns, such as the Great Recession, may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.” In other words, if the US economy does not show strength, interest rates will go negative.
The Europeans, the Japanese, the Chinese and the US are all trying to keep their currencies from appreciating. The headline US Dollar index only shows the battle between the dollar, the euro and the yen. The currencies of Algeria, Egypt, Mexico, Brazil, South Africa, Turkey and Russia, among others, have all reached historic dollar lows in the last month. That means money is flowing into the US and this will continue as will extreme volatility in the commodity, equity and currency markets.
This past week, the Bangko Sentral ng Pilipinas kept base interest rates unchanged after raising those rates one year ago. This is in stark contrast to what is being done in other countries. Norway just lowered its rates to their historic low.
The Asian Development Bank said two days ago that the Philippines will have its lowest economic-growth rate in the last four years in 2015. However, it is highly optimistic—as it should be—for 2016. Likewise, Fitch Ratings raised its outlook on the Philippines to “positive” from “stable.” But before the potential good times of 2016, we need to get through the last quarter of 2015 and that may not be a gentle trip.
The Philippine peso, as well as the stock market, is going to continue to be volatile with swings that would be considered “wild” in the past. In 2013 we saw this same kind of extreme movement, but this time it is different.
In 2013 the Philippine economy was growing at a faster rate and the concern was that any Fed rate increase at that time would stall the country’s growth. The rate increase did not happen. The Philippine peso was appreciating then and the dollar was stable and weaker. The euro is now 1.12; in 2013 it was 1.30 to the dollar. The Japanese yen was also 20-percent higher. Should I mention that crude oil was trading at $100 in 2013?
Central banks were in firm control. Government policy makers had the peoples’ confidence. All was good as in the next year stock markets hit historic highs.
Forward to 2015 and look around. Europe is in chaos with its refugee and Greece debt crisis, and now the US is moving more nuclear weapons to Russia’s doorstep. The Middle East is in chaos with Russia building military bases in Syria. China’s economy is in crisis with data showing a continuing and accelerating decline. Both Canada and Japan are in recession, although their governments are making excuses for the downturn. Global trade volume and value is in its steepest and longest decline since 2009.
The Philippine government is desperately singing, “Don’t Worry, Be Happy” as we go into the election season. We will find out if they are right in about 30 days when third quarter economic numbers are released.
Local stockbrokers desperately want investors to look at fundamentals, “Fair Value” and future profits in order to keep buying issues that are down 8 percent and more in six weeks. They might be right also.
In the meantime though, be cautious and carry your umbrella at all times. The financial and economic typhoon season is just beginning.
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.