Singapore, Malaysia, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 3rd Qtr 2014

Almost all countries discussed in this blog post, with the exception of Thailand, have been experiencing rapid growth in home prices that have outstripped inflation by a wide margin.  The gap between home prices and their inflation adjusted levels are at the widest ever, particularly in Singapore and the Philippines.

Singapore


Singapore's home prices slid for four straight quarters, which, according to Bloomberg, is the longest losing streak in five years.  Home prices are still  81% above their year end 2004 levels. Overall prices levels, as measured by inflation have just increased by 30.37% since year end 2004.  In other words, for the past ten years, Singaporean home prices have outpaced inflation by more than 50 percentage points.

Malaysia

Neighboring Malaysia's House Price Index actually topped out at 135.44% in the second quarter of 2011 and has posted a 3.37% decline since then to 130.87% as of the fourth quarter of 2013.  In the first quarter of 2014, home prices rebounded to 133.03% and have continued to march higher to 134.22% as of the third quarter 2014, reducing the overall decline from the peak to just 1.02%.  Home prices are just 34.22% above their year end 2004 levels.  General price levels are only around six percentage points lower, at 28.26% above their year end 2004 levels.

Thailand


In Thailand, which has been experiencing political turmoil for some time, home prices have remained essentially flat since the end of 2004. Home Prices ended 2013 with the index at 100.54%, just 054% higher than the end of 2004, but showing a substantial recovery since the recent low of 74.08% posted in the third quarter of 2009. In the third quarter of 2014, home prices have rebounded to 106.23%, or 6.23% higher than its year-end 2004 levels, way below its expected inflation adjusted levels. General Price levels are 34.68% above their year end 2004 levels.

Indonesia

Meanwhile in Indonesia, home prices have showed no signs of slowing down their upward trajectory.  In fact, prices seem to have gone parabolic, climbing 4.63% in the last quarter of 2013, from a base of 121.49% as of the third quarter of 2013 to 127.11% as of year end 2013.  In the third quarter of 2014, home prices have climbed an additional 6.64% to reach 133.75%.  Since the first quarter of 2007, home prices have risen 33.75%. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Philippines

Philippine house price index stands at 208.08% at the end of the third quarter 2014 or over 108.08% above their year-end 2004 levels.  Philippine home prices have posted the largest 10 year gains among all the countries considered in this blog post.  Like Singapore, Philippine home prices have outstripped inflation by more than fifty percentage points.  Like Indonesia, Philippine home prices have so far no signs of slowing down their upward trajectory for the foreseeable future.   The question is, is this momentum sustainable?  Or will the Philippines and Indonesia follow its ASEAN neighbors, Singapore, Malaysia, and Thailand, in exhibiting plateauing or declining house prices?  That remains to be seen.

Source: Global Property Guide, World Bank, Trading Economics

Great Depression vs. Great Recession: Unemployment

The reported unemployment rate during the Great Depression was significantly higher than the reported unemployment rates of the Great Recession.

But are the two rates comparable? Before 1938, children were a significant part of the labor force.  In 1900, children younger than sixteen made up as much as eighteen percent of the labor force.  It was only when the Fair Labor Standards Act of 1938 became law that children younger than sixteen were barred from working in manufacturing and mining but not agriculture.

To make the numbers more comparable, it is better to get the ratio of Employment to the Total Population (which includes children). When we do this, the two measures are not so far apart.  In 1929, the year "0" for the Great Depression, 54.41% of the total population was employed.  By 1933, year "4", only 41.97% of the population was employed. But the rise in employment was dramatic.  Four years later, 47.63% of the population was employed, almost six percentage points higher. The employment momentum only stalled when the tax hikes of 1937 induced another recession in 1938 and new child labor laws barred children from the labor force.  If the momentum had continued, the employment ratio would have recovered in less than five years.

In 2007, the year "0" of the Great Recession, 48.42% of the population was employed.   Four years later, only 44.89% of the population was employed, a drop of less than 4 percentage points.  By October 2014, roughly three years later, only 46.14% of the population is employed, an increase of only 1.25% percentage points.  The growth rate of employment was less than a fourth that of the Great Depression.  At this rate, it will take six more years before employment recovers to that of Year "0".

"Great Depression vs. Great Recession"


Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"

Great Depression vs. Great Recession

Why does the US Recovery from the Great Recession feel so sluggish?  That's because it is!

Although the overall collapse in REAL GDP was relatively shallow  (-3.1% from peak to trough) and took place over two years (2008 to 2009), the recovery in the five years since then has been very anemic.  The economy reached parity with its pre-recession peak in 2011, only four years after the Great Recession started in December 2007.   In 2014, the US economy is only 10.9% larger than the bottom in 2009, averaging only 2.1% growth every year since the Great Recession bottomed out.

