Third Eye on the Third World

“Get In To the PSE Now Part 2”

2009-04-02T17:28:00.000+08:00

Date April 1, 2009

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

On May 6, 2008, the Philippine Composite Index closed at 2,727 and the title of this column was “Get Out of the PSE Now”. Seven months earlier, on October 8 2007, the index hit its high of 3,573.

Two to three weeks ago, there was a strong probability that we would see prices fall to the 1500 or even the 1300 level. Now that negative scenario has turned into having only a slight possibility, perhaps a 20 percent chance. The greater probability is that the market, with some occasional pullbacks, is headed towards the 2200-2400 area.

On Tuesday, I spoke of some of the technical analysis considerations of the Philippine Composite Index (PSEi) that forecast that we have reached the bottom and are beginning a new upward phase. But the PSEi is not the only indicator of the market’s performance. The All-Share index, measuring the movement of all stocks on the PSE, is stronger than the PSEi. Further, the Industrial Index, made up of issues like Manila Water, San Miguel, Energy Devt Corp, URC, and First Phil Holdings Corp, is even stronger, moving way ahead of the PSEi.

There is of course a downside risk with the possibility of the PSEi moving to the 1,900. Any pullback that does not breach below the 1,900-1,880 area is a buying opportunity.

However, no one believes technical analysis anyway because few understand how it works and why it serves as a predictor of the future. That is why you read comments like “No one can predict a market bottom”. Predicting the bottom is not the point. Stockmarket forecasting is not like weather forecasting as some people would hope. What this type of analysis does is accurately identify price tops and bottom, turning points, after they have happened, not as they are happening.

The charts say that the PSE reached its bottom in January and turned higher in February and March. The technical indicators say that an upward trend has been created and until the price action says otherwise, that trend is in effect.

But for those that would like an analysis that is more comfortable, more easily understood, then we turn to fundamental corporate and macro-economic analysis.

Philippines listed companies for the most part are making healthy profits. Earnings are one part of the company quality picture but equally if not more important, is the sharing of those profits with shareholders through the distribution of dividends. Money generated by a company after expenses can be used three ways; spent for expansion and growth, kept in reserve, or released as dividends. Companies do not declare dividends just to be nice. Paying dividends is a serious matter as this takes funds away from the company. If a firm believes that it will need this money for capital expenses or fears that it needs a sizable reserve to shield against future problems, dividends are not paid. Local companies are paying substantial amounts of their profits in dividends because they have all the funds they need to grow and are not fearful about revenues and profits in the future. This is a very positive sign.

The macro-economic picture is becoming more favorable every day. The potential fall in OFW remittances is being lowered constantly. And this will more than be compensated by the massive increase in outsourcing investments in the Philippines that is growing day by day. It is almost a daily occurrence of a report of another call center operation coming to the Philippines which will employ thousands.

Do not worry about the value of the peso. One of two things will happen. Either Obama is the economic genius of all time that his supporters want to believe and his programs will recover the US economy like never before in history. Or, those policies will be a disaster and drive to the US dollar to lows that have never been seen in history. There is far too much non-productive cash in the US economic system. The hundreds of billions pumped into the economy is not going for any sort of wealth creation. Where it is going temporally is into the US stock market. And in the long term, it will move to better stockmarkets and better economies around the world.

Either way we win. Further, although you will never read it in the local newspapers, the really smart money is scrambling to get long term funds out of the US to safe havens like Panama, Uruguay, Colombia, Chile, Slovakia, Albania, Poland, New Zealand, and the Philippines. Why? Sound banks, stable currencies, and good economies.

Forget about oil prices, our inflation monster, skyrocketing also. There is still an oversupply despite OPEC production deceases. Oil traders are hoping and praying that Obama is a genius. But demand is remaining constant at the 2008 levels. Gasoline around P35 a liter is just fine economically.

It is not too early to start purchasing local shares. At this stage, it is important to be selective and prudent, watching closely for any reversals that would signal a change in direction. However the odds are weighted firmly on the side of the buyers, not the sellers as it has been over the last year.

This is going to be a good year for the market. A PSE index level of 2,800 is attainable and not unrealistic by year end.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

“Get In To the PSE Now”

2009-04-02T17:27:00.000+08:00

Date March 30, 2009

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

On May 6, 2008, the Philippine Composite Index closed at 2,727 and the title of this column was “Get Out of the PSE Now”. Seven months earlier, on October 8 2007, the index hit its high of 3,573.

From that October 2007 high, the index lost almost 2000 points, reaching a closing low of 1,700 almost exactly one year after the historic high. Since the 1700 level, prices have recovered about 300 points.

Beginning November 2008 until now, the market endured one of its longest congestion periods in recent memory. The last time we saw this occur was in 2005, from June to December of that year. Interestingly enough, the congestion in 2005 occurred at exactly the same price levels as our 2008-2009 congestion. From a very long-term perspective, this would seem to indicate that our decline since the 2007 high has been a correction in a long term bull market that began in 2003.

These periods of range-bound trading have much to tell about the psychology of stockmarket investors, as well perhaps, about the psychology of the nation. Neither fear nor greed, the prime motivators of buying and selling, seem to get an upper hand. There is a balance between buy and sell orders. When prices move up, sellers liquidate positions. When stocks move down, buyers suddenly appear to take advantage of cheaper prices.

However, out of these periods of indecision, there emerges substantial and sustained price movement. From the 2005 period, the market rose nearly 1500 points. Two to three weeks ago, there was a strong probability that we would see prices fall to the 1500 or even the 1300 level. Now that negative scenario has turned into having only a slight possibility, perhaps a 20 percent chance. The greater probability is that the market, with some occasional pullbacks, is headed towards the 2200-2400 area.

First the technical analysis. Over the last months, prices have formed a long term chart pattern known as a rounding bottom with a very unique formation called a reverse “cup with handle”. Do not let all this technical analysis jargon put you off. It is only a way to describe the situation in an abbreviated form, which is common to many games. If you're chess player you know exactly what a "Queens Gambit” or a “King's Indian Defense” is. It is not some sort of secret language; it is merely an explanatory shortcut.

Three weeks ago, the chart pattern was signaling the probability of another 10 to 15 percent fall. The market did not fall. A basic truth of physics as well as of the stock market is that prices have to stop going down before they can start going up. That is what we have seen. During the last two months, the technical indicators, the long-term technical indicators, have been giving us a buy signal. But prices have not cooperated with that buy signal until now.

Forecasting stock market prices using technical analysis is as much an art as it is a science. Moreover, a competent technician realizes that the best that can be hoped for is to understand the risk-reward ratio as it relates to prices.

I am as confident today about the probability of stock prices going higher as I was one year ago about stock prices going lower.

If this analysis is correct, then what we have witnessed durng the last 18 months is a correction in a long term bull market that began in 2003. For the stockmarket ‘techies’, I would suggest looking at the Fibonacci retracement numbers.

I would view any momentary pullbacks as a buying opportunity. I would look for those issues, those blue-chip issues, which are showing leadership and outperforming or pre-performing the broad index. I would keep a very close eye on issues that suddenly have increased volume and where those volume increases are sustained for several days with or without upward price movement.

The risk area lies in the 1,900 area. Prices could potentially, although I would place a small percentage probability on this, fall 100 points lower and still keep the bullish scenario in tact.

Predicting stock market movement is probably easier than predicting the fundamentals of an economy. Perhaps the best we can say is that the stock market might be the best forecaster of the economic future. This pretty much widely knowledge by those in the economic community that the recession in the United States actually started in the last quarter of 2007. Interestingly, our stock market peaked six months earlier in July 2007. Maybe if the experts had listened to the Philippine Stock Exchange, they would have more accurately predicted the future of the US and global economies.

If this rally is sustained, the market is telling us that the worst of the effects of the global crisis is over for the Philippines. I know the ‘experts’ are saying otherwise. But stockmarket investors, both local and foreign, and putting their money on a favorable outlook for the future. If the first quarter economic numbers are a favorable surprise, then remember that stock prices have been telling us that for two weeks.

Start building up your positions in stocks now. Be selective, very selective. Understand clearly the reasons for buying a particular issue. Have well defined cut-loss points. If am correct in my long term view of the PSE, then 2009 may at least partially mimic the price action of 2006 when the index rose from 2,100 to 3,000. and that would be very rewarding.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

“The Stock Market Panic”

2008-10-19T10:44:00.000+08:00

Date October 15, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “The Stock Market Panic”

To quote a good friend of mine, “Anyone who thinks the stock market crisis is over has rocks in their head”.

The collapse in stock prices particularly in New York last week was described as a selling climax or capitulation, supposedly indicating the bottom was reached. This week’s historic one day rise is supposedly the beginning a new dawn. Nonsense. Despite the fact that the shares of certain companies are ‘cheap’, very few are buying shares to put in their portfolio for the long term.

The stock trader who bought when the Dow Jones Average was up 100 points, made a killing when the market ended 900 points higher. The ones who bought when the market was up 900 points only got killed.

Conventional stock market wisdom encourages investors to take advantage of lower prices by buying more to average the cost over the longer term. This can make sense in most instances. But how can you average your cost when the stock you bought at $20 two months ago is now trading at $5.00?

Last week was also described as a time of “irrational fear”. Stock market wisdom says that the time to buy is when there is blood in the streets. The question then becomes, how much blood does it take to signal a buying opportunity? Fear is only irrational if it is unjustified and not a single expert can make an accurate prediction of what the future may hold.

The global economic rescue package is only an attempt to stabilize the situation, not a cure for systemic flaws and failures. No one has a clue as to the next year of economic activity in the United States or Europe. No one can forecast as to what levels bank lending will return. No one can estimate what will happen to consumer spending in the months to come and these economies are driven by the consumer. And remember this. The Dow Jones dropped from 14,000 to 9,000, a 35 percent fall. To go back up to 14,000, the market must rise 56 percent. Does anyone realistically believe that several trillion dollars of stock buying is going come in to push the Dow up 56 percent in the foreseeable future?

Perhaps the best stock market truth is that you should sell until you can sleep comfortably.

Based on country stability, corporate growth, and economic soundness, there are only three stock markets I can see that make investment sense; Canada, China, and the Philippines. I would also include Iraq, but their market only trades a million dollars plus per day.

Canada is a small country with the world’s strongest banking system and a large amount of profitable energy/commodity related companies. China has 1.5 trillion dollars of foreign reserves to support their economy. The Philippines is a place of calm in an economic storm.

So why is our market down? Because foreigners are bailing out to get their money back home and local investors rarely have a clue why they bought in the first place so therefore do not have a clue why they are selling.

To sell local stocks because New York, London, and Japanese markets are down is simply foolish because there is no direct and very little indirect connection. To see the shares of companies like PLDT, Megaworld, Meralco, and the banks at these levels is amazing. Oil is under $80 a barrel and will probably be lower by year-end, taking care of our recent inflation problem. All the stable economic drivers including exports, remittances, agriculture, and consumer spending are still growing.

I have yet to hear a rational justification that shows the correlation between the corporate value of PLDT, Megaworld, Meralco, or any other issue to the global debt crisis. I know what investors in Japan, Europe, and the US are fearful of. What are local investors afraid about?

Show me that Megaworld’s profits will be down 75 percent over the next 12 months to rationalize the stock falling 75 percent. If so, then MEG will be a great buy at 50 centavos. If not, it is a great stock bargain right now.

The market will probably fall further to the 1,950 area in order to get as much of the foreign money as possible out of the PSE. And if you are a short term player, you should also sell. If you are a longer-term investor, accumulate on the way down or wait for the decline to stop and then jump in with both hands.

On a personal note, I answer all your emails, if I get them. Your email might still be floating around the internet trying to get to me. Therefore, if you do not receive a reply within 24 hours, please email me again.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

The Death of Debt-Based Wealth

2008-10-19T10:35:00.000+08:00

Date October 13, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “The Death of Debt-Based Wealth”

The price of oil plummeted from a 2008 high of $147 to below $80 a barrel and is trading at the September 2007 price. Commodity prices have collapsed. The leading indicator, the Reuters/Commodity Research Bureau index, is not only down 30 percent from its June 2008 high; it is down over 10 percent from October 2007 levels. Global stock markets are in free fall. European markets are off 45 percent in the last 12 months. Asia’s markets dropped nearly 50 percent in a year, as has the Philippines. The US has fallen 40 percent since October 2007. Even the Saudi stock market is down 47 percent from the 2007 close.

I have called the recent events financial AIDS, Asset/Investment Deflation Syndrome, and the roots causes are not unlike the basis for medical AIDS. No matter what the propaganda about medical AIDS, by far the highest risk groups for contracting AIDS are those engaged in promiscuous behavior and intravenous illegal drug use. Promiscuous sexual behavior comes from a desire for instant gratification and pleasure regardless of the consequences and intravenous hard drug use is a trap and addiction that is impossibly difficult to break.

