Be Vigilant and Prepared

This will be my last post for quite a while, if not permanently.

It's been an interesting year with so many things happening locally and aboard.  Based on what I have seen this year, I expect 2012 to be even more interesting, with plenty of risks and opportunities.  As such, I have decided that I needed to devote more time to prepare my family and myself for the coming crisis that I expect will hit us starting next year.

I wish all of you the best in terms of getting ready.  Be vigilant and prepared, as most Singaporeans are not and will not be.

Take care and God Bless!

On the SMRT Debacle

1. The entire senior management team of SMRT should be replaced with people who have greater operational and technical expertise.

2. Singaporeans need to learn how to be more prepared for things breaking down.  Acting like petulant little children does nothing to solve the problem nor help one deal better with the inconvenience resulting from slower trains and lower frequencies.

Enough said.

Circle Line Issues

This was taken around 6:55 am at the connector between the Circle Line and NS Line at Bishan Station.

This display board has failed to display train arrival information during my morning commute on 3-4 occasions in the past 3 months.  As a piece of electronic equipment, this rate is too high.

Also, since the start of this week, Door 12 of Platform B on the Circle Line at Bishan Station had stopped working, and commuters have had to use the other exits. Now why does it take so long to repair a door?

MRT breakdowns

Major system faults on 2 consecutive days. Sign of the times as far as I am concerned.

I was affected by the outage on Wednesday morning, although the impact was minimal as there were good alternative methods of getting to work.

We need to be prepared. Start by thinking of alternative travel plans for use when the MRT has problems. That would be a good start.

I expect problems in other areas of our public infrastructure as well. Got to start being more aware and prepared.

More Losses at Temasek Holdings

Last week, Reuters reported that Temasek Holding's stake in NIB, a Pakistani bank, was estimated to have suffered a paper loss of around USD 400 million, out of a total of USD 540 million invested initially.  This was indeed bad news.  While I am not against Temasek Holdings per se, it is perhaps time to have a fundamental re-look at its mandate and to see if things can be changed so that the company better support the long-term survival of the country.

Firstly, if not already being practised, geopolitical risk analysis should be incorporated into the investment process.  In the case of Pakistan, that it was on its way to being a failed state was evident for a number of years even if we examine publicly-available information sources. As such, while such 'frontier countries' are suitable for private entities with large risk appetites, it may not be suitable for SWFs that are supposed to be trustees of national wealth.

Secondly, instead of focusing only overseas, could there be a possible shift inwards to look at higher risk investments inside Singapore that will help the country's longer term survival?  What I have in mind is the funding of technology projects that have longer payoff periods, such as converting our national energy infrastructure to one that has a significantly larger component for solar energy, as a way to mitigate the risks arising from dependence on imported natural gas for our electrical power generation.  Imagine how much solar capacity could have been added to our HDB estates if the billions lost in recent years were to be redeployed.

Both GIC and Temasek Holdings are institutions designed to prosper in the previous age where financial asses were on the ascendant.  With the impending approach of Round 2 of the Global Financial Crisis, where there is a significant risk of systemic financial collapse, it is likely that there will be a lot more heartache for Singaporeans arising from our SWF investments overseas. In the coming era, where resource scarcity and climate problems could limit economic growth, I feel that it is high time we prepare for a global environment where control of resources becomes much more important.

PM Lee on Food Security

The Singapore government appears to be well aware of the issues surrounding food security and the need to address how we will feed ourselves in the future.

