There is no denying the recent stock market rally. Is it for real? Deutsche Bank reportedly says it is because the locals are now “cash rich.”
I believe that one indicium of a bubble is the circulation of reasonably credible stories that have the effect of generating enthusiasm for the object of the bubble. The Deutsche Bank story is of course one such. In brief, Deutsche is saying that in the beginning it was the foreigners who “invaded” and enlivened the local stock market. Now, it is the locals who are playing. Deutsche even thinks that the Philippine peso is no longer a “soft” currency, but a “semi hard” one because of OFW remittances. That and the collapse in US dollar yields make rich Filipinos more willing to hold peso-denominated assets. In effect, Deutsche’s story is that the Philippine stock market is now immune from financial crises abroad because rich Filipinos have enough money to keep the game going. The hero is, as ever, the OFW, who does not own stocks and is not likely to be playing the market.
But suppose a well-meaning policy maker at the central bank were to think that bubbles are not good because inevitably they are followed by crashes. What can he do? He could suggest tightening up on monetary policy, but this would nip a budding recovery. In a sense his hands are tied. This is yet a second story that can help support a stock market bubble.
Bubbles, if indeed they’re out there, are creatures in the world of Caveat Emptor. The game of swimming with the local whales is a very tempting one. But it may be better to watch the dolphins in Bais and enjoy the pristine waters of the sand bar. Here’s to hoping that Cebu Pacific and PAL would have enough promo fares to Dumaguete..