For some thirty years, the developed so-called First World unashamedly did everything possible to make indulging in material satisfaction a primary life goal. The quest for more and more pleasure-giving ‘things’ has pushed aside faith, honor, family, dignity, wisdom, integrity, and responsibility.

Corporate executives falsify company books in order to fund their luxurious lifestyles. A woman in the US carrying triplets, aborts two of the children because having three kids would seriously affect her financial ability to entertain and travel. In the pursuit for ‘more’, average middle class people make wild investments. The result of being able to have more possessions is the justification for doing anything it takes to achieve that goal.

And if you cannot afford to buy the pleasure you want, borrow the money. Just like the drug user, one time will not hurt. That wasn’t so bad was it? So do it again and again and again until you are hooked and financially destroyed. The total debt obligation of the United States including the federal, state, and local governments, business, and private personal debt is 53 trillion dollars. That is $175,154 per man, woman and child or $700,616 per family. Total U.S. individual consumer debt, which includes installment debt, but not mortgage debt, is $10,000 for every person. That means an average family owes $40,000 in personal debt not including their home loan. 80 percent of today's debt was created since 1990. In the 1990s alone, debt increased more than two times faster than the growth of the total economy. The percentage of disposable income spent on personal debt payments was 8.6 percent in 1983 and over 80 percent in 2007. In 1981, US families saved an average of 11 percent and owed 4 percent of their income on credit cards. By 2000, the average savings rate had already fallen below zero, and credit-card debt had gone up to 12 percent of income.

What is the human cost? In 1987, the number of shopping malls surpassed the number of US high schools. For US parents: average time spent shopping per week: 6 hours; time spent with children per week: 40 minutes. The percentage of college freshmen who reported thinking it is essential to be well off financially was 44 percent in 1967 and 83 percent in 2007.

Is there any wonder why the Holy Father, Pope Benedict, would say last week that the current global banking crisis indicates that the modern world economic order is "built on sand", and only the "word of God" can offer a solid foundation for life.

This is not simply religious talk. A building erected on a foundation of sand and not bedrock only has an illusion of strength. Wealth created by debt and borrowing is only an illusion of wealth.

All of these recent efforts by western governments do nothing to create a financial bedrock and only serve to reinforce the foundation of sand. The idea that the world can somehow continue to build wealth through borrowing and debt is a fantasy. When you hear the experts debate about when the financial markets will recover, know that the answer is Never.

Japan had its borrowing bubble collapse in 1990 and the Japanese stock market index then was at 40,000. The highest it has ever been in the last 18 years is 22,000 and today it stands below 10,000.

Many nations have fed their economies off the illusion of western wealth including Japan, South Korea, India, Russia, and most prominently, China, through inflated Foreign Direct Investment (FDI) and exports to the US and Europe. China will survive by public spending of a large amount of its $1.5 trillion foreign reserves. Russia has its oil and Korea and Japan have stable domestic economies. Opinions are mixed on India, as its domestic banking sector appears to be sound but its currency is at a six year low.

The Philippines? Assume a 10 percent drop in all contributors (remittances, FDI, exports) to the Gross Domestic Product and economic growth is still 4 percent. The stock market? Wait a few weeks and you will see the best buying opportunity (probably near 1,950) since 2003 when the index was at 1,000.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

Are Filipino Banks in Trouble?

2008-10-11T07:08:00.001+08:00

http://businessmirror.com.ph/

Date October 8, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “Are Filipino Banks in Trouble?”

The wildfire that is burning out of control through the US and Europe necessitates that we know exactly what is going on with our financial institutions.

All monetary and financial transactions are based on trust. The only way that a person can maintain trust is with full and complete information. A major problem for the West right now is that depositors do not trust the banks or their governments and banks do not trust other banks. In that climate, people start withdrawing their funds, banks raise interest rates for their lending to other banks as evidenced by the spike in London Interbank Offered Rate (LIBOR) rates, and credit and money stops flowing.

The recent disclosure by Banco de Oro (BDO) of its exposure to Lehman Brothers is a case in point. Because of the proper, both ethically and financially, handling of that situation, BDO held the trust of its customers.

This is not the time to be optimistic nor is it the time to be pessimistic. This is the time to realistic and that requires sound and factual information.

Everyone has a critical stake in the local banking system and that requires looking far beyond the headlines and the comments to the numbers. It is interesting and favorable to note that during these times of the more ‘developed’ countries experiencing panic in the streets, the Philippines reported the following data on the local banks.

From BusinessMirror: “Bad loans held by universal and commercial banks were down to 3.98 percent in July as measured by the non-performing loans (NPL) ratio. The NPL ratio dropped from 5.18 percent a year earlier. Total bad loans shrank 1.54 percent from June and were down 9.60 percent from a year earlier. [The end-July] NPL ratio is the lowest recorded since the onset of the 1997 Asian financial crisis”.

Not every financial institution such as Lehman and other companies is run by stupid incompetents. As the West’s financial system began showing problems as early as 2007, our banks were firming up their balance sheets with careful lending and continued disposal of non-performing assets.

Further in favor of our banks and another critical point, our banks are preparing themselves even more in the very unlikely event of future loan problems, by more fully protecting their financial position against defaults. “While bad loans continued to shrink, the BSP said the big banks’ NPL coverage ratio—or provisions for bad loans—strengthened to 97.86 percent from 96.60 percent in June and from 85.29 percent in July last year”. What that means is that our big banks put into reserve another 12 percent of the amount of these bad loans just in case the value of the NPLs falls and cannot be turned into cash. At a 97.86 percent coverage, these loans have been almost totally written off, so that any money that might still be recovered is a bonus.

Are we facing a credit crunch where there just is not any loan money available, an event that would slow the economy? Not happening and not likely. “Bank lending also shrank from June, with total loans down 1.2 percent in July. On yearly basis, however, total loans grew 17.9 percent as of July 2007”. Yes, the banks have become more cautious in the last months but overall, 2008 has seen more lending than 2007, despite the economic slowdown.

Not everything is perfect but never as bad as the ill-informed headlines might lead you to believe. One daily newspaper said that residential property loan problems were rising, mis-leading you into believing that maybe the Philippines is next for a housing loan crisis. It is true that foreclosed real and other properties grew 1.15 percent in the just ended third quarter from the second quarter 2008. But, and it is a big BUT, that was down 7.71 percent from 2007. Despite the terrible financial situation during the last six months, the picture is better than in boom-year 2007.

It is true that the banks are experiencing a slight increase in problems with their real estate lending portfolio. Problematic residential loans rose to 7 percent of total lending to individual home borrowers, from 5.6 percent at the end of June 2007 and 6.3 percent from the end of the first quarter 2008. Two factors are important in order interpret the significance and to see if there is any potential problem for the future.

What is the loan-loss provision carried on the books of the individual banks for any doubtful loans? Since 1997, the banks have been very conservative and prudent in setting aside money to cover potential losses. BDO is a good illustration as they carry excess reserves that are more than adequate to handle the approximate 4 billion peso exposure with Lehman.

Is the value of the underlying collateral, the real estate, valuable enough to cover the loan? Please remember that these Western banks would still be in fair financial shape if the value of the housing assets were not, in many cases, smaller than the face value of the loan. Never will you see a bank in the Philippines loan more than 80 percent (if that) of the value of the property. The worst-case scenario is that the banks might have to take back the property, said property worth more than the loan. Our local property values are not in trouble due to excessive supply or huge amounts of potential foreclosures.

We need to know the financial facts of our banks and based on those facts, we need to maintain our trust.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

“$700 Billion: What It Does and Does Not Do”

2008-10-11T07:06:00.001+08:00

http://businessmirror.com.ph

Date October 6, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “$700 Billion: What It Does and Does Not Do”

After the United States Congress passed the law last week creating the $700 billion economic package, the US stock market fell significantly. I was contacted by a large stock market participant asking why. If the bailout is critical to the economic future of the West, why wasn’t the bailout greeted with greater enthusiasm?

Note, it is not a ‘bailout’. The anti-business liberal press and media in the West (and the Philippines) call the economic package a bailout so that they can create the impression that taxpayers are forced to give money to greedy, evil failing businesses. It can be more accurately characterized as an economic rescue package for the failing banking/credit sector.

It is an economic rescue attempt in the same way that throwing a life preserver to a drowning man is only the first step. You have to stop the situation from getting any worse before you can save anyone. The United States and Europe are drowning in a sea of bad loans. Without this government funding, those economies may drown. However, it will not save those economies. This is only chemotherapy to try to keep the credit cancer from growing; not to eliminate it.

Remember what this is all about. The US government forced banks to relax lending rules to everyone, ‘rich’ and ‘poor’ alike. Since everyone knew that was bad business, the government guaranteed the payment of hundreds of billions of dollars of those loans through government subsidized enterprises (GSE), Fannie Mae and Freddie Mac.

The lending worked this way. In 1998, you buy a $100,000 house and put up $20,000 cash, borrowing the rest. Three years later, someone wants to buy your house for $150,000. The new buyer puts up $10,000 and borrows $140,000. The following year another buyer comes in to pay $200,000, puts a down payment of $10,000, and borrows $190,000. The final buyer pays $300,000 with $10,000 cash and takes out a loan of $290,000. However, as I related in prior columns, general economic conditions created a surplus of houses and a lack of buyers caused housing prices to fall.

The house now has a market value of only $250,000 and a loan of $290,000. If you had a piece of real estate that you owed a loan of $290,000 and the property was worth $250,000 or less, would you continue to pay the loan or let it go to foreclosure? Welcome to the US and European economic crisis.

So now, you have major banks that, for example, show $50 billion of assets but only $10 billion is liquid (30 % in cash) and $40 billion in bad non-performing loans backed by assets (houses) that no one wants to buy and no one knows what they are worth.

The US government is stepping in to take over those loans and pay the banks a fraction of the amount of the loans. If a bank is sitting on $40 billion in bad loans, the government might pay them $5-10 billion cash to give them money to work with. The government will assume the ownership of loans and either get paid back some of the loan or have the house to sell, both at a later date.

What the rescue package will do is clean up the balance sheets of many banks, not unlike the Philippine model of a rescue package (the Special Purpose Vehicle) did after 1997. The banks will have an infusion of cash to carry on their business as best they can. In 1997, Filipino banks were much stronger financially than now in the US and Europe and did not need massive government cash infusions.

This $700 billion rescue package will not bail out the banks. It might have a short-term positive impact to keep the credit and housing market from sinking any more. It will put a short term $250 billion into the banking sector for them to be able to continue to stay in business. There are no miracle economic cures in this legislation.

Highway Robbery?

On another topic, the Land Transportation Office might want to consider stopping its outsourcing of traffic enforcement by ‘deputizing’ private security personnel to issue traffic violations. Unfortunately, some of these deputies may consider their LTO authority a license for something else or they are not being properly trained.

I received an email from someone who was stopped and ticketed on the Subic-Clark-Tarlac Expressway (SCTEx) on September 21, 2008 for taking too long to pass another vehicle. According to his legal ‘Affidavit of Protest and Complaint for Harassment’, “They (the deputies in the Tollway Management Corporation (TMC) patrol car) told me that I stayed too long on the left lane”.

The problem is that there is nothing in the law, Republic Act No. 4136 (Article II, Sections 39-41), that says anything about how long it should take a person to legally and safely pass another slower moving vehicle. Even the traffic citation had no checklist for this supposed violation. The writer of the email says that he felt these private sector employees under the authority of the LTO were either completely ignorant of the law or had another motive (financial?) for stopping him. The Lopez group-controlled TMC and the LTO should look into these practices. Incidents like this are not good for anyone’s business, private or public sector.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

“Forget the Crisis”

2008-10-11T07:04:00.001+08:00

http://businessmirror.com.ph/

Date October 1, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “Forget the Crisis”

Prices on the Philippine Stock Exchange just staged the greatest single day reversal of direction in its history.

Tuesday, the Philippine Stock Exchange Index (PSEi) immediately opened 147 points lower and soon fell to a low of 2447 for a loss of 160 points. Over the course of the next two hours, prices went up 122 points to close down 38 points for the day at 2569.

The trading of PLDT even more dramatically proved the strength of our stock market. PLDT opened down P145 at P2,576, hit a low of P2,520 (-P165) and then clawed back those P165 to close unchanged at P2,685. Looking at the other ‘down’ issues, it is likely that had the market traded for another 30 minuets or so, our market could have actually been higher for the day.