The following is an excerpt of PM Lee's keynote address at the 7th IISS Asia Security Summit in 2008:

Besides a peaceful ordering of global power structures and institutions, countries must also work together to tackle trans-border common security challenges. One immediate issue of concern is food. People have long worried about food shortages, resulting from population growth outpacing food production. Human ingenuity has deferred this Malthusian prediction for more than 200 years, but it could still happen in the future. On the demand side, the world population is steadily increasing. Furthermore, with Asia’s rise, hundreds of millions of people are becoming more affluent and, as one minister put it to me, ‘They used to eat one meal a day. Now they eat two meals a day.’ That makes an enormous difference to their poorer compatriots and to poor people in many other countries in the third world. On the supply side, misconceived green policies to subsidise bio-fuels are encouraging farmers to grow corn for fuel instead of food, and squeeze the supply of food. In the longer term, gradually, climate change will lead to more extreme weather conditions, and likely reduce the supply of fresh water and arable land.

Over the next year or so, food prices may moderate with better harvests. In the longer term, the trends towards tighter supplies and higher prices will likely reassert themselves. This has serious security implications. The impact of a chronic food shortage will be felt especially by the poor countries. The stresses from hunger and famine can easily result in social upheaval and civil strife, exacerbating conditions that lead to failed states. Between countries, competition for food supplies and displacement of people across borders could deepen tensions and provoke conflict and wars. We are already experiencing a small foretaste of this today. The recent sharp rise in food prices, particularly rice prices, has led to riots and unrest in several developing countries. In vulnerable areas, such as in Darfur and Bangladesh, large numbers of people are moving across borders, often illegally, in search of food and water. It becomes part of the game. As one country says, ‘I am being blackmailed by my neighbours. They say, “Sell me one million tonnes at the friendship price or I will send you one million refugees”’. 

Even without a food crisis, movements of people like this have raised tensions and caused serious problems, as you can see in South Africa with the vicious xenophobic attacks on immigrants fleeing unstable regimes and desperate poverty in their home countries; from Lesotho, from Zimbabwe, and so on. They are now having to flee home because South Africans feel threatened and have viciously attacked them. In the event of a global food crisis, all of this will play out on a much bigger scale across the globe.

To avert a serious problem, we need a multilateral cooperative effort. Individual countries need to upgrade productivity and infrastructure in their farm sectors. International agencies like the World Bank and the UN Food and Agriculture Organisation need to promote research and development in agro-technologies to develop higher-yielding and climate-resistant crop varieties using the full power of modern bioscience, and, inevitably, using genetic modification techniques. Through the Doha Round, countries must work together to keep agricultural trade free and fair. Only then will farmers everywhere have the right market signals and incentives to produce more food to meet increased demand. If countries pursue greater self-sufficiency and try to keep food production and food output within their own borders, they will cause greater international tensions because the prices will become more unstable, food importers will scramble to secure their own supplies, and poor countries will suffer not just greater privation, but famine and starvation.

From this excerpt, we can see if the recent uprisings in North Africa and the Arab world would likely not have surprised our government, given that the link between food insecurity and social unrest.

Now I wonder what our government officials are thinking about the potential for instability in China. :)

European Crisis - No Way Out

PM Lee, at the recent G20 summit in Cannes, urged European leaders to adopt policies conducive to growth as a long-term solution to the sovereign debt crisis there.  My guess is that he was being polite and needed to say something encouraging after Singapore had been invited as an observer.

The fact of the matter is that there is no way out of the Eurozone debt crisis.  This has been a problem 40-years or more in the making.  Furthermore, based on traditional economics, the fact of Europe's aging population argues against any possibility of economic growth as a viable option for dealing with the debt problem.  When we add to this the fact of energy dependence and racial issues there, the lack of a realistic solution becomes crystal clear.

Now the only question is when the thing will blow up global stock markets, which appear to have been successful in pretending that the problem has a solution, thus far.  It has often been said that the stock market is for kids, and that the real adults play in the bond market.  I guess that must be true given the divergence in these 2 key markets.

Demographics and Economic Crisis

The anti-population mainstream media has been doing some hand-wringing over the arrival of the 7th billion person on this planet, and warnings about environmental and food crisis have been flowing non-stop.  Not unexpectedly, intelligence service Stratfor has provided a piece on this matter via its Geopolitical Diary service. What was different was that Stratfor argues that we are on the verge of a population decline with the advanced countries leading the way via their aging populations.

