Bubbles everywhere

This is what some investors and other market participants say they see in the market at the moment—bubbles everywhere.

As one whose orientation in stock investing is that of a trader than an analyst, I find the market plots suggested by non-mainstream economists such as Jesse Colombo and Geoffrey Pike to be both challenging market perspectives and handy trading guides this year.

Pike, in his article for Wealth Daily, says that after some three decades of phenomenal growth—particularly based on his observations and knowledge of “The Austrian Business Cycle Theory”—it’s time to short China because “China is about to see its first major recession.”

With a similar doomsday theme, Forbes.com contributor Colombo is warning about “growing bubbles” in countries like Canada, Australia, the Nordic countries, China and the emerging markets.

Colombo wrote lyrical but tragic articles on Thailand’s impending “1997-style crash,” the perceived “Iceland-style Meltdown” of Singapore’s economy, the noticeable “Malaise on Malaysia’s Bubble Economy,” Indonesia’s “Worse Yet to Come Epic Bubble Economy” and “Why the Philippines’ Economic Miracle is Really an Economic Bubble In Disguise.”

This intransigent anti-economic bubble activism by Colombo has piqued local market patrons and lovers, including government economic planners. For instance, the Department of Finance (DOF) said the Philippines was not in a bubble: First, the Philippines has “more savings than investment and is even a net lender to the rest of the world.” The country’s BOP, accordingly, is in surplus unlike in the 1997-98 Asian crises where it tilted along with other Asean countries that had current-account deficits.

Second, the country’s international reserves have been rising. It had $81.7 billion in 2012. As of Oct. 2013, this stood at $83.4 billion. Significant to that is that it’s “equivalent to a year of imports of goods and services.” It’s “one of Asia’s highest,” the DOF stressed.

Third, inflation rate is still within the 3 to 5 percent target. ASEAN economies in 1997 “had an average inflation rate of 6.1 percent, which rose to 15.1 percent the following year.”

Fourth, while “slightly outside the P41-43/$1 range,” the exchange rate is relatively stable. This is far from the 1997-98 crises where the peso depreciated by 13.1 percent compared to the ASEAN depreciation of 53.8 percent.

Fifth, the government has not been really spending enough. The “35.8-percent infrastructure spending in the first half of 2013 is due more to realignment of spending priorities than excessive spending.” The budget deficit is still lower than target.

Sixth, the observed “soaring capital inflows” are but OFW remittances and BPO revenues. The DOF pointed out that “personal remittances of OFWs rose 9.7 percent last year and 6.6 percent as of September this year even if Europe was in crisis and the US was not growing.”

As for the spike in external debt, the DOF said Colombo was wrong as it has been declining. Philippine external debt amounted to “$60.4 billion in 2011, $60.3 billion in 2012 and $58.1 billion as of June 2013.” As a percentage of GDP, these amounted to only “27.0 percent, 24.1 percent and 21.6 percent, respectively.” Foreign direct investment (FDI) in the last 10 years, too, is yet to boom. The DOF said that it would have been very happy if it were true, for “FDI has averaged less than 0.9 percent of GDP during the past 5 years.”

As to the “sharp rise” of the Philippine equity market that averaged “32 percent during the last 5 years,” according to the DOF, this “just mirrored the sharp rise in corporate net incomes (equivalent to a) 28.4-percent rise.”

For the inflating property bubble, the DOF explained that “the rise in prices and rentals of residential properties in Manila CBD are not a sign of a bubble but are in fact due to rising demand and low supply.” Prices and rentals should sober up when new supplies come on stream. The DOF observed that vacancy rate in the residential and office space were then “9.8 percent and 4.3 percent,” respectively. “When rates drop below 10 percent, prices and rentals rise. It is necessary to keep on building to reduce impact on prices,” the DOF added.

Colombo is creating some pretty scare. He was gloriously cited by the London Times as one of “The Ten People Who Predicted the Meltdown” along with noted economists Nouriel Roubini and Stephen Roach.

The attack on emerging markets has a follow-through commentary. This can be read in his article “Why Southeast Asia’s Boom Is a Bubble-Driven Illusion.” Pike says China’s economic bubble is in imminent danger. This came about from the mercantilist policy of China’s economic planners. Over the years, China’s leaders “kept the yuan from getting too strong against the US dollar.”

While this helped prop up their export sector, the policy did not address local concern. It was hurting Chinese consumers who found the prices of goods and services still otherwise expensive.

The “Austrian Business Cycle Theory,” according to him, happens “when there is massive monetary inflation and artificially low interest rates.”  Some sectors will actually do well but others will experience serious bubble activities. In the case of China, he finds the real estate sector to be in a classic bubble. He says the policy has “created significant monetary inflation (which in turn) has created perhaps the biggest real estate bubble in history.” He cites, for example, cities with huge buildings and shopping malls still sitting empty. These, he says, would make “the bubble in China eventually make the previous US real estate bubble look small in comparison.” Thus, Pike said that barring some economic miracle, the inevitable bust is just a question of timing now.

(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)