``The controls are deeply and inherently immoral. By substituting the rule of men for the rule of law and for voluntary cooperation in the marketplace, the controls threaten the very foundations of a free society. By encouraging to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality.”-Milton Friedman, An Economist’s Protest
Nothing captures the human mind more than the huge events.
And huge events frequently spawn oversimplistic explanations on everything that accompanies this.
For instance in the realm of the stock market, natural catastrophe or disasters have often been equated to lower prices, for the simple reason that such dislocations are deemed to “hurt” earnings or the domestic economy.
Plausible as it seems, however this exemplifies our populist “ipse dixitism”.
Fallacy of Natural Disaster Equals Lower Stock Prices
The Philippines is home to typhoons or tropical cyclones or “Bagyo” in local vernacular, where about an average 6-7 of them lay scourge to the country annually.
The table above from wikipedia.org enumerates on the deadliest and the most destructive of the typhoons that had afflicted the country in terms of deaths and estimated damages in Peso (albeit the estimates of Peso damage doesn’t specify whether prices are reckoned from current or constant “real” terms).
However this interesting trivia from wikipedia.org, (bold highlights mine)
``The most active season, since 1945, for tropical cyclone strikes on the island archipelago was 1993 when seventeen tropical cyclones moved through the country. There was only one tropical cyclone which moved through the Philippines in 1958. The most frequently impacted areas of the Philippines by tropical cyclones are northern Luzon and eastern Visayas. A ten year average of satellite determined precipitation showed that at least 30 percent of the annual rainfall in the northern Philippines could be traced to tropical cyclones, while the southern islands receive less than 10 percent of their annual rainfall from tropical cyclones.”
So how did the top 3 worst typhoons, which occurred mostly during the early 90s, impact the domestic stock market?
The worst in terms of fatalities would be Typhoon Thelma or codenamed Uring, which slammed the country in November 1991 with an estimated 5,000-8,000 death.
However in terms of estimated property damages, Typhoon Mike or codenamed Ruping (November 1990) and Typhoon Angela codenamed Rosing (November 1995) had been recorded as the largest, with over Php 10.8 billion each (with a marginal spread between the two).
Three noteworthy observations from these typhoons on the Phsix:
One, over the short term, the impact from these typhoons had generally been a carryover of the interim trend.
Typhoon Mike and Thelma traded sideways reflecting on the trends prior to their occurrences, while Typhoon Angela traded downhill also reflecting on the prior trend.
Second, in the wake of the three worst catastrophic typhoons, in the medium term (1-2 years) the Phisix surged!
A Pollyanna could even make a misleading conclusion that typhoons are ‘beneficial’ to the stock market! However, as a word of caution: correlation doesn’t imply causation.
And lastly, over the longer term, these typhoons merely reflected on the secular trend of the market.
Since all three typhoons were at that time operating under the secular bull market cycle from 1986-1997, hence the general trend was up.
In short, in contrast to the popular “available bias” of equating “calamity equals poor stock market”, the typhoon’s impact to the stock market has largely been immaterial over all timeframes considered and tends to reflect on the major trends from which undergirds the stock market cycle.
Typhoon Milenyo And 2004 Indian Ocean Earthquake As Added Exhibits
More proof.
Conditions of the 90s have been significantly less similar than today in the age of the iPod, twitter, facebook or the internet and the epoch of globalization (in spite of the recent crisis).
So we’d make two recent comparisons: one local and an international event.
The latest typhoon that appears to have an almost parallel degree of havoc to last week’s fateful Typhoon Ketsana or codename Ondoy, to the National Capital Region of the Philippines was Typhoon Xangsane or codenamed Milenyo in late September of 2006.
Again according to wikipedia.org, ``In all, Milenyo was responsible for 197 deaths and 5.9 billion Philippine pesos ($118 million, 2006 USD) in damage, mostly to personal property and agriculture.”
The difference is that most of the destruction and loss from today’s tempest had emanated from intensive rainfall that had induced massive instantaneous flooding than from Milenyo’s calamitous winds.
In addition, the death toll from Ondoy has now reached 280 as of October 1, according to the Inquirer. This would be larger than the Milenyo experience, but would still account as vastly lower than 9 out of 10 of the list in the top 10 of the most devastating typhoons to slam the Philippines.
