In Free Fall

Why do we feel like Groundhog Day?

 Vaccines are on the way, world economies have woken up, foreign stock markets are signaling a return to normalcy, world COVID numbers are trending down, U.S. long term interest rates are pointing to a V-shaped recovery, and China has economically turned the corner. The world has moved on while we are frozen in time in an endless loop of yesterday.

There is this debate whether the we need another round of stimulus to jump start the economy. The House economic team led by Rep. Stella Quimbo believes more financial adrenalin is needed. NEDA Sec. Karl Chua argues a Bayahihan 3 is unnecessary, that all it takes is for the economy to reopen and the forces of capitalism and animal instincts will take over. He is convinced the 2021 Budget has set aside enough of a “huge” provision for social protection without defining what the term means. By all assessments even by multi-laterals like the World Bank and the ADB, the Government’s relief package is insufficient in absolute terms and modest in relative terms when compared to what countries the world over have ploughed in.

We understand one of the jobs of NEDA is to talk up the economy but it helps if it is occasionally right. We were assured a year ago COVID was a tempest in a teacup and we would be out of it in a flash. Twelve months and four economic downgrades later we are still in a storm but now in a soup bowl with more to come. NEDA admits Q1 2021 numbers are again expected to fall short imperiling the full year estimate of around 7% growth. Predicting the future is obviously not one of NEDA’s core competence.

The ADB has reported that poverty will resurge to 21% of the population if struggling households and businesses do not get financial aid. NEDA reportedly contends our hunger rate has declined from 34% to 15% and unemployment from 16% to 7.7% so where is the concern? It apparently does not feel 16 million starving Filipinos and 6-10  million out of work or in crummy jobs at crummy pay is reason for worry. That is what happens when ivory tower economists get hooked on the numbers not recognizing the human dimension of the problem.

NEDA has its supporters. Sen. Sonny Angara, Chair of the Senate Finance Committee, agrees that Bayanihan 2 funds are still unspent so why go for more? It is such broad brush assertions that worry us. Of course there will be unspent money in the program since some of the funds are for long gestating infra projects. However the direct-to-the-needy budget is depleted. What the economy needs right now is a boost in consumer demand by putting money in people’s pockets asap. 

Anti-stimulus proponents are seemingly unaware of the structural destruction to the economy. Certain businesses will never reopen and many unemployed are no longer employable. There is a growing exodus of workers back to their home towns as urban jobs have disappeared. Our economic leaders believe we cannot walk and chew gum at the same time, that opening the economy and injecting relief to the public are mutually exclusive when they are in fact complementary.

Our economic team talks incessantly of targeted and time bound measures without providing substance to their meaning. Essential industries and workers are not getting the support and urgency they deserve. PAL just laid off another 2,100 people. There is no appreciation that time is of the essence, that a moribund patient cannot be revived by an extended period of convalescence, he needs the cure now and in massive doses. The longer the recession the greater the structural damage and the longer it is to rebuild  the economy. Without a boost in the tank the economy will not reach escape velocity, will hit stall speed and crash to the ground.

The anti-stimulus advocates believe the Philippines cannot support more deficits and debt and that excessive liquidity will stoke inflation. This outdated neo-classical economics no longer holds. Singapore, one of the most fiscally conservative nations, has gone all in. The consensus today is higher fiscal deficits are sustainable as long as the monies are put to good use like jump starting demand and investing in infrastructure and education which over time will increase productivity and competitiveness. In short, we can afford more debt so long as our growth rate is higher than our debt service which historically it has been. We just have to get back to that path. What we cannot do is wait for the economy to somehow return on its own because the long term damage and humanitarian impact on our people is unacceptable. 

Filipinos are now faced with the dual problems of loss of income and rising prices. Gov. Ben Diokno is right that inflation is not demand but supply induced particularly in food. As such it requires supply side solutions. There is excess liquidity in the system but that is not fueling demand. The BSP has said  that “markets are liquid but risk aversion is noticeable” which is their oblique way of saying banks are not lending and without that many businesses may not survive much less expand. One of the largest mall owner has reportedly notified its major tenants they will be allowed to close for up to a year without penalty. That is how bad things are.

