Is the peso still beautiful?
So markets didn't like what the Supreme Court is doing. Can you understand that? I can't.
Well the simple explanation is that the court ruling on suspending the EVAT introduced more uncertainty in public policymaking. Especially for this particular policy, said to be the leading effort at restoring fiscal balance. And without fiscal balance, government debt will avalanche. Either the government declares bankruptcy (nationally, internationally, both), or prints money to pay off debt, igniting hyperinflation.
Okay look at it again - EVAT suspension today, 1,000,000% price increase tomorrow. Or, EVAT suspension today, no imports tomorrow (because no dolars tomorrow). Conclusion: sell Philippine stocks now! Sell Philippine currency now!
Sounds farfetched, right? IT IS. That's why I said I don't understand it.
This is assuming though that demand and supply is purely driven by fundamentals - the underlying health of the economy, the actual magnitude of uncertainty introduced by real world events.
However there is a better assumption - include the uncertainty in predicting the behavior of others in the market. (The following analogy from Keynes). Suppose you have a beauty contest in which the judge who votes for the eventual winner gets a prize. If you are a judge you will be casting a vote not only for what you perceive to be the most beautiful contestant, but also thinking who would appeal to the other judges, who the other judges will vote for, what other judges are thinking about your choices...
In (what I think is an important) paper, Pierre Monnin shows evidence that such "higher order beliefs", i.e. beliefs about beliefs, are responsible for introducing volatility into the stock market.
So - is the peso still beautiful to you? Monnin paper
Posted by roehlanobriones
at 11:04 AM JST
Updated: Wednesday, 6 July 2005 11:07 AM JST