``The collapse of the southwest real estate bubble in the
Oops. Just as we thought we found the first clues of a bottom, the Phisix got whacked by almost 4.7% over the week on ferocious foreign selling.
This could probably be due to the downgrades slapped by some foreign institutions to emerging markets economies rocked by the present rice crisis such as the widely followed BCA Research whom recently wrote (highlight mine)…
``higher inflation and upward pressure on interest rates, rising social tensions could force policymakers to forgo proven market mechanisms, creating distortions that have long-lasting and harmful economic implications. In turn, this can lead to higher risk premiums on asset markets. The negative shock and risk of pass-through from skyrocketing food prices will be greater in the economies with a rigid supply side and low competition. Moreover, countries where the currency has been sliding will feel the effect of rising global food prices much more acutely. Bottom line: We are positive on emerging equity markets as a whole, but are concerned about the outlook for
Coincidentally, countries negatively rerated by the BCA Research likewise suffered from a severe thrashing this week as shown in Figure 1.
Figure 1: stockcharts.com: Possible Impact from Downgrades
And the losses were quite severe: for the week,
This is not to pin the responsibility on a single research entity for having to recommend an “underweight”, (although they indeed command a good following among international financial institutions), the point is, the continued hysteria over the rice crisis has been generating a bad image at a time when the sentiment for risk aversion is high enough to severely affect domestic asset prices as we see today.
Yet, with government continually throwing in more subsidies at the expense of the country’s fiscal conditions (more short term placebos for long term damage-our children pays for increased tax burdens), we can’t entirely fault them for such dire outlook; this seems more of a self-inflicted predicament. Yes, we simply love to shoot ourselves in the foot.
Rice Crisis: Distinguishing Noise From Facts, Transmission of Price Signals As A Cause
As we said last week, while yes, there is indeed a global food crisis; the “rice crisis” in the
First we don’t see snaking queues for commercial rice. Those lines in TV and elsewhere in media are with subsidized NFA rice.
Second, evidence exhibits that it is largely a policy induced crisis. Subsidies have been providing incentives for arbitrage opportunities through price spreads from which some people have responded to, thus aggravating the demand supply imbalances.
Next, you have a central bank promoting more inflationary policies by keeping interest rates at present levels while consumer prices have been surging. This deepens the incentive to “hoard” tangible goods as the purchasing power or the “store of value” of the Peso diminishes.
Moreover, we have argued that price signals have not filtered to farmers enough for them to increase income or investments, as their output have long been constricted by traders and merchants and by price controls from the government purchases. An article from the Inquirer.net supports this premise,
From Philippine Senator Edgardo Angara, ``By the time the NFA comes in, the traders have already scooped up the entire harvest. They cannot even buy 10 percent. If you buy less than 10 percent, you're not going to influence the price movement.”
More again from the Inquirer (emphasis mine)…
``Maintaining stable prices all year round within reach of the poor and yet at the same time providing farmers with reasonable profit had been an NFA conundrum. NFA has suffered significant losses through the years as prices had been volatile and incomes of farmers have been low.
How does one maintain stable prices and reasonable profit for farmers when the market is controlled by select interest groups and by the government? The problem is essentially one of effective transmission of price signals to the farmers arising from misdirected government intervention.
When rice prices are capped and manipulated by certain interests groups aside from the lack of alternative markets (commodity spot and futures) which restricts output, financing access, hedging options and insurance coverage the result is the above “conundrum”; imbalances whose pressures have been building eventually reaches a culmination point-today’s crisis.
You don’t solve the problem of price signals with more price distorting interventions. Not even with absurd populist solutions as the so-called “genuine land reform” with poor international track record or more “distribution” centers which do nothing but increase taxpayer’s burden and resource allocation inefficiencies.
Again to quote Senator Angara (emphasis mine), ``If we let go of the NFA and give it full rein subsidizing and importing rice, then we will have a bottomless pit that will be hard to fill because it will consume so much of our taxpayers' money."