The overall economic contraction during the Great Depression was much more severe (-26.7% from peak to trough) and took much longer (four years from 1930 to 1933).  Economic parity with its pre-depression peak was only reached in 1936, seven years after the start of the Great Depression. Despite the severity and depth of the economic contraction, it only took three years for the US economy to reach parity with pre-depression peak in 1929.  Recovery, in terms of economic growth rates, was a lot more robust, averaging 10.9% annually during this period.  In the five years since the US economy bottomed out in 1933, the US economy was 38.6% larger than the bottom in 1933, averaging 6.7% growth per year every year. In nominal terms, the US economy only recovered its pre-depression peak only sometime in 1941, when WWII spending began in earnest.

Source: www.worldbank.org, www.bea.gov, Reinhart and Rogoff, "This Time is Different"


Why was the recovery during the Great Depression a lot more robust than the Great Recession?  That is the subject of future blog posts.

What Happens When the Boom Turns to a Bust?

Another sign that the Philippines is in the middle of one of the biggest real estate booms in the past twenty years is that employment in the construction industry as a percentage of total employment is at an all time high.  As of April 2014, the construction sector now employs 6.8% of all employees, surpassing the peak of the previous boom of 6.2% posted in July 1997, right before the bottom fell out of the market.  The current percentage is more than three standard deviations above the sector's long-term historical average of 5.54% (the average from January 1996 to April 2014).  The probability of this occurring is low, as in very low - less than 0.3%.

In previous blog posts, we talked about how the Philippine Real Estate Bubble might have already peaked.  What we haven't dealt with is the aftermath of that boom, when the boom turns to a bust.

For that, we can turn to the US Construction Industry, which, at its peak, employed 5.0% of all US Workers as of May 2006.  This is only slightly above its long term historical average of 4.5% from May 1999 to May 2013.  When the US Real Estate Market collapsed, employment in the construction industry collapsed as well.  Employment in the sector did not only revert to the mean, it went way beyond it, to compensate for the sector's exuberance during the boom.  Today, the sector employs only 3.8% of all US employees.  On an absolute basis, the number of jobs in the sector collapsed as well.  From a peak of 6.7 million employees as of May 2007, the number of jobs dropped by 1.6 million or 24% to just 5.1 million employees as of May 2013.

Will this happen in the Philippines?  We don't know.  But if it does, it will be disastrous for the country as a whole.

If employment in the sector merely reverts to the mean, meaning a drop from 6.8% as of April 2014 to its long-term historical average of 5.54%, this will mean 1.26% or 486 thousand people will lose their jobs.  If employment in the sector drops to the low end of the range (like 5.0%), this will mean a drop of 1.80% or or a loss 696 thousand jobs.

This just covers the construction sector.  It does not take into account how the sector interacts with the rest of the economy.  Given that the real estate sector has been one of the major drivers of economic growth, it will not be surprising to see how massive the aftershocks of the real estate bust will be.  The US has been through it post 2009 and so has the Philippines after 1997, when the Asian Financial Crisis took hold in the country.

The Philippine Consumer Has Not Peaked - Yet

Quite a few previous blog posts have detailed how the Philippine Real Estate Market may have already peaked in terms of sales volume and loans to the residential real estate sector.  The Philippine Real Estate Market has yet to peak in terms of price, although some of our ASEAN neighbors have already showed signs of plateauing to declining prices for residential real estate, notably including Singapore and Malaysia.

The two charts below indicate a slowdown in terms of loan growth in the real estate sector.

Since home prices have still continued their relentless climb, this  has not yet translated to a sharp uptick in Non-Performing Loans (NPLs) in the sector.

However, there was a slight uptick in NPLs from 3.15% of residential real estate loans in 2013 to 3.34% as of March 2014.

Negative Real Interest Rates

The persistence of negative real interest rates in the Philippines has led, unsurprisingly, to a sharp drop in Gross Domestic Savings Rate as a percentage of GDP since 2010.

Uptick in Consumer Loans

With negative real interest rates, it makes sense for consumers to buy tangible goods, such as real estate and cars, as a store of value.  Correspondingly, there was a sharp uptick in total consumer loans both as a percentage of GDP and as a percentage of the Total Loan Portfolio.

The uptick seems to have leveled off since 2012. Most of the increase, it seems, can be attributed to residential real estate loans and auto loans.  Again, the leveling off has not yet translated to any notable increase in consumer loan NPLs - yet.

Another Sign that the Philippine Real Estate Bubble May Have Already Peaked?

In a technical analysis of the price trends of financial securities, volume is a very important technical indicator. If the volume moves with the trend, the volume confirms the trend.  When price and volume diverge, it is often indicative of a shift in the trend. For example, if an uptrending stock price is accompanied by lower and lower volumes, it may indicate that the price trend is weak and that prices may start to decline.