Typhoon Ondoy seems closing in on Typhoon Babs or codenamed Loleng during October 1998 which ranked 6th which tallied 303 deaths.
Typhoon Milenyo had basically the same traits as cited above from the “worst” predecessors as reflected in the Phisix.
The precursor trend determined the short term actions. The medium term move was a significant advance and the long term manifested the secular trend-up.
Incidentally, Typhoon Loleng of 1998 had the same short and medium term impact albeit the long term reflected anew on the major trend-down (that’s because 1997-2002 was the bear market cycle).
And fundamentally the same dynamics would even apply to one of the worst or deadliest natural disasters in recorded history over the world: December 2004 Indian Ocean earthquake.
Fatalities in the 2004 Indian Ocean Earthquake approximated 443,929, according to the wikipedia.org, which makes it the fifth worst.
The pecking order of the 5 worst disasters ever to hit human history ahead of the Indian Ocean Earthquake are: China’s 1931 Floods which took some 1-4 million lives, China’s 1887 Yellow River Floods which had some 900k-2 million deaths, 1556 Shaanxi earthquake again in China which tallied 830k of lives lost, and the 1970 Bhola Cyclone in Bangladesh which claimed 500k lives.
Indonesia took the brunt of the casualties from the December 2004 Indian Ocean earthquake which had been propelled by the secondary effect of the earthquake-a destructive tsunami.
According to wikipedia.org, ``The Sumatran province of Aceh was severely damaged by the earthquake and resulting tsunami. An estimated 167,736 Indonesians were killed and 25% of Achenese lost their source of livelihood. Banda Aceh, Aceh's capital, was the closest major city to the earthquake's epicenter, and many of its major libraries suffered extensive damage.” (bold emphasis mine)
[I would like to further disclose that wikipedia’s account of statistical figures varies: the list of natural disasters by death toll page indicates an estimated 443,929, while 2004 Indian earthquake page lists 230,000]
Nevertheless the important point is, while the impact of catastrophes is real which has significant economic implications, stock markets seem to have discounted the effects from such human losses and property destruction.
Jakarta’s major bellwether, the JKSE, even immediately rose in the aftermath of the disaster but traded sideways for most of 2005 until it eventually took off by the end of 2005.
Moreover, the devastating earthquake in Indonesia last Thursday which has exacted 1,100 as of this writing left JKSE virtually unchanged as of Friday’s close.
So whether it is typhoon Thelma, Mike, Angela, Xangsane or today’s Ketsana (Ondoy) or the tsunamis from the December 2004 Indian Ocean Earthquake or even the Spanish Flu in 1918-1919 [as discussed in Swine Flu: The Black Swan That Wasn’t], these tragedies have had minor impact to the price movements of the stock markets.
Human Action And Monetary Policies Matter
So why would stock markets seem to overrule the popular impression that “calamity equals lower stock prices”?
We offer two explanations:
One is that this signifies the dynamics of human action.
It is natural for people to speedily work for the restoration of the economic structure.
John Stuart Mill has a magnificent explanation:
``This perpetual consumption and reproduction of capital affords the explanation of what has so often excited wonder, the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.” (bold emphasis added)
While restitution from the natural disasters in rich countries can be financed by medical or insurance coverage on properties affected or on lives harmed or lost, in the poor nations, people rely mostly on social network for aid.
As in the wake of Typhoon Ondoy, it is why tremendous amounts of “private” sector charity (here and abroad) have poured into those afflicted areas.
It is also why there has been a large participation from the wide spectrum of the society to assist in the distribution of relief goods.
Unseen by most, these acts of social cooperation dynamics or the “bayanihan” spirit in local lingo is more than just a manifestation of self esteem or social work goals.
It represents exhaustive efforts towards swift societal rehabilitation for the economic interest of the community [as we explained in Typhoon Onyok's Aftermath: Charity Is The Province of the Marketplace]. It is in the interest of almost everyone to see the reversion to a semblance of ‘normalization’ of the community.
In other words, marketplace charity signifies as complimentary function to the recovery of capital impaired by the calamity.
Again John Stuart Mill, ``The possibility of a rapid repair of their disasters mainly depends on whether the country has been depopulated. If its effective population have not been extirpated at the time, and are not starved afterwards; then, with the same skill and knowledge which they had before, with their land and its permanent improvements undestroyed, and the more durable buildings probably unimpaired, or only partially injured, they have nearly all the requisites for their former amount of production.” (bold emphasis added)
Hence, markets could have discounted the adverse impact from these disasters as possibly representing an anomaly than from a permanent structural impairment in the economy.
