Former Shell Oil Chief Predicts Much Higher Oil Prices

The former President of Shell Oil in the United States, John Hofmeister, has predicted significantly higher oil prices in the coming 2 years in a recent interview. Here's the video clip of that interview:

While he talks mainly about the US, there is some relevance for us here in Singapore because we are so dependent on imported oil. Given our growing dependence on tourism to support our over-crowded retail and hospitality sectors, it is not hard to see that higher oil prices will have a serious negative impact on the economy.

Some Thoughts About COE Prices

Some random thoughts about the recent elevated COE prices:

1. Car dealers are partly responsible for the rapid increase in prices, even though reduced future supply has an important role to play. Yet, the same dealers are now asking the government to cut other car taxes so that affordable to not decrease further and discourage more buyers. This is a case of shooting yourself in the foot and then asking the government for help.

2. If the US military is right in its assessment of future world oil supplies, by 2015, there will be a 10 mbpd shortfall relative to demand. In Singapore, this will either mean shortages or very high prices. I suspect that if this scenario plays out, more than a few people will be wondering what they were thinking paying $70K for their COEs.

3. A $70K COE costs more than 1 kg of gold. To me, this is clearly a bubble. People's perception of value is severely distorted.

Fighting inflation

This week, Channel NewsAsia reported that the price of a cup of coffee is expected to increase soon due to the rising cost of coffee beans. Having argued that inflation is heading higher for several years now, this has not been a surprise to me. What caught my attention in the CNA report was this quote:

Coffee drinkers appeared resigned to paying more for their daily cuppa. Insurance agent Dennis Lim might switch from drinking premium coffee at high-end joints to cheaper alternatives if prices go up steeply. "We don't have much choice. We need drinks to go with our food when eating out," said the 40-year-old.

To me, such an attitude is too passive to have in the face of rising inflation. To fight inflation, we need to send signals to the market that there is a limit to our tolerance for higher prices. And we do that by adapting our behaviour as prices rise. For example, using the above case of buying drinks, I know of very well-to-do people who bring a water bottle out during lunch, because they refuse to pay inflated drink prices at coffee-shops.

By adjusting our spending patterns, we can signal to retailers our limits. In turn, this will eventually allow landlords to get the message that they can't keep raising rents. We should start voting with our wallets and stop acting like sheep.

Powering HDB flats with Solar Panels

Channel Newsasia has reported on the success of HDB's solar trial in several housing estates in Singapore, resulting in energy savings. It also reported that the HDB had express hope that the common-area electrical power needs of HDB flats could be 100% covered by solar energy. This is definitely a move in the right direction, despite the fact that the cost of electricity from solar panels is current higher than from natural gas.

With improving efficiency for PV cells, and better conservation, I think it is highly possible that the 100% target can be achieved. The only thing that I think can be done better is perhaps that HDB could hasten to expand the programme to as many areas of Singapore as possible.

Negative Real Interest Rates

A survey of economists of next year's CPI inflation expectations by the Monetary Authority of Singapore showed that inflation is expected to be around 2.9% for 2011. What this means for the typical Singaporean saver is that it could be yet another year of negative real interest rates for his hard-earned savings.

Faced with such a situation, any saver who is serious about protecting his purchasing power will likely be forced to take some risks in having to invest in riskier assets such as bonds, stocks and other asset classes. This also makes saving for retirement more complicated, since CPF interest rates for the Ordinary Account is below the expected rate of CPI inflation.

Also, if home loan rates remain roughly around current levels, the negative real rates may also encourage further price appreciation due to speculation, and this could force the government to come up with another round of measures to cool the property market.

In a negative real interest rate environment, my view is that gold and silver will continue to do well in SGD terms, although likely combined with very high volatility in these 2 markets. As such, it seems possible that next year, just like the current one, savers wanting to protect their purchasing power will have to stomach higher volatility. The faint-hearted are destined to see the value of their hard-earned money erode.

This is most unfortunate. I feel that savers should not be penalised like that. But my opinion on this matter is irrelevant. We just have to be prepared.

A Two-tiered Economy?

I recently came across some very positive comments on the Singapore economy on a popular US financial website. The author of the article (about overseas opportunities for Americans) and a reader commented that the Singapore economy was booming and that there were plenty of business and employment opportunities. The tone was consistent with other reports in the mainstream media, including those concerning higher pay raises and bonuses this year.

In contrast, I have various Singaporean friends who are having difficulties finding work. I also noticed that the licensed money-lender down the corridor from where I am doing a brisk business, with a lot of desperate looking people knocking on its door looking to borrow money.

Looking at the anecdotal evidence, it would appear to me that we now have a two-tier economy. Not everyone is enjoy the fruits of the rapid growth that we have in 2010.

Gold and Silver Very Strong

Gold and silver were showing significant price strength in New York trading on Friday, as can be seen from the 2 Kitco charts below:

This move appears to have negated the Head & Shoulders formation that I had thought might form in the daily gold chart:

This was a costly mistake as I had traded out of a small speculative gold position, and I wasn't quick enough to buy below the 1390 level last night during NY trading. Not too sure whether a short-term top is near though, as the momentum indicators in the chart above are not at oversold levels yet.

On the macroeconomic front, the ECB's backdoor QE programme appears to be winning approval from the stock market, even though it is sign that the EU's debt problems are too serious to be solve with austerity alone. On the US side, the bad unemployment numbers also did not appear to have discouraged the bulls.

To me, this is a very confusing market environment.

China's Bubble Economy

Below is a video about the current state of China's economy, casting doubt on the widely-accepted belief in China's 'economic miracle'. The analysis, in my view, is fairly consistent with the Austrian School's analysis of malinvestments due to excessive credit growth. For those who are familiar with Frédéric Bastiat's 'Broken Window Fallacy', it's also featured prominently in the analysis.

EU Crisis Unabated

Talk about diminishing returns. The Greek bailout managed to calm markets for a few days. Now, even before the ink is dry on the Irish bailout, the markets are again sending credit default swap rates for various EU sovereign debts sky high. While I had expected the crisis remain unresolved, I didn't expect the market to shift its focus so quickly onto the other EU debt-ridden countries.

Result: Closed a small speculative gold position out too early.

Merkel Pledges Permanent EU Bailout Fund

The BBC has reported that German Chancellor Angela Merkel has vowed to implement a permanent bailout mechanism for the EU. As I have written earlier, the debt crisis will continue, and that's why the EU politicians deem that there is a need for a permanent bailout fund.

There was speculation earlier in the day as to the course that the Germans would take given that the continued bailouts have started to affect the country's credit ratings, as reflecting in the credit default swap market.

It seems to me that while the German people are unhappy with having to pay for the mistakes of other EU nations' banks (I believe that such bailouts benefit banks and shift the burden to taxpayers), their ruling elite has decided that the half-a-century political effort to build a united Europe and to prevent another war is worth the financial sacrifice. To make matters worse, several EU countries have started to take money from pension funds to support their fiscal shortfalls.

Given the protests that have taken place all over Europe, one has to wonder how much longer the political elite of the EU can continue to ignore the views of the people and pretend to be democratic.

In response to the Irish bailout, financial markets have sold off the Euro against the USD, and stock markets in Europe have ended Monday largely down.

Looking at the USD/SGD price chart, it would appear that the USD has reversed its downward course against our local currency. We could perhaps see the 1.40 level again if a big financial event occurs in the near future.

Debt Crisis Will Continue

Even as EU ministers rush to cobble together a bailout package for Ireland before Asian markets start trading tomorrow morning, one has to really wonder about the effectiveness of bailing out banks as a means of solving the ongoing debt crisis in the developed nations. Such bailouts merely shift the debt onto the taxpayers of the problem countries, who are themselves hard-pressed to solve their own financial troubles. Furthermore, the EU's bailout fund basically involve financial contributions from EU nations that are all in financial dire straits. Again, this does not make sense to me.