The same holds true for the real estate market.

US Real Estate Market

In the US, sales volumes peaked for US Total Home Sales (New and Existing Home Sales) at 8,4 million homes in 2005, a year before the US Median Sales Price peaked at US$ 225K in 2006.  By 2007, the US Median Sales Price slipped by only 1% to US$ 223K while sales volumes had already dropped an astonishing 30.58% from the peak sales volume in 2005, to 5.8 million in 2007.

From then on, the US Median Sales Prices continued to decline year after year, bottoming out at $170K in 2011, or some 25% below the peak price level.  By then sales volumes had already bottomed out a year earlier in 2010 to 4.5 million homes, or some 46% below peak volumes.

Sources: Realtor.org, St. Louis Fed
Median Sales Price is a weighted average of the median sales prices of New Home Sales and Existing Home Sales


The same dynamic played out in both segments of the US Residential Real Estate Market: New Home Sales and Existing Home Sales.

Here is the chart for New Home Sales:

And here is the chart for Existing Home Sales, the much larger market segment.

Philippine Real Estate Market

Might the same dynamic be playing out in the Philippine residential real estate market?  One problem bedevilling such an analysis is the dearth of data.

To my knowledge, the Philippines does not have adequate market data.  For instance, there seem to be no published figures for sales volumes for residential homes.  The best approximation of such data is HLURB's statistics for licenses to sell residential homes.  This statistic represents only new homes and only represents licenses to sell for each residential unit and not the actual sales volumes.

Another issue is that there seems to be no price data on residential sales.  The best data is assembled here, which in turn, is assembled from the Philippine Office of Colliers International, a global real estate agency.  These prices, in turn, are based on the average prices of a prime 3 bedroom condominium unit in the heart of the Makati Central Business District.  This is like basing nationwide US housing prices on the price of a prime 3 bedroom coop unit in Manhattan in New York, one of the priciest real estate markets in the US.  The data available in the Philippines is not representative of the true state of the entire national residential real estate market.  At best, it is an approximation of the Philippine Real Estate Market.  The BSP has stepped into the picture to overcome this deficiency by developing their own real estate index, which would be more comprehensive in scope. Here is a possible candidate for such an index.

But based on the data available, we arrived at this chart:

Based on this data, volumes (as indicated by Residential HLURB licenses to sell) may have already peaked in 2012, while prices have continued their upward climb to date.  Volume seems to have peaked at 264,237 units in 2012 and dropped 15% to 225,051 units in 2013.  In the first quarter of 2014, volumes declined further on an annualized basis, to just 189,668 units or 28% below peak volumes.

Prices though, have continued to climb since 2012, another 14% in 2013 and another 2% in the first quarter of 2014, representing a 16% increase over 2012 prices.

Is the same dynamic that played out in the US Residential Real Estate Market playing out in the Philippines?  It looks like it, but it may still be too early to tell.

Is the Philippine Real Estate Bubble About to Burst?

In a previous blog post, we noted that Philippine House Prices have outpaced inflation by a wide margin.

Real Estate as a Store of Value:

In the Philippines, as is true in many other countries, real estate is often seen as a store of value, as a hedge against the relatively high inflation that characterizes so many emerging markets.  The investment options available and trustworthy to the general public tend to be few: government securities such as Treasury Bills, Bank Deposits, etc. As recently as 2012, less than 1% of the population own stocks because it is seen as too complex, or as investment vehicle only for the affluent, or a form of gambling. So to many Filipinos, the equity market is no place to be.

Negative Real Interest Rates

Unfortunately, the safest form of investing open to the general public, Philippine government securities, has been a money loser, inflation-wise, for the past several years.  Philippine Treasury Bill Yield Rates have continued their steady long-term decline to a point that they have barely hovered above zero in 2013.

Although yield rates have climbed in 2014, they do not compensate for the inflation underlying the economy.  As a result, real interest rates have been negative for almost four years running: from 2011 onwards.  Despite the recent rise in yields, real interest rates have dropped even further to a -2.68% as of July 2014.

The prolonged presence of negative real intest rates have increased the impetus to invest in real estate.  Construction as a percentage of GDP is the highest it has ever been since 1997 (the year the Asian Financial Crisis hit the Philippines).  Back in 1997, construction as a % of GDP was 11.14%.  As of the first semester of 2014, this ratio now stands at 11.20%, well above the historic average of 9.48%.

Construction Overhang

As a result, construction as a ratio of GDP has been well above this historic average of 9.48% since 2009.  The gains in construction spending have eaten away at the cumulative underhang or underinvestment in construction that has taken place since 2004, wherein the excessive spending that took place in the late 1990s was being absorbed.  As of now, in the first semester of 2014, the cumulative investment in construction of 0.4% is now at or slightly above equilibrium. But given the momentum of investment, construction investment is likely to surpass equilibrium in the coming years.