The IATF, mayors and our economic managers unanimously voted to open the economy and go from GCQ to MGCQ. The President disagreed. He believes health rather than the economy should take precedence until we have a full blown vaccine.  

The debate of health versus jobs is a complicated one to which there are no easy or correct answers. The President could be right in his instincts. That is not the concern. The concern is the private sector no longer understands how Government makes decisions.

Business has been brought up to believe one does not buy a dog and choose to bark oneself. The private sector is led to understand a leader chooses the best people he can find to properly study and make recommendations affecting the nation. He then follows the consensus particularly when the recommendations are unanimous. There is a process. In the case of whether or not to re-open the economy the President has chosen to ignore the process without a model that the private sector can recognize.

Businesses rely on guidance and a decision frame that is studied, clear, consistent and predictable. That basis is no longer there. Businessmen have become confused and when uncertain will cease to hire and invest. 

There is a lot of other weird stuff going on. The Dept. of Labor has announced it will allow more Filipina nurses to work in Britain and Germany in exchange for vaccines (Britain has declined the offer). Are we so desperate and debased we are now offering up our heroic frontliners as hostages? Who is thinking up this non-sense?

Our leaders have become binary in thinking, limiting our policy options rather than be nuanced in the possibilities. There is no boldness, no courage to take measured risks. There is no appreciation of the economic or human value of time. The private sector does not have a clue how, when and where it is supposed to move.

So we are rudderless waiting for that all elusive vaccine that even at this stage is mired in bureaucratic delays. incompetence at iba pa. Sinovac has FDA approval for the population in general but not for health workers. Go figure. What is good for the goose is apparently not good for the gander. And we ask why 40% of Filipinos refuse to be vaccinated.

Adrift we can only hope the current will take us to safe harbor but that, unfortunately, is not what generally happens.

We are in free fall.

Bitcoin: Quo Vadis?

On Dec 16 2020 I wrote a piece on Bitcoin (BTC). Most people laughed at me. At that time BTC was trading at around $20,000. As of this writing, it is trading at $56,000 plus or close to 3 times two months ago. I have since been bombarded with questions about Bitcoin. Here is my attempt at answering them.

What is Bitcoin? BTC is a wannabe digital currency founded on blockchain technology. The latter is a robust, secure, transparent, distributed ledger that accounts for all transactions in the BTC space.

Why the need for an alternative currency? The current monetary system is based on paper or fiat money backed solely by the trust in Central Banks. With COVID, Central Banks have printed money and Governments have racked up debt and deficits at record levels. This has debased fiat money and stoked inflation fears. Many are losing confidence on the ability of Governments to ever repay the debts. This has prompted calls for a monetary system and alternative currency that is founded on objective truths and controls that are beyond qualitative decisions of politicians and central bankers however well meaning. Venezuela is a good example of how the Bolivar, its currency, has become worthless because the Venezuelan Government has irresponsibly printed money. The German Weimar Republic in the 1930’s and Argentina a few decades ago are other such examples.

What are the essentials properties of a currency like say BTC? A viable currency must be a trusted store of value and medium of exchange, the operative word being trusted. BTC is seen as a store of value in that it has a limited supply and is based on a platform that is secure, robust, efficient, transparent and Government agnostic. BTC is also a payment mechanism that has been accepted by Paypal, Mastercard, Square and other respected institutions. It is better than gold in that it is easily divisible and storeable. However BTC is still too volatile to be a widespread payment platform but with wider institutional and retail adoption the volatility should diminish.

What is the utility value of BTC? Unlike gold which is used for jewelry BTC has no underlying value per se but neither does the P100 in your wallet which is really just a piece of paper. Yet the latter is accepted as a form of payment because everybody believes it is worth P100. BTC and fiat currencies’ utility value comes from the network effect.