One part of the article that resonated with me was the following:

Demography drove economies to this condition in the 1990s, when credit (and thus growth) increased. In the 2000s, mature workers produced a good deal of excess capital. The 2010s find the global economy correcting itself after 20 years of excess-capital-driven growth — at the same time as mature workers are retiring and leaving their capital-supplying role.

A darker period is likely to dawn by the 2020s. Most of those high-wage earners will have retired — they will no longer supply capital and instead will depend on the state to issue their pensions. The cost of capital will invert strongly. The generation born between 1964 and 1979 — characterized by its low numbers — will be responsible for supplying capital. They will not only have to fund the younger generations but will also have to support the pensions and geriatric-support programs created by their predecessors. Since the developing world’s aging process lags about 30 years behind that of the developed world, this same generation will act as the primary capital suppliers to the entire world. 

The developing world started to age too late. Its countries will lack enough mature workers to generate the capital needed to replace that which can no longer be imported from the developed world. The developing world will experience the financial challenges of the developed world, without having built up the infrastructure and industrial base the developed world has had for three generations. Such capital scarcity threatens to halt growth across the poorer parts of the planet. It will also make for strange bedfellows: the only hope the developed world’s ’64-’79 generation will have to meet their bills is to import more taxpayers. Perhaps the most unexpected outcome of population patterns is that the developed world will have a massive interest in attracting immigrants

The significance of the aforementioned for me is that while I disagree with the government's immigration policies as they now stand, one can see that if Stratfor's analysis is correct, Singapore is already quite ahead of the curve in terms of preparing for the darker future postulated.

As some commentators have noted, we could well be in the midst of a Kondratieff winter.  If that were the case, this dynamic of aging population in the developed world will have very serious repercussions for the global economy.  I suspect that those Singaporeans currently paying $100K COV for bigger HDB flats and $75K for a COE will not have too happy a future.

Importing Electricity

The local media reported that Singapore is looking to import electricity from other countries in the region.  Perhaps this is a prelude to tapping potential new nuclear power capacity that may come online in neighbouring countries, especially in view of the fact that natural gas production in both Indonesia and Malaysia are expecting to fall in the coming years.

But whatever it is, I think it is a step in the wrong direction, since it is moving us towards a greater dependence on imported energy rather than greater resilience through stimulating domestic alternative energy production.  It is disappointing that the government appears not to be willing to prepare us for a future where the holders of energy resources will gain political and economic power, and where importers like Singapore will be increasingly at their mercy unless we take active steps to mitigate the risks.

Values-driven Education

Now that we have a new Education Minister, talk is that there will be more emphasis on values in the education system rather than just a focus on grades and 'technical' achievements.  Besides this, there were also calls for more 'individualised' education rather than treating our kids as a 'collective'.

I think these sentiments will result in a worse education system than what we have now and a much worse one that the one that I had to go through growing up.

To me, it is a fundamental mistake on the part of Singaporeans, especially the younger liberal parents, to think that government should be involved in education beyond narrow technical domains.

Firstly, governments are, by definition, bureaucratic entities.  There is, despite the best efforts of civil servants and politicians, no way around this fact when we throw in the checks and balances necessary to have a sound system in a democractic society.  Therefore, to expect the government to deliver individualised education is like asking a fish to swim in sand.  It is plainly ridiculous.  But I don't blame the government for trying to meet such demands as I do the stupidity of people who think that what has always been, in human history, a parental responsibility should be abdicated to civil servants.

Let's face the facts.  Look at how the average Singaporean student is basically incompetent in both English and mother tongue, and we can easily see that even in narrow technical domains, the system has failed to deliver.  Can we realistically expect the system to deliver far more complex things like values and morality?

Secondly, the young liberal set have often complained about the lack of freedom in this country.  My question is this: Why do you complain against alleged government oppression and then turn around to expect the SAME government to be benevolent with regard to teaching your children the right values?  Again, it is to me sheer stupidity and an abdication of responsibility.