Real Estate Loans

The push into real estate is also reflected in Real Estate and Construction Loans.  Beginning sometime in 2010, Real Estate and Construction Loans as a % of Total Loan Portfolio broke out of its historic range of 12.5% to 17.0% from 1999 to 2010.  The percentage share of such loans peaked at 20.52% in September 2013 and has since dropped to just 18.65% as of June 2014.  Although the drop is significant, this ratio still has to drop even further to just reach the top end of its historic range.

Residential Real Estate and Commercial Real Estate Loans as a % of GDP have also begun to level off after climbing sharply since 2010.  Residential Real Estate Loans and Commercial Real Estate Loans now stand at 4.37% and 2.67% of GDP, respectively, as of March 2014.

As it stands, investment in construction and real estate have seem to reach equilibrium.  But the continued and prolonged presence of negative real interest rates will continue to drive investors to seek real estate as a store of value, a safe haven to protect their money against the vagaries of inflation.  The recent jump in Treasury Bill rates may dampen this enthusiasm for real estate but rates have to climb further for such market euphoria to disappear.

Charting the US Jobs Recovery - Washington State, DelMarVa + DC Edition - August 2014

Most media discussions on the US Jobs Recovery focus on just one number - the headline Unemployment Rate.  To add color to the first number, financial pundits like to add a second number - the Labor Force Participation Rate.  Both are intertwined and affect each other.  But in the aftermath of the Great Recession, there is a third, much more meaningful number that is almost never discussed - the Employment to Population Ratio.

Definitions

Now, what are these numbers?  Many people will give you a technical description that can be hard to grasp and make your eyes glaze over the minute you hear them.  But the reality is simple.

The Unemployment Rate is the percentage of:

PEOPLE WHO WANT  A JOB BUT DON'T HAVE ONE (Unemployed)/
LABOR FORCE

The Labor Force is:

PEOPLE WHO WANT AND HAVE JOBS (Employed) + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE (Unemployed)

The Labor Force Participation Rate is percentage of:

[PEOPLE WHO WANT AND HAVE JOBS (Employed) + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE (Unemployed)]/
WORKING AGE PEOPLE

Working Age People are generally defined as PEOPLE WHO ARE 16 YEARS AND OLDER.  In reality, they are:

[PEOPLE WHO WANT AND HAVE JOBS (Employed) + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE (Unemployed) + PEOPLE WHO ARE NOT IN THE LABOR FORCE (Not in Labor Force)]

The category PEOPLE WHO ARE NOT IN THE LABOR FORCE includes:


PEOPLE WHO ARE IN THE MILITARY
PEOPLE WHO ARE INSTITUTIONALIZED
PEOPLE WHO ARE STUDENTS
PEOPLE WHO ARE HOMEMAKERS
PEOPLE WHO ARE RETIRED
PEOPLE WHO ARE MARGINALLY ATTACHED TO LABOR FORCE (INCLUDING DISCOURAGED WORKERS)


The Employment to Population Ratio is the percentage of:

PEOPLE WHO WANT AND HAVE JOBS/
WORKING AGE PEOPLE

In other words, PEOPLE WHO WANT AND HAVE JOBS/
[PEOPLE WHO WANT AND HAVE JOBS + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE + PEOPLE WHO ARE NOT IN THE LABOR FORCE


How does this work out?

According to this chart from the popular financial blog, Calculated Risk, the US, in May 2014, gained back all the jobs lost since the Great Recession started in November 2007.

But this is deceptive.  For one, the working age population of the US grew by 16.362 million people or 7.06% from 2007 to August 2014, while the labor force grew by 2.835 million people or only 1.85% during the same period.   The number of employed persons grew by only 321,000 people and unemployed people grew by 2.513 million people or 35.50% during the same period. People Not in the Labor Force grew by 13.526 million or 17.18% during the same period. In fact, People Not in the Labor Force is at an absolute all time high of 92.269 million.

United States
Employment Situation
In Thousand Persons
									2007 to August 2014
	2007	2008	2009	2010	2011	2012	2013	August 2014	Variance	% Variance
Civilian Non Institutional Population	231,867	233,788	235,801	237,830	239,618	243,284	245,679	248,229	16,362	7.06%
Labor Force	153,124	154,287	154,142	153,889	153,617	154,975	155,389	155,959	2,835	1.85%
Employed	146,047	145,362	139,877	139,064	139,869	142,469	143,929	146,368	321	0.22%
Unemployed	7,078	8,924	14,265	14,825	13,747	12,506	11,460	9,591	2,513	35.50%
Not in Labor Force	78,743	79,501	81,659	83,941	86,001	88,310	90,290	92,269	13,526	17.18%

Source: bls.gov


For the United States, the headline Unemployment Rate has dropped down significantly, from a peak of 9.9% in 2009 to just 6.1% as of August 2014.  The Labor Force Participation Rate continues to drop and is now at 62.8% - levels not seen since the late 1970's when women started entering the workforce in droves.  The Employment to Population Ratio has only recovered marginally from its recessionary low of 58.3% to just 59% in August 2014.  It is nowhere near its pre-recession average.  In other words, job growth has been growing only barely faster than the growth in the working age population.

