Lunes, Setyembre 5, 2011

My analysis of geopolitical considerations for emerging markets for potential investors (emphasis Philippines):

Geopolitics greatly influences the viability for the economy of the Philippines with respect for investment opportunity.  Investors who are not seeking speculative short-term gains or would be emotionally affected by temporary uncertainty in global markets are best suited for emerging markets like the Philippines.  For example, when the corporation made a bulk of its real estate and fitness center acquisitions in 2005-2006, the Philippine Peso (PHP) was trading as high as Php57 to one US Dollar (USD). This large spread in the exchange rate was largely due to artificial political instability and had little to do with economic reality. Over the past 5 years, the Peso has strengthened to as high as 40:1. At the 40:1 exchange rate peak, the corporation correctly called said peak and sold several properties to net a 30% return vs. the Dollar based on the exchange rate at the time of purchase.As of this writing in early 2011, the Philippine Peso has been fairly stable at an exchange rate of Php44 to one US Dollar ($1). It is widely known that the Philippine Central Bank artificially suppresses the Peso against the US Dollar due to pressure both from the players in the export economy as well as the amount of OFW (Overseas Foreign Workers) who remit their earnings back to the Philippines. Filipino workers abroad depend on a weak Peso relative to the Dollar in order to maximize their buying power. These OFW remittances represent 10% of the GDP in the form of net inflows that are invested primarily in family education and real estate. The local media in the Philippines often sensationalizes any unrest to justify the weakening of the Peso vs. the Dollar. Finally, this sensationalism allows for the Philippine government to petition the US government for foreign aid in its ongoing fight in a questionable  (due to its means, methods, and scope) “War on Terror”. In order to justify bureaucratic budgets and special interest contracts, the US government is very generous to its allied nations who cooperate to dramatically perpetuate the myth of a clear and present danger. It is our belief that these activities are to keep FBI agents from investigating the financial crisis of 2008 and its relative bank and mortgage fraud based on current agent allocation and lack of arrests. Therefore the mainstream notion that developing nations are inherently unstable is largely political and artificial (not grass-roots), especially when considering the controlled anarchistic nature of most cities. What this means is that every company or corporation with significant assets maintains a high profile level of private security for projection of force, making the need for government interference minimal, if not nonexistent. This allows for businesses and residences that are very secure from acts of random vandalism, arson, or theft due to the threat of immediate retaliation from private security. In addition, most rallies and protests are largely a festive atmosphere where the majority of the “protestors” are paid participants who often cannot even read let alone understand the context of the signs they hold, or otherwise know why it is in their interest to protest in opposition to the stated policy. The end goal for paid protestors is a few hundred Pesos (about $6) and a free chicken dinner from a local franchise restaurant that is provided with slush funds from opposing political parties. Finally, most protestors are bussed in from the distant provinces using said payments, making it absurd to conclude that something portrayed on the international media as “unrest” when, in fact, said unrest is nothing short of a staged celebration with even local celebrities paid for entertainment. In conclusion, if purely political events were subdued, it is our opinion that the Peso will strengthen to Php35 to $1 (35:1) within the next 24 months. This projection is even more likely with the democratic election of President Aquino in 2010 and the solvent nature of local banks that do not participate in unsecured lending practices. The President is considered to be business friendly due to his focus on streamlining government with an anti-corruption campaign that is successfully ongoing as of this writing. In addition, the President has pledged to accomplish a balanced budget throughout his tenure with success in the form of a surplus as of February 2011 without a rise in taxes. It is our estimation that within 10 years the Peso will likely, once again, achieve parity to the Dollar. Note that this estimation is based on the widely held belief (and recent precedent action from Russia and China) that the US Dollar will lose its status as the “World Reserve Currency” where commodities will be traded with a basket of currencies or a gold standard. The rate of international transition away from the Dollar will be largely dependent on the rate of money printing by the Federal Reserve. Most consumers have already experienced the effects of the money printing of the Federal Reserve with the loss of their purchasing power as an inflated money supply causes the Dollar to devalue. The Federal Reserve cannot end its QE program without immediate and severe consequences now that it has been set in motion due to a lack of buyers of US Treasuries required to finance US government debt. Furthermore, this situation is exacerbated since any future growth of the US economy is primarily dependent on inexpensive oil simply to maintain, let alone increase, GDP.  It is our observation that oil production peaked in 2007 and the international markets must now turn to sources of oil that are more difficult (slow to extract) and expensive to produce. Therefore the printing of Dollars is necessary to maintain the illusion of growth in order to buy time politically in a desperate hope that a new system may come online. But such a transition is highly unlikely based on the current lack of political will to reverse existing legislation. This geopolitical analysis also takes competing emerging markets into consideration such as India, China, and Brazil. The activities of these populous emerging markets will continue to make up a greater share of a global GDP that is dependent on the supply of easy and cheap energy (oil). In addition, these emerging economies are under intense pressure to raise the standards of living for their people. The raising of these standards of living cannot take place in the current environment of global currency devaluation and the resulting surging of Dollar based commodity prices. These factors make up the inevitable reality in that the Dollar will likely be replaced by a new world reserve currency. When this happens, the Peso will no longer require artificial devaluation relative to the Dollar. Therefore, any investment via Dollars in emerging markets at the near future are expected to see a large ROI based on appreciation in exchange rates alone, with actual economic appreciation being of separate but equal importance.

All true unrest in the last 25 years was relatively peaceful and short-lived such as the EDSA I Revolution in 1985 that toppled Ferdinand Marcos and then during EDSA II in 2000 to remove a corrupt presidential administration. These were true grass-roots movements that were supported by the middle and upper classes. The Aquino Administration is already considering any genuine grievances in the future related to rice prices where the government is building up strategic food reserves as a preemptive response. As noted in the State Of the Nation Address (SONA), President Aquino pointed out how an audit showed that millions of tons of rice were left to rot in warehouses as prices skyrocketed due to political jockeying before an election. It is our opinion that President Aquino understands the long-term consequences of using food as a political weapon and has laid out transparent plans to ensure that political opponents cannot take advantage of global uncertainty and speculation. Throughout history only genuine shortages of food will cause violent unrest in a large percentage of any population. Since 40% of Filipinos are agrarian with large amounts of potential farmland still undeveloped, it is unlikely that a severe global depression would trigger a revolution or a collapse of the Republic. This is in stark contrast to the West, where only 1% of the population is self-sufficient with respect to food production. Therefore any disruptions in Western supply chains or triggers of a long-term global depression would send shockwaves through their urban populations. Therefore to invest in micro real estate in developing nations would be a means of
mitigating risk where any temporary downturns would be greatly outstripped by long- term gains.
The last aspect to note geopolitically is the global cost of retirement and its relevance to growth in the Philippines. Due to its warm weatherwebcam girls and low cost of living, the Philippines is witnessing increased rates of retirement inflows from developed nations as their aging populations seek out a better quality of life in their golden years. With decreasing pension and social security purchasing power, it is our belief that developing nations will see millions of elderly expatriates in the coming years.