We ought to recognise what the government is good at, and constrain it to those areas.  Education is too important to be left to the government.  If we want our children to grow up right, we have to take back the task of educating them, and not leave them to civil servants who may or may not have their best interests in mind.

Indon Natgas Supply Risks

The Jakarta Globe carried a story on Sep 22 where a top minister called for cuts in Indonesia's natural gas exports to Singapore, claiming that such exports were excessive and that the gas was needed for domestic use.

While I have no doubt about the ever-increasing domestic demand for natural gas in Indonesia, it is interesting to note that Singapore has been singled out even though countries such as Japan and South Korea take larger volumes of the country's gas exports in the form of LNG.

What this illustrates is that because Singapore is small, we are naturally taken as being 'easy to bully'.

As I have written repeatedly on this blog, we are moving into an era of resources nationalism, where countries with good resource endowments want to use them to gain leverage over others that are dependent on such imports.  In such an era, Singapore's power relative to its resource rich neighbours will be weakened, and so we can expect more 'bullying' from them in the coming years.

Given the risks to our natural gas imports, which is used to generate electricity, we need a coherent plan to reduce reliance on imports to the greatest extent possible, even though we will always need to import.  But so far, we haven't got a plan.

China Bailing Out the Eurozone

It's amazing what politicians will do to keep the status quo and their privileged positions.

The idea that China, a country of peasants who can barely afford to feed themselves, should put money into Eurozone bonds to bail out the fat cat bankers of Europe seems to defy common sense.  And yet, the financial markets rally on the news.  So much for the crap in finance textbooks known as the 'efficient market hypothesis'.

On China's part, it is merely trying to keep its mercantilist policies going, since it needs an export market for its excess industrial capacity.  Global debt deflation will immediately bring China into a Kondratieff winter that will make the Great Depression look mild.  Also, given the problems within China's financial system, one has to wonder where they are going to find the money to bail the Europeans out.  The US$ 3 trillion in reserves that the PRC supposedly has isn't actually enough to fix the internal financial black-holes there.

As for Europe, I think the 'peasants' who still can't accept the fact that their 60-year experiment with socialism has failed will eventually rise up and revolt against the political establishment in Brussels and their respective home countries.  Europeans will not likely take kindly to the prospects of their politicians selling the continent's 'crown jewels' to China.  This is something that the CCP leadership appears not to have understood so far.

Geopolitics and GLCs

The literature on the Singapore economy has discussed the issue of GLCs and their role in the economy rather extensively.  Most of the works are somewhat polite in their criticisms of the the system.  Outside of academia, the critics have been more vocal, with certain opposition parties calling for the dismantling of the Temasek Holdings system.

Being something of an Austrian School adherent in my economic philosophy, I can see the merits of the arguments.  However, I have also felt that there was some merit in the government's arguments for the need to get involved directly in the economy, and I have also recently argued that dismantling Temasek Holdings will eventually lead Singapore down the path to de facto rule by an unelected oligarchy of business and corporate interests.  As such, I've had a somewhat uncomfortable ambivalence on the issue for a long time.

A different angle presented itself to me recently when I was reading a Stratfor article on American geopolitics.  The author postulated a positive correlation between geopolitical risks and the state involvement in the economic model.  When I read that, the proverbial light bulb in my head was turned on.

Here, I will quote the relevant passages from the article:

As discussed previously, the United States is the most capital-rich location in the world, courtesy of its large concentration of useful waterways. However, it also boasts one of the lowest demands for capital. Its waterways lessen the need for artificial infrastructure, and North America’s benign security environment frees it of the need to maintain large standing militaries on its frontiers. A high supply of capital plus a low demand for capital has allowed the government to take a relatively hands-off approach to economic planning, or, in the parlance of economists, the United States has a laissez-faire economic system. The United States is the only one of the world’s major economies to have such a “natural” system regarding the use of capital — all others must take a far more hands-on approach.

