Another MEGA “Pump” Bubble Based on The China Philippines MEGA Deals!

The wonderful thing about bubbles is that it provides a psychological function where people escape reality. And bubbles are very addictive. (Such is why superhero movies, teledrama among many others sells)

Politics serves as an ideal milieu for bubbles. That’s because it doesn’t deal with empirics, theories and economic laws. Instead, it deals with raw emotions and idealism based on abstractions, such as hope.

And a splendid example has been the two-day massive 4.88% pump on the PSEi. Along with the BSP data padding on OFW remittances, bilateral mega deals with China inspired a two-day series of frantic bidding or panic buying spree.

This showcases the free lunch mentality that sees price actions as signifying the only relevant function of stock markets. In particular, prices actions predicated on hope.

Even more, easy money fueled intense price chasing speculative excesses undergird the possibility of what I call the BW-SSO phenomenon—a terminal skyward-vertical pump on the index.

We already saw a preview of this via the 33% January to July move. Now symptoms have reappeared. The establishment has been in search for a reason for such move.

There are much to discuss about the so-called “mega-deals” featuring “investments” on infrastructures andoil explorations.

But I wouldn’t exert much effort on these, except to cite two critical factors: these are mostly long termprojects (where some of the projects would have completion dates that could surpass the term of the leadership—if there will be no constitutional change). 

And second, most importantly, these are political investments rather than market investments. Political investments are undertaken with publicly unseen or unstated political goals and quid pro quo conditions. Servicing the consumers or the markets operate as subordinate objectives. The (cost benefit) distributional effects of the former would starkly be different than the latter.

Of course, I see a vital (largely) unseen investment opportunity here. But this is something I’d discuss sometime.

Nonetheless, Chinese FDI/ODIs haven’t been anything new. I would like to use Africa as an example.

China has poured a lot of FDIs/ODIs on Africa. Part of these has been meant to increase her geopolitical sphere of influence rather than just comprise “investment” or “aid”.

 

The IMF charts shows of the Chinese investments in several African nations subdivided into resource (oil and non-oil) economies and non resource economies from 1998-2012.

And here are the stock markets of several key African states with Chinese FDI exposures.

 

 

If you should notice, none of the stock markets of the above African nations that had Chinese FDIs has experienced “elixir” (sustained shot to the moon) in the stock market in the same way the PSEi has reacted over the two days, or possibly, in the coming days.

And hardly anyone of them became a first world nation. To the contrary, some of them could be at a precipice of a (political/economic) crisis.

The crux: When markets are used as a political shibboleth, they lose their essence. And the outcome of which would certainly not be what everyone expects them to be.