In addition, markets may also have anticipated a relatively quick recovery from the collective rehabilitation efforts to restore the economy as reasons for valuation insouciance.
Another important unseen factor, which has always and seemingly intentionally been glossed over by the mainstream, is the impact of monetary policies on asset prices.
This appears true even amidst the turmoil brought about by natural disasters.
The red arrows in the chart courtesy of the economagic shows of the “Greenspan Put” policies instituted in response by the US Federal Reserve in the face of specific global crisis or to combat US recessions, such as the 1990-91 US Recession (left most shade) and Japan’s Bubble Bust (1990), the Mexican Tequila Crisis (1995), the Asian Crisis (1997), the LTCM (1998) and Millennium Bug scare (1999).
In other words, the easing of the monetary policies in the US which had been indirectly transmitted to Philippine equity assets by way of a secular boom cycle phase. Portfolio flows, which underpinned most of the secular trend, may have offset or cushioned the large scale of losses in the real economy exacted by the natural disaster shocks.
As one would note: The rallies in the Phisix, in spite of the calamity shocks, came in conjunction with the easing cycle of the US Federal Reserve.
It is likely that today’s market environment will trigger the same response as in the past, most especially that monetary easing isn’t just a conduct exclusive of the US Federal Reserve but from global central banks which means this includes the local central bank, the Bangko Sentral ng Pilipinas (BSP).
Further in the wake of the tragedy, I expect local monetary policies to further extend their easing cycle to politically justify on lending to the disaster victims.
Price Controls As Backdoor Entry To Tyranny
The real risks to the market arise NOT from the disaster itself, but from policies assumed by the incumbent government in the face of the calamity.
Considering that the stretch of the damage of Typhoon Ondoy has been significantly less than the damage from similar typhoons in the past, it would normally be a puzzle why a nationwide “state of calamity” had been promulgated by the government.
One of the alleged reasons for the nationwide scope of the state of calamity is because earlier impositions of price controls at selected typhoon affected areas haven’t worked. Producers or traders naturally opted to sell in places which had been free of regulatory controls.
Hence, a nationwide price control policy has been instituted, all aimed at controlling the “greed” of traders. Duh!
Given that our president hails from a respected economic professional background, such reactions wouldn’t be a stranger to her.
In addition, we wouldn’t question her familiarity with the hazards of employing the repeated historical precedents of the failure of price controls.
But alas! Political season is before us. And political expediency has taken precedence over economic priorities, thereby heightening the risks of exacerbating today’s crisis.
Yet mainstream media has virtually been stultified by discounting such government act as being connected to some other tangential electoral issues [see No To Price Controls! No To Despotism!]
Mainstream media have basically neglected the implication that a national price control implicitly “seizes” control of the factors of production.
This means that if such policies further get entrenched, we could be transitioning into etatism or a different flavor of “state” socialism.
In etatism, the largest industries will risk nationalization, especially those producing political goods or services. While the small and medium industries will probably retain their private identity, they will, in effect, eventually become extensions of government operations, whereby the amount of production and prices will all be ascertained by the government.
Further, the failure to control prices from nationwide price fixing would lead next to widespread rationing, universal price fixing (This means expanding the coverage of price controls from politically sensitive goods to general goods. Since shortages will force the public to consume substitutes outside of government controls which will likewise cause price increases, these will be areas which government will expand controls) and massive subsidies, all of which, I repeat, would only substantially aggravate today’s crisis.
Yet, any further signs of these occurring in the political theater, over the coming days, will be foreboding.
Media and the academic economic experts seemed to have forgotten that one way for a prospective tyrant to emerge is through the extensive use of price control instruments as political tool to grab power!
In short, price controls could serve as a backdoor entry into tyranny. Will we risk relapsing into a dictatorship or will we assimilate the socialist models of Latin America?
