Phisix and the Peso: CORRELATION DOES NOT IMPLY CAUSATION

``Predicting a circumstance can sometimes help prevent its occurrence—if it’s controllable. And most dramatic changes in life, markets and science often occur from circumstances that couldn’t be predicted. And even if they could be predicted, they might not be controllable (earthquakes, torrential downpours). But that doesn’t stop the circumstances’ actors, 24-hour cable pundits or policy makers from explaining pretty much everything away. This is natural, part of our biology. We seek causation. We seek confirming evidence.”-Joshe Wolfe Forbes Nanotech

Figure 3: Economagic: Strong Currencies back ASEAN Equities

Again the strength of the Peso has mirrored the Phisix, with both drifting at breakout territories. The same story can be seen applied to our ASEAN neighbors, as shown in Figure 3.

In contrast to the mainstream thinking that the Peso’s rise has been endemically propelled, Malaysia’s recently unpegged Ringgit and the politically hampered Thai Baht has shown similar relative strength that appears to have equally bolstered their bourses.

In the latest blog post last Wednesday, following a record run by the Peso, we were delighted to see a more germane reportage from which we quote anew the Philippine Daily Inquirer (emphasis mine),

``Traders said offshore investors were more bullish than local traders and were quoting the peso at 44.15-44.20 to the greenback in over-the-counter deals, outside the currency exchange Philippine Dealing System.

``The peso would have strengthened further if not for continued dollar-buying by the central bank, Bangko Sentral ng Pilipinas (BSP), on the spot market. However, dealers said the BSP purchases were not as heavy as in previous days as its dealers saw that the market was nearing a correction.

``The BSP purchases were estimated at $100-$200 million. Tuesday’s total volume was $640 million.

``The peso’s extended rally was also supported by a strong regional currency market, which in turn was caused by weak sentiment on the US dollar and by the region’s much-improved economic fundamentals.

Bullish Foreigners, Regional Driven, and State of Today’s Money System

Three notable observations:

One. Foreign investors have shown more BULLISHNESS in the currency market than local investors of late.

This similarly reflects on the internal activities of the Phisix since the advent of October, as noted above.

Two. The Peso’s moves are reflected REGIONALLY and NOT AN INSULATED phenomenon.

This is where it can be shown that the arguments of the baneful effects of a strong Peso signify ONE dimensional thinking.

Since the region’s currencies have been on an equally firming trend but on a distinct degree, the competitiveness of our industries depends on country’s scale of productivity and efficiency and not simply brought about by pricing power or through currency mechanisms.

Blaming the Peso for our woes is tantamount to barking at the wrong tree. Instead, experts should look at the economic or opportunity costs of politicization of the industries, overregulation and skewed policies, as well as, choking bureaucracy and the endemic culture of dependence (mostly to politicians) and risk taking aversion.

The growing obsolescence of the “Mercantilist” paradigms, aside from contributing more to global imbalances, and knee jerk reactions such as suggestion for capital flow restrictions or currency manipulation will improve LESS of the Philippine’s economic conditions. These signify temporary stop-gap measures which don’t deal with structural deficiencies of the economy. The present economic models should take advantage of the deepening trends of technology enabled regionalization as well as niche marketing/specialization in this much integrated world.

Three. The strength of the Peso and of the region reflects the state of the today’s Fiat Currency standard.

Essentially, it is NOT the Peso which is rising but of a phenomenon of a depreciating US dollar, the world’s de facto foreign currency reserve. The fall of the US dollar against a majority of world currencies simply reflects on the ACCRUED EFFECTS of misdirected policies in the US. Since the US dollar functions as the anchor of today’s monetary structure, naturally its conditions RIPPLE throughout the financial and economic realm worldwide.

So under present conditions, either our central bank or the BSP allows of an unfettered market determined rise of our currency, which should give rise to a consumption boom and/or trigger a massive reverse capital flight or repatriation of domestic capital stashed overseas (think Filipino migrants buying domestic real estate or investing in call centers or investing into the Phisix), or applies a “managed” float via open market interventions or printing pesos to buy US dollars, which adds to domestic liquidity.

The news report manifests of the second option. Nonetheless, in both instances, conditions allow investors the “incentive” to further rev up on the Phisix over the long term.

Political or Economic Democracy?