What is the network effect? The network effect is the notion that a product or a service or a thought creates value the wider its adoption. One cell phone on its own has no value but builds value as others buy phones and communicate with each other. Religion is another example. Jesus Christ had limited influence as a voice in the wilderness but with the 12 Apostles and the millions of subsequent followers Christianity became a major spiritual and political force.

How is BTC being used today? Institutions are using BTC as a hedge against inflation. Its closest equivalent is gold. The latter is considered one of the most conservative asset classes in an investment portfolio. It is ironical therefore that BTC which is often referred to as “digital gold” is seen as one of the most speculative asset classes.

Can BTCs be hacked? BTCs like fiat currency cannot be hacked per se. What can be hacked are their storage systems and intermediation platforms like your bank account, ATM and credit cards. So it is important when trading and storing BTCs that your counterparties are reliable much as you would choose a strong bank to house your deposits.

Are there crypto currencies other than BTC? There are over 20 cryptos but BTC accounts for about 70% of all cryptos. The next biggest is Ether which is the currency that powers Etherium (ETH). 

What is the difference between BTC and ETH? They are both cryptos but totally different in their functionalities much like gold and silver are both metals but have different commercial and industrial uses. BTC is essentially a store of value while ETH is a digital operating system like IOS (for Apple) and Android. Etherium creates smart contracts founded on block chain technology. Decentralized finance (DEFI) and decentralized applications (DAPPS) are built on Etherium. It is believed they will replace banks and central exchanges in transactions like deposit taking, remittances, lending and commercial trades for financial derivatives, real estate sales, etc.

What about BTCs being used for illegal purposes like money laundering and drugs? These are estimated to account for only 2% of all crypto trades. But so is fine art yet this has not deterred  auctions in collectible paintings.

What about Government bans on cryptos? Governments cannot ban cryptos successfully because they will just move to other jurisdictions. Again, once institutions like banks, insurance companies, mutual funds and corporates start to adopt cryptos Central Banks cannot ban them without creating a systemic risk. Today Massachusetts Mutual Insurance, Paypal, Square, Microstrategy, Tesla and others have taken BTCs on their balance sheets.

What about cryptos issued by Central Banks as China is doing? These cryptos are controlled in their algorithms and supply by Central Banks and so are not any different than the fiat currencies they issue. They do not solve the underlying challenge about an objective monetary system that cannot be influenced by humans.

What is the maximum supply of BTCs and when will it be reached? The BTC algorithm caps the total possible issuance at 21 million BTCs. We are now at around 18.5 million and expected to reach the cap in 120 years or 2140.

How does BTC supply increase? There is a community of BTC whose task is to secure the network via high speed, high volume computers. These so called BTC “miners” are paid in new BTC issuances for their work.

Where could BTC’s price go to? At roughly $56,000/BTC, the market value of all 18.5 million BTCs is now about $1 trillion. Gold has a market capitalization of about $10 trillion or 10 times more. If BTC should be adopted in the same scale as gold by investment managers, BTC could be valued at over $400,000.

It is estimated that if U.S. corporates were to allocate 1% of their cash balances into BTC the latter’s price would rise to $100,000. 

The U.S. bank JP Morgan, once a skeptic, has said that BTC could hit $140,000/BTC.

Apple has a market cap of a couple of trillion dollars. It is interesting that BTC which is potentially a world monetary system has a market value of only a third to a half of that.

Can you lose money in BTC? If BTC fails to gain traction as a store of value, BTC could fall precipitously. 

How does one buy BTC? Fractions of BTC can be bought through coin exchanges like Coinbase but this is somewhat cumbersome for those looking only at its investment potential. BTCs can be bought indirectly through over-the- counter trusts that are U.S. SEC approved like the Graystone Bitcoin Trust (GBTC) through your stock broker or Schwab account. A BTC exchange traded fund (ETF) just launched in the Toronto Stock Exchange with record first day volume of $165 million. The U.S. SEC could well approve this year a U.S. based BTC ETF which will allow for efficient trading of BTC, wider adoption and higher price.

