Recession or Depression?

After turning 50 years old, my male friends called me Mr. Mushy for dedicating last week’s column to the secret of my “success” – my wife, as we also celebrated our 25th wedding anniversary last Thursday. Many of them teased me for raising the standards in giving anniversary greetings, so their wives now expect nothing less from them.

That column elicited one of the highest responses through email and SMS messages sent to me. Of course, I earned a lot of points from my wife for writing it and surprising her. Still, the greatest challenge of our times is really keeping a marriage. With much temptation out there and stories of separated couples, 25 years is an achievement but still far from what my parents have achieved. Today, they are a happily married couple for 51 years, even though for the last few years they have been “fighting” daily. I guess that’s part of getting older together. But, they still always patch up things quickly and continue to stay together.

Funny how those who would still be turning 50 years old this year and a year from now were asking how different it feels to be 50. It’s all in the mind actually. Some people would maybe get into a mild depression or mid-life crisis or, well, even rediscover their fountain of youth. Last week was tiring for me, nursing a bad allergic cough. Luckily, my doctor since childhood days, Dr. Celdran, was able to help me get well, to be able to manage my twin celebrations.

Many in our Negosyo community joined us in our thanksgiving celebration and just to name a few, since it would be impossible to list all, let me thank Isaac Belmonte, Sec. Cerge Remonde, Joey and Vicky Cuisia, Grace Glory Go, Lance Gokongwei, Fred Uytengsu, Victor Tan, John Lu Koa, Harley Sy, Vicki Belo, Pax Lapid, Ping Sotto, Dennis and Tessa Valdez, Ronald Pineda, Ray Gapuz, Jo Magsaysay, Dave Valdez, Sanjiv Vohra, Karen Davila and hubby DJ, Anthony and Marixel Pangilinan, Gary and Angeli Valenciano, Kat Luna-Abelarde, Gabby Cui and many more. We recognized once again that night Marx Melencio, whom we awarded in Cebu, as he continues to serve as an inspiration to many Filipinos. We thank everyone who joined us in our celebration, which I actually mounted just to thank the many friends and supporters of the Go Negosyo advocacy.

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Now back to the real world… Is America and the rest of the world facing a recession or a depression similar to the one in the late 20’s?

While we were in America this summer, I have noticed a big change in how banks have been lending. Well, basically, they have practically stopped lending. Being an investor in some small real estate projects for the last 15 years, it was very easy to borrow money in America. With a down payment of five to 10 percent, you could be allowed to borrow before, with very little income verification.

America lives on credit. Without a credit card in that country, you can not move and you are even encouraged to pay using credit cards. Thus, Americans have the lowest savings. You can say that most of America’s growth over the years is basically through borrowed money. Today, they are one of the largest borrowers, as individuals and as a nation. In a way, America is a leveraged economy.

Now, with the real estate bubble burst, it has caused a sub-prime problem wherein banks were buying these loans with high leverage. While not all these loans are defaulting under the new accounting rules, banks have to adjust down their value given the market levels today. Basically, people bought houses because of the very aggressive financing given to them, even though they could not afford one. Now that the aggressive mortgage lenders are gone and banks all hurt, lending standards have been tightened overnight with home equity loans removed. It’s now a whole new era of how banks lend out money.

I remember the times prior to the 911 tragedy; traveling in America was lax. But, when 911 hit the airports, security reminded me of our travel to Israel, having to remove shoes and belts — removing almost all our clothes. This will also happen in America’s credit market within years to come. This is why a recession, at worst a depression, may happen because people in America will have to de-leverage. People will not be able to borrow as much. Credit card companies will even be stricter. As a result, consumer spending will be affected.

One of the causes of America’s problem is the high price of oil. Since the Iraq invasion, the price of oil has started to increase. Just last year, oil was at 50 dollars per barrel. Today, it’s in the $140 level. Some people even say that it will hit $180 to $200. The price of oil at these levels will kill the American economy, and may even push towards a depression.

I have told my friends and even my bankers that we are headed towards a Dow index around 10T. It’s funny because earlier this year in Bloomberg, there was a debate between a chartist and a fundamentalist as to where the Dow Jones was headed. Of course, the chartist said that he sees Dow at 9500, which made no sense at that time since the Dow was still at the high 13T levels. And, after spending time in America, I did feel that we will surely see Dow at 10t.

Asia has already gone ahead of America, with China and Hong Kong dropping by as much as 50 percent. Even here in the Philippines, we have dropped close to 50 percent. But, with all these downtrends, the market eventually bounces back. It is about the holding power or staying out until the market stabilizes.

I still believe that America’s present situation will benefit the Philippines, as America will have to find ways to manage cost and stay afloat, so we can expect them to heighten their outsourcing of their expensive labor. This is why our country’s business process outsourcing and call center industries should continue to do well.

We must also really focus on creating more farmer entrepreneurs, as the food shortage in the world may continue, with highly populated countries like China and India experiencing rapid growth in purchasing power. It is time that we accelerate a joint government and private sector partnership to ensure a viable food security program in the country. While we are for free trade, there are basic sectors that we must develop in terms of increasing efficiencies in production to ensure sustainable supply at lowest cost possible. As we have seen, in times of shortage, exporters of basic goods like rice and corn would prioritize their local requirements before sharing their produce to other importing countries. It is about time that we become self sufficient again in rice and other basic commodities. The Philippines has so much idle land. Let’s push for greater irrigation of land (or stricter conversion of irrigated land into other uses), as well as push for higher-yield seed varieties and modernization of farming techniques. We should have a closer review of the land reform law into one that would encourage more corporate farming.

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The highly successful Cebu Go Negosyo two weeks ago was also capped by a very nice gathering of Cebu’s high powered SME negosyantes in the evening. Go Negosyo would like to thank PLDT SME Nation led by Eric Alberto, Katrina Luna-Abelarde, Jerameel Azurin and Gabby Cui. We would also like to once again thank the government and private sector advocates who helped in Go Negosyo Cebu and for doing their share in developing entrepreneurship in the country.