Inflationary Bias and NOT Events Drive the Markets

``All professions are conspiracies against the laity." George Bernard Shaw

MAINSTREAM media and their clique of experts has it all figure out; first it was the elections a.k.a “peace dividends” that spurred the Phisix breakout following the culmination of the national elections. Then last week’s one day selloff was no more than from local political developments and to some extent influenced by China’s tremors (again!). And finally, Friday’s FRESH milestone RECORD high had to be from no other than better-than-expected Economic Growth Data. If only markets worked as simple as media projects them to be….

ANY SENSIBLE market observer knows that the rudimentary function of the financial markets is the extrapolation of future outlooks by discounting them to the present. On the contrary, we are then made to believe that markets (or any germane social subjects be it economics, politics, etc…) operate on a backward process; the public prices securities as a matter of historical actions, particularly event based impelled actions. Why would anyone buy on a financial instrument based on the past? Unless, of course, we presuppose that such activities will CONTINUE way into the future. The 64 billion pesos question is WILL THEY?

In the CONTEXT of media, this makes us a “seer” or a “soothsayer” for “accurately” predicting the developments in the Philippine financial markets, so far. Albeit we don’t like to rent up a table space at the malls, spread out tarot cards and make use of astrology to inject events to spruce up on our forecasts, lest be accused of dislodging Madam Auring, whose role in the society’s division of labor we respect.

Our humble outlook is that we premise our views based on the most probable drivers of the markets rather jumble on supposed causalities or correlation which in the first place was less likely a factor after all.

For instance, we have been saying all along that the Phisix has been on an uptrend or advancing cycle primarily because of the inflationary-driven syndrome diffusing allover the world’s financial markets.

The so-called “Liquidity” factor is no other than the unprecedented scale of money and debt creation and intermediation that has filtered into almost every corner of the world markets or even among diverse asset classes.

Figure 1: Economagic: US Exploding Financial Sector debt

Aside from the Global Foreign Exchange Reserves held by Central banks as we previously discussed, in the US alone the credit owed by its Financial Sector has exploded massively to the upside in support of today’s buoyant global financial markets as shown in Figure 1.

Yet who among the laity would accept such abstract premise? Unfortunately because it is our natural tendency to look for simplified explanation for events we are inclined to dismiss such relevance and account for what is “sensational” rather than what really matters.