Comments in the daily newspapers yesterday attributed the rebound primarily to ‘bargain hunting’. This gives a completely false impression and does not do justice either to the traders who invested in stocks and made money or to the PSE. It is a blatantly unfair analysis.

First, ALL buying of stocks is ‘bargain hunting’. Look, it is just common sense, a trait that is often missing in the pundits. You buy an issue at a particular price because you believe that price is a ‘bargain’ compared to what the price will be in the future. Who in their right mind would say, “I will buy PLDT today at P2,520, but I really don’t believe it is a ‘bargain’ and it won’t go higher”. Who ever says, “I am buying today but I really think that in a couple of days the price will go down”. We always buy because we believe that the price is a bargain and will never be any lower than the price we pay for it. The idea of ‘bargain hunting’ is foolish thinking and silly analysis. And investors who purchased PLDT at the end of the trading session at the day’s high price of P2,685 also put their money on what they thought was a ‘bargain’, even if the price had been 6 percent lower earlier in the day.

The day started with a group of panicking investors that obviously spend too much time listening to the international and US financial networks. I wrote in this column a couple of weeks ago that what we needed to do now was to “think locally and act locally” and that also applies to the stock market.

Smart local and foreign investors set on the sidelines while the hysterical investors took big losses falling over each other to get out of stocks. Once the vast majority of the terrified sellers had jumped from the roof, sensible and clam investors started slowly buying at significantly lower prices. As prices started back up, a few still unbelieving sellers that might have overslept and missed the opening, liquidated a few shares into the buying.

At the end of the day, on heavy volume, the market recovered nicely.

The early sellers on Tuesday were played like a little school girl who is teased with a big, ugly plastic spider. The smart money anticipated the reaction of the frightened and foolish and let them run screaming down the road yelling, “The sky is falling, the sky is falling”. The buyers wisely waited until sellers ran out of shares and then came in and made a financial killing. Imagine making a 5 percent in one day buying PLDT. Now that is a juicy and satisfying windfall profit while taking advantage of other people’s fear.

DTI Secretary Peter Favila is right (Of course; he agrees with me) that the Philippines has a strong potential of becoming a safe haven , although minor, for international funds. Money is looking for preservation of capital and principle with little risk. The Philippines offers that opportunity as the banking system is sound and there is no likelihood of default by the Philippine government on its borrowings under even the worst-case scenario of global economic recession. Further, the Philippines offers a much higher interest rate return on funds making us doubly attractive. Further, the Peso-dollar exchange rate is stable and attractive in comparison to most of the world’s currencies. In just a short while, we will be discovered. When the $700 billion cruise ship is sinking, even the people in the most expensive penthouse stateroom, head for the safety of the smallest lifeboat.

Let me say this again. We have a well-balanced economic relationship with the world, not being overly dependant on any one factor such as exports, remittances, foreign investment, or tourism for foreign currency inflow. We have over the last decade, more adequately balanced our domestic economy with most all sectors contributing fairly well and balanced to the Gross Domestic Product.

But we do need to cut our imports. We need to “Buy Filipino” in all ways including personal tourism, personal investment, and personal consumption. That is critical and we all need to do our part. We need local businesses to invest more here through expansion and increased efficiency.

Ninety percent of all PSE issues are now ‘bargains’. The other ten percent never trade. If the PSEi goes above 2650, we have ended the correction and are headed much higher. If we fall below 2350, all bets are off.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

“The Crisis: The Future”

2008-10-11T07:00:00.001+08:00

Date September 29, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

From this column last Thursday: “By mid-2008, the Western financial system was in deep trouble. The incredible corporate failures you have read about are because these companies do not have enough cash to fund their operations or to pay back their clients’ investments and deposits. These firms are holding their share of the hundreds of billions of dollars of non-performing loans, near worthless loans, backed by near-worthless collateral (houses) that have lost a large portion of value, and worse, cannot be sold for cash”.

In the 1928 American Presidential campaign, Republican Party candidate Herbert Hoover ran with this slogan: “A chicken in every pot and a car in every garage”. The thought behind that message was that a Hoover presidency would provide the framework that would lead to individual citizens creating their share of national prosperity, and therefore, having that chicken and car.

Unfortunately, the American public and their politicians took that campaign promise literally, that government could provide people with chickens and cars. Eighty years later, we see the fruits of their actions in the “Financial Crisis”.

In the 20^th century, the political/economic/social philosophy was created that the government had the ability to give wealth to its citizens. Individuals no longer had to rely solely on their own efforts but could come to the government for at least a portion of their prosperity. It is a childish belief not unlike my five-year old son asking me to buy him a new toy. However, I have the wealth creation ability to do that; government cannot create wealth. It takes a portion of its citizens’ wealth through taxation.

In order to provide the “chickens”, government attempted to earn an income on its own by owning and operating businesses. The best example is post-war Great Britain where virtually all major industries, coal, transportation, power generation, petroleum, airlines, were government owned. The principle was that if government could generate legitimate income, then it would have the money to buy the chickens and cars. That policy failed miserably.

The only alternative to get the money was for government to borrow the funds. And this has created a 50 year philosophy that, if government could do it, then every person could borrow their way to personal prosperity.

Wealth as a result of personal productivity and innovation has been replaced by wealth through creative financing. America and Western Europe has conditioned two generations that a person can have everything they want and never have to pay for it as long as they can meet the monthly amortization.

Now because of this major global financial predicament, the West has learned that you cannot borrow your way to economic growth and prosperity. What will the future bring?

The US government will provide a financial infrastructure to rescue their financial and banking system. The formula they will use is very similar to the Philippine response to the Asian crisis in 1997; the “Special Purpose Vehicle Act Of 2002”, where the government will take over much of the non-performing loans of US banks.

The US economy will experience a slowdown but that is actually minor point. The probability is that the US economic system may be dramatically changed and that is a greater issue. When the Philippines was hit by a credit crunch in 1997-2000, the economy was sustainable because our economy is not dependant on borrowed money. Not so the US and Europe. Those economies cannot move without borrowing. And that is where the fundamental changes will come. President Bush described the situation on Monday as a “system failure”. He is right. The system of wealth through borrowing failed.

The economic bubbles of the 20th century have been caused by excessive borrowing that inflated assets to unrealistic price levels followed by a collapse of the value of those assets. This current bubble is simply the largest and most pervasive. The Great Depression would have been contained were it not for the long drought that nearly destroyed the US farming regions. This crisis is purely financial.

Over the next three years, major global economies (especially China) will slow significantly. American and European consumerism will fall like a rock, as they will actually have to pay for what they buy. Corporate expansion will come to a near halt for the same reason. More US jobs will disappear.

However, the net result will be a stronger and sounder Western economic base and that is good for everyone.

The global debt party is over and now we have to live through the morning-after hangover. Nevertheless, with the severity of this debt hangover, we will see fundamental changes in the way the West does business as happened in Asia after 1997.

This crisis had to happen not only because it is a result of the debt excesses but also because it was the only way to get the West off the drug of false wealth created by borrowed money.

Asia and the Philippines should and many will use the next few years to strengthen even more, its economic base. The West has been sucking out the world’s capital these last years to keep the bubble growing. Real global economic prosperity was sacrificed for the illusion of false wealth. That has now changed. The next decade will see global growth and prosperity such as the West experienced in the early 20^th century prior to World War I with productivity and innovation creating sustainable wealth.

PSE stock market information and technical analysis tools provided by CitisecOnline.com, Inc. Email comments to mangun@email.com.

The Financial Crisis: The Collapse

2008-09-27T07:10:00.000+08:00

Date September 22, 2008

Author: John Mangun

BUSINESS MIRROR

http://businessmirror.com.ph/09252008/opinion02.html

“Outside The Box”

“The Financial Crisis: The Collapse”

From this column last Tuesday: “By mid-2004, the picture could not have been any better. The New York stock market had risen from 8,000 to 10,000 over 12 months. There was almost an unlimited amount of global funding for housing loans. Mortgage interest rates were at the lowest level in 25 years. Home sales had never been any higher”.

That is the backdrop of the near collapse of the US and Western banking system these last weeks.

From 2001 to 2005, buying a house was a guaranteed profitable investment. Hundreds of billions of dollars of lending nearly doubled the price of a house during those years. The lenders made huge profits fueling the housing boom.

The now infamous Lehman Brothers, one of the Financial Services Companies (FSC), saw corporate profits soar by 74% (2003), 39% (2004), 38% (2005), and 23% (2006). In 2007, profits rose 4.8% and now, less than a year later, Lehman Brothers is dead.

How could that happen?

The boom was built on a vicious circle, a complex series of events that reinforces itself through a feedback loop toward greater instability. Higher home prices means more loans which creates higher home prices that fuels more loans.

That economic model is simply a pyramid scheme.

Housing prices continuing to go higher was dependant on lending. The loans used the houses as collateral and the loans being solvent were dependant on home prices going up. As long as new buyers were able to get new loans, the boom would continue. By early 2005, the conditions that boosted the property sector (and the FSCs) from 2001 to 2004 were about to end.

In order to keep home buyers coming in, new loans had to be generated and this was accomplished by lower lending standards. Furthermore, more money was needed to fund the lending so bigger and more complicated loan ‘packages’ were created to attract global institutional money. Continued lending and the boom times depended on three critical factors.

The first was that home loan interest rates stay very low so that almost anyone could afford the monthly amortization. In order to make that amortization as low as possible, a large percentage of the loans, nearly all the ‘sub-prime’ loans, were ‘variable rate mortgages’ (VRM). The interest rates on VRMs are based on prevailing rates that change and perhaps go higher if general interest rates increase. ‘Fixed rate loans’ are higher than prevailing rates but the rates never change. From 2001 to 2204, interest rates were at historic lows.

From August 2004 to July 2006, interest rates increased every month going from 1% to 5.25%. Over this period, the cost of monthly amortization increased and thousands of these new homeowners could no longer afford to pay their loans and the FSCs found themselves with millions of dollars of loan defaults, with the amount growing rapidly. As buyers defaulted, the banks now had thousands of houses in foreclosure that suddenly flooded the market, stopping the rise of home prices. Housing prices peaked in January 2005.

The second factor was home loan borrowers be able to keep paying their amortization. But over a short time, oil prices doubled and people did not have the money to pay their loans. In January 2004, a barrel of crude was selling at $30. By mid-2006, consumers were paying $70. By mid-2007, prices took off, reaching $147 in 2008. Too many of the housing loans made from 2004 to 2006 were made to people that did not have the extra income to be able to fund their loans and also buy high-priced gasoline. More foreclosures hit the market.

The third critical factor was that the Dollar remain strong. In order to find the enormous amounts of fresh loan money needed, the FSCs looked overseas for new investors and sold Dollar-denominated loan packages. In January 2004, the Dollar Index, which is the value of the dollar against a basket of major foreign currencies, traded at 88. By May 2004, the index was at 90 and the foreign investors were making a killing on both the loans and the foreign currency rate. The interest rate they were receiving on their investment was good and the dollar was strong. From 92 in late 2005, the dollar bottomed out in April 2008 at 71. The lenders, which included great numbers of foreign banks, pension funds, and other financial institutions, were not only experiencing large payment defaults from their ‘investment packages’, but they were also losing money on foreign exchange rates.

The start of 2006 was the beginning of the end for everyone. Interest rates skyrocketed, high oil prices damaged borrowers’ finances, and the falling dollar affected foreign funds for lending. Home sales and housing prices had topped out. Housing loan defaults were accelerating. The housing/credit bubble was bursting because the pyramid scheme could not bring in new players.

The last loan packages created in late 2007 were filled with loans that eventually defaulted causing huge financial losses to financial institutions all over the world. By mid-2008, the Western financial system was in deep trouble. The incredible corporate failures you have read about are because these companies do not have enough cash to fund their operations or to pay back their clients’ investments and deposits. These firms are holding their share of the hundreds of billions of dollars of non-performing loans, near worthless loans, backed by near-worthless collateral (houses) that have lost a large portion of value, and worse, cannot be sold for cash.

The Financial Crisis: The Explaination

2008-09-27T07:06:00.001+08:00

Date September 22, 2008

Author: John Mangun

BUSINESS MIRROR

http://businessmirror.com.ph/09232008/opinion02.html

“Outside The Box”

“The Financial Crisis: The Explanation”

It is as complicated as trying to trace one noodle in a plate of spaghetti. I was asked during a recent television interview, “Who is to blame?”. That is like asking who is to blame for a bowl of tangled pasta. The guy who invented spaghetti, the cook, the sauce, and the one who is eating. No one is to blame; everyone is to blame for “The Crisis”.

