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.

Video: Meltup

This is a highly-educational video on current US economic conditions which highlights the risks of hyperinflation in that country. While this is not directly related to Singapore, the fact that the US is the largest economy in the world and currently the most important source of global liquidity (due to the Federal Reserve's zero interest rate policy) means that any problems there will have serious repercussions on our small country.

'Biblical' Plague of Locusts Hit Australia

Australia has been hit by possibly the worst locust plague in a 75 years. According to this news report from the UK, farmers are warning of a grasshopper plague of 'Biblical proportions'. Up to 2.5 million hectares of infested land are now being treated by various agencies in New South Wales, as reported by ABC Australia.

Given that Russia now has stopped exports, and Canada is going to lose 17% of its wheat crop due to floods, it looks like the outlook for food for the next year will be increasingly challenging. With a 75-day inventory of rice at present, it looks to me that we are quite near to edge, 1 crop failure away from famine some place in the world.

Look for higher prices in food. Prepare for it accordingly.

Economic Crisis and Class Warfare

While there is now talk about currency wars between countries, there is now also talk of class warfare in the developed nations of the West, especially amongst left-leaning publications and websites. The proclamation of the death of Marxist ideas appears to have been somewhat premature.

Such talk arises because of the perceived injustice of asking citizens to endure austerity and reductions in social spending while their governments bail out banks and their shareholders with taxes paid for by the same citizens. As noted by the International Labour Organisation, worldwide employment is unlikely to recover until 2015, and this reduction in economic prospects for working citizens understandably causes anger about the moral hazards of bailing out people who have made poor investment decisions.

We can easily sympathise with the sentiments of the Irish taxpayers when we are confronted with an example like Russian billionaire Roman Abromavich, (owner of Chelsea Football Club) threatening to sue the Irish government when the latter spoke of exploring the option of defaulting on the subordinated debt of the Irish National Building Society. Why should innocent Irish taxpayers bail out bondholders, most of whom are supposed to be sophisticated investors? We can easily imagine the indignation of American taxpayers when Berkshire Hathaway vice-chairman Charles Munger said ‘Thank God’ for bank bailouts (Berkshire owns are large chunk of Wells Fargo Bank) and told them to ‘suck it in and cope’. Something is terribly wrong when the poor subsidises the rich.

On the other hand, people who advocate class warfare are not without fault either. While bailing out the rich is not fair, thinking that governments can ‘stick it to the rich’ with higher taxes so as to continue present levels of welfare and social spending is equally unrealistic. Raising taxes on the rich will only promote capital flight out of those jurisdictions that try such measures, as amply shown by history. Workers in the developed nations, especially those in the EU, need to wake up to the reality that their countries are broke, and that even if their government taxed 100% of everyone’s income, the outstanding sovereign debts cannot be repaid. They also need to understand that in the age of globalisation, it is not realistic to want to sustain First World living standards when their productivity can’t even match those of the emerging economies in Asia.

Unfortunately, I doubt that the parties involved in this economic conflict will be able to resolve things amicably. From a generational cycles perspective, the Western nations are due for some unsettling times as each side struggle to protect ‘their fair share’ of the economic pie. One likely outcome of this struggle will be an increased level of protectionism, as countries seek to protect their own citizens from global competition.

From a Singaporean perspective, all these things may well mean lower economic growth in the next few years as we move into a more turbulent global environment. We should be prepared for tougher times ahead, and position ourselves to better ride the next wave up when it comes after the storm.

Another Peak Oil Report from the U.S. Military

After the United States Joint Forces Command published its Joint Operating Environment 2010 report in February this year in which the issue of peak oil was mentioned, the US military has one again dealt with the issue in a new report entitled Fueling the Future Force: Preparing the Department of Defense for a Post-Petroleum Environment.

While the report has made some unrealistic assessments about biofuels, it does make an important point, namely that we are currently in a period of relatively cheap oil prices and living under the misconception that there are ample supplies, resulting in prices not reflecting the true value of oil and a lack of incentives to move away from this source of energy. This sentiment is similar to the one expressed by the late Matthew Simmons, who said that oil was too precious to be burnt away in cars as transportation fuel.

The point regarding the lack of incentives is particularly pertinent to Singapore, as one of the reasons for the slow pace of deploying solar energy systems is that they are not economical at current oil and natural gas prices. Whether or not we will be able to make the transition in time towards using more solar energy systems in the future when oil prices are sufficiently high is at present a matter of speculation. That said, from an energy security perspective, it would appear to me to be prudent to start working on the transition now even when it does not make short-term economic sense, since we do not know when supplies will become unavailable even if we are willing to pay the higher prices that will definitely be demanded for the remaining precious supply of oil.

Currency wars

Mexico is the latest country to complain of a strong exchange rate by selling US$600 billion worth of USD options, following loud protests from Brazil. Amongst the developed countries, the EU, Japan, South Korea and Switzerland have all either tried to talk their currencies down or intervened in the FX market to try to weaken their currencies. The reason for such sentiments is plain - everyone wants to export their way out of recession and into economic growth, and with China's exchange rate pegged to the USD, the fear of losing even more market share to China is driving many countries to try to devalue their currencies.

Since balance of payments must always balance on a global basis, it is impossible for everyone to achieve a balance of trade surplus without someone willing to run a deficit. That someone used to be the United States, but since the start of the global financial crisis, Americans have either been unable or unwilling to continue to play this role.

We live in a strange world indeed. In the papers, we read about an economic recovery, but then we also notice that countries are all complaining about strong currencies. 1 side of this story is not true. Which side would you believe?

Looking at things as they are now, if the global economic situation deteriorates further, currency wars could escalated into full-fledged trade wars between nations. One possible trigger could be the US-China row over the RMB exchange rate issue. That may trigger the start of a new wave of protectionism. Sounds a little like what happened in the 1930s, doesn't it?