The Year That Was

Here are the events and personalities that I thought moved the needle in 2020, nationally and internationally.

1. COVID19 – Merriam-Webster’s word of the year was “pandemic”. The virus overturned our lives, for some, permanently. It first appeared in China in late November 2019 but it came onto its own in March with full global lockdowns. The Philippines today holds the world record for a continuous state of quarantine even as other countries are on their second wave of the pandemic. Our health leaders will claim the wisdom in this move although the millions of Filipinos whose lives and livelihoods have been upended will disagree. 

We were told COVID was a “hiccup”, there would be a V-shaped recovery and Christmas would be virus free. It now appears we will not be out of it before mid-2022, longer if certain health officials continue to drop the ball. We do not know how many Filipinos will last that long. There will be political and economic pressure for us to accept unproven vaccines. Some private hospitals are asking for volunteers to test Russia’s Sputnik V antidote. Good luck with that.

2. The economy – We have the distinction of having the worst economy among our neighbors and expected to be the last to recover. We could well end the year down some 10%, the worst since independence. Hardest hit were tourism related businesses – hospitality, recreation, aviation -, retail services, restaurants and construction. The beneficiaries were food manufacturing, telecommunication and online services. Agriculture was flat. Banks are still counting their credit card losses.

The POGOs left for Myanmar and Cambodia. Together with work-from-home and the reduced number of expatriates left commercial and residential real estate with a vacuum which can only be partly filled by the increase in BPOs.

The peso will end up some 5% stronger than a year ago and international reserves are at all time highs but these are symptoms of weakness, not strength. Imports are down reflecting the softness in the economy. Remittances are up some 4% but this is more the result of dollar loans to shore up liquidity and not for capital expansion; and foreign relatives sending money to beleaguered friends and family. Foreign Direct Investments are supposedly up but much of these are multinationals bringing in money for depleted working capital. Foreign chambers report the supply chains that left China have relocated to Vietnam and Indonesia.

We maintained our investment grade credit rating as a result of our fiscal conservatism. The jury is out on the wisdom of this policy.

3. Corruption – Corruption prospered in the health crisis. COVID presented the two conditions for the perfect heist, increased budgets for social amelioration and healthcare and unsupervised spending. Bayanihan 1 and 2 dispensed with the usual protocols for oversight and competitive bidding. As a result much of the PHP 500 billion that was allocated to social relief went to the pockets of politicians and LGU officials rather than to the intended beneficiaries. At the DOH procurements for protective gear were padded up to 4 times the market price. Philhealth funds were channeled to private hospitals for ghost COVID cases. The good news? COVID should be over although not soon enough. The bad news? Corruption is here to stay. The masterminds are just licking their chops waiting for the next big kill.

And that is the vaccine.

The vaccine could be the mother of all cookie jars. The budget for procurement and distribution of the targeted 60 million doses should at the manufacturers’ SRP exceed PHP 60 billion, a multiple of that after the kickbacks. The “dropping of the (Pfizer) ball” is a precursor of what is to come.

4. ABS-CBN – The closure of ABS wins the award for business event of the year. The end was long in the making but stood out mostly for its malice and its hypocrisy. The politicians did not just want to stick the knife in, they wanted to insert it and turn the blade, and watch in amusement as the victim writhed. It was not a regulatory exercise, it was a political lesson. It was a public lynching disguised as good governance.

5. MVP Award – President Duterte for the fourth year running wins the Most Valuable Player of the Year. In the midst of a pandemic, an economic crisis and rampant corruption; the President garnered a 90% approval rating. You just have to hand it to the man.

The award for Least Valuable Player of the Year goes to DOH Sec. Francisco Duque. The award is unanimously so adjudged by the Senate, his colleagues in Government, his medical peers, the business sector and the public. We are where we are due to his record unmarred by success. After over a decade directly or indirectly in office, Duque still does not know how to hold on to the ball which speaks to his competence, his ignorance and/or his integrity. Duterte continues to support Duque – “There is no probable cause to dismiss him “- which has diminished the President’s public persona and raises questions whether there is more than meets the eye. Even Sen. Pacquiao who has no unkind words for anybody (except the LGBTQ community) has said Duque should resign because he is tainting the President.