Should one invest in BTC? BTC is a volatile asset class that should stabilize once widely adopted by institutions. The reward/risk ratio looks to the upside. An allocation of not more than 1-5% of one’s portfolio is suggested for those with a modest to aggressive risk profile.

Waiting Is Not An Option

The first anniversary of COVID will be in a few weeks. I am very sad the numbers are bearing me out.

Ten months ago I wrote the economy would take longer than NEDA was predicting for a V-shaped recovery. GDP dropped by 9.5% in the year, the worst performance since our independence.

I said then the pandemic would take at least six months to play out. One year later we are still in the thick of it.

Late last year I said inflation in general and food in particular was going to be worse than expected. Last week NEDA reported prices were up 4.3% across the board, higher than the forecast of 2-3%. Food prices were up over 6%. 

NEDA predicts a 7% growth this year. I believe that number is priced to perfection.

My observations are not based on macroeconomic inputs or the predictive models of our economy planners but on assessments on the ground, anecdotal stories of businessmen struggling to stay afloat, conversations with ordinary Filipinos in their daily struggles, with bankers assessing their loan books, and my weekly grocery bill. Looking at things from the bottom up gives a clearer picture of what is to come. If the DTI and DA had kept their ears to the ground they would have immediately noted the spike in food prices in real time. As it is they waited for the official numbers to be reported months later and precipitously imposed price controls after the damage had been done.

In assessing our way forward I also look at the mind set of our leaders. Are they truly aware of what is happening, have they personally internalized the suffering on the ground, are they simply going through the motions of governance calming fires rather than leading change, is each Cabinet Secretary hunkered down in his individual silo rather than moving collectively with others as one? Is it just a job? Are they incompetent or equally bad, corrupt?

The President at some level truly cares for this country. He has the highest popularity rating of any prior Chief Executive which, given the pandemic and everything else, is an amazing achievement. With his political capital and control of all levers of Government – the Executive, the Legislative and the Judiciary – the President has the power and the ability to truly change this country. Duterte is the one President in recent history who has it in him to be a great leader, a truly transformative one. Yet popularity does not always equate with greatness. With one year left in his Administration does he want historically to be bigger than he is? What is the historical legacy he wishes to leave or does it matter to him? The answers to these questions will determine where we are come next year.

After being somewhat disengaged from the subject, the President recently acknowledged the economy is in serious trouble. He has said that of drugs, COVID, the Red menace, politics and corruption but never really on economic matters. He has left these entirely to his economic team. His decision to engage may be because, one, he does not want to end his term with the economy on its knees; two, because a poor economy may affect the May 22 elections; and, three, because he may have finally realized the economy matters and cannot be left alone to his people.

Our economic team is capable and trusted by the President. The debate is not about their competence, it is about their approach to risk taking, in how aggressive they should be in turning the country around. There are no correct answers to this qualitative question, only time will tell. All other nations have taken the view that COVID is an extraordinary externality that must be met with an extraordinary response. The U.S. is on its fifth stimulus program, we have not exhausted our second. 

Additional stimulus spending and the debt and deficits this creates is as much an ethical as it is a technical matter.

On the ethical side the question is what is the value of a human life and a livelihood in the decision of whether to expand the safety net? When does an economic crisis morph into a humanitarian crisis and how does one measure the latter in GDP terms? If this was a war would we be more amenable to doing more?

On the technical side what is the appropriate level of stimulus, what is the equilibrium ratio of debt/GDP or deficits/GDP? What is a sustainable level of borrowings? When is too much too much? This debate is raging with Central Banks and Treasury departments the world over.

Economic theory tells us that further debt is justified for as long as economic growth exceeds the cost of borrowing. For corporations the same applies, one can keep borrowing as long as the return from investing the debt proceeds is larger than the interest payments on that debt. (For the economic nerds out there this is the microeconomic theorem that profits are maximized when marginal revenue equals marginal costs). In short it is alright to borrow more if the money is put to good use.