If a full subsidy to the NFA, whose institution has been reckoned as ineffectual and a source of corruption, consumes much of our taxpayers’ money, in the words of the good senator (at least we are delighted to see a politician display a good deal of common sense!), what do you think goes with land reform or more government distribution centers? You only throw the public’s money to address the symptoms and not the cause. Moreover, an unthought-of reactionary response tend to have unexpected consequences at the expense of the general public via direct or indirect taxation (higher prices) or other future crisis! In addition, you don’t get increased productivity by edict (Stalin and Mao tried it and failed miserably); it is done via the transmission effects of prices through profits.
Third, the fact that 1 million hectares of fallow agricultural properties had been reportedly leased to
Market directed or government instituted, these idle lands will come into play as the global commodity cycle will induce more investments in response to supply demand asymmetries as reflected by market prices.
Notwithstanding, technological advances will certainly usher in the next wave of Green Revolution, an era marked by surging agricultural yields (1940-1960s) powered by product innovation.
We are not only blessed with vast amounts of agricultural lands, we are also fortunate enough to have the world’s major rice institute the International Rice Research Institute (Irri) headquartered in the Philippines. Reports say that the IRRI are in the final stages of introducing a new biotech hybrid variety (Aerobic and Submarine) which have the potentials to increase harvest yields by reducing sensitivity to drought, flooding or salinity.
Of course, there is always opposition to anything, this time the issue centers on compelling our farmers through taxpayer funds to adapt to this hybrid. If the new product has the potentials as advertised, it won’t need government’s money to get accepted and become a standard.
The point is that higher prices are forcing new investments into the industry as well as in the technology frontier which eventually translates to more supplies.
That’s why we’ve been bullish with agriculture all along. Have we not been right with this cycle?
Rice Crisis and Political Survival
Of course another dimension or ingredient to this problem is one of politics; the need by the incumbent to be seen by the public as doing something or what I call the Superman effect. People are wired to see images of heroes in action, thus the natural predisposition towards publicity stunts.
With a politically embattled administration coming off from a slew of scandals, such crisis provides the opportunities for diversionary PR stratagem, which perhaps is part of the theatrical plot, at the expense of our financial markets. What more attraction than to throw the public’s money to the “poor”! As a neighbor quipped, for “Pogi” points.
Everybody bleeds for the poor, the problem is more solutions via inflationary policies and price distorting laws or policies addressed to the “poor” increases the numbers and plight of the “poor”. People can’t seem to differentiate the trade off between today and tomorrow.
And this also why much of the world is turning into “socialism” via inflationary policies which will certainly keep the tabs of rising consumer prices until eventually either prices will be so burdensome enough to choke off demand where any government stimulus won’t work (“pushing on a string”) or provoke wars or prop more dictatorial regimes (furthers inflation) or that people would come to the realization of governments’ pretensions via the collapse of the present money standard or until a new “Paul Volker” appears.
Phisix: Still In Search For A Bottom
Nevertheless, with respect to the Phisix as we noted last week, while sentiment has produced some signs of a potential bottom, we further commented that this has to be backed or confirmed with positive technical action coupled with DURABILITY from external factors. This week’s action proved otherwise.
The intense selling produced a divergence with most international stock market benchmarks effectively decoupling from us as we turned lower.
Meanwhile, technical actions dramatically deteriorated as the Phisix fell to its major support level (again see Figure 1) where it is presently perched with the likelihood of a potential breakdown test given the intensity of the latest shakeout.
There are two likely scenarios here, one is that a successful breakdown means that a Phisix floor has yet to be established which means there could be more downside market actions.
The other is that the Phisix bounces from the present levels or from its 2,773 lows which could carve out a bullish double bottom pattern. Yet even if a double bottom does emerge it could take probably take sometime before the Phisix recovers meaningfully and exit from its declining phase reinforced by improving market action, sentiment, fundamentals and decreased sensitivity to external variables (or improvements abroad).
To be sure, we are still in a bear market until clearer signs of the bottoming phase sets in. Here is what we wrote, during the latest bounce last March in Missing Rallies or Catching A Falling Knife?
``Remember, bearmarkets draws in hopes of investors until they capitulate. If a decision has been made to enter the market today, then the expectation should be geared towards the longer horizon since the risks is likely tilted towards more potential downside actions or the risks of a portfolio going underwater. For me, trying to bottom fish or picking market tops is a game of vanity.”
So again have we been wrong with the cycle?