There are only 2 ways to solve problem of too much debt: Either default or monetise it. A default will likely mean a breaking up of the Euro grouping, and so politicians may be tempted to follow in the footsteps of Bernanke's 'QE2'. Who knows?

I just wonder how long more such schemes can last before the current financial system crashes once again, possibly with a ferocity that greatly surpasses that of 2008.

Cutting Our Defence Budget?

The papers today carried a letter from Ms Hazel Pua of the Reform Party written in reply to MND Minister Mah Bow Tan's op-ed piece some days back defending the affordability of HDB flat. Various very good points were made in the letter to argue that HDB flats are now less affordable, with Minister Mah's assumptions taken part rather cleverly.

That said, I would disagree with part of the following:

The Reform Party is happy to offer some other options for consideration: Cutting the defence budget; reducing the payments made by HDB to the Singapore Land Authority for the purchase of land to build HDB flats; and cutting ministerial salaries.

To my mind, the above statement appears to suggest that our current level of defence spending is unnecessary. But in the absence of a war to test out the adequacy of our military, such a claim is untestable. To draw an analogy from IT, it is like trying to argue whether one's off-site backup system is cost-effective when there had been no data disasters before to quantify the range of possible losses.

I think cutting the defence budget is a terrible idea. As I have maintained throughout my writings on this blog, the world is moving into a period of greater geopolitical risks, driven largely by resource scarcity. Given our dependence on foreign resources for our most basic needs, it is paramount that we have a strong military as a kind of leverage against any hostile foreign intentions. Furthermore, such military force will likely be required to keep our sea lanes open in the face of terrorist threats. Ms Pua and the Reform Party have made the rather common error of thinking that if Singapore is friendly towards other countries, they will reciprocate. I would suggest that they read some of the local language newspapers of our neighbours if they have not seen the vitriol poured out against Singapore on a fairly regular basis.

The Reform Party's letter again shows, in my view, that the coming elections will only be about domestic issues. The bigger storm clouds coming over the horizon are being ignored by all political parties.

North Korea Attacks South Korea and Irish Troubles

South Korea's Yeonpyeong Island, near the disputed maritime border with the North, was shelled by the latter today, killing 2 South Korean marines and injuring several others. The attack has been criticised by the United States, Europe and Russia, while Japan is demanding action from both the US and the United Nations. I think China's reactions should be interesting.

Apart from this, the Irish bailout by the EU and IMF appears to be in trouble. This just in from Dow Jones Newswires:

German Chancellor Angela Merkel Tuesday underlined the grave situation facing the single currency in the wake of the financial woes facing Ireland.

"We're in an extraordinarily serious situation, as far as the situation of the euro is concerned," Merkel said during a speech at the German employers association annual conference.

She labelled the Irish crisis "very worrying" but different from that faced by Greece in spring this year.

Thus, financial markets around the world have been rattled by these 2 events today. Interesting times in the markets.

Possible Food Crisis in 2011 - UN

The UN's Food and Agriculture Organisation's latest Food Outlook has reported that there could be a global food crisis next year, and asked that the world be prepared for greater price volatility.

According to the report:

• World cereal production will contract by 2% instead of the 1.2% expansion in an earlier forecast.
• Inventory in world cereal is expected to drop by 7%. Barley will decline by 35%, corn by 12% and wheat by 10%
• Only rice stockpiles are expected to increase, by about 6%.
• Prices of some food types may rise up to 2008 levels.

If the FAO report is accurate, it will mean food riots next year as had happened in 2008. I think for the problem to be fixed at least partially, we have to stop the idiocy of biofuels, especially palm and corn-based fuels. It's ridiculous to devote so much land and resources to produce motor fuel when people run the risk of starvation.

For us here in Singapore, it is perhaps time again to look into preparing for this possible crisis by means of food storage and some limited forms of urban agriculture. Preparing early could mean saving some money if food inflation should become a serious issue. In China, it already is. So we need to be watchful.

Preparing For A Less-Friendly World

At the recent G20 Summit in Korea, PM Lee Hsien Loong rightly called for the G20 group of nations to work together towards policy measures that will sustain global economic growth. Unfortunately, as the aftermath of the meeting showed, his urgings fell on deaf ears as the Americans went ahead with QE2 despite opposition from China, Brazil and others. It looked to me like 'every nation for itself' and the possible outcome would be some kind of 'Nash equilibrium' when it comes to the trade and currency war situations.

As I have written before, I believe that we are moving into an era of reverse globalisation where there will be more friction of various kinds between countries. Here in Singapore, based on public information, it would appear to me that the government's economic assumptions are still predicated upon the continuation of the old free-trade system that has started to unravel since the 2008 financial crisis, with only a change in leadership from the developed world to Asia. What I would hope to see from our government is first an acknowledgement that we could be going into a rough period in the international scene, followed by concrete policy measures to prepare for such a possibility.

Realistically, I don't expect any change in our national economic thinking any time soon. Neither the government nor the opposition parties appear to have considered the risks of the era of reverse globalisation, at least not publicly.

COE prices: Irrational exuberance?

COE prices have reportedly reached 10-year highs in all categories, at a time when economic growth is expected to slow down globally and in Singapore as well. The proximate cause of the price increases is the expected reduction next year in vehicle quotas by the LTA.

One the demand side of the equation, I wonder whether some Singaporeans continue to be overly optimistic about the country's economic prospects next year and beyond. It also looks as if no one is paying attention to peak oil and the risk of another economic crisis.

Foreign funding of local politics

A member of a local group that had recently been classified as a political organisation under the Political Donations Act (PDA). wrote a piece in an anti-government website criticising the policy of restricting funding of political bodies in Singapore to local fund sources as a self-serving rule of the PAP government. He cited our openness to foreign influences in many other aspects as a kind of counter-argument.

I would say that his piece is also highly self-serving, given that his organisation's foreign funding sources have been cut off by the ruling under the PDA. No country in its right mind would want to allow foreign funding of political organisations. Even a superpower like the US, where vast amounts of money change hands in political donations, bar foreigners from donating to American political bodies. Given the size of the US, it is obvious that foreigners trying to influence US politics would have a lot less leverage. For example, donating US$20 million to a political party there would be a drop in the bucket. In contrast, that amount of money would have a huge impact on any political organisation here, even for the PAP.

To my mind, we have enough foreign influences as things now stand. Maintaining the restrictions on foreign funding of local political bodies is one of the last bastions of 'local sovereignty', even if it is merely symbolic. I don't want to see my pink IC's meaning being eroded further.

UK University Subsidy Cuts

I had a foretaste of the recent protests this week when I was a graduate student in the UK more than 10 years ago, when the British government wanted to enact a small increase in the fees to be paid by local students. The usual 'this will hurt the poor' chorus was sung out very loudly. At my school, the irony of course was that most of the local students were from well-to-do families, and were expected to join the country's elite given the pedigree of the qualifications that they were in the process of acquiring.

I'd say that I was in full support of the fee increases back then, and even more so now, given the dire state of the UK's fiscal health. Like it or not, British higher education is a waste of taxpayers' money. I would say that more than half of the universities are not more than what in Singapore we would consider as polytechnics, producing graduates that lack the level of skills and knowledge that would accrue from a proper university education.

As an illustrative example, I met one of my house-mate's university buddy. He got a 2nd lower honours degree from a university that was near the lower half of the 2nd tier of universities in the UK. He only managed to get a local council job that paid GBP 9000 per year at the time (That's like, after tax, making S$1 k a month as a graduate). My house-mate, a British PhD candidate in biochemistry, told me that in most cases, if one fails to get a 2nd upper honours degree, it was as good as not having a degree when it comes to assessing one's prospects in the job market. That to me was the key to the issue of quality - if employers are not willing to hire people below 2nd upper honours, it means that the pieces of paper held by most graduates didn't count for much.