The Philippines has grown on average by 6-7% in an era of 3-4% borrowing costs. This means theoretically the country has more room for additional loans. If we can return to this path the 3-4% spread means our debt can be repaid over time. On the other hand if we become overly cautious in our fiscal management we may never return to our prior state of affairs. We could die in the ICU.

Our GDP growth numbers do not include the long term productivity that comes with investing in education and infrastructure which will enhance competitiveness, mobility and capacity. Adding these to the equation further enhances our borrowing head room. Vietnam recently announced that one of its companies, Vinfast, was just approved by California to test its autonomous cars. Our neighbor which three decades ago was in our rearview mirror is now at the cutting edge of technology while we figure out whether we should be in GCQ, MGCQ or ECQ.

Will our credit rating suffer from additional Government spending and debt? Credit ratings are not based on absolute metrics but on relative metrics. They are awarded not on how much we have borrowed and can repay but on how we compare with our neighbors by these measures. Currently all our neighbors have borrowed and spent far more in fighting COVID than we have so our credit rating would not be at risk even if we were to be more fiscally aggressive.

Corruption is a principal reason why our economic managers have opted to scale down spending. They believe with the leaks the economy would never see much of the money. They saw this when they rolled out Bayanihan 1 & 2. However rather than curtail relief altogether they should look at ways to improve the distribution system, bypass the sources of leaks like the LGUs, and go direct to the beneficiaries. House Speaker Velasco has recently filed for Bayanihan 3, a PHP430 billion spending initiative.

In the last 12 months our country has opted to wait for a vaccine rather than pro-actively address our economic, education and health concerns. This means we shall still be on stand-by for another 12-18 months. It explains why we will be the last out of the door. We have chosen to promise rather than deliver, to lean back rather than move forward, to play defense rather than offense, to react rather than act, to wait for the world to come to us rather than challenge the crisis head on. The problem is, like all illnesses, the longer we wait the more serious is the damage and the harder it will be to recover. This crisis is not going away on its own.

We Need To Play Offense, Not Defense

After predicting it was just a “hiccup”, then forecasting a V-shaped recovery, then downgrading it to low single digit growth, then to negative 4% decline, then to 7% further decline; NEDA announced the economy contracted by 9.5% in 2020. NEDA predicts a 6-7% recovery this year but has since hedged warning Q1 will be lower than expected. I guess the admission that things are not necessarily getting better is, at this point, progress in itself. 

Former President Gloria M. Arroyo recently spoke at the CENSEI, a local think tank, on the economic prospects for 2021. The speech was notable not particularly for what she said but for the scale of her thinking. She talked not of GDP which was refreshing and unique for an economist but delved instead on long term trends and the broad sweep of China’s geo-political ambitions and the impact of global and technological change on our future. She talked about big ideas and strategy which is so severely missing in conversations on our economy.

Philippine economic policy is based on Keynesian fiscal and Chicago school monetary doctrines layered over the animal spirits of Western capitalism and free enterprise. The outcome is an economy that feeds on the lowest lying fruit with little attention to balance, sustainability and equality. By contrast China, Singapore and Taiwan, the real tigers in the region, recognized, emphasized and capitalized on longer secular trends like education, technology, competitiveness, infrastructure, governance, the environment and the collective good.

In the last decade the Philippines grew at an average rate 6-7%, one of the highest in the region, which led us not only to praise ourselves but to boast to the world how things should be done. We are proud of our credit rating. These led to a complacency and an absence of strategic thinking. In fact we grew not on the strength of wisdom or vision or effort but on the easy pickings of overseas remittances which fueled a boom in retail and urban construction; on the exploitation of our natural resources; and the wonders of our geography and friendliness of our people to propel our tourism. In the last two decades the only meaningful structural change in our economy was the emergence of our BPO sector.