Economists have attributed to this phenomenon to increased retirements among the elderly.  But the Bureau of Labor and Statistics itself  is projecting large increases in the Labor Force Participation Rate among people aged 65 and older. The reality is fewer people can afford to retire.

Washington State


Although Washington State's Unemployment Rate has dropped considerably from a peak of 9.9% in 2010 to just 5.6% as of July 2014, its Labor Force Participation rate has continued to drop to a new low of 63.1% - a level not seen since 1977 when women entered the labor force in considerable numbers.  The Employment to Population Ratio now stands at 59.5% or just 0.4% above its recessionary low as of 2013.

Regional Comparison

So how does the DELMARVA + DC Region stack up to the rest of the United States?

Delaware

The state of Delaware is in a funk, employment-wise.  Its Labor Force Participation Rate, at 61.2% as of July 2014, is even lower than the 62.7% Labor Force Participation Rate the state registered in 1976, the earliest available BLS.Gov data.  Although its Unemployment Rate has dropped from a peak of 8.0% in 2010, to just 6.2% as of July 2014, its Employment to Population Ratio, at 57.4% as of July 2014, is still hovering near the bottom at 56.7% in 2013.

Maryland

Like Delaware, Maryland's Labor Force Participation Rate continues to trend lower, hitting 66.4% as of July 2014 - levels not seen since 1977.  Its Employment to Population Ratio has yet to bottom out. At 62.3% as of July 2014, it is reaching levels not seen since the early 1977.  Its Unemployment Rate, however, has dropped sharply, from a peak of 7.9% as of 2010 to just 6.1% as of July 2014.  As the previous data indicates, much of the drop has come from people dropping out of the labor force altogether.

Virginia

Virginia has seen an uptick in its labor force participation rate, from a post-recessionary bottom of 66.4% in 2013, to 66.7% as of July 2014.  Likewise, its Employment to Population Ratio has improved to 63.2% as of July 2014., slightly higher than its post-recessionary bottom of 62.6% in 2010. Unemployment Rate has dropped from its 2010 peak of 7.1% to just 5.4% as of July 2014.

District of Columbia

The District of Columbia's Labor Force Participation bottomed out at 67.8% in 2011, bounced up to the 69.3% level for 2012 and 2013 and is down again to 68.1% as of July 2014.  Its Employment to Population Ratio bounded up sharply from a low of 60.9% as of 2011 to 63.5% as of 2013 and now stands at 63.1% as of July 2014.  Its Unemployment Rate, which reached a peak of 10.2% as of 2011, now stands at 7.4% as of July 2014.

Singapore, Malaysia, and Thailand Post Flat to Declining Housing Prices, Can the Philippines and Indonesia be Not Far Behind? - 1st Qtr 2014

Almost all countries discussed in this blog post, with the exception of Thailand, have been experiencing rapid growth in home prices that have outstripped inflation by a wide margin.  The gap between home prices and their inflation adjusted levels are at the widest ever, particularly in Singapore and the Philippines.

Singapore


Singapore's home prices slid for a second straight quarter, which, according to Bloomberg, is the longest losing streak in five years.  Home prices are still  84% above their year end 2004 levels.

Malaysia

Neighboring Malaysia's House Price Index actually topped out at 135.44% in the second quarter of 2011 and has posted a 3.37% decline since then to 130.87% as of the fourth quarter of 2013.  In the first quarter of 2014, home prices rebounded to 133.03%, reducing the decline from the peak to just 1.78%.  Home prices are just 33.03% above their year end 2004 levels.

Thailand


In Thailand, which has been experiencing political turmoil for some time, home prices have remained essentially flat since the end of 2004. Home Prices ended 2013 with the index at 100.54%, just 054% higher than the end of 2004, but showing a substantial recovery since the recent low of 74.08% posted in the third quarter of 2009. In the first quarter of 2014, home prices have rebounded to 102.13%, or 2.13% higher than its year-end 2004 levels, way below its expected inflation adjusted levels.