UK under the Labour government has pursued extremely socialistic policies, and now the taxpayers are asked to pay for that overwhelming burden. Cutting university spending is a move in the right direction. The higher-education bubble should be popped sooner than later.

Minimum Wage and Competitiveness

In the recent debates about the possibility of a minimum wage in Singapore, both the government and the Singapore National Employers Federation came out against the idea with the textbook objection that higher wages will lead to jobs being moved overseas to cheaper locations. The argument implies that in an era of free-trade and globalisation, a minimum wage policy will lead to high wages and thus job losses.

In this context, I would like to share quotations from a blog post by Charles Hugh Smith entitled Why America Is Slouching Toward Third World Status:

Free trade fanatics would do well to study Germany and South Korea, two blatantly mercantilist export giants. German wages are among the highest in the world, yet their industry has not been boxed up and shipped to China; why?

Germany made a series of political and cultural trade-offs. Please examine their apprenticeship programs, the manner in which their unions accepted cuts in pay, benefits and working hours in order to sustain their own jobs, and that nation's political balancing of issues around jobs, trade, currency and security. Please educate yourself about the trade-offs made by South Korea.

To believe that an open market would solve everything is akin to believing in a Marxist paradise: all trade is deeply, fundamentally political. Free trade, like Marxism, promises an emotionally appealing perfection but in the real world, it is a tangled series of trade-offs that are guided by those Elites with the most to gain from one "trade" or another.

While Germany does not have a national minimum wage, it does set by law the minimum pay for several types of jobs. For the rest of the economy, wages are set by collective bargaining and are enforceable by law. As Smith rightly pointed out, the high wages in Germany has not resulted in the wholesale loss of manufacturing jobs to China, unlike in the US.

Some food for thought for us here in Singapore, especially when examining textbook arguments in economics.

Temasek To Increase Stake in China Construction Bank

Looking at the streaming news feed on my brokerage screen a few minutes ago, I saw a story by Dow Jones Newswires that Temasek Holdings has decided to take Bank of America's entitlement in the latest China Construction Bank (CCB) rights issue exercise:

(Dow Jones)--China Construction Bank Corp. (0939.HK) said Thursday that Singapore state investment firm Temasek Holdings Pte. Ltd. will take up Bank of America Corp.'s (BAC) entire entitlement in CCB's rights issue, confirming an earlier comment made by a Temasek spokesperson to Dow Jones Newswires.

According to the article, CCB had announced in April of its intention to raise up to USD 11 billion to shore up its capital base, which had deteriorated due to a government-directed lending boom. From what I can remember, this lending boom was part of the multi-bullion Yuan monetary stimulus that the central government had implemented to artificially shore up economic growth in the mainland during the recent financial crisis. For its efforts, China was widely regarded as the 'saviour' of the world economy after all the developed economies tanked.

From an Austrian School perspective, we know that a government-mandated credit boom usually lead to malinvestments as borrowers recklessly invest in projects that are unprofitable without cheap money. This is typically followed by a credit bust and loan defaults.

While the CCB is prudent in shoring up its balance sheet, it does look to me like Singapore is indirectly paying for China's monetary stimulus.

Sign of The Times?

In recent years, I have read or heard various political and financial commentators like Harold James ("The Creation and Destruction of Value") and Russell Napier ("Anatomy of a Bear Market") talk about the increasing level of intervention that governments will assert in both markets and in our lives. Looking at what's been happening since the 2008 global financial crisis, such assessments appear to me to be correct.

In a sign of things to come, the following is a story that I received from the newsletter service Casey's Daily Dispatch:

Basically, a man was arrested and taken in by anti-terrorist police in Sweden after complaining to a friend on the phone about having an “explosive headache.” How did this happen? Apparently, Sweden has had blanket surveillance of all phone and Internet traffic since 2009, and the use of the word “explosive” triggered a keyword rule that made the anti-terrorist troops come out in force. After invading the man’s privacy by listening in on his phone call, police with automatic weapons stormed his house, scared the hell out of his family, and proceeded to arrest him and three relatives, all because the guy had a headache. As if to add serious insult to injury, the guy was denied a public defender, presumably because of the “terrorist” nature of his crime. Way to go Sweden.

If you can read Swedish, the original news article can be found here.

My point is this: Those who criticise Singapore for our lack of freedom should note that increasingly, we may not be alone in having our freedoms restricted by government actions. That's the new reality, in my view.

IEA's Tacit Nod to Peak Oil

The International Energy Agency's World Energy Outlook 2010 has just been published, and in the Executive Summary of the report, we find the following noteworthy passage:

Oil demand (excluding biofuels) continues to grow steadily, reaching about 99 million barrels per day (mb/d) by 2035 — 15 mb/d higher than in 2009. All of the net growth comes from non‐OECD countries, almost half from China alone, mainly driven by rising use of transport fuels; demand in the OECD falls by over 6 mb/d. Global oil production reaches 96 mb/d, the balance of 3 mb/d coming from processing gains. Crude oil output reaches an undulating plateau of around 68‐69 mb/d by 2020, but never regains its all‐time peak of 70 mb/d reached in 2006, while production of natural gas liquids (NGLs) and unconventional oil grows strongly.

The part in bold font is consistent with what leading peak oil experts have been saying for the past few years, namely that conventional crude oil output peak at around 75 mbpd in the 2005-06 time frame, and that what has keep output growing in pace with demand has been the rising role of NGLs, coal-to-liquids, biofuels and other non-conventional liquid fuels.

Unfortunately, this important piece of news has received little or no coverage in Singapore. Given the importance of trade to our economy, and the dependence of trade on fossil fuels, this is disappointing although predictable.

World Bank Chief Talks About Gold Standard

The financial media has been set abuzz over the weekend because of comments by the World Bank chief Robert Zoellick regarding the include of gold into a future international monetary system. Calling for a more cooperative system which will include the major currencies of the world, he added the following statement, as reported by the Financial Times:

"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."

Whether or not this is another one of those 'trial balloons' that senior people like the float before a major policy change I don't know, obviously.

But it is worthwhile considering what impact the inclusion of gold into a future monetary system will have on Singapore. This is particularly so given the low percentage of our foreign reserves that is being stored in gold. Based on IMF data, as reported by Wikipedia, Singapore only has 127.4 tonnes of gold reserves, which is a miserable 2.3% of our total reserves.

In a future system that values gold more than the current one, will Singapore suddenly become poorer relative to other countries that have more gold? How will that affect our CPF savings? Does the government have more gold than what it has reported to the IMF, like China previously? I have not figured it out yet, but like I said, it's something to think about.

Vietnam protests against China mapping

More troubles between Vietnam and China, this time over the way a PRC government agency has drawn its maps marking the Spratly and Paracel Islands are PRC territories. This has been reported by the FT Chinese edition today:

中国政府上月启动的一个在线地图服务受到了越南政府的强烈批评。这是由于中国姿态日益强硬，造成地区摩擦的又一个体现。

Vietnam has protested the PRC action, and this has been reported by the Vietnamese media, an English version of which can be found here.

Definitely something to keep an eye on.

$10.2 trillion problem in 2011

The Wall Street Journal has reported that the developed countries of the world will need to raise US$10.2 trillion in 2011 to finance their budget deficits as well as to repay maturing bonds issued previously.

Given that many investors are now aware of the fact that most of the developed countries' governments are bankrupt, and that China may be increasingly unwilling to buy such sovereign debt as a result on the ongoing currency and trade wars, this could mean another round of shocks to the global financial system next year. If investors fail to show up for those bond auctions, there will either have to be debt default or monetisation. In the US case, the outcome is already clear - the US Federal Reserve will act as the buyer of last resort, buying up US Treasury debt in order to monetise it. As for Europe, I am not sure what will happen, as national politics between the different EU nations are involved. Austerity measures aren't getting much traction so far given the scale of protests that are happening across the EU. So, perhaps the EU may also be tempted to monetise debt? Who knows?