What is the root causes for this global financial crisis? There isn’t any. This crisis is the result of a progression of events. US government policies created a legal framework that the financial institutions maximized for their business interests and consumers participated so they could get wealthier, all for the purpose of a long term housing boom.

Home ownership is a critical part of Western economies. This is why government policies are geared to keeping a continuous boom in the housing industry.

In the United States:

Housing contributes about 14 percent of US GDP.

Home equity is the largest share of household wealth.

Residential assets are worth nearly $10 trillion, equal to one year of US GDP.

About 40 percent of monthly consumer spending is housing related.

Annually, more than $1 trillion exchanges hands from home sales.

However, in the West, no one ‘buys’ a house. They borrow the money.

During the Bill Clinton administration, lending institutions were strongly encouraged to broaden the base of homeowner borrowing. The power of government-backed financial institutions Fannie Mae and Freddie Mac to guarantee these loans was greatly expanded so that much lower-income people could buy a house. With more people being able to borrow-to-buy, the housing sector boomed as housing prices increased continuously over a decade and individual wealth grew fantastically as the value of their homes increased.

During the Clinton presidency in 1999, Congress passed the Financial Services Modernization Act (FSMA) that repealed the Glass-Steagall (GS) Acts of the 1930’s. In response to the Great Depression, GS separated commercial banking and investment banking. The Great Depression was caused in part by banks loaning money for speculative buying in the stock market. When the market fell, those loans could not be repaid and the banking system failed.

Commercial banks borrow money from depositors and loan money to businesses and consumers. Investment banks and stockbrokers use client funds for speculative investments like the stock market. GS prevented the banks from acting like stockbrokers and the reverse.

Since the 1970’s, banks and investment brokers often crossed line of their respective businesses. Brokers were paying interest on uninvested funds (money market funds). Banks were offering brokerage services through affiliates and subsidiaries. However, with FSMA, the line between banks and brokers was officially and legally eliminated. Investment companies such as Merrill Lynch and Lehman Brothers could now act as a bank would, offering depositor services, but using those funds for investments way outside of simple business and consumer loans. Banks bought out and took over investment companies, as Smith Barney (broker) becoming part of the Citigroup (bank/insurance). Banks were brokers and brokers were banks. Now they were called “Financial Services Companies” (FSC). And they were incredibly successful.

Although accounting for less than 3 percent of the total US GDP, FSCs eventually booked 30 percent of all US corporate profits.

Government policy was to increase home ownership and the lenders were making a fortune cooperating. One way to get more borrowers was to lower the credit standards to receive loans. These were called ‘sub-prime’ loans meaning the borrowers had less than a ‘prime’ credit rating. Government ignored these bad lending practices as they achieved the goal of more homeowners. The private sector did not care because it was making lots of money. Existing homeowners were happy because home values were always rising and with more credit available, they could buy home number two or three as an investment.

As lending criteria loosened significantly, the natural progression was the kind of loans finally made in the last two to three years; “NINJA” loans. “No Income No Job or Assets” loans. Home lending became almost like a pyramid scheme, with a constant demand for new participants to keep the pyramid of rising home prices going, and these new ‘investors’ were brought into the pyramid through borrowed money.

When the line between banking and investing disappeared, the banking side of the FSCs that loaned the money, put many of these loans in investment packages, and ‘sold’ them to investors on their brokerage side. This increased the amount of money available for lending. Institutions around the globe bought these packages as a good, safe investment vehicle. After all, Fannie Mae and Freddie Mac guaranteed almost half of all US housing loans. Further, ‘the packages’ included thousands of individual loans spreading the risk of loan default. Housing prices had increased almost without hesitation for more than a decade so the underlying collateral of the loan was solid. These were home loans and people will do almost anything to pay their loan to avoid losing their homes. Increased lending was also fueled by decreasing interest rates from 2001 (6.5%) to 2003 (1%) and rates remained flat for a year.

By mid-2004, the picture could not have been any better. The US stock market rose from 8,000 to 10,000 from 2003 to 2004. There was an almost unlimited amount of global funding for housing loans. Home loan interest rates were at the lowest level in 25 years. Home sales had never been any higher.

“The West is Controlling Your Rice Price”

2008-04-04T17:10:00.002+08:00

Date :April 2, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “The West is Controlling Your Rice Price”

Go to the Internet and “Google” the phrase ‘world rice shortage’. Most of the websites carrying information about a shortage of rice is from our own local newspapers. However, a potential shortage of reasonably priced price is affecting communities from ‘Kansas to Kabul’ as one newspaper in Bangladesh described the problem.

Quoting from Asia News Network, the website independent-bangladesh.com perhaps summarized the cause of the problem the best. “Worldwide, economists are worried that the diversion of agricultural land and certain crops to biofuel production is cutting into grain and cereal production for human consumption. The prices of rice and wheat are linked”. That last sentence is the key to the issue, something our local politicians have failed to understand.

Wheat prices are going to historic highs and will continue to climb. The best barometer of future commodity prices is the futures exchanges in the US. There the contract price for December 2008 delivery is higher than the current March 2008 price forecasting rising prices through the end of the year.

And if wheat prices are going to continue up, then you can be sure that rice prices will track the wheat price trend.

I wrote in this column that one of the reasons that we are not able to produce enough rice in the Philippines is because of government interference in the free market system that would have allowed farmers to sell rice at a high enough price to invest in agricultural infrastructure.

While there is still a large group of people that believe that government is the answer to all problems, in fact, government usually creates the problems that private enterprise must solve. Thirty years of government intervention in rice production has not solved the production problem.

National governments did not build the rail systems of Europe and the US in the 1800’s; private companies did. The Philippine government gave the nation the Philippine National Railway. Any chance that private enterprise might have done a better job? Globe, Smart, and Sun put phones in 20 million Filipinos’ hands, not Malacanang or the Congress.

And the US and European governments’ interference in the free market is what will drive rice prices up in the Philippines.

From the Environmental News Service: “The world is facing the most severe food price inflation in history as grain and soybean prices climb to all-time highs. Wheat trading on the Chicago Board of Trade on December 17th breached the $10 per bushel level for the first time ever. In mid-January, corn was trading over $5 per bushel, close to its historic high. And on January 11th, soybeans traded at $13.42 per bushel, the highest price ever recorded. All these prices are double those of a year or two ago. In Mexico, corn meal prices are up 60 percent. In Pakistan, flour prices have doubled. China is facing rampant food price inflation, some of the worst in decades.” Why? “28 percent of the projected 2008 U.S. grain harvest” will be used, not for food, but for fuel, bio-fuel.

If you subscribe to all the environmental hysteria, you might think that using bio-fuels is a good thing. But consider the consequences. “Projections by Professors C. Ford Runge and Benjamin Senauer of the University of Minnesota four years ago showed the number of hungry and malnourished people decreasing from over 800 million to 625 million by 2025. But in early 2007 their update of these projections, taking into account the biofuel effect on world food prices, showed the number of hungry people climbing to 1.2 billion by 2025. That climb is already under way. The U.N. World Food Programme (WFP), which is now supplying emergency food aid to 37 countries, is cutting shipments as prices soar. Whereas previous dramatic rises in world grain prices were weather-induced, this one is policy-induced”.

The reason for the dramatic rise is grain prices is because of government intervention. In an attempt to reduce the use of crude oil coming primarily from the Middle East, Western governments mandated the use of bio-fuels, savagely interfering in the free market. But these governments took one more disastrous step towards food scarcity. They subsidize the non-competitive price of ethanol-based fuel. Because of government subsidies for bio-fuel production, corn farmers in the US and in other countries can make more and more profits as the price of oil goes up.

We may think of rice as rice meaning that rice prices live in a world of their own, controlled by the dastardly rice cartels and smugglers. Prices of basic food commodities are all connected. The free market allows adjustment in all countries.

In India, wheat and rice are almost equally important in the diet. Yet because of rising wheat prices, Indians are eating more rice leading to higher prices. And the fact is, the price of wheat as with corn, is artificially high because of the artificial demand created by bad government policy.

Email comments to mangun@email.com.

“Bad Journalism Bashes Philippines Business"

2008-04-04T17:10:00.001+08:00

Date :March 30, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “Bad Journalism Bashes Philippines Business"

An article about the Philippines hit the internet last week with the completely misleading headline, “Survey: Philippines Viewed By Japanese As One Of The Riskiest Places For Business”. The copyright is by All Headline News from AHN Media Corp and is dated March 27, 2008. It is located at http://www.allheadlinenews.com/articles/7010455308.

The article, which incorrectly puts the Philippines in a negative light, talks about a survey, released last week by JETRO or the Japanese External Trade Organization.

My opinion is that either the author never properly read or perhaps misinterpreted the JETRO survey. I sincerely hope that this was not a deliberate attempt to discredit the Philippines.

The purpose of the survey is to profile more than 700 Japanese companies as to their business plans with the world. Five hundred of those companies have existing operations overseas, including 15 who have some sort of setup in the Philippines.

The second paragraph reads, “The survey of international operations of Japanese firms, 66.4 percent of those polled said they have plans to expand offshore operations, but the Philippines was their least choice among 18 countries”. This is false.

The implication is that there was a question that said, “Where do you want to do business?”, and the Philippines came in number 18. In fact, there was no question like that.

There were several questions asked about company expansion. In summary, it went like this: If you are expanding your Sales Operation, or Research and Development, or Distribution, or Regional Headquarters or Production overseas in the next 3 years, where are you going to locate?

Of course, the Philippines was near the bottom. China was the overwhelming favorite for sales expansion with its billion plus consumers as too with the US. China was favored as a regional HQ since China is Japan’s largest trading partner. China, Europe, and the US are the places to go for R&D facilities. The top five for production were China, Thailand, Vietnam, India, and the US.

No Japanese firm plans on setting up a primary R&D facility in the Philippines over the next three years. But they also have no similar plans to set up in Mexico, Brazil, or Eastern Europe.

Only one percent of surveyed companies intend to set up production plants in the Philippines. But this is a higher percentage than those that intend to build up these facilities in Hong Kong, Singapore, Canada, Mexico, or Russia.

The article falsely implies the Philippines is unfavorable a place to do business without putting the survey in any factual context. This is dishonest journalism at the most, and sloppy ‘news’ at the least.

The language itself is inflammatory and fraudulent. “The poll placed Manila the 15th best place to conduct primary research and development in, and, worst place to conduct new product development”. This survey never talked about “best” or “worse” nor did the question even speak of ‘favorable’ or ‘unfavorable’. It simply asked Japanese businesses “where firms are planning to expand through new investment or building up existing bases”. Yes, most are going to China. Yes, few are coming to the Philippines.

The survey results when these companies were asked to ‘rate’ each nation according to certain factors was most revealing.

The article says that the Philippines is “One Of The Riskiest Places For Business”. The survey asked about “Risks or issues in doing business” and separated ‘risk’ into eight categories: High forex risk, Inadequate Infrastructure, Lack of clustering or development of related industries, Underdeveloped legal system, Intellectual Property Rights, Rising labor Costs, Tax-related issues, and Labor Issues.

In six of those areas, guess which country was considered the riskiest? China. Vietnam was top risk in business development and the riskiest in inadequate infrastructure.

The Philippines never showed up as risky for labor costs or tax problems. In the other categories, the Philippines was the 5^th riskiest out of five for forex, 3^rd for infrastructure, 5^th for legal, 3^rd for business development, 4^th for property rights and 5^th for labor problems.

Based on all the eight risk factors, China is the most risky with 31 points, followed by India (24), Vietnam (23), Indonesia (16) and then the Philippines (11) and finally Thailand (8).

Perhaps to attempt to show journalist balance, the article concludes, “But there was some positive news for the Philippines as the firms gave plus points to the Philippines in the areas of little language barrier, second; fifth in full set of preferential measures and incentives; fifth in low business costs; and fifth in easy to access local information and services”.

It might have been nice if the article had compared this 2007 survey with the 2006 report. In one year, the Philippines lost its risk factor of “Political/social instability” and improved in all the other “Risk” factors.

The headline for AHN’s article should have read, “Survey: China Viewed By Japanese As The Riskiest Place For Business and They Still Want to Invest”. Or perhaps, “Survey: Japanese Think Philippines is Getting Better for Business”.

Email comments to mangun@email.com.

“Rice and the Free Market”

2008-04-04T17:09:00.000+08:00

Date :March 26, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “Rice and the Free Market”

It was with relief that I noticed there is not a shortage of mangos, onions, tilapia, pork, or chicken and many other commodities including tissue paper, pencils, and soap.

Should I point out that these aforementioned items are not subject to an undue amount of government control in terms of production and pricing?

What do you call a person who does the same thing over and over and over again without any success? A) an idiot, B) an economically ‘liberal’ politician or C) all of the above?