• Germany sits on the middle of the North European Plain and has no meaningful barriers separating it from the major powers to its east and west. It also has a split coastline that exposes it to different naval powers. So Germany developed a corporatist economic model that directly injects government planning into the boardroom, particularly where infrastructure is concerned.
• France has three coasts to defend in addition to its exposure to Germany. So France has a mixed economic system in which the state has primacy over private enterprise, ensuring that the central government has sufficient resources to deal with the multitude of threats. An additional outcome of what has traditionally been a threat-heavy environment is that France has been forced to develop a diversely talented intelligence apparatus. As such, France’s intelligence network regularly steals technology — even from allies — to bolster its state-affiliated companies.
• China’s heartland on the Yellow River is exposed to both the Eurasian steppe and the rugged subtropical zones of southern China, making the economic unification of the region dubious and exposing it to any power that can exercise naval domination of its shores. China captures all of its citizens’ savings to grant all its firms access to subsidized capital, in essence bribing its southern regions to be part of China.

Based on this, I feel that a reasonable argument can be made that given our vulnerable geopolitical situation, the need for state intervention is high, and possibly even evident.

And given the rising risks in our external environment, I would argue that there will be more reasons for state intervention in the coming decade.

But that's for another day.

Tan Jee Say - Agitating for Change

Some thoughts on Tan Jee Say's campaign strategy so far, obvious as it is that he is out to get votes from the anti-PAP Singaporeans.

Checks and Balances

While I am fully in favour of the concept of checks and balances against government powers (from my libertarian streak), I feel that using the Presidential Elections as a platform is highly misleading, and I am dismayed (but hardly surprised) that there are Singaporeans who have been taken in by his tricks.

The fact of the matter is that nothing in our constitutional tradition suggests that the Presidency is a source of independent power in itself capable of challenging the government.  It is as ludicrous as saying that Her Majesty Queen Elizabeth II can act as a check on the UK government.

It would appear to me that Tan Jee Say is tapping on the unhappiness of the people who voted for the opposition parties during the last GE and who felt that they had 'lost' that contest to dumber Singaporeans (I have seen opposition supporters say this of Singaporeans who voted for the PAP) who supported the PAP.

Constitutional Powers

He also challenged the Law Minister, saying that the latter's interpretation of the constitutional provisions in respect of the powers of the President may not be the only valid one.  This is an argument clearly designed to hoodwink his supporters and to give them false hopes.

From Section 9A of the Interpretation Act (enacted following the landmark UK House of Lords decision in Pepper v Hart), we know that where there are ambiguities in statute, courts can have recourse to extrinsic materials such as records of Parliamentary debates in order to help with the purposive interpretation of written provisions.  If the interpretation of the powers of the President were unclear and open to competing views, the courts would have recourse to Parliamentary debate records, which clearly show that Parliament did not intend for the President to have the powers that Tan Jee Say and his supporters think that the office possesses.  So unless the Law Minister doesn't know his stuff, which appears to be unlikely since he had been a top-notch lawyer previously, it is not likely that any legal challenge to settle the issue would resolve in favour of the view proffered by Tan Jee Say.

Disregard for the Law

It has been reported that Tan Jee Say had said that, if elected, he would not be prevented by the circumscribed role of the Presidency from raising sensitive issues with the government.  He had also said that the Presidency is what the office-holder makes of it.  For example, he suggested that the President should be involved in Singapore's economic strategies (surprise, surprise!), which even an idiot like me know is beyond the prerogatives of the Presidency.

To me, this shows that he has no respect for the Constitution.  While it is perfectly permissible for a Singapore citizen to feel that the Constitution has flaws and ought to be reformed, integrity demands that one should seek change through the right channels, and not use a position created pursuant to the Constitution to subvert it.

