How bad can it be?

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Ben D. Kritz

Ben D. Kritz

THE disappointing report on Tuesday that Philippine exports had contracted for the eighth straight month was just another stanza in what seems to be shaping up as an entire symphony of economic pain in a year that is barely two weeks old.

Although there have been a couple of bright spots—Japan’s economy seems to have perked up a little, and the latest jobs report from the US indicated some positive movement—more often than not, the news at both the macro and enterprise levels is disturbing.

Oil prices remain mired in a tailspin, putting a number of big petroleum companies at risk and causing Saudi Arabia to make deep revisions to its economic plans. The Chinese equity market is imploding, and dragging most of the rest of the world’s markets down with it. Brazil’s economy appears to be on the verge of a complete collapse. A report late Tuesday indicated that as many as 3.7 million people there have fallen back below the poverty line.

Giant automaker Volkswagen, which had surpassed Toyota as the world’s largest carmaker, has been battered into a near-coma as a result of its vast emissions cheating scandal. Major US retailer Macy’s, citing poor holiday sales and disappointing overall results for 2015 as direct causes but implying its troubles run much deeper, last week announced a plan to close 40 stores and eliminate about 4,000 jobs.


Billionaire investor and controversial economic genius George Soros recently warned that we are seeing the initial stages of a disaster as bad as or worse than 2008. Whatever one may think of George Soros (For the record, I’m a fan; the fact that he’s a Hungarian and so am I is probably the least of the reasons why), his view is never one to be lightly dismissed—this is a man, after all, who made his fortune betting against the unjustified optimism of the markets, and who as a hedge fund manager pulled in returns that averaged around 30 percent.

The key to Soros’ philosophy is his firm belief that markets are poor predictors of actual value; while that does not necessarily mean that markets will always err on the high side (there is an argument to be made, for instance, that biotech stocks, despite their boom in recent years, are still undervalued), in practice that is usually the case. Markets in apparent decline, then, present a scary scenario: Their retreat is very likely lagging the actual downturn in the world’s economic health, and moves such as China’s market interventions do not in any way reflect reality, and will sooner or later be exposed, leading to an even faster slide.

The significance of the disappointing export results for November—they were $60 million less than they were in the same month a year earlier, a nominal 1.1 percent decline, but closer to 2.3 percent lower when inflation is taken into account—is that they tend to confirm the view that the stock market is a poorly-drawn avatar for the economy as a whole. $1 in exports is worth $5 or $6 to the wider domestic economy behind it (the exact multiple is somewhat debatable, but the real point is that the multiple exists). A change either up or down in exports is more significant than a similar degree of change in some other part of the economy—for example, spending on services—because exports are the pathway for most of the money entering the economy from outside; remittances are a bit of an exception, but as they fundamentally involve an export of labor, their impact is not as great as it might seem at first glance.

The amount of money that can simply circulate around the economy is necessarily finite unless the profit mechanism to increase it (i.e. exports) exists. Therefore, a decline in exports or even growth that is statistically flat (in other words, doesn’t exceed the rate of inflation) indicates an economy that has, at best, hit a plateau in terms of performance—the Philippines illustrates this by being stuck at around 6 percent growth, which in practical terms is a snail’s pace, since the long-term effects of inflation and population growth means the country needs to average around 4 percent growth just to break even.

But despite this economic reality, the stock market continues to average a price-to-earnings ratio of somewhere between 18 and 20, meaning that the market on the whole is ultimately overestimating the country’s economic potential by several times. Experts who focus just on the market would most likely hotly disagree with this viewpoint (I can already hear keyboards being hammered all over town), but when one looks at the market in terms of its place in the broader economy, the bases for confidence evaporate—if that were not so, the local market would not be so reactive to outside stimuli.

So to the original question—How bad can it be?—the answer must be, “Very bad indeed.” While the Philippine economy is not really in bad shape now, there is still too little propping-up from the inside, and if the global economy deteriorates as a growing number of people who should know are beginning to suspect it will (and it certainly doesn’t help that these sorts of views, when they become widespread enough, tend to become self-fulfilling prophesies), circumstances here could be fairly grim.

ben.kritz@manilatimes.net.

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