Indonesia

Meanwhile in Indonesia, home prices have showed no signs of slowing down their upward trajectory.  In fact, prices seem to have gone parabolic, climbing 4.63% in the last quarter of 2013, from a base of 121.49% as of the third quarter of 2013 to 127.11% as of year end 2013.  In the first quarter of 2014, home prices have climbed an additional 2.56% to reach 130.36%.  Since the first quarter of 2007, home prices have risen 30.36%. Indonesian Home Prices, like Thailand, have lagged inflation since 2007.

Philippines

Philippine house price index stands at 199.50% at the end of the first quarter 2014 or almost 100.00% above their year-end 2004 levels.  Philippine home prices have posted the largest 10 year gains among all the countries considered in this blog post.  Like Indonesia, home prices have so far no signs of slowing down their upward trajectory for the foreseeable future.   The question is, is this momentum sustainable?  Or will the Philippines and Indonesia follow its ASEAN neighbors, Singapore, Malaysia, and Thailand, in exhibiting plateauing or declining house prices?  That remains to be seen.

Charting the US Jobs Recovery - DelMarva + DC Edition - June 2014

Most media discussions on the US Jobs Recovery focus on just one number - the headline Unemployment Rate.  To add color to the first number, financial pundits like to add a second number - the Labor Force Participation Rate.  Both are intertwined and affect each other.  But in the aftermath of the Great Recession, there is a third, much more meaningful number that is almost never discussed - the Employment to Population Ratio.

Definitions

Now, what are these numbers?  Many people will give you a technical description that can be hard to grasp and make your eyes glaze over the minute you hear them.  But the reality is simple.

The Unemployment Rate is the percentage of:

PEOPLE WHO WANT  A JOB BUT DON'T HAVE ONE (Unemployed)/
LABOR FORCE

The Labor Force is:

PEOPLE WHO WANT AND HAVE JOBS (Employed) + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE (Unemployed)

The Labor Force Participation Rate is percentage of:

[PEOPLE WHO WANT AND HAVE JOBS (Employed) + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE (Unemployed)]/
WORKING AGE PEOPLE

Working Age People are generally defined as PEOPLE WHO ARE 16 YEARS AND OLDER.  In reality, they are:

[PEOPLE WHO WANT AND HAVE JOBS (Employed) + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE (Unemployed) + PEOPLE WHO ARE NOT IN THE LABOR FORCE (Not in Labor Force)]

The category PEOPLE WHO ARE NOT IN THE LABOR FORCE includes:


PEOPLE WHO ARE IN THE MILITARY
PEOPLE WHO ARE INSTITUTIONALIZED
PEOPLE WHO ARE STUDENTS
PEOPLE WHO ARE HOMEMAKERS
PEOPLE WHO ARE RETIRED
PEOPLE WHO ARE MARGINALLY ATTACHED TO LABOR FORCE (INCLUDING DISCOURAGED WORKERS)


The Employment to Population Ratio is the percentage of:

PEOPLE WHO WANT AND HAVE JOBS/
WORKING AGE PEOPLE

In other words, PEOPLE WHO WANT AND HAVE JOBS/
[PEOPLE WHO WANT AND HAVE JOBS + PEOPLE WHO WANT A JOB BUT DON'T HAVE ONE AND ARE LOOKING FOR ONE + PEOPLE WHO ARE NOT IN THE LABOR FORCE


How does this work out?

According to this chart from the popular financial blog, Calculated Risk, the US, in May 2014, gained back all the jobs lost since the Great Recession started in November 2007.

But this is deceptive.  For one, the working age population of the US grew by 16.156 million people or 6.81% from 2007 to July 2014, while the labor force grew by 2.899 million people or only 1.89% during the same period.   The number of employed persons grew by only 305,000 people and unemployed people grew by 2.593 million people or 36.63% during the same period. People Not in the Labor Force grew by 13.258 million or 16.84% during the same period.

United States
Employment Situation
In Thousand Persons
									2007 to July 2014
	2007	2008	2009	2010	2011	2012	2013	July 2014	Variance	% Variance
Civilian Non Institutional Population	231,867	233,788	235,801	237,830	239,618	243,284	245,679	248,023	16,156	6.97%
Labor Force	153,124	154,287	154,142	153,889	153,617	154,975	155,389	156,023	2,899	1.89%
Employed	146,047	145,362	139,877	139,064	139,869	142,469	143,929	146,352	305	0.21%
Unemployed	7,078	8,924	14,265	14,825	13,747	12,506	11,460	9,671	2,593	36.63%
Not in Labor Force	78,743	79,501	81,659	83,941	86,001	88,310	90,290	92,001	13,258	16.84%

Source: bls.gov


For the United States, the headline Unemployment Rate has dropped down significantly, from a peak of 9.9% in 2009 to just 6.2% as of July 2014.  The Labor Force Participation Rate continues to drop and is now at 62.9% - levels not seen since the late 1970's when women started entering the workforce in droves.  The Employment to Population Ratio has only recovered marginally from its recessionary low of 58.3% to just 59% in July 2014.  It is nowhere near its pre-recession average.  In other words, job growth has been growing only barely faster than the growth in the working age population.

