Phisix, Inflation and the Available Bias

``While inflation is a growing problem for Asia's developing countries, it is not necessarily the region's biggest threat. Rather, the looming risk is the potential for governments to react poorly to inflationary conditions in a bid to quell popular dissatisfaction. In the process, poorly construed policies may actually exacerbate, rather than alleviate, inflationary conditions.”-Matthews Asian Fund

And another thing, one of the factors attributed to Tuesday’s decline in the Phisix was due to “rising inflation”.

For us, this serves a vivid example of the application of the available bias to stock analysis or news reporting.

The inflation figures reported by the newswires dealt with April figures. Why should a market react to past records, unless they think “goods and services” inflation figures will worsen now?

One must be reminded that the market functions as a forward discounting mechanism. Hence estimated actions are based on potential outcomes and not on past records.

Second, “inflation” data always lags. Inflation data captures “lag” responses to government policies or to shocks in an economy.

Third, there is no strong correlation between the performance of stocks and inflation as shown in figure 5.

Figure 5: IMF Staff: PSE and Inflation Over 6 Years, Correlation Where?

Courtesy of IMF’s April Consultation Staff Report the chart shows that over 6 years there has been NO direct correlation between the performance of the Phisix and Philippine “inflation” benchmarks.

Soaring inflation in 2003-2005 did not stop the Phisix from doubling, whereas the declining “inflation” coincided with a steepening of the Phisix gains of 2007. The operative word is “coincided”.

Our idea is that stock markets serve as a repository of company assets (tangible and intangibles) which accounts for potential diversity of treatment by investors given the current “goods and services” inflation landscape.

Since there is no firm correlation to “inflation” and the “Phisix”, hence ascribing “inflation” as deterrent to advancing stocks is simply an excuse or justification based on available news used to explain unrelated events. Thus, the available bias. The fact that the Phisix climbed by 2% over the week debunks such imputation.

Maybe journalists and mainstream analysts should explain why and how hyperinflation (165,000%) in Zimbabwe has been “beneficial” to stocks (360% in Three weeks or 4,000 % from January to April 28^th)?