6. Distance (so called) learning – 2020 and possibly 2021 will be the forgotten years of Philippine education. From being ranked the worst in writing, communication, math and science, COVID just about threw our young under the bus. Education, as required by the Constitution, has the highest national budget allocation but the novelty, the rudimentary arrangements and the lack of infrastructure for distance learning pushed us back at least two years. We will see the impact in the medium term as graduates fail to meet the minimum standards for entry level employment.

7. Cayetano- It was not quite kicking and screaming but the exit of Alan as Speaker was not, let me think, graceful. The election of Lord Velasco in his place signals the ascension of Sara.

8. Ulysses and Vicky – These two catastrophic typhoons reminded us that climate change is here to say. And then there was Taal.

9. Red tagging – This cowardly political branding is the 2020 Philippine equivalent of Nazism in the ’30s, Mcarthysm in the ’50s, the Cultural Revolution in the ’60s; and Trumpism and QAnon this year. It might be dismissed as an outlier except to the danger it poses to ordinary citizens with an alternative point of view and, if left unchecked, as a means for mass political repression.

Internationally the major events in 2020 other than COVID were:

1. The U.S. election – Americans finally came to their senses and elected Joe Biden as President. Donald will be dragged from office possibly in a straight jacket although there are still three weeks to go and God only knows how much havoc he will inflict before Jan. 20. Trump will remain glued to his Twitter account and will keep his millions of followers but as a private citizen he will now be subject to the platform’s social media controls on fake news. Trump will be around for a while, where only the NY Southern District Prosecutor’s office will tell.

2. The U.S. stock market – U.S. equities hit all-time highs despite a slowing U.S. economy and the ravages of COVID. Forward looking markets, a vaccine, record personal savings and pent up demand, the lack of alternative investments, a fourth round of fiscal stimulus and a hugely accommodative monetary policy; are expected to support stocks into 2021. Bitcoin, increasingly a portfolio hedge like gold, has broken the psychological $20,000 resistance level.

3. China – After giving us COVID, China is on the march. To distract from internal political and economic pressures, China clamped down on Hong Kong, is going after private companies “too big to fail” and expanded its territorial reach. Vaccine policy has replaced ping-pong policy in foreign relations, the promise of a cure in exchange for subservience.

4. Technology – COVID has accelerated the adoption of technology by 2-3 years among consumers and businesses. On-line commerce which was expected to grow by 10% every year grew by 40% this year alone. The combination of algorithms, artificial intelligence, machine learning, super-computing and Big Data will upend businesses that do not adjust to the new paradigm. Many companies in banking, commerce, real estate and transportation will be disrupted and left with stranded assets. COVID made 2020 the year when business finally gets it.

Is Bitcoin A Crazy Idea?

Does Bitcoin have legs as an alternative currency or asset class? That is the question private and institutional investors and central banks are grappling with.

Bitcoin emerged from the ashes of the 2008 financial crisis as an alternative currency when our monetary system came into doubt. Since then its value has grown at a compounded rate of 200%. This year alone it is up 170% flirting at around $20,000. It is easily the best performing asset but it has been a wild ride which has led serious investors to question its suitability as a store of value. In fact volatility is part of any emerging asset class: As it gains acceptance, the fundamentals will outweigh the speculation making for less gyrations in value. Having said that, the US dollar recently lost eight percent of its value against major currencies in just 30 days yet nobody questions its status as the reserve currency of the world.

For a currency to gain adoption it must meet certain requirements. It must be seen as a store of value and a means of exchange. As such it must have integrity and robustness, transparency, clear protocols to limit its finiteness, be efficient, transferable and secure.

The most accepted currency in the world is the so-called fiat money which are really just pieces of paper backed by the strength of the Governments that issue them. In this sense fiat money is an article of faith. The one hundred peso bill in your wallet is only worth one hundred pesos in terms of goods and services because everybody believes so. Otherwise it is only a piece of paper.

The faith in a currency can be lost when Governments act irresponsibly and start issuing them opaquely and uncontrollably without clear guidelines. This debases the currency such as as we saw in the 1930’s in the German Weimar Republic and today in Venezuela. To instill confidence in their currency some Governments like the U.S. tied their value to a finite physical asset or commodity like gold. However this limited the flexibility of central banks to conduct monetary policy such that the Gold Standard was abandoned by the U.S. in 1971. 

COVID has re-ignited the debate on the trust worthiness of fiat money. As a result of the pandemic, Governments worldwide have had to borrow more than they earn from taxes resulting in a record widening of budgetary deficits. Critics are now saying the current levels of sovereign debt are unsustainable and can never be repaid. The only way to do so is to print more money and “monetize the debt”. This will lead to hyper-inflation, the debasement of the currency and people’s trust in the fiat.