Whatever the case may be, it will definitely mean more 'interesting' times for investors as governments get more and more interventionist.

US Federal Reserve QE2 looks set to fail

Since the US Federal Reserve announced its US$900 billion 'QE2' programme of buying US Treasury debt and other mortgage-backed securities, stocks, bonds and commodities have moved violently in response. Looking at the intra-day actions on Wednesday and Thursday (US time), the market seems to be signalling failure of the new policy. Here's why.

Whatever the ostensible reasons for 'QE2', one important reason for the Fed's actions is to prop up the US stock market, using the 'reflation trade' to try to create enough wealth effect to stimulate household consumption, and thus get the US economy moving again. This is typical Keynesian thinking.

However, when we look at the market movements in the latter part of the week, we find that while US stocks have moved up, commodity prices have increased to an even greater degree. Since commodity prices influence cost-of-living, it means that the weak wealth effect has been more than negated by pipeline inflation. Thus, the market appears to me to be saying that the Fed's leveraging up of its balance sheet ultimately is a lot of 'noise' but no real impact is achieved. This is exactly what economists of the Austrian School have predicted together with some of the more savvy market participants.

For us here in Singapore, what this means is that we have to discount most of the 'good news' that the mainstream media is feeding us about the effectiveness of the Fed's latest policy move in helping the US economy to recover. The risk of a 'double dip' is still out there, probably in 2011.

Biggest Debt Bubble in Human History

This is an article from the Economic Collapse blog arguing that the US is still in the midst of the largest debt bubble in human history.

Living Beyond Our Means: 3 Charts That Prove We Are In The Biggest Debt Bubble In The History Of The World

Apart from the US, there are also debt bubbles in the various European nations. As such, I think it is a matter of time before another financial crisis hits the world, as the size of the debt bubble is at or near a point where it is mathematically impossible to be sustained. And when that happens, Singapore will also be seriously affected.

Singapore's Energy Strategy

While it has been reported recently that foreign experts have opined that Singapore's national energy strategy is on the right track, I feel that much remains to be done to move to a more sustainable energy infrastructure. Thus, although LNG is a good way to diversify our natural gas needs, we still can't escape the reality of well depletion, especially the rapid rates of offshore wells (since our LNG supply will come from the fields off the west coast of Australia).

And as much as it is good news to have a solar plant operate here, I still feel that we are not aggressive enough in putting in solar infrastructure. Yes, at current oil prices, it makes no economic sense, but if we look at the investment as one of providing a partial backup solution, it will make a lot of sense when (not if) there are disruptions to our natural gas or crude oil supplies.

And as for nuclear power, unless new technology making use of thorium becomes viable, if we have to wait 10-20 years as some experts have suggested, uranium-powered nuclear reactors may not be relevant as we might have reached 'peak uranium' by that time and all the known supplies would have been locked up by big countries like China and India.

NEA Website Overloading - A Simple Solution

During the recent haze problem some forest fires in Indonesia, many Singaporeans were using the NEA website to check the PSI readings. As a result, the website became overloaded and this caused a lot of unhappiness amongst users.

In response to a complain letter, the NEA posted this reply to the Today newspaper:

We refer to Mr Lam Wei Guang's letter "Frustrated by NEA's weather info hotline, site" (Oct 16-17).

We wish to apologise to Mr Lam for the inconvenience that he experienced. The lightning information on NEA's weather hotline (6542 7788) is being replaced with a newer and better system and is expected to be ready in October next year. We will inform the public when the new system is operational.

Mr Lam was unable to access to NEA website at 4.25am on Oct 10 as the website was undergoing routine maintenance on that day between midnight and 8am. We will ensure that users are kept informed of the period of scheduled maintenance.

We thank Mr Lam for his feedback.

Instead of spending time and money calling for a tender to build a new system, which will only produce results next year, a much simpler solution could have been implemented during the time of the overloading and had the problem fixed within hours.

The NEA web page showing the PSI reading was a very 'heavy' page filled with graphics and other extraneous information. What the NEA could have done is to put up a stripped down page with only the bare PSI reading information, which will not only cut down server load significantly, but could also be marketed as being 'mobile phone friendly'. This is a very common practice among popular websites, as they seek to attract mobile phone surfers such as those using the iPhone.

This simple solution could be implemented in PHP or even the current ASP framework within a few hours (including UAT) for less than S$1,000.

Now, what we get is a new system, possibly over-sized to take care of peak traffic while idle most of the other times when the air is clear. Or we get a refactoring of the website code to move to a cloud-computing solution. Both of these are complicated ways to solve a simple problem. Complexity of course means more energy, money and time expended, with doubtful benefits.

Storm Clouds Over the Horizon

While the drumbeat of Singapore politics has become louder in recent months, I am of the opinion that the focus of the discourse has so far been too parochial. There are some of the storm clouds that I see over the horizon and that could have impact on Singapore within the next 5-10 years, but which has so far not been covered in the discourse.

In this article, I shall outline some of the issues that I think will have major consequences for the long-run viability of our country. Admittedly, since I don’t have the power to predict the future, these points are somewhat speculative, although I have done some homework in all areas.

Peak Oil

Some experts such as Dr. Colin Campbell and Prof. Kenneth Deffeyes have argued that global peak oil production had actually peak in 2005, based on current available data. Production of liquid fuels has kept up with demand so far due to other sources like coal-to-liquids and gas-to-liquids technology. While new ways will be found for extracting oil and gas, the fact that the Brazilians have to drill for oil more than 7 km below the earth's surface for their Tupi field shows that the era of cheap oil is over.

Peak oil will result in very high volatility in the crude oil market, as high oil prices triggers recessions in economies. Such recessions will bring down demand and thus prices for a while until recovery takes places, at which time prices move up again and the cycle repeats.

As high prices take its toll on the global economy, trade will be reconfigured as businesses seek to move their production closer to their customers in order to cut down on the distance over which they have to ship their goods in order to cut transportation costs. A preview of this happened in 2008 when some US manufacturers found that moving production from China back to the US or Mexico made a lot of sense when oil was over US$100 per barrel. Besides this, tourism will be affected as high fuel prices forces airlines to cut routes and ground planes, as had happened in 2008.

Since the Singapore economy is very dependent on trade and tourism, peak oil could have a very large negative impact on our livelihoods.

To make things worse, high fuel prices will definitely lead to higher food prices since we import almost all of our food from abroad, sometimes over long distances.

Resource Scarcity

Due to changes in the weather cycles (not anthropogenic global warming), global food production could consistently fall short of demand. This explains the current ‘land grab’ that many countries are engaging in over in Africa and South America, as previously covered by this blog. Furthermore, the availability of potash and phosphorous could also be constrained, resulting in lower fertiliser production.

In terms of other minerals, peak oil proponents like Richard Heinberg have argued that we will soon experience declines many key industrial commodities.

And let us not forget the issue of water scarcity. As covered by the National Geographic magazine in April 2010, water conflicts are starting to surface, especially in the Tibetan plateau (China and India) and the Nile region.

As resources get scarce, there could well be conflict between countries competing for those limited supplies to satisfy their own economic needs. Global cooperation will decline and the world will become more unstable, again not good for Singapore's economic model.

End of USD as Reserve Currency

If the US Federal Reserve continues current policy of debasing the USD, it could well only be a matter of time before confidence in the currency collapses and the world is forced to move to a new currency regime.

While I don’t claim to know what the likely impact of such a scenario will be for Singapore, the fact that our country is a large holder of US government debt makes the possibility of financial losses quite high should the USD lose its reserve currency status. What this means for us as citizens is that our CPF savings will suffer losses as well.