Pork prices have recently exploded. From approximately P135 a kilo where I shop, pigue is now selling at P173, an almost overnight increase of more than 30%.

Well, there is obviously only one solution: price controls, right? Or maybe use government funds to subsidize the price back to P132. Both of those ‘solutions’ are being offered by certain politicians regarding the price of gasoline, so why not pork also.

Except, government interference in the free market will only lead to both shortages and higher prices. Unfortunately, the policy experts have not figured that fact out even with a 4,000-year track record of failure.

Required reading for all elected officials should be “Forty Centuries of Wage and Price Controls” by Schuettinger and Butler, first published in 1979. It is a fascinating study for the fact that it seems some of the same people who were running ancient governments are Philippine legislators in 2008.

From “Four Thousand Years of Price Control” by Thomas J. DiLorenzo of Mises University and Loyola College in Maryland; “In 284 A.D. the Roman emperor Diocletian fixed the maximum prices at which beef, grain, eggs, clothing and other articles could be sold, and prescribed the penalty of death for anyone who disposed of his wares at a higher figure. The results were that the people brought no provisions to markets, since they could not get a reasonable price for them and this increased the dearth so much, that at last after many had died by it, the law itself was set aside.”

I have never understood why government people mistrust if not hate the free market system. With all of its faults, it works. They refuse to accept the fact that price controls always, always, cause shortages. And the free market always provides supply and fair pricing.

Rice prices should probably go up to grow the agricultural sector and rice production. When inter-island shipping was deregulated, transportation prices initially went up. But the industry became more competitive and profitable giving consumers better service and in the end, better pricing.

Farmers would make more money enabling them to modernize and increase production. Everyone might want to, not plant camote, but plant rice. Then, guess what? Supply would increase and prices would go down.

Oh, you say, but then prices will go up without some sort of government control. Yes, and then they go down, equalizing out because of the law of supply and demand.

The National Food Authority controls only five percent of the total rice supply. Yet it costs some 10 billion pesos a year to accomplish very little. The biggest problem facing our rice producing industry is credit facilities for farmers who now suffer at the hands of “five/six” lending practices. The government should fill the gap by using that P10 billion to provide reasonable credit access to enhance the free market system.

But what about all the poor people if prices rise? In every case with our ASEAN neighbors, government control hampers both production and the farmer’s income. And our usually ignored rural poor are these agricultural workers. Thailand is the largest rice exporting country primarily because of its credit support. But farmers that fall under government price ‘protection’ are less well off than those that sell and compete in the free market.

If price support and subsidizes are so wonderful particularly for the poor, why after 35 years of NFA existence are our farmers some of the poorest on the planet and our rice production is one of the worst on a per hectare basis?

A great part of the world’s foodstuff price and supply problem is improper government intervention as in the case of corn-based ethanol production in the US. Land that formally produced wheat now produces corn because of government mandates and subsidies.

Paranaque Congressman Roilo Golez is showing courage and wisdom in my opinion, by asking for a moratorium on the development of biofuels that would compete with food production.

Of course, according to the politicians, the current rice price/supply problem is ‘very complex’ (for them) and is because of climate change, population, and conversion of agricultural lands to name but a few factors.

No way it could possibly be because of decades of government interference here and abroad in the free market? Every government policy to keep prices artificially low fails and worse, is counterproductive to production and economic growth.

But just keep trying, policymakers. Maybe you need only another 4,000 years to prove the free market wrong.

Email comments to mangun@email.com.

“Agricultural Creativity”

2008-04-04T17:08:00.000+08:00

Date :March 24, 2008

Author: John Mangun

BUSINESS MIRROR

“Outside The Box”

Title: “Agricultural Creativity”

Of course, you have heard it a thousand times; crisis provides opportunities.

Human thinking, particularly at the government policy-making level, tends to make problems larger by looking at too large a picture. Sort of like the old saying that you cannot see the forest because there are too many trees in the way.

Every day the newspapers are blaring headlines about high prices and potential shortages of oil, pork, pan de sal, rice, power.

And then my email inbox gets filled with various well-meaning politicians offering solutions that usually involve screwing around with the free market system (price controls) which leads to more shortages. Or tinkering with an already flawed taxation scheme that only might provide short-term relief.

The basic defect with government-based thinking is that creativity, ingenuity, and imagination is rare. For example.

Communication was a problem in the Philippines ten-fifteen years ago. Government in its wisdom created a program to put a telephone line in every barangay in the nation. Costly and inefficient was the only way to describe that program then as it looks now years later.

Private enterprise and private capital solved the problem of poor communications first with the pager and then with the cell phone. Now we have wireless ‘landlines’ rolling out.

In fact, it was only in the last few years that the government dropped that fixed landline program for the barangays look after creative thinking taking advantage of new technology as it evolved solved the problem. Had we waited for government to be at the cutting edge of the infrastructure problem, we would still be using two cans and a long string to communicate.

Now the Philippines has a deeper penetration of per capita wireless communications than most of our neighbors.

Once, just once, I would like to receive a proposal from a policy maker that shows any desire, willingness, and ability to break new ground to help mitigate some of the nation’s problems. You know how the government has these contests for the public to submit new ideas and win a prize? Or how companies offer awards and money to students with fresh entrepreneurial concepts. Maybe as the public, we should create to prize fund to give to a politician to win who comes up with a new, original idea how to deal with current problems.

Take the rice price and shortage problem. You would think that this is the first time the Philippines had to import massive amounts of rice. Yet what has really been done over the last 15 years to help solve this problem?

Virtually every government program to increase agri production and efficiency has been a band-aid on a bullet wound. What we need is a Comprehensive Agrarian Reform Program. No not for land redistribution that has been a failure but a CARP to increase production. What we need is investment in agricultural on the same level and with the same type of incentives that has grown the outsourcing business.

And remember this regardless of what you here the government says. Outsourcing was started by small local Philippine businesses who then attracted overseas companies to buy them out and form larger corporations who then advised the government on what to do to bring us to where we are today.

However, some problem must be solved from the top down and that is supposedly what government is there for to do.

I have read some of the government commissioned studies on improving agriculture and good intentions notwithstanding, they border on the useless.

Agricultural production like every other type of ‘production’ is a business. There has been some notable creativity in tackling productivity as for example the contract growing systems for poultry and swine. Frankly, it would probably be better to eliminate and consolidate the 80% of swine production that is characterized as ‘back yard’ with a few dozen pigs.

But that might be too dramatic a change for our social economy. So then government needs to do much more to raise swine production, keep stable prices that allow the consumer to purchase and the farmer and processor to make a profit. The same applies to other crops.

The knee jerk reaction and non-creative idea is to expand government subsidies for rice to keep the leftist “keep-them-poor but fed” proponents.

What if the Philippines just cannot produce enough cost-effective rice to feed the people? Japan has the lowest percentage of food sufficiency of all developed nations at 41% versus the US at 132%. Therefore, they produce other goods to make money to pay for their food. Even Japan barely produces enough rice that they need.

Get creative. There is only a limited amount of Filipino soil that can produce crops. If we cannot produce enough rice efficiently, then find something else we can produce to make the money to buy the rice. And try to think outside the box beyond the bio fuel crops like jatropha. Albert Einstein said. “Problems cannot be solved by the same level of thinking that created them.”

Email comments to mangun@email.com.

US waging economic war against China ?

2008-03-23T10:54:00.001+08:00

Outtside the Box
By JOHN MANGUN

Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?
Perhaps the larger picture is that the United States is waging an economic war against China.

The New York stock market rallied some 400 points Tuesday night, prompting an increase in prices across Asia. Even the Philippines participated a little. US stock prices reacted favorably to the news that the Federal Reserve lowered interest rates. Bloomberg: “The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.”

But don’t get too excited because you must look not just at the “big” picture, but the “whole” picture.

Conventional and common wisdom talks about the recession facing the United States and the potential that an economic slowdown is confronting the globe. There is little indication that a “normal” economic slowdown is happening; normal meaning that production is dropping. It is not so much that production is going down but that the end-result of production, buying, is dropping. If you look around the world at virtually every country in every economic and wealth group, people are wealthier today on the average than at any other time in history. But if people are wealthier, why aren’t they purchasing? One word: inflation.

Prices are going through the roof around the world. Well, that is obviously the fault of high oil prices, right? For example, Kuwait reports that inflation is at a 15-year high. China is very worried and the United States is ignoring the issue in favor of trying to keep the financial system sound.

World inflation has been in a downtrend since 1990, but prices are expected to show heavy increases in 2008, potentially reversing a 15-year movement. Traditionally, high interest rates were a strong indication of inflation trends. In the last 20 years, inflation was best illustrated by a weak dollar and strong gold and commodity prices. And we now have the dollar at historic lows and gold at historic highs, with both of these trends showing little likelihood of changing.

Then we must ask, why is this happening? Why have the prices of commodities like oil and gold risen so dramatically in the last year? Why has the dollar fallen so much? Normal business cycle? Bad management from the world’s financial institutions? And why hasn’t the world’s largest and strongest economy, backed by the most powerful government, been able to change the course of the situation?

Perhaps the larger picture is that the United States is waging an economic war against China.

The United States could strengthen the value of the dollar. It has not. China is hurt because now Chinese products are very expensive in the United States, and this will reduce the US trade deficit with China. China must import huge amounts of oil and strategic metals which are very much more expensive now. China holds hundreds of millions of physical dollars, the value of which is now much less.

China has refused to revalue its currency to a realistic level to improve its trade position with the United States. China has used its huge dollar reserves as a sword against the United States by threatening to sell those dollars, and thereby causing the dollar to drop in value. In effect, the United States is using China’s strength against China.

In order for China to maintain the levels of its trade with the United States, it will be forced to lower the value of its currency. However, if it does that, it faces two major problems. Foreign direct investment (FDI) into China would become less expensive, and China is worried that more and cheaper FDI would spur China’s inflation. Further, a devalued currency would reduce the profit to China for its exported goods.

If China keeps it currency at its present levels, the United States will buy less. The United States wanted a stronger yuan to reduce trade, which China was unwilling to do. That objective is now achieved by a weaker dollar.

China’s dollar holdings are worth much less when buying goods like oil and metals that China depends on for its development and growth. Further, China has been talking and trying for some time to diversify its foreign-reserve holdings form dollars to other currencies and gold. Now, their dollars are worth much less when buying gold, yen and euros.

The current crisis hitting the financial institutions looks to me like a normal business-cycle shakeout not unlike the dot-com IPO fiasco of the 1990s, the savings-and-loan and foreign-country debt crisis of the 1980s and the personal credit crisis of the 1970s.

Back then, the US government bailed out Wall Street, Mexico and the banks, among others, without receiving much in return. This time, the “crisis” is being used to further the US economic position, long-term position, particularly with regard to China. From Sun Tzu: “All warfare is based on deception.”

The Philippines and China: A Bad Match

2005-04-27T15:17:00.000+08:00

President Gloria Arroyo acted as excited as a schoolgirl with the prospect of refereeing the dispute between China and Japan. The thought that a minor player like the Philippines might sit down at the same table as Asia’s two giants, even momentarily, was almost too much to comprehend.

And with China’s President Hu Jintao making a state visit, what more could a girl dream of? But there was more. China has ‘promised’ to invest billions of pesos in the Philippines newly opened, but financially starved mining industry. Malacañang Palace was proud to state that the Philippines established relations with China 30 years ago. The Philippines and China: a match made in heaven.

But is this the right match? Are President Arroyo and the Philippines pursuing the wrong suitor?

The role of those of Chinese ancestry in the Philippines is important and unique. When other countries speak of open and sometimes violent hostility between the “locals” and the Chinese, they need only turn history back a few decades. In the Philippines, it has been centuries since the two societies viciously clashed. Although the taipan groups of “Chinoy” and those of Spanish heritage view each other suspiciously at times, the wheels of commerce and community turn smoothly for the most part.

However, this is not about the local social and economic order. This is about the international economic relations of the nation of which all Filipinos of every different blood and background have vital stakes.

Given a choice between strengthening bonds with China or Japan, the Philippines would be much wiser to choose Japan and not China.

Malacañang refuses to accept and deal with the fact that China invaded, occupied, and stole Philippine territory in the South China Sea. The Spratleys may be worthless outcroppings or the gateway to boundless treasure. It does not matter. Those atolls and islands are Filipino property as much as the ground on which the President walks each day. China’s conduct and treatment of the Philippines shows their inconsistency and lack of honesty in their conduct of foreign relations.