Let us divert for a while and dabble on the political context of this issue; as we have repeatedly argued, such inflationary actions (such as currency intervention) add to social inequality. While it stands to benefit select industries as ours, the promulgated intent, as advocated by some mainstream experts, of attaining an egalitarian society or social equality using inflationary activities like the above is almost equivalent to the idiom “left hand doesn’t know what the right hand is doing”. The end effect has always been through diminishing business competitiveness, surge in taxes and rising consumer prices.

One has to understand that the major beneficiaries of government inflationary activities are the banking and finance industries, the main conduits of the Fractional Banking Reserve system, and most importantly the political bureaucracy and their associate providers or “special interest groups” (e.g. the alleged doleouts to select local government units and members of the congress by the present Philippine incumbent administration) where they are accorded the privilege of buying freshly printed money with today’s prices while leaving out the public to buy at tomorrow’s much higher prices-mostly in the name of social equity but behind the scenes is all about the perpetuation of power.

Most politicians, regardless of their affiliations, are inclined to idealistic vote generating rhetoric but are disinclined to do corresponding unpopular actions of sound money and policies when in power. And so goes with the majority of media, where controversies and short-term nostrum sells.

Yet most of the leaderships within the bureaucracy are predisposed towards reaction “knee jerk” based solutions. Recent reactions of global Central banks exemplify this. While the recent credit crisis appears to have seemingly abated, the day of reckoning has simply been postponed but should worsen in scale. This will likewise be reflected in the financial markets.

On the other hand, prevalent in the street, in the café or again in media, it appears that everybody else knows how to spend on other people’s money in one form of social program or another, without looking at its unintended consequences. Just watch political discussion programs or editorials, everybody seems to be an expert in forecasting. The irony, is when you put them into the markets to apply their “expertise”, none of them can call it consistently right, if they even can make a majority of accurate calls. So how can a political social improver, who is unable to predict the markets rightly, make a right judgmental call on the adequate balances of a living and dynamic economy with even more variables to reckon with? In the case of the US Federal Reserves, former Chair Greenspan escaped without much blemish, but will it apply to Chairman Bernanke as well?

For others, the role of our political economy has been to redistribute wealth from productive individuals or entities to those devoid of the virtues of savings, hard work, and industry or to political parasites. As they say there are two ways to generate wealth by hard work and savings or by plunder. Unfortunately some suggestions cater to the latter though indirectly.

As we always aver, when economic opportunities are determined by politicians and the bureaucracy instead of the markets, our political economy is then reduced to a game of musical chairs, where the vicious cycle of personality based politics signifies only a symptom of a deeper structural malaise; the lack of respect for a market driven economy. We opt to choose our leaders via political democracy but elect to have our economic choice determined, not by ourselves, but by political leaders, whose operating incentives are far different than ours.

Some Asian nations have shown, like the Hong Kong and Singapore, how the lack political democracy can be compensated by a market based economy or economic democracy or the respect for entrepreneurs. However, some see it the other way around, obliquely the success of political control, you call this selective perception. Unfortunately for us, we see what we want to see and choose not to learn.

Correlation Does Not Imply Causation

Now back to the financial markets, the perspective that the strength of Peso is required to bolster the Phisix has been tangential as shown in Figure 4.

Figure 4: Phisix-US Dollar Peso: Correlation Does Not Imply Causation

While the Phisix (black candle) and the Peso (red line) have shown stronger correlation of late, one must realize that the Phisix had been on an uptrend since June of 2003 (thanks to Greenspan’s 1%! Fed Rate), as shown by the upside green arrow, even when the Peso continued to flounder. The Peso only reversed in October of 2005, shown by the downward pointing blue arrow, almost ONE full year when we made our forecast and TWO YEARS AFTER the Phisix gradated into the advance cycle.

And in perspective of the past advance cycle in 1986-1997, the Phisix had not been accompanied by an attendant rise of the Peso. Yet, past conditions are unique to the present, unworthy of simplified association.

In short, as we always argue, CORRELATION DOES NOT IMPLY CAUSATION. Although, they may have interlocking relationship somewhere, it COULD NOT BE ESTABLISHED as a textbook case of “cause-and-effect” over the bigger picture. Such attribution requires more evidences of sustained tight correlation over time.

Yet, this similar frame of oversimplified narratives (using different variables) on the Peso’s conditions can be found elsewhere in the mainstream analysis or media reporting, something we will deal with sometime in the future.