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Did they burn the house down?

Column box-John Mangun-Outside the Box

Everything we need to know about the future is right before our eyes. Granted we must know where to look but even that is not as challenging as it may seem. The past leads to the present and the present to the future.

The greatest problem is being willing to examine data and trends from the data that go against preconceived notions and personal narratives.

John Kenneth Galbraith once wrote, “Faced with a choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy with the proof.” John Maynard Keynes wrote: “When the facts change, I change my mind.” And those are quotes from two of the most “stubborn” men that ever walked the planet. Both were considered iconoclasts and roundly criticized for their economic concepts, you would be hard pressed to find either one ever saying, “I was wrong.”

It is an “Old Boys/Girls Club” idea that the local stock market tracks the New York market and that is 100 percent accurate, until it doesn’t. The data—daily price changes over a five-year period—shows that the PSE has a 50 percent chance of trading up or down as the Dow Jones did the day before. But what about longer term? On a monthly basis over years, of course both exchanges track each other. The “Crash of 2020” was worldwide. Even the Somalia and Cambodian exchanges crashed in March 2020 “following” the DJIA. Or maybe it was the US that was tracking those markets.

However, despite local Philippine economic conditions, government fiscal and monetary policies, and the overall place in the world economy, I am noticing something that historically is unusual.

Realize that the great financial thinkers are saying that the Dow is ready for a massive decline. They have been saying that for many months and the recent market peak came in August with nearly a 20 percent fall to the September bottom. The PSE did almost the same identical pattern.

But since the early October bottom, the Dow is up 20 percent, with the PSE gaining 15 percent. Superimpose both price charts back to April 2022, and the correlation is too close for comfort.

I am not comfortable because looking at global economic growth is like watching a Low-Pressure Area develop into a super typhoon. The latest IMF forecast is for 3.2 percent global growth—from 6 percent in 2021—and 2.7 growth in 2023. The US forecast has gone from 5.7 percent in 2021 to 1.6 percent this year.

The Asean 5—Indonesia, Malaysia, the Philippines, Singapore, and Thailand—is looking at increasing growth to 5.3 percent in 2022 from 3.4 percent in 2021. The Philippines is expected by the Japan Center for Economic Research/Nikkei Asia to be the second strongest behind a lower base 2021 Malaysia coming in year-end 2022 at 6.5 percent.

Two things hammered global economies with inflation in 2022: supply chain problems and high oil prices, which drove shipping costs skyward with equally high food cost. US inflation in June was 9 percent and has come down to 7.7 percent.

Signs of lower consumer/industrial demand is seen in the price of the container freight rate, which peaked in September 2021 at $11,000 and is now at $2,800. The FAO Food Price Index has fallen 15 percent since then with the largest declines being in cereals—notwithstanding the Ukraine war—and vegetable oils.

The interest rate increases were supposed to lower inflation with a gentle effect on economies. It looks like the Fed and other central banks burned the house down to kill the inflation cockroach infestation.

Or, what if with lower oil prices ($115 to $83) and the supply chain smoothing out, the inflation cockroaches were already leaving “naturally”? What if the higher-interest rate “house fire” has only just begun? How bad will global economic growth be in 2023?

The Philippines: Sub-$100 oil prices are very good. Inadequate agricultural policies are very bad. If the US stock market goes down on the back of a bad US economy and if the local market follows that fall, do we blame the US Federal Reserve?

E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.

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