Economists have attributed to this phenomenon to increased retirements among the elderly.  But the Bureau of Labor and Statistics itself  is projecting large increases in the Labor Force Participation Rate among people aged 65 and older. The reality is fewer people can afford to retire.

Regional Comparison

So how does the DELMARVA + DC Region stack up to the rest of the United States?

Delaware

The state of Delaware is in a funk, employment-wise.  Its Labor Force Participation Rate, at 61% as of June 2014, is even lower than the 62.7% Labor Force Participation Rate the state registered in 1976, the earliest available BLS.Gov data.  Although its Unemployment Rate has dropped from a peak of 8.0% in 2010, to just 6% as of June 2014, its Employment to Population Ratio, at 57.3% as of June 2014, is still hovering near the bottom at 56.7% in 2013.

Maryland

Like Delaware, Maryland's Labor Force Participation Rate continues to trend lower, hitting 66.6% as of June 2014 - levels not seen since the late 1970s.  Its Employment to Population Ratio has yet to bottom out. At 62.7% as of June 2014, it is reaching levels not seen since the early 1980s.  Its Unemployment Rate, however, has dropped sharply, from a peak of 7.9% as of 2010 to just 5.8% as of June 2014.  As the previous data indicates, much of the drop has come from people dropping out of the labor force altogether.

Virginia

Virginia has seen a sharp uptick in its labor force participation rate, from a post-recessionary bottom of 66.4% in 2013, to 67.2% as of June 2014.  Likewise, its Employment to Population Ratio has improved to 63.6% as of June 2014.  Unemployment Rate has dropped from its 2010 peak of 7.1% to just 5.3% as of June 2014.

District of Columbia

The District of Columbia's Labor Force Participation bottomed out at 67.8% in 2011, bounced up to the 69.3% level for 2012 and 2013 and is down again to 68.2% as of June 2014.  Its Employment to Population Ratio bounded up sharply from a low of 60.9% as of 2011 to 63.5% as of 2013 and now stands at 63.2% as of June 2014.  Its Unemployment Rate, which reached a peak of 10.2% as of 2011, now stands at 7.4% as of June 2014.

Just How Rich Are The Marcoses Today?

Marcos is widely believed to have plundered US$ 5 billion to US$ 10 billion from the Philippines during his regime from late 1965 to early 1986.  Although some studies have estimated the plunder to be as high as US$ 17 billion, these are not widely cited.  The Presidential Commission on Good Government (PCGG), the government agency tasked with the recovery of the Marcos Wealth, has recovered around US$ 4 billion in the past 28 years.

Does this mean the Marcoses only have US$1 billion to US$ 6 billion left?

Definitely not!

First of all, the US$ 4 billion that the PCGG has recovered was recovered over a stretch of 28 years, giving the Marcoses enough time to squirrel away and hide most of those assets beyond the reach of the PCGG.  Moreover, the Marcoses have had more than enough time to grow those assets to even more unimaginable sums.

People of Great Wealth tend to have one primary investment strategy: Capital Preservation.  This capital preservation investment strategy generally has two goals:

• Preserve the Absolute Amount of the Wealth:

In other words, if the Marcoses had US$ 5 to US$ 10 billion in assets, they would like to have at least the same amount (US$ 5 to 10 billion) so many years later. In this case, at least 28 years later.

• Preserve the Amount of Wealth Relative to Inflation:

Most people intuitively understand inflation: that the buying power of one peso today is much less than the buying power of one peso ten years ago.  Similarly, having US$ 5 billion today is not the same as having US$ 5 billion in 1986.  You could buy more stuff with US$ 5 billion back in 1986.  Therefore, the Marcoses would have liked to preserve their wealth on an inflation-adjusted basis.

Just how much would the Marcos Plunder be on an inflation adjusted basis?  What was US$ 5 billion to US$ 10 billion in 1986 dollars would be worth US$ 10.7 billion to US$ 21.3 billion in 2014 dollars.

People of Great Wealth and Ambition also have another, often overriding goal: to grow their capital even further over and above what it would be on an inflation adjusted basis.  In other words, the Marcoses would most certainly want to grow their wealth beyond US$ 10.7 billion to US$ 21.3 billion.

There are many, many ways to do this.  The possibilities are infinite.  There are a multitude of ways for a wealthy but law-abiding citizen to grow his wealth in a most tax-efficient manner.  Just ask Mitt Romney. Given the magnitude of the Marcos wealth, its stateless status, its illegal origin, and the Marcoses' determination to evade the law, there are even more ways to hide and grow this wealth way beyond what they have lost to PCGG's recovery efforts.