As Robert Shuettinger, Eamon Butler, Forty Centuries of Wage and Price Controls, ``In Egypt, government controls over the grain crop led gradually to ownership of all the land by the state. In Babylon, in Sumeria, in China, in India, in Greece and in Rome various kinds of regulations over the economy were tried and usually either failed completely or produced harmful effects. One of the most well-known cases of wage and price controls in the ancient world occurred in the time of the Emperor Diocletian. Thousands of people throughout the Empire were put to death before these futile laws were finally repealed.” (bold emphasis added)
And by taking over the reins of the major segments of the economy from the control of the “greedy” private sectors, our political leaders will then require extended police powers for the pervasive enforcement of such political objectives.
And the feedback mechanism between more price controls and more police power would accelerate to cover more and more economic areas and eventually snowball into martial law powers as the whole economy falls into the ramparts of government control.
Considering the twilight of the incumbent political regime, emergency powers aimed to addressing calamity woes could function as fitting rationalization to short-circuit the electoral process.
Effects From Price Controls, Hoping Over Hope
Besides, we should realize that there is no getting around the natural law of economics which principally operates on the world of scarcity.
Eventually, out of the façade of short term fixes will surface the strains from the imbalances built upon superficial structures-the unintended consequences. And this could be vented through a political upheaval.
Moreover, increased used of price controls would eventually translate to heightened risks of inflation-where the real economy will suffer from specific and relative real good shortages combined with mass subsidies and an upsurge in fiscal expenditures for the expanded imposition and enforcement of regulations.
All these would also be expressed in the financial markets.
Although widespread use of said policies would naturally imply for a weaker currency or a weak peso, the Peso’s fate would greatly depend on the relative dimension, or which of the country will do least worst in the race to the bottom. In the Philippines, the conventional exchange rate pair is the US dollar-Philippine Peso.
In addition, we should expect to see below par economic growth, spikes in unemployment, political restiveness and perhaps a lagging stock market-in view of nationalization risks, as investors turn risk averse.
We can only hope that forthright “sensibilities” will sink into consciousness of our political leadership.
And that the temptations of egotistically extending political tenures, by means of maneuvering economic policies as political instruments, would immediately be abandoned.
Aside from lifting price controls, the only way to rebalance the calamity distorted prices is by the liberalization of local trade barriers so that interim shortages will met by a barrage of supplies in response to temporary surges in price signals, which would bring back prices to normal levels.
Hence, the risks of wastage will all be borne by “greedy” entrepreneurs.
And for the genuinely concerned political leadership, these measures would mitigate the burdens of taxpayers by minimizing extravagant and unproductive redistribution and ultimately shield society from the ravages of inflation.
Politics Dictating The Affairs Of The Market, Outlook
For market observers and participants, while many continue to look for entertainment value instead of the real drivers of the marketplace, the role of politics has increasingly deepened its entanglement here and abroad, thereby generating more marketplace distortions that affect both the real and financial dimensions.
Hence we suggest that policy actions will continue to strongly determine the fate of the local and global markets, the local and global economy and even our society’s agility to recover from the recent disaster.
Traditional way of thinking has been loaded with theoretical lapses (e.g. devaluations doesn’t solve disequilibrium simply because currency values are not everything, instead inflationary actions aggravates them), confused definitions (e.g. macro thinking sees the world as operating from one kind of good or product, labor and capital, hence prescribe on simplistic set of solutions cloaked with technical jargon) and selective facts to confirm on tenuously held biases (e.g. rising US unemployment is deflationary to the Philippines!!?? Excuse me).
Domestic political uncertainty, as clearly shown above, and not the deflation menace is the risk for the local financial markets. A move towards a Honduras (political turmoil) or Venezuela (deepening socialism) risks upending present gains.
While Venezuela’s IBVC appears to be up over the past 5 years as seen from the chart above from Bloomberg, the tragedy is that stock market gains are wiped out by the huge spikes of inflation as seen from the chart below from tradingeconomics.com.
This should serve as a basic example on how inflationary policies from socialism will harm investors and the rest of the population or the economy alike than to enable them to achieve fraudulent “noble” social goals.
And political risks equally apply to the international marketplace than from the premises of traditional valuation. (e.g. growing murmurs of a military strike on Iran)
While we still remain net positive on asset prices mostly from the transmission effects from global and local monetary policies, we will have to keep a close vigil over the direction of the present political winds where the risk towards a recidivist dictatorship could constitute as political shock and rattle local markets regardless of exogenous developments, or if present actions have been cosmetically designed at embellishing the highly unpopular political credibility over the interim.
This from Wall Street Journal (emphasis mine),
.bmp)