To view China and Japan similarly in our economic relations is a disaster for the nation. Madame President, listen well: China is a business COMPETITOR; Japan is a buying CUSTOMER. Fifteen years ago, ninety percent of all Christmas ornaments and decorations sold in the United States were imported from the Philippines. Now that ninety percent comes from China. The same trend occurred with Philippine garments and shoes.

Major investments in the Philippine mining industry are greatly welcomed. However, the profits from these ventures will go to support the Chinese mining sector back home. The Philippines needs to attract investment from Canada, Australia, and the United States whose mining industries are mature and not in need of capital like China’s. Then the investments will remain in the Philippines to develop new projects, not used to rehabilitate obsolete Chinese mines.

A free trade agreement with China is not in the best interests of the Philippines. Japan unlike the Philippines is a rich nation: China is not. China will not in the near future be a major buyer of Filipino goods and services. A free trade agreement with Japan is an excellent development for the Filipino economy as they need and want Philippine services and manpower.

The continuing and historic breakdown in Sino-Japanese relations might be the best thing that could happen to the Philippines. Arbitrate it? It would be in our best self-interest if the Philippines could aggravate it.

Tensions between these two giants is nothing new; it is centuries old in fact and in the last thirty years, each time relations sour, the situation worsens. Japan has very substantial business interests in China that are now at risk like never before. The Japanese will not jeopardize their investments.

China is quietly encouraging Chinese employees of Japanese companies based in China to cause problems and dispute production. Already, very high-level discussions between the government and Japanese businesses are progressing, talking about moving these factories out of China to the Philippines. Japan will not wait until the next deterioration of relations and see their investments expropriated or harmed in China. They will move out and the Philippines is best on their list for relocation.

A recent Business Sentiment Survey by the Japan External Trade Organization showed Japanese companies’ outlook on the Philippines for investment turned positive while all other countries rated negative in future investment outlook. That is not a coincidence.

The President would serve the nation better by stopping her fawning over China. China does not need the Philippines today or tomorrow. As in personal life, choose partners with whom a long-term relationship is mutually beneficial. You can trust those relationships.

On a personal note, author and former Secretary of Tourism, Gemma Cruz-Araneta and I begin a new project, a daily radio show, “Gemma and John: Home in the Philippines”. Easy and interesting conversation with ideas and features designed for your lifestyle. Every weekday from 5 to 6 p.m. on DZRJ 810 AM. I hope you will join us.

The Pre-Need Pyramid Scam

2005-04-26T12:38:00.000+08:00

Two more pre-need firms recently saw plan holders lined up outside their offices in the early morning, as stories broke in the newspapers of the potential of company failure.

It was amazing to see so many local columnists rush to their defense, taking the position that the pre-need firm was really not in trouble. Or if acknowledging the company had major financial problems with their educational plans, blaming government policy as the culprit.

What a sad, tragic joke.

“Pre-need” is supposed to work this way. You give the company a small amount every month. They invest your money in a way that generates a higher return than you could, primarily because they pool everyone’s funds together. Sometime in the future, you use your accumulated money to pay for your children’s educational needs.

The system was viable, and not in the nature of a pyramid scam, ten to fifteen years ago when tuition increases of schools was regulated by the government. The pre-need company could guarantee to cover the cost of the education because they knew exactly how much they needed to pay when the plan reached maturity. These companies were able to make a fortune in profits because the ten percent yearly cap on tuition could easily be beat with the return on investment in the high interest rate climate of the Philippines.

They key provision in the plan that kept the ‘smart’ people from buying and the lower income groups rushing in, was the word “guarantee”. When educational institutions could join the free market and set the own tuition costs, the ‘guarantee’ provision failed, as the companies could never know exactly how much they would never to cover future costs. They deleted that provision from the new plans sold in lieu of a fixed amount at maturity. Unfortunately, all those ‘guaranteed’ plans started maturing with inadequate funds in the bank.

The pre-need companies continued to pay on those guaranteed plans by using the funds of new policy buyers, purchased under the new ‘no-guarantee’ provision. That is a pyramid scam and illegal. But no one did anything about it. And no columnists seemed to point this fact out as the problem unfolded. Actually, the pyramid fraud could have lasted forever except that now these plans were less attractive to invest in and sales of new plans did not generate enough money to keep the pyramid going.

So many times when we hear about the failure of major company, behind all the nonsense is the fact that somebody used company money as if it was their own funds. A ‘mini-taipan’ uses depositor money in the bank he controls to ‘invest’ in his real estate company. When the property market slumps, the bank fails and the depositors get to hold an empty bag. There is no question that this type of fraud occurred within the pre-need industry. So why don’t any of these big shots go to jail (or worse) for stealing other people’s money so this criminal activity will stop? I know: VSQ. Very Stupid Question. Next point.

“It’s the government’s fault”. “It’s the government’s fault”. “It’s the government’s fault”. How many times do we have to hear that nonsense? Rising oil prices, rising electricity costs, now fraudulent and failing pre-need companies. And the solution from the ‘experts’ is always More Government Control. Wait a minute. Government was such a total failure at generating power through NAPOCOR so it that should be in private ownership, but government should regulate distribution and subsidize electricity rates. Government was a failure at owning Petron, but should control gasoline prices. Government controlled and gave PLDT a monopoly and nobody had a telephone. The pundits are right about one aspect of regulation: even before the control of tuition fees ended, there should have been regulation of pre-need.

Notice how government control is always good for the OTHER person? Government should keep an iron hand on big business but keep hands off big unions. Government should control tuition fees, but teachers and administrators are best to determine the curriculum. Highly regulated large-scale mining is bad; non-regulated, anything goes small miners are good.

In all the wailing and pity for the failed pre-need companies (who are the victims of government deregulation), not one single word is mentioned about those companies that kept paying their obligations to their plan holders, who profitably survived the tuition fee increases, and who astonishingly never used other peoples money to support their other business interests. Why are companies like Eternal Plans (a sister company of the Philippine Graphic) and several others still thriving with satisfied and confident customers? Maybe it has to do with characteristics that were lacking in the corporate plan and business practices of the failed firms: professional ethics and personal integrity.
com.

Third World “Corruption”

2005-04-18T09:13:00.000+08:00

Sometime between Chinese New Year and Easter comes an annual event eagerly awaited by Asian governments and pundits alike, an ‘award’ given by the Political and Economics Risk Consultancy group out of Hong Kong. And like the movie industry’s “Oscar Awards”, the newspapers headline the results on the following day. This year the Philippines came in a close second to Indonesia’s winning score in the “Corruption Index”.

PERC’s bases their index ratings on a survey of hundreds of foreigners doing business in Asia who give their perception of the level of corruption in the various nations. The key word is “perception”. These businesspeople need not to have done business in any of the countries they rate for corruption. It does not matter if they have even ever visited any of the countries they rate; this survey measures their perception.

Having actually done business in many of these countries over the last twenty years, I can personally tell you the most corrupt person in the region is a certain moneychanger in the Jurong area of Singapore. The most corrupt public official I encountered was a member of the Thailand Senate, who threatened my partner with prison unless he at least considered marrying the good Senator’s very unattractive daughter…and apply for a U.S. visa for the family. But that is another story.

Corruption is the dishonest use of power or authority for personal gain and immediately implies a moral defectiveness. Maybe that is why the “First World” so enthusiastically applies the expression to governments in the “Third World”. To use that term so readily, echoes sentiments from the colonial past when the “First” ruled the “Third”, in part because the “Third” did not have either the moral or intellectual ability to govern itself. The First World capacity for unbridled and unashamed arrogance is amazing. But that too is another story.

Corruption is not a moral issue; it is an economic issue and the issue is poor and wasteful utilization of capital. However, actual or even perceived corruption does not necessarily preclude economic expansion. China was always on the top of PERC’s list, yet attracted great foreign investment, and achieved sustained economic growth for a decade. Even as the surveyed were decrying China’s crooked politicians, they continued to pour money into the Chinese economy.

Nonetheless, in nations like the Philippines where capital is limited and sometimes scarce, funds flowing into the off-shore bank accounts of dishonorable public servants, minor and high ranking, hinders economic development. When twenty percent of the money allocated for an infrastructure project never goes into the venture, something has to suffer, usually the quality of the project itself.
Corruption and the poor and wasteful utilization of capital, is not the birthright of the ignorant, wicked citizens of the Third World. We are just not as advanced in the techniques and really need to learn from our betters in the West.

Nothing in Southeast Asia has ever or perhaps ever will compare with the corruption of a project currently underway in Boston, Massachusetts, U.S.A.

Know as “The Big Dig”, it is a series of roads, tunnels, and bridges running through the city with the purpose of easing traffic congestion. Originally begun in 1983 at an estimated cost of US$2.2 billion, completion was scheduled for 1995. As of 2005, construction cost is more than US$14.5 billion for the 7.5 mile highway. One commentator estimated that the road could have been made using of bricks made of pure gold for about the same cost. The tunnels leak water so severely that safety is constantly questioned and repairs, if ever possible, will take at least ten years. Now that is corruption!

Still no public officials have been executed for malfeasance as occurs regularly in China. Senator Ted Kennedy, who pushed the funding for the project through the U.S. Congress, is not criminally liable and been incarcerated like former presidents of South Korea and the Philippines. In fact, the other strong proponent of “The Big Dig” just ran for U.S. President, Massachusetts Senator John Kerry. And they call us corrupt.

The corruption of public funds is not limited to a disaster like “The Big Dig”. A major city in the state of Michigan builds a mass transit system that costs so much to operate that the city must subsidize passenger fares or the customers would not be able to afford to ride it. The taxpayer subsidy amounts to over US$10,000 annually for each regular user. For the same amount of the yearly subsidy, not counting the construction cost, the city could have bought each of the passengers their own automobile. And they say we are foolish when we spend public money. And they are right.

The post-World War II economies of the West (and Japan) saw the greatest economic expansion and living standard improvement in the history of the world. It resulted primarily from the wise use of capital. Third World leaders and public officials ought to be forbidden from wearing clothes, eating food, or living in houses different from the poorest member of their societies. Then we might see an end to the economic corruption that plagues our nations.

A Third World Pope

2005-04-06T15:58:00.000+08:00

Pope John Paul II begins his eternal rest and the world ponders who will be his successor. Virtually within hours of his death, commentators in every language raised the question and contemplated the possibility of the papacy held by someone from the Third World.

They deliberated that a man of color, a man of poverty, a man from a ‘marginalized’ country would bring a new perspective to the Roman Catholic Church. In their enthusiasm for change, these pundits ignored the fact that the chair of the Holy Father has been occupied by a black man, by many poor men who remained poor even through their rise in the Church, and that several Popes came from a country which did not enjoy major economic and political status on the world scene.

Often through the days long coverage of this historical event, repeated comments were made that the Church ought to choose a man who did not whole heartedly embrace a free economic system. If not outright hostile to a free market and capitalistic economy, at least he should be very skeptical and cautious.

It is astonishing to think that anyone who holds the papacy, and who understands the human suffering that poverty brings, would embrace any economic system that does not foster the greatest opportunity for individual wealth building. No one who honestly examines economic history for the last five hundred years could come to any conclusion other than that a free and open economic system creates the highest standard of living for the greatest number of people.

Every nation and its citizens that existed under a closed and controlled economic environment, whether communism, socialism, colonialism, National Socialism, or feudalism lived a more destitute life than those under a free market economy. To be sure, government must maintain and enforce certain regulatory power to curtail economic abuses. However, to support any of these “isms” of failed economic theory is to keep people poor. It is historically ironic to mention that the period of greatest power of the Church occurred during feudal times when the mass of humanity in its areas of dominance experienced the most poverty.

For the Church to hold to any economic philosophy that stifles man’s God given creativity, determination, and entrepreneurship runs even against the teachings of the foundation of Christianity found in the Gospels of the Bible.

In the teaching commonly known as the parable of the talents, Jesus of Nazareth taught that people have the obligation to make the most of the assets they have been entrusted with handling. The person who uses his skills and ability most wisely is supposed to get greater financial rewards according to Christian philosophy. The parable of the vineyard workers teaches Christians that the boss has the authority to determine salaries of the workers and that those salaries are not always and should not be the same. That idea does not sit well with the economic doctrine of socialism, where everyone in the workplace is treated the same regardless of effort or productivity. In the parable of the hidden treasure, a man finds a great wealth buried in a field and then goes and buys the field without telling anyone about his discovery. He keeps all the wealth for himself, a very capitalistic viewpoint.

For practical purposes, you would think that a Pope would look at those nations that have adopted a strong secular view and virtually ignored the Church, as the economic model not to welcome. Socialist, anti-capitalist France was once the “elder sister of the Church”. Now the Catholic Church in France is for old people and other senile fools. The Church is only growing in those nations that are firmly committed to economic individual self-determination. Catholicism is not healthy in those countries where the people expect the state and government to be the engine of wealth creation.