This blog post will merely explore the investment possibilities that are available to anyone with much much more modest financial assets: the affluent but ordinary investor.

Given the size of the Marcos wealth, it would be inconceivable for the Marcoses not to have a significant portion of it invested in what the world deems the biggest, the safest, and most liquid investment market: US financial securities. Also, given the size of the Marcos wealth, it is entirely possible for them to invest in these securities and reinvest 90% of the interest payments received.  The income from the remaining 10% of interest payments would be more than sufficient to provide the Marcoses with a decent amount of cash flow to pay living expenses and whatever taxes they cannot avoid.  The calculations below assume that the investment instruments were held to maturity.  They account only for returns due to the stated interest rate and not total return (yield plus gain/loss in price of security)

Risk Free Investments

The safest US financial instruments are US Government Securities such as US Treasury Bills and US Treasury Bonds.

3-Month US Treasury Bills

If the Marcoses had invested all their assets in 3-Month US Treasury Bills from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 12.71 billion to US$ 25.42 billion as of year-end 2013. Moreover, they would have received a cumulative income distribution of US$ 0.86 billion to US$ 1.71 billion during this time.

10-Year US Treasury Bonds

If the Marcoses had invested all their assets in 10-Year US Treasury Bonds from 1986 to 2013 and reinvested 90% of the coupon payments they received, they would still have an estimated net worth of US$ 18.46 billion to US$ 36.92 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 1.50 billion to US$ 2.99 billion over that time period.

Safe But Not Risk Free Investments

1-Month Eurodollar Deposits

If the Marcoses had invested all their assets in 1-Month Eurodollar Deposits from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 13.81 billion to US$ 27.61 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 0.98 billion to US$ 1.96 billion over that time period.

AAA Rated US Corporate Bonds

Triple A Rated US Corporate Bonds are safe and have higher yields than US government securities.  They are not entirely without risk because even blue chip corporations can and do default from time to time but the risk is minimal.  If the Marcoses had invested all their assets in AAA Rated US Corporate Bonds from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 26.64 billion to US$ 53.28 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 2.40 billion to US$ 4.81 billion over that time period.

Tax-Free Investment

20-Bond Municipal Bond Index

The Marcoses could also have invested in tax-free US Municipal Bonds.  If the Marcoses had invested all their assets in 20-Bond Municipal Bond Index from 1986 to 2013 and reinvested 90% of the interest payments they received, they would still have an estimated net worth of US$ 19.53 billion to US$ 39.05 billion as of year-end 2013.  Moreover, they would have received a cumulative income distribution of US$ 1.61 billion to US$ 3.23 billion over that time period.

US Equities

US Equities, by definition, have higher risks than debt instruments such as AAA Rated Corporate Bonds, Municipal Bonds, Eurodollar Deposits, and US Government Securities.  The easiest way to invest in US Equities is by buying into an Index Fund, preferably one that tracks the S&P 500 Index, which is often cited as a measure of the broad equity market.  Such a strategy would have certainly been available to the Marcoses in 1986 because Vanguard, which pioneered this investment strategy, has been offering this since the 1970s.

Why invest in an index fund? Because most fund managers cannot beat the broader market on a consistently long-term basis and at a lower cost

S&P 500 Index Fund

If the Marcoses had invested all their assets in the S&P 500 Index from 1986 to 2013 and withdrawn all the dividends they received, they would still have an estimated net worth of US$ 45.18 billion to US$ 90.35 billion as of year-end 2013.  Moreover, they would have received a cumulative dividend income distribution of US$ 11.75 billion to US$ 23.50 billion over that time period.

If the Marcoses had invested all their assets in an S&P 500 Index Fund from 1986 to 2013 and reinvested 90% of the dividend payments they received, their net worth would be significantly higher: US$ 77.61 billion to US$ 155.22 billion as of year-end 2013.  Moreover, they would have received a cumulative dividend distribution of US$ 1.67 billion to US$ 3.33 billion over that time period.

If the Marcoses had invested all their assets in an S&P 500 Index Fund from 1986 to 2013 and reinvested all dividend payments they received, their net worth would be significantly higher: US$ 82.35 billion to US$ 164.71 billion as of year-end 2013. 

Conclusion

Most likely the Marcoses would have employed a mix of all these investment instruments (stocks, bonds, deposits, government securities) plus many many more investment vehicles only available to the extremely wealthy.  In 1986, their wealth was already diversified with investments in art, jewelry, real estate, etc.  to reduce the risk of loss of capital.

How much are the Marcoses really worth? No one really knows.  Not even the PCGG.  Some of it turns up here and there.  But when Imelda Marcos says that she can pay off the Philippines foreign debt, she wasn't kidding.

Data Sources: New York University Stern School of Business.  St. Louis Federal Reserve.  Worldbank.org