The Bursting of the Bubble

The declines in the stock market and values of currencies may aptly be described as a bursting of the bubble because it reveals a lot of things: the real state of the world economy and the dominance of international mobile capital; the fundamental weakness and vulnerability of the Philippine economy; and the empty boasts of the Macapagal-Arroyo administration regarding her achievements in the economy during her state of the nation address.

Vol. VII, No. 28, August 19-25, 2007

For the fifth straight day, the Philippine stock market has been falling. By Wednesday it has fallen by 133.22 points or 4.08 percent to 3,130.34, its lowest in five months. But it was still 4.96 percent or 147.8 points higher than in December. By Thursday, the stock market lost all gains since December falling by more than 200 points. This has also erased the 3,665.23 index hits in June 2007, which was declared as an all-time high and being claimed by the Macapagal-Arroyo administration as one of the signs that the economy is well on the road to “First World” status.

Analysts attribute the stock market jitters to problems in the U.S. sub-prime mortgage market and disappointing forecasts by major U.S. retailers Wal-Mart and Home Depot. After a period of housing boom, more and more Americans are finding it difficult to cope with mortgage payments, thus an increasing delinquency rate. There are fears that Countrywide Financial, one of the biggest U.S. mortgage lender, is headed towards bankruptcy. The grim forecasts by Wal-Mart and Home Depot, on the other hand, reflect an increasing pessimism on consumer spending. The housing boom and consumer spending, both of which are credit-driven, are the two prime movers of the U.S. economy since the decline of the IT/computer industry in the year 2000.

Foreign “investors” in high risk-high yielding portfolio investments such as the stock market, money market, real estate, and commodity futures rush to cash in causing the decline in the value of the peso to P46.60. The value of the peso continues to fall amid interventions by the Central Bank, in the form of dollar selling, to soften the decline.

An international phenomenon

The decline in the stock market and the value of the currency is not exclusive to the country. Stock markets all over the world have likewise been experiencing a slump. Asia’s major stock markets are tumbling and so are stocks in London, Frankfurt, and Paris. The stock markets in these three countries are weaker by 1.6 to 2 percent. The Dow Jones index of the U.S. declined sharply by 207 points.

Japan’s stock market is on an eight-month low falling by 1.7 percent. South Korea’s market has skidded by five percent. And markets in Hong Kong and Singapore declined by between two and four percent.

Central Banks of Indonesia and Malaysia are likewise intervening to soften the decline in the value of their currencies.

Clearly, the world is in recession affecting all countries. But the negative impact is much greater in underdeveloped countries such as the Philippines, Indonesia, Thailand, and Malaysia, and in relatively more developed economies dependent on foreign markets and technology such as South Korea, Taiwan, Hong Kong and Singapore. The Japanese yen, for example, is even appreciating.

These developments also reveal the dominance and volatility of portfolio investments. And as the world economy plunges deeper into recession, more and more funds are diverted towards portfolio investments. Banks, hedge fund investors and managers, and financial investment and pre-need firms would rather place their money in portfolio investments with the goal of earning big, fast rather than have their capital tied up in companies which are not selling and earning as big and as fast.

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