It would be good for the Church and perhaps beneficial for the world if the next spiritual leader of one billion people was a product of the Third World. These countries deserve that recognition not only for their place and importance in the global future but for their faithfulness to the Catholic Church. It was in Manila, not Paris or New York, where John Paul II spoke to four million people at a Mass. We may live in a nation of too much poverty but we are neither helpless nor hopeless, and the Third World has not moved towards the secularism that has drained and depleted the vibrancy from and truly threatens the future of the Church.

Note this also. It is not the economic system of a free market that has kept the Third World from achieving prosperity and general wealth creation. As in the Philippines, most of the third World is poor because of government abuses and the wickedness and immorality of those governments. Perhaps a Third World Pope, who understands for having lived under that kind of government, could provide the leadership necessary to effect changes. Pope John Paul II was an architect of the defeat of Soviet communism because he knew it all too well.

Terri Schaivo and Sexual Predators

2005-03-23T10:49:00.000+08:00

The international news services recently had two major stories coming out of America repeatedly headlined in their broadcasts. Sitting in my little corner of the Third World, I realized how, for all the wealth, convenience, opportunities, and advantage the First World enjoys, those people face terrible daily struggles unknown to my adopted countrymen.

While a couple of billion people on the planet occupy their waking hours with the routine and monotonous task of seeking food, shelter, clothing, the First World tackles much greater moral and practical problems. I actually found myself feeling sorry for them and a little guilty that we in the Philippines do not have their struggles. It is almost as if we in the Third World are not doing our share in solving the world’s great predicaments and helping to find answers to the major questions and dilemmas humanity must grapple with each day.

Terri Schaivo, the American woman who has been in a “persistent vegetative state” for fifteen years, is the subject of a legal battle for her continuing existence. Crudely put she is brain damaged and incapable of communicating and cannot take care of herself, requiring constant assistance. A feeding tube sustains her life. Her husband wants her to die, ending her abnormal and difficult life. Her parents want her life preserved and are willing to take care of her, doing whatever is necessary to make her comfortable in spite of her condition. They celebrate her birthday and bring her Christmas presents, never knowing if she is cognizant of their attention.

A neighbor in my working class neighborhood of Manila has a fifteen year old son who is brain damaged from birth. He is incapable of communicating and cannot take care of himself, requiring constant assistance. The family celebrates his birthday and brings him Christmas presents, never knowing if he is cognizant of their attention. He sits in his wheelchair outside the house in the morning sun as his grandfather feeds him. His younger sister plays, pretending they are both having a party, with her dolls resting on his lap.

These foolish and ignorant people do not understand the “First World” concept of “quality of life”. They do not comprehend that this boy would obviously prefer to die rather than to live in a “persistent vegetative state”.
All they know is that they love their son no matter what his circumstance is, that God gave this child life, and that they have a responsibility to take care of him. It is probably a good thing that people like this are not in a position to make the important moral decisions for humanity. Much better that the collective wisdom of the U.S. Supreme Court be the final arbitrator of who deserves to be starved to death.

A man in the southern United States kidnaps, sexually abuses, and murders a nine-year-old girl. He has repeatedly sexually abused children in the past, been jailed, and released. He is caught and the discussion immediately turns to what the government and society can do to best rehabilitate these offenders. How can the government insure the criminal’s rights while trying to protect young children? What is a fair punishment and who is at fault for their behavior? These questions certainly require the exhaustive consideration by experts in their field, as there are momentous legal issues and vital social concerns.

A man on my street named Joey lived in a small shed behind a neighbor’s house. He washed cars and took your garbage to the truck to earn his living. He bought your lotto ticket, wishing you the winning numbers and reminding that he should share in your good fortune if you got lucky. For three years, he was a participant at every fiesta and holiday celebration.

One afternoon, a nine-year old neighbor girl came running into her house, crying and screaming that Joey had fondled her and exposed himself in front of her. Her family ran to find Joey, who was already cornered by two others who had seen the incident occur and had intervened before the situation became worse. The little girl’s older brothers began beating the molester when the child dealt with some of her trauma by picking up a nearby stick and pounding her assailant in the face. Quickly the barangay tanods (community security patrol) arrived and took Joey into their custody.

If this had happened in Chicago or Los Angeles, Joey would defiantly have grounds for a major lawsuit against the girl’s family. The tanods took Joey away never reading him his rights. Some neighbors say he was taken to some relatives on the other side of town or maybe put on a bus to the province or maybe not. This event clearly demonstrates that citizens of the “Third World” simply do not understand the rule of law, civil liberties, and judicial procedure. All they were concerned about was protecting the children from a sexual predator.

There is an arrogant and a self-righteous attitude in the “First” towards the “Third” about how we, the underdeveloped and unsophisticated, live our lives. We are severely condemned for allowing children to work, that we do not always treat the environment with “proper respect”, that we do not follow the acceptable standards of “human rights”. The Third World just does not know what is correct like those in the First World know. What would we in the Third World do without them and their principled leadership?

Lenten Thoughts On Money

2005-03-16T14:12:00.000+08:00

The farms of a certain rich man produced a fantastic harvest and his factories made a large profit for the year. He thought to himself, “What shall I do? I have no place to store my crops”. Then he said, “This is what I’ll do. I will tear down my storage facilities and warehouses and build bigger ones, and there I will store all my commodities and all my merchandise. I will take all the money I made and put it in long-term deposits. And I will say to myself, “You have made a fortune and you never have to work again or at least for many, many years. Take life easy; eat, drink and be merry.”

But suddenly a divine voice spoke to him and said, “You fool! This very night your life will be taken from you. Then who will get what you have prepared for yourself?”

We know the answer to that question. Before the wake began, wife Number One had a friendly RTC judge issue a TRO to evict wife Number Two from the Makati condo she was living in. The youngest son had guards placed around the office of his eldest sister and she was barred from the factory. The older brother withdrew the money from all the bank accounts he could find.

But that is not the real message of the story of the “rich fool” that Jesus of Nazareth told to a group he was teaching. The purpose of the story was to enlighten us on how to become wealthy.

There is an old saying that no one ever got rich by working for a living. That is partially true. No one ever became “wealthy” by earning a salary. However, even salary earners can rise to the heights of financial stardom if they know what to do with the money they make. Few people know the secret and Jesus tries to show them the way.

You have seen as well as I a person who enjoys a very large income from his occupation be it professional such as doctor or lawyer, or the owner of even a small business who also lives a ‘large’ lifestyle. The good times roll and the brand new cars and the bigger condominiums seem to flow like water. Every time you see him, he is talking about that fancy, expensive restaurant where he is a favored customer. The wife is constantly showing off the pasalubong from her last trip abroad. But when his business turns, sometimes by even a small amount, to the downside, his financial ‘empire’ collapses and the next time you see him, he is trying to borrow money from you.

Stupid behavior with money is not limited to the elite and the amount of money involved. You see workers who receive their weekly wages Friday or Saturday after work, and that night they live like millionaires. They buy drinks for the house and fill the table over and over again with food. By Monday when they come back to work, there is nothing left of last week’s salary. All they have to show for their week’s work and weekend of ‘wealth’ are empty pockets and a big hangover headache. Then they start the same useless and foolhardy cycle over once more. People that behave this impractical way cannot see any need to use their salary and their harvest as an investment in their future. They just see it as a short-term provision, made to last for the moment until their next harvest. They live from paycheck to paycheck because their thinking is that this week’s paycheck is intended only to last until next week’s paycheck and amazingly, that is all the longer their money lasts.

OCW remittances are a classic example of using income for lifestyle and not the future. The billions and billions of OCW money that has flowed into the Philippines in the last twenty years has done nothing to alleviate poverty for the country. Actually it has done little even for the individual OCWs. Most of their remittances goes for “lifestyle” and not the future. The OCW wife buys the latest, expensive cell phone when it could have been used to start a business. Of course, this is not true in all cases but sadly for far too many.

You cannot consider that your harvest is your provision for your day-to-day lifestyle. Past opportunities should become our war chest to make the most of upcoming bigger opportunities to build more prosperity in our lives. A foolish greedy person spends everything that he has to increase his lifestyle. The vast majority of big winners in all the national lotteries around the world have nothing left 24 months after hitting their jackpot. These fools might even deceive themselves that they are wise by devouring all of the abundance, but doing it more slowly. The fool raises his standard of living with no thought of using the money to invest and prepare for the next planting. A judicious person spends during the lean times and saves during the good times.

Lent is more than eating a fish sandwich instead of spaghetti for lunch. Godly financial management is more than being thankful for what we receive. It is what we do with our blessings.

Iraqis (And Others): Learn From the Philippines!

2005-03-07T06:54:00.000+08:00

There is a storm moving around the globe and like the Bob Dylan song of the 1960’s; you don’t need to be a weatherman to know which way the wind is blowing.

The change of a nation’s government structure and social/political system to a participatory democracy is never orderly, rarely graceful, and often burdened with bloodshed and chaos. Because forming a democracy entails the transfer of the power of control from the few to the many, the ‘few’ vigorously resist relinquishing that which they believe has become theirs by right and habit. Strangely enough to some of the world’s current crop of dictators, monarchs, and “presidents for life”, the people seem to think that democracy is worth all the trouble and struggle, which must make democracy a very tempting and important concept.

George W. Bush is probably right about the fire of freedom and self-determination residing within all people. However, the chasm is very wide between desire and the actions necessary to fulfill that desire of democratic liberty. Interestingly, the rulers like Egypt’s Mubarak, Zimbabwe’s Mugabe, and the House of Saud understand that once that flame is kindled, it is difficult to quench. Unless a leader is willing to use all means available, like Saddam’s torture chambers, rape rooms, and mass graves, the most practical solution for holding power is to delay the democratization process by giving the people a few political bones to chew on. Mugabe promises to redistribute the land stolen from the white colonizers. Saudi Arabia allows local elections and talks about the vote for women sometime in the future. Mubarak thinks it might be a good idea to have an opposition candidate for president in the next election, if he decides to let any of them out of prison.

However, the people are never satisfied with just the bare essentials of political freedom. For some reason, they seem to want all the benefits of democracy as evidenced by recent events in the Ukraine and Lebanon, where that Filipino notion of “People Power” reared its head and teeth. Twentieth century “People Power” was born almost simultaneously in the Philippines and in Poland. However, the Filipinos were more ambitious; they intended to restore democracy and take over a government, not simply the workplace. Perhaps then, it is beneficial for those with newfound democracy, those trying to preserve their hard won democracy, and those looking to move towards democracy, to learn these lessons from the Philippine’s experience of twenty years of democracy’s freedom.

It is probably wise for those living with democracy for the first time, or the first time in a long while, to forget all that nonsense that you are hearing from the ‘experts’ about democracy being “a process”. Democracy is no more of a process than becoming a parent. Yesterday you did not have a child to care for; today you do. The change is virtually instantaneous and can be irreversible. These pundits would like you to believe that when you walk into the voting booth, that is the conception of democracy. Not true; that is the birth. The conception usually takes place with just a few people behind closed doors, sometimes in deep secret. The “process” of democracy is the caring and feeding just like with a child. If you do not nurture democracy properly, it will die.

Be careful also not to be too caught up in the exuberance you hear about the advantages of democracy from leaders like George Bush. He is correct in principle but not in practice about democracy being the epitome of social equality and wealth creation. Democracy does not provide a magic bullet against all the evils that trouble a society. It is not a medicine, providing a remedy for all the ills that will beset a nation. Think of democracy as more of a vaccine that can help protect a country from dangerous forces, people, and ideas. Justice and prosperity are still your responsibility to develop. A strong democracy can make it easier.

A legitimate and energetic free press and media are crucial to maintaining a democracy. Guard them well with vigor and intensity. In order for the benefit of democracy to thrive, it needs sunlight and a transparent environment that only the freedom of expression can supply. Error on the side of openness; never on the side of repression. Even repugnant and irrational ideas must be allowed to spread through a free press because in time they will disappear on their own, disposed of on the garbage heap of foolishness. Suppressing free speech often gives credibility to thoughts that have no reason for being taken seriously. Distrust and rebuke every politician who tells you limiting discourse is in your best interest. That person is a clear and immediate threat to your democracy.

Finally, be tolerant with your politicians and leaders. Most have no experience having to share power with you as a stakeholder in a democracy. Many of them lost privilege as you gained power. However, never ever give them the benefit of the doubt. That could be fatal for your country. Give them instead much of your collective patience. Eventually, they may learn how the new system works and be productive. And of course, eventually they will die off. Your democracy and freedom will not.