This fear has led to a spike in the price of gold which is seen as a hedge against inflation. However its physical properties -its bulkiness, its indivisibility, its costs of physical storage and transport- make gold an unsuitable alternative to fiat currency.

Enter cryptocurrencies.

Crypto money and its most popular representation, Bitcoin, has all the features one looks for in a currency. It is secure, transparent, finite but divisible, has clear protocols, and is easily transferable.

Cryptos are criticized as having no intrinsic value and therefore not a proper asset class unlike say stocks which are a source of earnings. But neither does fiat money which are simply pieces of paper. The value proposition of cryptos and fiat lies in trust and confidence. It is as simple as that.

The technical foundation behind cryptocurrencies is complicated and relies on a robust and secure technology called blockchain. The latter is essentially a distributed digital ledger which accounts for all crypto units issued and transferred.

If there is anything that all technical experts agree on is the security of blockchain technology which is close to bullet proof. The distributed nature of the technology means the eco-system cannot be hacked. Banks are now considering blockchain in their internal processes.

The algorithm behind the Bitcoin blockchain ensures that only 21 million units can be created. There are currently around 18 millio Bitcoins issued. Its supply is growing slowly and will cap out somewhere in 2140. The scarcity of the units means that if adopted universally – and that is a big if- Bitcoin can only grow in value. By contrast fiat currencies are subject to social, economic, political and as in Venezuela criminal considerations. There is no objective truth in fiat money, there is in its digital equivalent.

Bitcoin is often called digital gold in that it most closely resembles the commodity as an alternative asset class. Even today, some investors are selling gold as a hedge and replacing it with Bitcoins because the latter has many features which are more attractive. If indeed Bitcoin becomes an alternative to gold which is an alternative to fiat money, then Bitcoin has a long runway. The current global value of Bitcoin at $20,000 is around 2% of the worldwide value of gold. If Bitcoin gains as much traction as gold, some analysts believe Bitcoin could rise fivefold to over $100,000. If that sounds crazy, Tesla stock gained sixfold in eighteen months.

Institutional investors such as PayPal, Massachusetts Mutual Insurance, Square, and established hedge funds; are buying into Bitcoins. After claiming in 2017 Bitcoin was a fraud, Jamie Dimon, the CEO of JP Morgan, is today less skeptical. Goldman Sachs is still a non-believer so the acceptance of Bitcoin is far from universal but then so was Tesla 7 years ago or space travel today.

Central banks are wary of cryptocurrencies because they have been used by criminals to launder money but so is fine art and collecting is not prohibited. Again cryptos transacted by underground elements are said to be less than 2% of global holdings. Some Governments have also sought to ban cryptocurrencies because they are potentially an existential threat to traditional monetary policy; but as institutions and even sovereign wealth funds start to adopt the currency and as they become an accepted way to inexpensively, transparently and efficiently conduct economic transactions; it becomes increasingly difficult for monetary authorities to stem their adoption. Today many payment platforms like PayPal accept Bitcoins as a form of settlement. Some CBs have plans to issue their own digital currencies but these are unlikely to succeed because they take away the privacy element of Bitcoin.

Bitcoin is the most accepted crypto but alternatives have emerged like Etherium and BitCash in what is termed “forking”. Critics say these forks expand the crypto supply so the scarcity argument behind digital currencies does not hold. In truth there are many cryptocurrencies just like there are many fiat currencies other than the dollar -the euro, the yen, stirling, the yuan – but this has not limited the adoption of fiat money as a store of value or means of exchange. Think Bitcoin as the US dollar, the world’s major but not only reserve currency. As it expands its installed base, Bitcoin should become more pre-eminent, the more equal of cryptos.

Buying Bitcoins for the layman is still complicated which remains a deterrent to its universal adoption (Buying physical gold has worse limitations yet gold has become an accepted asset class for portfolio investors). There are counter-party risks, ease of access and security issues but these are slowly being addressed. Today one can buy Bitcoins indirectly in small lots of less than $20,000  through Index Funds and over-the-counter trust vehicles which offer some degree of comfort.

Should one buy Bitcoins? For those with a sense of the upside, that is no longer crazy. I have seen wilder ideas with a lower economic and transparent construct. Still Bitcoins should remain a very small part of the portfolio and be a medium term investment.