Besides this, since our independence, we have only had experience with a USD-based global currency system and nothing else. One could even argue that our economic policies were designed to take advantage of the global trade system made possible by the USD’s reserve currency role and the attendant global credit expansion cycle since the early 1970s. Once that changes, we will have to figure out how to adjust our economy to the new global architecture, and whether or not we will be up to the task remains to be seen.

War

That the US is in decline is by now quite obvious, except for people like Stratfor’s George Friedman. As we move toward a multi-polar world, there could actually be more instability, if the Hegemonic Stability Theory is correct. This is especially so as the world faces the reality of resource scarcity and there is heightened competition.

Besides this, based on historical analysis, some cycle theorists and market experts believe that we are now in a Kondratiev Winter, and some believe that major wars have to occur before the next upswing in the global economy. From a generational cycle perspective, John Xenankis of Generational Dynamics predict a war between China and the US.

If the world were to move into a period of conflict, it would again mean that Singapore’s economy will be affected, since we depend on peace for our economic model to work.

Conclusion

Since this article is about threats to Singapore, I have not covered the more optimistic factors that will affect our future (e.g. Asia’s rising economic power etc). What I hope is that more Singaporeans will take a look at these possible threats and make preparations to deal with them in whatever way they can, and of course, pray that they don’t come to pass.

More Bad News on Inflation

With bakeries in Singapore reportedly raising prices for their products due to the sharp rise in the price of sugar, there is now more bad news as Bloomberg reports that cooking oils are poised to see price increases as record demand has brought inventories down to 17-year lows.

"Inventories of soybean oil and palm oil, used by Nestle SA and Unilever and in everything from Hellmann’s mayonnaise to Snickers candy bars, will drop 12 percent in the coming year as China and India increase consumption 11 percent, U.S. Department of Agriculture data show. Food prices climbed in September to the highest level since the crisis in 2008 that sparked riots from Haiti to Egypt, the United Nations says."

Indeed, China and India will be the prime drivers of demand for agricultural commodities for years to come.

Raising Retirement Age in Singapore - Structural Issues

In PMO Minister Lim Boon Heng’s trial balloon about the need to raise the retirement age to 68, he used the example of Finland which faces a similar aging population problem. Let us look at why the example of Finland is not useful for Singapore as well as the other structural problems in our country that makes the raising of the retirement age an ineffective means of dealing with the inadequate savings problem.

We Lack Finland’s Strengths

In Finland, as in most other developed countries, quality control of both long-term and short-term immigrants is fairly robust, and immigration policy is tailored towards enhancing the well-being of citizens. In contrast, our government’s overwhelming concern is in this area is for economic growth, achieving through the use of foreign labour to lower costs for employers.

In addition, Finland is also an innovation-driven economy (see Michael E. Porter’s Competitive Advantage of Nations) where its companies can produce goods and services that have pricing power. On the other hand, the short-term growth focus of our economic policies for the past 20 years (since Prof. Porter’s book was published) has resulted in our economy being stuck at the ‘factor-driven’ stage, dependent on containing costs to satisfy the profitability needs of multinationals and local companies.

Thirdly, Finland has evolved a social compact where citizens and companies share both the burdens of their welfare state and the benefits thereof. On the other hand, Singapore citizens are told to fend for ourselves due to the risk of companies packing up and moving to cheaper locales. Clearly, the social glue that is present in Finland is not found in Singapore.

Given the aforementioned, it is reasonable to believe that raising our retirement age to 68 will not result in higher employment for older, less productive workers.

Other Structural Problems

The biggest structural problem that I can think of now is the high cost of housing in Singapore. In the recent decade (at least), HDB has allowed the pricing of its flats to move with fairly high correlation with the price movements in the private property market, thus deviating from its mandate of providing affordable housing to citizens. With prices rising faster than salaries, this means that CPF savings that can be productively invested elsewhere in the economy has been used up to pay for housing. Furthermore, as the US housing bubble shows, depending on the value of one’s home for retirement can result in a lot of grief, since it is premised on ever-increasing prices that some later generation has to pay when the properties are sold. Somewhat like a Ponzi scheme, don’t you think?

As the economy is increasingly become more service-oriented, the inherently lower productivity of the services sector will mean greater income inequality when coupled with our current immigration policy. For most of us who don’t have exceptional skills, the need to compete with foreigners in our own country will mean diminished income growth prospects, and thus lower savings for retirement.

What Does It Mean For Us?

Since there is no way we can restructure our country to be more like Finland in the short time before some of us are hit with the retirement crisis, it basically means that we have to start to look for our own solutions to this problem. And as advocated in my previous article, this definitely means an aggressive plan to lower current costs of living in other to transfer purchasing power into the future to fund retirement.

Raising the Retirement Age in Singapore

Since hitting the news last evening, PMO Minister Lim Boon Heng’s trial balloon about raising our retirement age to 68 has prompted a fair amount of negative comments online, with Singaporeans expressing anger and fear about the issue. Some online commentators have even called for Singaporeans to vote against the PAP in the coming elections to express their displeasure and to effect political change.

Since dealing with this issue through the ballot box requires that other Singaporeans to co-operate in terms of voting, and since we cannot be sure of the outcome until after the fact, I thought that it would be more useful for us to plan on how to deal with this potential policy change at the level of our individual lives instead.

Likely Impact

First of all, let’s look at the likely impact that raising the retirement age to 68 will have on us. The thing that we can be certain of is that access to our hard-earned CPF funds will be delayed in line with the later retirement.

The other thing which I think is likely to happen, although there is some uncertainty, is that the chances of us staying employed beyond the age of 60 will not improve even with legislative changes. This is because without complementary policy changes and actions elsewhere (e.g. immigration), this policy alone will not alter employers’ preference for younger workers, and legislative compulsion will simply drive them to take evasive actions and to move production overseas to cheaper locations such as Vietnam, which has a young and motivated population. The result will be that for the years between 60 and 68, we will need to find alternative means of supporting ourselves financially without recourse to CPF funds.

Defensive Actions

Having spent time thinking about the future economic prospects of our country, I am driven to conclude that for the majority of the working middle-class in Singapore, our current lifestyles will almost certainly translate into poverty in old age (I will write a more thorough analysis if I have time in future).

Given this situation, I feel that it is very important for us to make preparations for the possible retirement funding crisis. The first step is to come to terms with the reality of poorer future prospects for most of us who have to depend on a salary for our livelihoods. If you are not convinced of this either rationally or emotionally, please leave a comment here to let me know that you want further analysis on this subject. Note that blaming the government for past policy mistakes will not be helpful towards our preparedness!

The next step is to take a critical look at our current lifestyles, and find ways to cut back on expenses in order to increase savings. In a more serious case, it may even mean selling an over-priced property to downgrade to more modest dwellings. And as I have argued earlier, it is not prudent to depend on cashing out of our real estate at retirement in order to raise the needed funds.

Once a plan to cut unnecessary expenditure is in place, we can then upgrade our knowledge on investing in order to be better at making our savings work harder. This is necessary because markets are getting more volatile unlike the previous 30 years when a buy-and-hold strategy works because of the rising tide lifting all boats.

Finally, we may want to re-examine the premises upon which we define our happiness and fulfillment. We may want to find meaning in building deeper relationships with our friends, family and community, and move away from the endless cycle of ‘work-and-consume’ that seem to pervade our materialistic society.

The above is merely an outline of what we can possibly do to prepare for the policy changes that the government is thinking about. I hope that it will encourage you to think of creative solutions and to take proactive steps to deal with the situation. Comments are most welcome.

U.S. Shale Gas Hype

With natural gas prices at record low levels in the US, I have been hearing arguments that the abundance of shale gas has resulted in an abundant supply for that country far into the future. While this is good for consumer, it is bad news for investors in natural gas companies.