Community Policing and Community Wealth Building

2005-02-28T12:50:00.000+08:00

I am a product of the First World. By education and experience, I exemplify all that the First World created in the last half century. And I am its prodigal son who gladly left to spend that inheritance somewhere else.

I am a citizen of the Third World. For nearly half my life as its adopted child and as both an observer and active participant, countries like the Bahamas, Fiji, Morocco, the Philippines are my home.

It makes no sense when one views the great disparities of human economic condition. There seems to be no rational reason for the world to be so unevenly divided between rich and poor. A nation with virtually no natural resources like Japan is wealthy, while a nation with the some of the largest proven gold reserves in the world, the Philippines, mires in poverty. Technology and information is freely available worldwide to almost all, particularly in the age of the Internet and the global community.

It is true that most Third World nations are young, with little comparative time to develop strong institutions as in the First. However, there are notable exceptions. Malaysia is not a poor country and yet in its present state, it is a new nation. South Korea faced war’s devastation only a generation past.

The “why” of the great divide between rich and poor is a comparatively new question. For all their errors of reasoning and other basic fallacies, we have Marx and Engels to thank for attempting to describe and seek an answer to this problem. Their idea that the solution could be found in changing the system was correct. However, they viewed wealth as a win/lose situation: a limited amount of wealth could only go to one person or another, not to both. In prosperous and vibrant economies, the system creates a win/win scenario in that all are recipients of the benefits of almost unlimited wealth creation.

A new book published in the Philippines shows the practical application of the social model and governance strategy first formulated by Peruvian economist Hernando de Soto. This book shows how that model was rationally applied to Philippine law enforcement and in effect provides a blueprint for the Third World to solve the specific problems created by poverty, which will in the end reduce that poverty. This book ought to be required reading for Third World officials and leaders.

"Community Policing: Pathway to Good Governance” is written by Ricardo F. de Leon, currently a three-star general and police Deputy Director General of the Philippine National Police. With a doctorate in Peace and Security Administration, General de Leon is not the average cop on the street. But in a larger sense, he is. His father was a police Sergeant of average means who taught his son the values of discipline, honor, and service to country. General de Leon has not made his career pushing pencils at a desk, but has served in far-flung provinces fighting crimes perpetrated by insurgent rebels to petty thieves. The man knows how to be a policeman.

General de Leon, as the leader of a government institution, recognizes that such an organization can never function effectively nor achieve its mandate unless the public considers it trustworthy and unless the public is involved in performing its duties. This is the central theme of “Community Policing” and it is the critical premise to realize good governance.

The crucial problem in the Third World is that the governments do not effectively deliver services to its citizens. These governments cannot be depended upon by the people to do the job. Governments preach poverty alleviation but the people know from experience that it is a farce. The people do not have any trust in the government bureaucracies and their employees, the “public servants” that man those bureaucracies. De Leon gives practical example after example of efforts to upgrade the quality of performance by his police officers. He dismisses “image control” and “praise releases” by saying “Image must be complimented with positive and direct action”.

Once citizens honestly believe that law enforcement is sincerely trying to do their tasks well, then the second step of community involvement can enter the picture. The public will not help and cooperate with a police body they view as pointless and corrupt and without the public’s best interest at heart. However, once the public becomes involved in law enforcement, the job of the police is easier and the results in crime reduction are evident. It is a win/win situation for both the government servants and the served.

Private enterprise in a non-monopolistic environment must cater to the customers or face extinction. However, government services are monopolistic and therefore not subject to market forces.

Discounting the conventional mantra that “Money is the problem”, de Leon’s formula of community involvement based on trust, opens the doors and the wallets of the private sector for resources that government might not be able to provide.

General de Leon is a policeman; hence, the book is about law enforcement. Had he been a doctor, the same ideas would apply to the delivery of health services and can also apply to all aspects of community development, both urban and rural. And when the community is improved, then wealth creation can take root and flourish.

Nonetheless, no plan or program is possible without political will from the top. This is the story of one man’s personal determination to create positive changes: not simply to talk about it. Unfortunately, that is what most Third World leaders are best at: talking.

The philippines is Coming Back!

2005-02-24T15:13:00.000+08:00

It cannot be because Valentine’s Day was the last holiday. Age took away that sort of exhilaration many seasons ago. Spring is in the air but that only means endless days of heat and that is nothing to get too excited about. Nonetheless, it is not even the end of the first quarter of 2005, and my feelings of good fortune for the nation in the last half of the year are beginning to bloom.

As expected and predicted, Moody’s report card of the Arroyo, administration showed less than a passing performance rating. Smokers and drinkers are paying more for their favorite “sin” and it did nothing to offset the dismally poor fiscal ‘accomplishments’ of the government. In fact, the ‘sin’ seems to be the way the administration handles the people’s money and the government’s finances. Oh well, like a lover subject to the flight of Cupid’s arrows, we must live with the results of the downgrade, for better or worse.

Apparently, international finance, like romance, is unfathomable to some of our political leadership as one senator told the president to ignore the reduced credit evaluation. Wrong audience I am afraid. The international lenders use the rating to judge risk, not for the ego of the international borrower i.e. the Philippines. That is like telling a woman that her using make-up does not matter; Daddy thinks you’re beautiful. Unfortunately, as potential suitors think a woman with lipstick looks prettier, so too foreign bankers think fiscally responsible governments are better to loan money to.

Expect another economic ‘bomb’ to fall around April to round out 2005’s First Quarter Storm of poor consequences for several years of bad policymaking from Malacañang. The First quarter GDP/GNP data does not show an accurate picture of the economy. The service sector grew well, but unfortunately, we are not a service-oriented economy. However, the last half of ’05 is going to be good and, could easily usher in a new period of increasing prosperity for the country. I haven’t felt this good since ’95. Here are some reasons for my good mood and my good expectations.

Despite opposition from the foreign funded anti-mining, anti-prosperity NGOs, the economically successful Supreme Court resolution of the Mining Act is already starting to take effect. Now with a firm legal basis and a President who understands the benefits to the nation, the multi-billion dollar minerals industry has the Philippines on their radar screen again. Of course, once they start putting their investments in place, the self-serving will attempt to derail the nation’s march to prosperity. However, some of these companies will persevere with jobs and wealth creation as an outcome

After preaching for years that agriculture, tourism, and mining were the industries that the Philippines should place the emphasis, finally, the long-term advantageous mining sector is coming into the economic game. Each year through the 2010 end of the Arroyo administration will see greater and greater economic gain thanks to her pushing for the legal validation of the Mining Act and her mobilizing various government agencies to help investors. For that, the nation can thank the lady. The picture is not entirely rosy and there will be difficulties. However, I believe that 2005 will mark the year that we finally got smart about mining and began to reap its rich rewards. One hundred thousand new jobs in the next 36 to 48 months will do much to vindicate the President’s mining policies.

The price multiplier affect of high world crude oil prices will lessen its grip on our wallets over the next nine months. It may seem hard to believe that, as of this writing, crude is above fifty dollars barrel again. Bear in mind that demand is very high right now with a colder than expected winter in both North America and Europe. Still holding price only at US$50 is a good sign.

By the time that the winter freeze is over, Iraq will firmly have a new government in place. It will take much more time for stability to fully overtake that nation, but before the end of the year, production will surpass pre-war levels and world prices will drop slightly. By that time also, the United States Congress will have passed legislation allowing for further oil exploration in Alaska that will have a negative influence on rising oil prices.

Another glimpse of a more prosperous future is in the announcement that the Philippines and Japan will sign a free trade agreement before year’s end. At last, we will have unfettered access to a major trading partner. The relationship is not as favorable for the Philippines as a free trade agreement with the United States would be. We buy much more from Japan than we do from the United States. However, it is a start. The key to this agreement is the emphasis on services, particularly contract workers that Japan needs so desperately from the Philippines. Want a tip on starting a new business? A Filipino friendly Japanese language school. Japan will make it easier for caregivers to enter Japan but will require additional language skills to keep the sex workers out.

Remember when the media used the phrases “Tiger Economy” and “Tiger Cub” to describe our neighbors in Asia? We have not heard those since 1997. Maybe soon we will call the Philippines a “Carabao Economy”: sometimes slow, sometimes not too smart, but once it gets going, it is hard to stop.

Terrorism: The Losing Strategy of the Incompetent

2005-02-17T12:09:00.000+08:00

Across the globe for more than a generation, nations, governments, and individuals have lived under the constant threat of violence through terrorism.

A discussion of terrorism often centers on the method and the brutality of the attack, be it a person strapped with a bomb on a bus or a car exploding in a crowded street. There is something inherently disdainful about individuals, in their pursuit of a goal, deliberately choosing an action that results in their own death. Even on a traditional battlefield, entering into a combat mission with small chance of survival pushes to the extreme the definitions of courage and bravery.

However, “war is war” and “war is hell”, so we expect that combatants will take many sorts of fanatical measures to win the battle. That is to say, there is realistically little difference between filling a truck with plastic explosives or an airplane with steel bombs, and attempting to kill the enemy. Even the certain death of the truck driver is no different from the possible death of the bomber’s pilot; both are merely a cost of battle.

What distinguishes the current situation, and perhaps why we use the word “terrorism” to describe these actions, is the intentional and premeditated targeting and killing of non-combatants. A non-combatant is a person who is not defending themselves or actively attacking during the course of the war.

But is this killing of ‘ordinary citizens’, these ‘innocent bystanders’, actually a new phenomenon? Equally important, is the killing of non-uniformed civilians justified by the tradition of warfare?

Like it or not, the answers are: No, it is not unique to our times, and Yes, civilians can be legitimate and justifiable targets.

From Genghis Kahn piling up mountains of skulls of the ordinary citizens of the villages he conquered to the aerial bombing of Hanoi during the Viet Nam war, civilians are always in the crosshairs of the weapons’ sights. If you kill the peasant farmers growing food to supply the enemy’s troops, your victory might be a little more assured. If you kill as many of the able bodied men before they are armed and reach the battlefield, so much the better for your soldiers. Unarmed civilians can pose just as real and potentially immediate threat to your victory as the well-trained, well-equipped front line warrior.

However, the purpose for the last forty years of civilian slaughter in Northern Ireland, in Israel, in the Philippines, has nothing to do with the material support civilians give to the uniformed combatant. The philosophical and strategic underpinning of this ‘warfare’ loosely comes from the book “On War”, written by Prussian military tactician Carl von Clausewitz in the early 19th century.

One of von Clausewitz’s basic premises in his brilliant treatise (comparable to Sun Tzu’s “Art of War”) is that armed conflict is merely a continuation or extension of a formulated political policy. Crudely put, if you want to achieve a particular objective, anything goes and everything is permissible.

However, if war is a tool to implement a political policy, then perhaps victory could also be gained by changing your opponent’s policy. If an enemy’s political agenda is to take your territory, then get the government NOT to want to grab your land. Von Clausewitz theorized that perhaps if a direct attack were made on “non-combatants”, a government would be persuaded to change its policy by its own citizens. Bomb London to rubble; England will surrender Europe to Hitler because its people will not accept the suffering.

This belief lays the foundation of modern terrorism. Blowing up some buses on the streets of Manila will birth a separate Muslim state in Mindanao. Attack a pub in Belfast and the Brits will go home. The terrorists believe that they will get what they want because the innocent people will force their governments to change their policies.

The problem for the terrorists is that this strategy is a total failure. No long-term government policy has been reversed by acts of terrorism on non-combatants. Even the recent Madrid train station bombing merely reinforced the majority popular opposition to the Iraq war and gave voters an imperative to elect a government reflecting their will.

The world’s current crop of terrorists are incompetent and failures and that is why they have little or no political and policy influence around the world. A truck bomb that kills some 200 U.S. Marines in Beirut, Lebanon in the 1980’s results in the Americans withdrawing from the country and the terrorists’ objective is won. Killing 3000 at the World Trade Center only succeeds in pushing the U.S. to invade two “terrorist friendly” countries. The difference is that the military weighs probability of success against the rewards of victory and the cost of failure. Militarily, it made no sense to remain in Lebanon.

However, when civilians are attacked, there is no military equation to determine and set the parameters of response. It becomes personal. Philippine President Arroyo reversed the prior administration’s open combat policy against the insurgents in favor of negotiation. Kill some of her constituents who were harmlessly looking forward to their Valentine’s Day festivities and the President (and the people) become more resolute to crush the enemy.

Bin Laden and his kind, regardless of the individual horror and tragedy of their actions, have no chance of victory simply because their strategy and tactics are thoroughly defective and even counter-productive. In the end, bin Laden has a greater likelihood of taking over Iraq by running for Parliament.