FINANCE.TXT A Framework for Value Prepared by: Paul Edwards Location: Ligao, Albay, Philippines Date: August 2026 Status: Core corpus document. The financial framework. Companion documents: economy.txt, strategy.txt ---------------------------------------------------------------------- THE BASIC QUESTION In a world where real estate collapses, bonds default, and bank deposits are wiped out, what is left? The factories. The farms. The telecoms. The utilities. The productive economy survives. The question is: what is a fair price to pay for a share of that productive capacity? ---------------------------------------------------------------------- SCOPE AND LIMITATIONS This framework assumes the productive economy continues to operate. It is a hedge against a debt-deflation collapse—not against a Mad Max scenario where the sun is blocked by a volcanic eruption, or where the physical infrastructure of production is destroyed. If the factories stop producing, the framework breaks down. That is not a flaw in the framework. It is a boundary condition. The framework is for the world where the factories survive. It is not for the world where they do not. ---------------------------------------------------------------------- THE FACTORY VS. THE SHARE A share is a legal claim on the earnings of a factory. If the factory produces, the share has value. If the factory does not produce, the share has no value. The distinction between owning the factory and owning a share is a matter of legal form, not of economic substance. The objections to this equivalence have been considered and rejected: 1. "You don't own the factory. You own a piece of paper." The piece of paper is a legal claim on the factory's earnings. If the factory produces, the claim has value. If you are not selling, the distinction is irrelevant. 2. "Capital controls could prevent you from selling your shares." Capital controls do not prevent you from collecting dividends. They only prevent you from selling. If you are not selling, it does not matter. A direct factory owner faces the same problem—you cannot sell a factory quickly either. The speed of liquidation is irrelevant if you are not liquidating. The share is the factory. The factory is the share. For the purposes of this framework, they are identical. ---------------------------------------------------------------------- THE DATA As of August 2026: - Bank Deposits: PHP 22.22 trillion - Bond Market: PHP 13.7 trillion - Total Domestic Savings: PHP 35.9 trillion - PSEi Market Cap: PHP 13.65 trillion - PSEi Earnings: ~PHP 1.24 trillion - Current P/E: ~11x ---------------------------------------------------------------------- THE CEILING If all domestic savings (bank deposits + bonds) flowed into the stock market, the maximum sustainable market cap would be: PHP 35.9 trillion (savings) + PHP 13.65 trillion (current cap) = PHP 49.57 trillion. At earnings of PHP 1.24 trillion, that gives a P/E of: 49.57 / 1.24 = ~40x. 40x is the ceiling. It is the maximum sustainable valuation without foreign capital or speculation. At 40x, the earnings yield is 2.5%. ---------------------------------------------------------------------- THE DYNAMIC CEILING AND THE SAVINGS PROBLEM The 40x ceiling is not fixed. It moves upward each year as new financial savings are added to the pool. Gross National Savings: PHP 8.4 trillion per year Gross Capital Formation (Real Assets): PHP 6.2 trillion per year Net Financial Savings (bank deposits, bonds, etc.): PHP 2.2 trillion per year. The PHP 2.2 trillion is the pool that can flow into the stock market. If all of it flows into stocks, the market cap increases by PHP 2.2 trillion each year. Starting from a fair value P/E of 40x, and assuming earnings remain constant (adjusted for inflation): Year 0: P/E = 40.0x (Earnings yield: 2.50%) Year 1: P/E = 41.8x (Earnings yield: 2.39%) Year 2: P/E = 43.5x (Earnings yield: 2.30%) Year 3: P/E = 45.3x (Earnings yield: 2.21%) Year 4: P/E = 47.1x (Earnings yield: 2.12%) Year 5: P/E = 48.8x (Earnings yield: 2.05%) Year 10: P/E = 57.7x (Earnings yield: 1.73%) Year 20: P/E = 75.5x (Earnings yield: 1.32%) The fair value P/E increases by approximately 1.8x each year. The yield constantly decreases. This is not a problem with the market. It is a problem with savers. The yield falls because people keep saving, and the saved money has nowhere to go but the stock market. The "problem" is that people are saving instead of being jackasses who blow all their money on cigarettes. But the consequence of saving is that the yield on existing capital falls. The only way to maintain the yield is for earnings to grow at the same rate as the market cap. But earnings are anchored to the real economy—population, productivity, consumption—which grows slowly, if at all, in a post-collapse world. ---------------------------------------------------------------------- THE BUBBLE If the P/E exceeds the dynamic ceiling (40x + annual savings flow), the market is being driven by forces other than domestic savings: foreign capital, leverage, or speculation. If the P/E exceeds 50-60x, the market is in a bubble. The yield is below 2.0%. The risk of principal loss outweighs the benefit of the yield. At that point, sell. Move to gold. Wait for the correction. Buy back at the new fair value. ---------------------------------------------------------------------- THE BARGAIN The current P/E is 11x. The market is pricing in a collapse. The factories will survive. The productive economy will continue to operate. The earnings will continue to flow. 11x is not a collapse price. It is a bargain. ---------------------------------------------------------------------- THE STRATEGY 1. Buy at 11x. The market is below fair value. 2. Hold until the P/E reaches the dynamic ceiling (currently ~40x, increasing by ~1.8x per year). The earnings yield falls toward 2.5%. 3. If the P/E exceeds the dynamic ceiling, start selling. The price is being driven by speculation, not domestic savings. 4. If the P/E exceeds 50-60x, sell and buy gold. The market is in a bubble. Wait for the correction, then buy back at the new fair value. ---------------------------------------------------------------------- THE PASSIVE INCOME REALITY If you are hoping to live on passive income, you should be prepared for a low and decreasing return. 2.5% is all that is justified by the correct market behaviour at the initial fair value. But as new savings flow into the market, the yield will fall further—to 2.0%, then 1.7%, then lower. Passive income is a luxury. You are lucky that someone has made their factory available to you at all. You should not expect a lot. If you want a lot, you need to get off your ass and start your own business, instead of expecting to be able to click some buttons on a web browser and get easy money. If you want a higher return, you have two options: 1. Buy when the market is depressed (like now at 11x), and capture the temporary higher yield. But that is a one-time opportunity, not a permanent state. 2. Start your own small business. Take on the operational risk. Earn a higher return. But that is not passive income. That is active income with risk. If you cannot live on a low and decreasing yield, you need to adjust your expectations, reduce your spending, or increase your capital base. There is no magic. The factories produce what they produce. This is not pessimism. It is realism. ---------------------------------------------------------------------- End of finance.txt