The Oil Drum, a well-known peak oil website, has posted an article entitled 'Shale Gas - Abundance or Mirage? Why the Marcellus Shale Will Disappoint Expectations'. It gives a detailed analysis of the likely poor financial performance of Exploration and Production (E&P) companies involved in the shale gas play. Of particular interest to me was the following paragraph:

"Our evaluation suggests that there is limited commercial value from these plays despite public enthusiasm and operator claims. E&P company shareholders have subsidized low natural gas prices and have little hope of recovering their investment in the near term. The underlying problem is a failure to grasp the concept of discounting. Reserves that are produced in small volumes over decades have little future value and are, therefore, not reserves. The shale plays are called resource plays for a reason: they are all about resources but not profit or the shareholder."

The conclusion is that the shareholders and bondholders of these E&P companies are subsidising consumers of natural gas in the US.

Why is this relevant to us? Because one of the companies analysed in the article is Chesapeake Energy, which received a US$500 million investment from Temasek Holdings in the form of a 5.75% cumulative non-voting convertible preferred stock with a liquidation preference of $1,000 per share. Besides Singapore, sovereign wealth funds from Korea and China have also invested money in the company. One hopes that buying the preferred stock is a much smarter move than buying the ordinary stock of Chesapeake, which has had a dismal performance since the financial crisis of 2008.

The End of Globalisation

Jeff Rubin is one of the few economists who understands resource constraint issues. He has argued since 2008 that the global financial crisis was caused by high oil prices breaking the backs of the advanced economies.

In this interview, he argues that oil will again be above US$100 in the near future, and that it will lead to a reconfiguration of world trade and thus a reversal of the trend towards globalisation.

Peak oil will mean that oil will become too expensive to burn. This does not bode well for the Singapore economy in its current form.

Home-grown Vegetables

Organic chye sim grown at home.

Tastes quite good when stir-fried!

Korea Considers Capital Controls

In a move that appears to bolster my belief that the boom in the emerging market economies and stock markets are due more to the US Federal Reserve's quantitative easing rather than improvements in the global macroeconomic fundamentals, South Korea is reportedly considering measures to curb capital inflows, as reported by the Chinese edition of FT.

韩国透露了实施一系列新的资本管制措施以应对投资流动激增的可能性。

这意味着亚洲第四大经济体可能采取与巴西、泰国和印尼相似的防御性政策。

The full article can be found here.

And as a further sign that the underlying structural problems in Europe has not been addressed, let alone resolved, budget talks in Portugal aimed at implementing austerity measures to satisfy the bond market have made little headway so far.

Now that the US Fed is expected to announce a new round of quantitative easing, we need to watch to see what impact that policy will have on stock markets. We live in very interesting times indeed.

UN Warns of Food Shortages

The United Nations has warned of rising food prices and shortages in the coming months, although it does not expert a repeat of the 2008 situation.

"Although food stocks are generally good, after a year in which harvests were wiped out in Pakistan and Russia, sugar and rice are at their highest price levels. And global wheat and maize prices recently jumped nearly 30 per cent in a few weeks.

Global meat prices are at 20-year highs and last week the US predicted wheat harvests would be 30 million tonnes lower than last year. Meanwhile, the price of tomatoes in Egypt, garlic in China and bread in Pakistan are at near-record levels."

The story as reported by The Age in Australian can be found here.

Jim Rogers Has Been Very Polite

Around January this year, Jim Rogers was reported to have said that the Hong Kong real estate market was in a bubble situation. However, according to property consultants Knight Frank, the Singapore property market rose 37% year-on-year in the 2nd quarter, ahead of both China (36.8%) and Hong Kong (24.9%), as reported by Bloomberg.

So far, Jim has not called the Singapore market a bubble. Rather polite, don't you think?

Singaporeans Buying Properties Overseas

Last evening, I overheard a report on the 6:30 pm Chinese news programme on Channel 8 that more Singaporeans were looking to buy properties overseas. This was also reported by Channel NewsAsia here.

What caught my attention was the following statement made by one of the developers:

"Still, buying properties in Spain now is about 50 percent cheaper than several years ago as property prices there have reached rock bottom, said property developers."

While it is true that real estate prices in Spain has declined by 50%, whether or not it has reached rock bottom remains to be seen. As the old trader's adage goes, 'cheap can get cheaper'.

The premise of the aforementioned statement by the developer appears to be that the worst of the financial crisis is over, and that we are slowly climbing back to economic growth. This is something which I disagree with.

A quick scan at the EU landscape shows increasing levels of social unrest as people express their unhappiness about the forthcoming fiscal austerity programmes imposed by their governments. Europeans accustomed to generous welfare benefits have so far been unwilling to accept the reality that high standards of living require the exertion of more than minimum efforts. This does not look to me to be a sound basis for an economic recovery.

Furthermore, despite the fact that European banks in general are more poorly capitalised than US ones, none have been closed down so far compared to hundreds in the US. Something is wrong with this picture, isn't it? Short of the ECB doing more 'quantitative easing', bank failures will hit the EU next year.

For Spain itself, more bad news as FT reports that municipal debt default has started with the town of Villajoyosa. Again, it does not look like recovery is on its way.

I don't know about you, but I never trust property developers when it comes to macroeconomic analysis.

Immigration, Property Prices and Your Retirement

The Straits Times reported on Friday 22/10/2010 that Singapore was ranked seventh in a survey of how countries ranked in terms of adequacy of income for retired persons. It reported that the CPF Board had expressed reservations regarding the limitations of the survey, in particular its exclusion of the CPF funds that we use to buy property:

“If CPF monies withdrawn for housing are included, savings are substantial, averaging around $200,000 for active members who turned 55 in 2007-2009.”

Implicit in the CPF Board’s statement is that money used to buy our HDB flats could be included in the assessment of our financial preparedness for retirement.

What worked previously

Historically, our HDB flats and other residential properties have been a good store of value for our retirement. Rapid economic growth in the past decades have allowed for the appreciation in the prices of such properties. This has allowed older people who have retired in the past 20 years to cash out of real estate at significant profits for use to fund their retirement.

What this means for those of us who are saving for our retirements is that if we are to rely on the existing model of using real estate as a means of funding, we will also need our economy to continue to grow in order to be able to obtain the price appreciation needed. Furthermore, for most of us, we will need to have continued growth in our incomes in order to pay off the mortgage that invariably comes with the purchase of real estate.

In order for this model to continue working, we will also need to sell our properties to someone else, and this is where the issue of immigration comes into play.

Given the country’s low fertility rate, we will soon be facing the prospect of a declining population if there is no immigration. Specifically with respect to the real estate market, this will mean lower demand for housing in future, which translates to the possibility of the country having a surplus of housing units. This lower demand will mean either lower growth or even outright declines in property price in future.

In addition, given that economic growth is a function of capital, labour and productivity growth, a declining population will also mean that economic growth will slow unless compensated by rapid increases in productivity. Given our mediocre record in raising productivity, this means that economic growth will be problematic in future without immigration.

It can thus be said that we Singaporeans are confused about the immigration issue. On the one hand, we have expressed our unhappiness at the influx of foreigners causing all sorts of stresses on the country’s physical infrastructure. On the other hand, whether we are aware of it or not, we need to keep population either stable or growing in order to maintain real estate prices that we depend on for our retirement. So short of a rapid turnaround in birth rates, which seems to me to be unlikely, we will have to accept the current liberal immigration policy.

Risks

While I feel that the government is not likely to reverse in any significant way the current immigration policy, I would like to highlight the risks to us as individuals of continued reliance on real estate as a store of value to fund our retirement accounts.

A mortgage is a bet on your personal future. It is an expression of confidence that you will be able to grow your income sufficiently to handle the payments, and if stretched over a long period, that the income stream will be stable. In recent years, we have seen more volatility in the Singapore economy due to greater uncertainty in the global economic situation. With the constant need to restructure, jobs have become less secure and retrenchments and unemployment more likely. This means that committing to a long term mortgage (e.g. 15 years and above) may not be a prudent thing to do.

