What is PHL’s ‘wealth effect’?

When each of my sons began working I told them to follow this advice: Whenever you get your paycheck, buy yourself a treat. Buy that genuine leather belt or go to lunch. When my eldest James first did that, he came home and told me he ordered a P145 shawarma.

My first reaction was “P145 for a shawarma?” His reply was that this was at a “fancy” Middle Eastern restaurant in Makati and the shawarma was imported lamb.

Our income particularly from selling our time, effort and expertise is a measure of our success. It is equally important that we enjoy the fruits of our labor even though some people would like us to believe that is “wrong.” They are wrong. Wealth is meant to be enjoyed. It is called the “wealth effect.”

By definition, “the wealth effect is the change in spending that accompanies a change in perceived wealth.” Spending changes in the same direction as perceived wealth.

For me personally, my wealth effect is a trip to Landers and a couple of kilos of imported bacon for a family weekend brunch. A bottle of special liquor to add to my collection is another wealth effect just for me.

Nations have a wealth effect also that collectively are watched and makes the people feel good or not so good about the general economic condition. An individual may or may not have a direct interest in the wealth effect. However, they believe that it does affect them.

In the United States, it is the performance of the stock market. All the talk about the stock market being for and beneficial to the rich is nonsense. Nearly half of all US households are directly or indirectly invested in the market. This includes personal ownership of shares and by pension plans.

Personal pension programs such as the 401k—a retirement savings plan that lets workers invest some of their paycheck before taxes are held by more than 50 percent of employees. The median value of these accounts is about $35,000, so this is far from being “rich.” About 60 percent of all 401k money is in the stock market. So when stock prices go up, people feel wealthier.

In China, the wealth effect is in real estate. Three quarters—75 percent—of Chinese household assets are in real estate, compared to only 28 percent in the US. That is why the Chinese government is so concerned about real-estate prices at least remaining stable if not increasing. There is now great concern with some 50 million empty homes or roughly 22 percent of China’s urban housing stock being unoccupied.

I started thinking about what is the Philippines’s wealth effect? Obviously it is not the stock market. It could be real estate, except that the property boom is more a result of a decades-old backlog of unfilled need. I believe then that our national wealth effect is twofold.

The two financial factors that almost all of us have watched for many years with close attention are overseas remittances and foreign investment.

The moment any data for either is released, it is guaranteed that the pundits and the news will cover both with close scrutiny. The numbers will be turned upside down and inside out with long explanations of why. And, of course, the results will be made into a political narrative whether increasing or decreasing.

Is this wealth effect a valid perception of the economy? It does not matter. Psychologist and philosopher Edward de Bono said: “Perception is real even when it is not reality.”


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.



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