Ever heard the term ‘Burgernomics’?  Believe it or not, there’s actually such a term and it’s widely used by economists/investors.

The publication The Economist actually publishes an index that makes reference to the Big Mac PPP. Err, the Big Mac what? PPP is short for Purchase Power Parity.  PPP is a theory that states that currencies adjust according to changes in their purchasing power.  It is actually survey done by The Economist that determines what a country’s exchange rate would have to be for a Big Mac in that country to cost the same as it does in the United States. They use the price of the Big Macs in different countries and divide it by the price of a Big Mac in the US.  Let’s say that the price of a Big Mac in the Philippines is P100 and the price of a Big Mac in the US is US $ 3 — you simple divide the Philippine Big Mac cost by the US Big Mac cost, or 100 divided by 3. In this case, according to the Big Mac PPP, the exchange rate of the Philippine Peso against the US Dollars should be only P33.33: US$1, making our Peso undervalued.

Sometimes, Burgernomics makes some sense to me… but most of the time it just makes me hungry.

..con’t. (Part 2)

Let’s simplify this. Because of the fears of losing money brought about by the crisis, the preference for safer havens increased the demands for fixed income securities. Price of said investments has an inverse relationship with yield – so as price increases, yields go down. Yields of such ‘safe’ investments have plummeted to a point that they are starting to be very unattractive and are forcing many to look elsewhere. Central Banks all over the world are keeping interests down to keep money circulating in the economy so we can’t see any improvement in the yields of new fixed-income securities as well. All these makes investors go out and look for avenues where they can get better performances.

At a certain point when the markets are too liquid, money needs to be invested, otherwise money will actually lose value because of inflation. Staying out of the equities market is a knee-jerk reaction to cut losses when things become awry. However, it can’t be expected that people will totally forget about the market as they are just waiting for signs of some recovery before they start taking positions. The question in my mind is, are we really seeing recovery? The US equities market has seen a remarkable 30% increase from its lowest point and thereby also having a positive effect in the Philippine market. Is this a sign that the stock market is in full recovery? Only time will tell. It’s not that I am sceptical; I pray every day that we see some recovery and eventually growth. But we need to look at things from a more prudent perspective. Here’s the FACT: the global economy crashed and is in recession. The damage is so severe that it will take time for institutions to heal and recover.

I maybe reading too much into things but here is a thought that occurred to me — can it be that one of the reason why there is action in the stock market is that people are seeing that inflation will shoot up soon?  Equities are a good hedge against inflation, much better than the safer fixed-income securities (well, at least in theory). A high inflation is not a remote possibility; it’s actually a very real one. With the way governments are pumping money into the economy, it puts a lot of pressure on inflation. Are people speculating too much, too soon? I don’t know, maybe. Is it time to start investing in the stock market again? I’m not sure; I wish I knew the answer to that too.

I will stick to my rules before letting go of my money (if I had any): Investment Objective, Time Frame, Risk Tolerance and Acumen. There is also a view that the market is now ‘over-bought’ so there is an expectation of some correction. If you have invested in the market you can do two things, get your profits and leave or just leave your money there and wait for the market to recover – it will definitely recover, we just don’t know when. I am not a technical guy and I’m not a big believer of timing the market so you know what I would do if I have money in the market.

Well, just to remind people that all these are just IMHO (In My Honest Opinion) and HTH (Hope This Helps).

We often hear the word ‘recession’ lately which prompted me to blog about it. Why is it that people fear recession too much? Is recession as bad as how we perceive it to be?

Let’s define recession. Recession may be deemed as significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP). When there is a severe or prolonged recession, it is referred to as an economic depression. Recessions also comes in different shapes – V, U, L and W. When the economic contraction is quick and followed by a rapid and sustained recovery, economists refer to it as a V shape recession. If there is a prolonged slump in the economy, it is informally termed as a U shape. A much longer decline, like 8+ quarters can be called an L shaped recession. Finally a W shaped recession is a term used when there is a double dip recession.

Nosebleed!

I like to look at the economy as a motor car engine. Any engine, no matter how efficient and durable it is, can’t run at full throttle for an indefinite period. Imagine driving your car at maximum speed continuously for days… at one point your engine will give in and break down. The economy is like that as well. When the economy is in constant growth, it will overheat and it will breakdown. Economic growth brings growth in disposable income; additional disposable income will allow people to increase consumption; increased consumption will drive up prices; increase in prices will result to inflation and so on and so forth. A state of balance is needed, or in economics terms, equilibrium. However, equilibrium can only exists in theory and there will never be an absolute equilibrium. When the car slows down, that’s like the economy going into recession.

The economy goes on cycles, recession is part of a cycle. Since recession is part of a cycle, we should not be in despair as it will come to pass … “We are hard pressed on every side, but not crushed; perplexed, but not in despair; persecuted, but not abandoned; struck down, but not destroyed.” (2 Corinthians 4:8-9, NIV)

Catch part 2, soon!