For those who buy additional properties to rent out, besides betting on the government not changing the current immigration policy, you are also betting that the economic prospects of Singapore are bright enough to continue to attract people to move here for work and residence. While we cannot foretell the future, we need to be aware of the significant risks that lie on the horizon. These include peak oil, the currency wars turning into global protectionism and trade wars, and a collapse of the USD resulting in a new currency regime. Although I am unable to guess with any degree of accuracy what the exact impact of these events will be on Singapore, it is possible in my view that they will result in diminished prospects due to the serious external economic dislocations that are likely to happen.

On the whole, I personally am of the view that reliance on real estate as a funding vehicle for retirement will have significant risks in future. Furthermore, as real estate prices here have increased at a pace far outstripping income growth in the past decade, one has to wonder how much further this trend can continue. As such, new entrants to the property game should be aware of the dangers of buying at or near the top of the market.

Our Dependence on Giant Oil Fields

While there are a large number of operating oil fields in the world, most of the oil output in the world comes from a much smaller subset of giant oil fields. This week, Jim Puplava of the Financial Sense Newshour interviews energy analyst and author Chris Nelder on how the depletion of these giant oil fields will affect global crude oil supplies.

Multiple reserve currency system

The Straits Times reported several days ago that Prof. Barry Eichengreen of U.C. Berkeley in a speech in Singapore said that countries should not worry about the move towards a multiple reserve currency system:

THE move towards a multiple reserve currency system is inevitable and instead of fearing it, world economies should welcome it, a prominent American economist said yesterday.

This is because such an arrangement, which will include the United States dollar, the euro and the Chinese yuan, provides more stability than the single currency system now, said Professor Barry Eichengreen.

As far as I can remember, the world has never had a multiple fiat reserve currency system before, so one has to wonder how Prof. Eichengreen came to the conclusion that such a system would be more stable. If 1 central bank can destabilise a single currency system, how does giving more central banks the ability to destabilise a multiple currency system make it more stable?

Besides this, the analyses of the current USD reserve currency system by various economists have shown that the reserve currency country, in this case the US, under such a system has to run persistent trade deficits. If the analysis can be extended to a multiple-currency system, it will also imply that both the EU and China has to be ready to accept trade deficits. While I am not certain about the EU’s position, it would seem almost as certain as finding an ice cube in hell that China would countenance running a trade deficit. Premier Wen Jiabao’s statement that a 20% appreciation in the RMB could risk creating social unrest in China clearly showed that China is not ready to give up its export-led economic model.

On the other side of the issue, the US may also not be ready to give up the seigniorage privileges that come with being the sole reserve currency. Being able to buy oil and other precious items with printed coloured paper is an enormous advantage to the US, which also helps to support its global empire.

With Brazil withdrawing from the G20 process as a sign that countries appear determined to continue with the ongoing currency war, the current geopolitical reality is not exactly supportive of Prof. Eichengreen’s vision of a stable, multi-currency global financial architecture. The risk of a chaotic end to the current USD reserve currency system will remain as long as the Federal Reserve continues to debase the USD and countries are not willing to come to an agreement on how to deal with the global structural imbalances between the developed countries and the emerging ones.

Here in Singapore, the MAS has continued with its policy of allowing for a gradual appreciation of the SGD on a trade-weighted basis. This has the effect of ameliorating the negative effects of global monetary debasement. That said, if the rate of appreciation of the SGD is lower than the rate of monetary debasement of the currencies that form the basket against which it is measured, we will likely continue to see inflation in hard assets and resources. That would most certainly mean higher food and energy prices for us.

China Does The Trade War Thing

Overnight, news came that China was halting exports of rare-earth minerals to Western countries, sending stocks like Molycorp up sharping on a day when the broader market got killed. This appears to be yet another salvo in the ongoing power struggles between China and the West.

The excuse that China typically uses for such moves is that it needs the minerals for its own fast growing industrial usage, which sounds plausible prima facie. The irony here is that China's own aggressive acquisition of overseas resources makes it vulnerable to such stunts being pulled by other countries as well, especially given the current trend towards resource nationalism. The Chinese would probably not be amused if say the US decides that it needed more wheat and soy meal for 'its own use', given the lack of supplies in the market currently. There's a difference between people not having enough to eat and them not being able to buy an iPad due to component shortages.

Perhaps that's why China is busy building up its blue-ocean capabilities, so as to be able to project power far away from its shores in order to get the resources it needs to sustain its increasingly expectant people. The risk of them 'running into' the US Navy is definitely on the rise.

己所不欲，勿施于人 - 《论语·颜渊篇》

MAS Stops Licensing of Financial Representatives

According to a report in the Sunday Times, the Monetary Authority of Singapore has done away with the licensing of the representatives of financial advisory firms. It will set up a Register of Representatives instead, which will allow consumers to do online checks on individual representatives.

Of course, this being Singapore, one inevitably finds the government-dependence syndrome popping up in the views expressed, such as:

"The move has worried some consumer groups and finance industry watchers, who fear that it could lead to an erosion of professional standards, particularly within the smaller financial advisory firms."

"Although the onus has always been on firms to ensure their representatives are fit and proper, some feel that consumers felt more 'secure' knowing that representatives were subjected to MAS screening during the licensing process."

Apart from the government's ability to check on an individual applicant's criminal record more efficiently than the private sector, it has no advantage in terms of assessing his/her qualifications and/or experience. Furthermore, the financial knowledge requirements for getting a license under the previous regime were so low that they were, in my view, quite pointless as far as a regulatory regime is concerned. Self-regulation and market competition would appear to me to be just as effective here.

In terms of how this will affect consumers, I believe that the impact will be minimal. This change does not alter the fact that when choosing financial advisers, one has to still do one's homework and exercise due care. For the average working adult, one should note that apart from insurance and estate planning, several weeks of sustained effort in the study of investing would in most cases allow one to come up to par with the knowledge of the average financial adviser. Thus, the search for a good adviser who can add value to one's thinking can be a challenge at times. One should not outsource the work of thinking about financial planning strategies entirely to an adviser. Financial planning has to be a collaborative process.

Turbulence Ahead for Markets?

Risk assets continue their relentless climb upwards. People are getting ahead about the stock market again, as shown by the IPO and debut of Global Logistics Properties Ltd here in Singapore. So perhaps it is time to revisit the case for caution.

Here's an article from the Pragmatic Capitalist website:

Why There is a Sizeable Air Pocket Beneath Risk Assets Currently

Take care and invest/speculate prudently.

Food Inflation at McDonald's

Here's an example of subtle food inflation. While McDonald's has managed to keep the stick prices of its value-meals from rising too quickly, a check at the quality and quantity of its food shows that food inflation shows up in the form of lower quality.

The Big Mac's beef patty looks a fair bit smaller than it used to.

And it's dry, even though the photo was taken immediately after the burger was sent to my table.

Be on Guard Against the Welfare State

In recent years, I have noticed that Singaporean bloggers who write about politics in a manner critical of the government also show a tendency to support increased government spending on welfare transfer payments. There is a similar tendency amongst the opposition parties such as the Reform Party and the Singapore Democratic Party.

That there should be such support of a welfare state amongst Singaporeans at a time when such a system is on the brink of fiscal and social collapse in the US, Europe and Japan is somewhat disheartening to me, a symptom perhaps of a lack of understanding and critical, independent thinking. The underlying premise amongst welfare state supporters such as the Reform Party appears to be that we are smart enough to avoid the pitfalls of the West. Being Singaporean, I think we are not smarter or dumber than the rest of the people in the world, and given similar economic incentive structures, we will exhibit the same kind of bad behaviour that has made welfare states the failures that they are.

As this is not the place to enter into a serious discussion about the ills of the welfare state, let me introduce to you the writings of American blogger Charles Hugh Smith and his oftwominds blog. Charles has done a very extensive analysis of the social ills plaguing the US currently, and I was actually inspired to write this blog post because of his article entitled The Normalization of Sociopathology in America. In this article, he gives examples of how being honest and hardworking actually means being financially worse off in the welfare state.