We failed to see the critical components of sustainability like education, healthcare, roads, airports, agriculture and the manufacture of products at a price and a quality the world wants. Worse we abused our God-given gifts allowing our cities to decay, tourism sites to degrade, mines to pollute, our education to fall to the lowest in the world, and our agriculture to wither on the vine.

Legislators are now talking about relaxing foreign ownership of essential industries to jump start the economy forgetting the national security implications for vital sectors like mass transportation, telecommunications and energy. Do we really want to wake up and find out we cannot live, walk and talk without the permission of foreign masters who just invaded our islands? Selling our organs to the world will mean riches to a small number of business groups and is just another excuse for our failures. Even the wealthiest nations with the freest of markets have limits on foreign ownership of critical businesses. Rather than take the path of least resistance we should identify and develop opportunities in sectors that have lagged like agriculture, human capital, knowledge industries and new forms of tourism.

COVID exposed us for who we really are, an emperor with no clothes, pining on the legacy however fragile of our past and the awards vested on us however shallow. With the virus our OFWs now are in trouble, our tourism has vanished, and the livelihoods of millions seriously in danger. We now have price limits on chicken when last year we were culling them from over-supply. And we have little way out of it because we never developed the means to do so. It is predicted the Philippines will be the last among our neighbors to recover. Vietnam actually grew by 4.5% in 2020. Our stock market was the worst performer in the region, not that it matters.

We still adhere to the notion that fiscal and monetary policies will save us from perdition, hence ARISE, CREATE, FIST and other initiatives that are mostly notable for their acronyms. Tax incentives are a questionable exercise when most businesses are not profitable. It will be used by the few that are not to expand and hire but to raise dividends and pay down debt. Fiscal stimulus is important as a catalyst but it has to be coupled with structural changes if it is to gain traction. 

Monetary easing is wonderful on paper but useless if banks resist lending which they are and who is to blame them? The same BSP that is driving them to expand credit will be the same body which will castigate them when loan losses rise. 

There has to be a quantum change in the way we think and run the economy. We have no leadership, no CEO with a vision and the courage to take risks. Our financial managers are tasked to steer the ship but they are not given the authority to do so. They have no oversight on the line agencies that drive activity – education, health, highways, transport, communications, tourism – and the governance that controls corruption.

Our economic team is understandably concerned about political cover and their legacy. We see it in their  reluctance to further stimulus and to rapid aid to essential industries like aviation and tourism. We understand they want full assurance that loans will be repaid and there is no bailout nor sweetheart deals but there should be a sense of urgency for those companies who meet the standards for collateral, governance and viability. Delays could mean the death of essential businesses already on their last legs.

The result is a rudderless economy with a bunker mentality run by a powerless economic team and an essentially absentee CEO; and dependent on a vaccine that is further and further in the distance. There is reportedly 3 million doses of some form in February and 178 million late this year which will be touted by our health authorities as salvation in progress. The greater probability is as the result of their bungling and suspicious motives, there will be no meaningful inoculation among the populace until at least 2022 and very possibly 2023 especially given the complexities of logistics, distribution and, lest we forget, corruption.

The first vaccine arrivals will reportedly be for the front-liners, police and army which speaks to the care and attention given to our armed forces. Workers in essential industries might be better served but the security apparatus apparently takes precedence over livelihoods and the economy. 

The elections are upon us in close to a year which one might think would spur the Palace to double time the economy. As Bill Clinton said: “(Elections) are about the economy, stupid!”. We are not so hopeful. The President and his designates are running on his personal popularity which if the polls are right will carry them through. 

This country is in serious trouble and nobody cares. For an enterprise or an economy to succeed somebody must take ownership of the vision and the risk of the outcome. Nobody is prepared to do that at this time. Why go out on a limb when it is too easy just to blame COVID?

So at a time when countries the world over are playing offense and taking destiny into their hands, this country is playing defense. What it does to the unemployed and the poor is for another Administration to address. As for the rest of us I suggest we batten down the hatches and hunker down for what could be a long, sad and painful journey possibly to nowhere.