Now, I am not against helping other people who get into trouble through no fault of their own (I grew up very near the poverty line myself). However, instead of showing the typical Singaporean 'the government should take care of this problem' mentality, we should perhaps ask ourselves this - why can't I do something about the poor myself? As an advocate of preparedness and self-reliance, I believe that the government's role should not move beyond setting the rules so that we the citizens can use our own money to the best of our own judgement, and spend that money on welfare causes that we personally deem are worthy. There should not be a need for the government to act as the middlemen between us and the poor, deciding for us what is good or bad. Working through voluntary welfare organisations is, to my mind, a far superior way of helping the poor than through a likely rule-based, impersonal government bureaucracy.

Property - Buy What You Can Afford

I saw a Bloomberg article today on the impact of the government's recent property curbs on HDB resale prices. What caught my attention was the case of the civil servant mentioned in the article.

The civil servant, who reportedly was earning about $2,500 a month, paid $405,000 for a 4-room Type S flat in Bishan, inclusive of $50,000 COV. In the article, he sounded somewhat unhappy at having bought at the top of the market just before the new property curbs were announced.

Personally, I found it hard to have any sympathy for his situation. Here's why:

1. Assuming that his fiancée is also earning at the same level as he is, a combined income of around $5,000 is, according to what I feel is financially prudent, too low to afford a flat of over $400K.

2. He overpriced his time very badly. At around the time of his purchase, a similar 4-room flat in Yishun would have cost $100K less than the Bishan one. The different between Bishan and Yishun is 4 MRT stations in terms of travelling. That's an additional 25 mins 1-way of travelling. Is his free time worth that much money? Being a civil servant isn't all that stressful in any case (I should know - I was one before).

3. Wiping out one's savings on property is a bad idea. Choosing a less prestigious location to buy property could have saved him quite a bit of money.

Of course, he has every right to do as he pleases with his money. I just felt that complaining about the negative impact of a government policy change in the press is a bad reflection of one's judgement.

NZ Parliamentary Report Warns on Oil Shock

A new report by a parliamentary researcher in New Zealand has warned that the country will be exposed to supply crunches and price spikes. It noted that low-cost reserves around the world are being rapidly depleted and that a supply crunch could start as soon as 2012.

A passage from the report which has some relevance to Singapore is as follows:

"Key export-generating industries in the New Zealand economy, including tourism and timber, dairy and meat exports are very vulnerable to oil shocks because of their reliance on affordable international transport."

Like New Zealand, we are also heavily dependent on tourism and trade, and thus rises in the cost of international transportation will affect our economy adversely.

Quantitative Easing and Rising Food Prices

In my last post, I wrote about the effects of global monetary stimulus on stock prices. Along the same lines of argument, it can also be argued that in addition to poor harvests, rising food prices can also be partly attributed to the pools of liquidity sloshing around the globe looking for higher returns. And in fact, a hedge fund manager has made this particular argument, as seen in the blog article enclosed below:

Auerback: You Can Thank Ben Bernanke for Higher Food Prices

From an end-user perspective, it of course sucks that food prices are going higher, irrespective of the causes. But what we can't change, we adapt to by taking defensive measures such as food storage, eating out less etc.

Stock Market and Gold Performance

Here's a chart of the Straits Times Index (STI) with data for the last 3 years.

It shows that the market rally from the March 2009 lows have recovered a substantial part of the losses since the late 2007 highs.

Here's another chart showing the same STI data divided by the price of gold.

Using the price of gold as a rough measure of the extent of monetary inflation in the world (and to my mind a more accurate reflection of inflation than the Consumer Price Index), we see that the stock market has actually not done all that well in real terms.

The STI has been relatively flat throughout 2010 in gold terms, meaning that all the price rises so far are likely caused by monetary stimulus, or 'liquidity' in other words.

To me, this shows that the massive money printing by the central banks of various countries have not been effective in dealing with the global financial crisis of 2008. It looks like we are still in the midst of what could well be a depression in the developed economies of the West and Japan.

Are we near a food crisis?

The Financial Times has reported on worries of an impending food crisis after the U.S. Department of Agriculture predicted that the country’s stocks of corn would halve to their lowest levels in 14 years.

Looking at the price increases, there seems to be cause for concern indeed. Data shows that in USD terms, year-on-year prices have increased as follows:

• Beef - 23%
• Pork - 68%
• Sugar - 24%
• Coffee - 45%
• Barley - 32%
• Oranges - 35%

Given that money in the bank is earning almost 0% interest, it does appear to me that 'investing' in a store of food at home is likely more profitable, given the rates of food price inflation.

China as a rising power

Here in Singapore, the media (especially the Chinese language one) is basically very pro-government when it comes to covering news from China. In fact, listening to Mediacorp Capital Radio 95.8 FM's coverage of the recent Sino-Japanese diplomatic altercation gave me the impression that I was listening to the CCP Propaganda Department's press releases. Thankfully, Mediacorp's English language stations were slightly more balanced in their coverage.

Besides this, it appears to me that most Chinese Singaporeans accept the rise of China as a regional and potentially global power as an unalloyed positive thing, perhaps due to our cultural affinity and identification with our forefathers' homeland. Perhaps this is due to our failure to differentiate between China as a country and the Chinese Communist Party as a political power ruling the country.

In any case, the view of China even amongst our ASEAN allies is somewhat less sanguine than ours. Without the blinkers of cultural affinity, they are more likely to see objectively the threats that the CCP pose to regional security and stability, as evidenced by Vietnam building closer ties with the United States recently.

As such for alternative perspectives on China, I would like to share the following articles and blog posts:

The Nobel Prize and the CCP’s Ignoble Response

China's Playground Politics Bodes Ill for the Future

Is a rising China getting too big for its britches?

Perhaps it may also be useful to know that while the CCP has played hardball with the Japanese over the issue of China's 'territorial integrity', much to the pride of ethnic Chinese people everywhere, it had not advertised the fact that it had signed a treaty with Russia to renounce claims to 1.6 million square kilometres of land that once belonged to China up to the Qing Dynasty. Somewhat duplicitous, don't you think?

As Singaporeans, we would be well-served to remain prepared and vigilant about regional developments, and not to take regional stability for granted during this period of waning Western power and rising Chinese hegemony.

HTC Desire HD Promo Video

This is a very well-made video by HTC on its latest Android smartphone, the Desire HD.

I still can't decide if I should buy it or the iPhone 4 for my next phone.

Oil Market Tightness by 2015

The Oil Drum has reported on the presentation given by geologist Jeffery Brown at the ASPO-USA 2010 Peak Oil Conference. The inventor of the Export Land Model, Mr. Brown was reported to have highlighted that Saudi Arabia could stop being an oil exporter by 2030, and that rapid demand growth in China and India could crowd out the rest of the world's demand:

He pointed to the problems that Venezuela is seeing, and noted that consumption in Saudi Arabia is rising at 6.9% a year. He anticipates that Saudi Arabia, until recently the largest exporter (now behind Russia), will stop exporting before 2030. Looking at the top 5 exporting nations, who collectively supply 50% of the imported oil around the world, he anticipates that they will have shipped half of their remaining export volume in two years. There are now only 33 countries that produce more than 100,000 bd. And, for these, production is sensibly flat over the past five years, while consumption has risen from 16 to 17.5% of production.

While unconventional oil is supposed to be a positive contributor in the future, he noted that when Canada and Venezuela are combined, production is actually falling. The worrying factor is the combination of China and India, who have increased imports from 11.3% of the total in 2005, to 17.1% in 2009. If this continues they will consume 25% of global oil exports by 2015, which will significantly reduce the amount available to the rest of us.

You can read the report from The Oil Drum here.

Perhaps something to think about when you plan to buy your next car.