Moral Power

The third argument used by Tan Jee Say to justify his position is to claim that the Presidency has moral power.   I find this claim untenable given the largely ceremonial role of the office, which does not provide much opportunities for it to develop moral authority in the hearts and minds of Singaporeans.  Furthermore, there is also nothing in our constitutional tradition (e.g. through unwritten conventions) that suggests the existence of such powers, unlike other Westminster-based jurisdictions like the UK.

In summary, I find that Tan Jee Say has campaigned using a strategy designed to exploit the unhappiness of a segment of Singaporean against the government, and have acted like a politician (in the derogatory sense) in his contest for what should be an apolitical office through the liberties he had taken with truth and the deliberate creation of false impressions.

As previously suggested on this blog, I feel that he has an agenda which, although unclear to me, does not appear to be one of benign intent.

Dismantling Temasek Holdings

Tan Jee Say, in one of his many anti-PAP moves, has recently suggested that Temasek Holdings be dismantled.  This was also the SDP's position during the recent General Elections.  While standard economic arguments were offered for the idea, I wonder if the motive were not purely political.

Now, the standard economic arguments that GLCs crowd out the private sector has been repeated ad nauseum (e.g. my professors made such arguments when I took a course on the Singapore economy in graduate school) and do not require further exposition here.  Because of such crowding out, it has long been argued that the Singapore economy would be better off if GLCs were privatised so that the government does not compete with the private sector.

In theory, the arguments sound good.  In terms of improving the overall efficiency of the economy, the arguments certainly have some merits. Unfortunately, in reality, it may not work out so well and will have negative political consequences.  The reason for this is that once the government sells off the GLCs, they will most likely end up in the hands of local tycoons and MNCs (most Singapoeans are too enslaved by their mortgages to afford to bid for such assets).  What this means is that in terms of reducing the concentration of economic power, privatisation has little or no net impact, and merely results in the transfer of such power from the government into the hands of a small group of private sector players.

While the ideological purists and the die-hard anti-PAP people will say that such an arrangement is better than the current one, I think that it will mean the undermining of our democracy, as the tycoons and other big economic players will then be in a position of strength to dictate terms to the government, much like what is happening now in Hong Kong.

As much as Hongkongers like to believe that they have more freedom than Singaporeans, the reality is that policies there are mainly set for the benefit of the elite few.  Granted that in HK, people are free to demonstrate, the fact that they cannot vote their government out means that they have no effective means of forcing a change in policy directions. Contrast this to what has happened here after the recent GE.   As for the so-called freer press in HK, any adult with a working brain can figure out that the media is tightly-controlled over there by a few tycoons and that success requires the backing of the CCP back in Beijing.

In short, dismantling Temasek Holdings will not result in more economic freedom, but will lead us down the road to oligarchic rule by the unelected rich whom we cannot kick out via elections.

Having tried my hand at running a business, I can understand the frustrations of having to compete with GLCs (how do you compete against entities whose cost of capital is zero?), and so I am not suggesting that the current system is a good one.  What I am saying is that the alternative proposed is worse.

If one assumes that Tan Jee Say is an intelligent guy, then one can only wonder about his agenda for suggesting that we hand power over to oligarchs.  I am sure he is not naive enough to believe the economics he learnt in school.

Presidential Elections: Make Your Own Decision

This is in response to an article at the temasekreview.com website, telling Singaporeans to vote for Tan Jee Say, their candidate of choice, so as to deny Dr. Tony Tan a victory.

As much as the site and its fans claims to support freedom and democracy, especially through their constant criticisms of the government, they have found it fit to tell others how to vote in order to achieve their objective.

To my mind, this is just another example of the Gramscian/Alinskyite Marxist tactics that I have often detected from that site and its supporters, the classic bait-and-switch of telling the people one thing and then doing another thing.  The other more prominent example is of course spreading falsehoods, and not bothering to apologise for errors, while claiming to be more 'truthful' than the state-controlled mainstream media.  All these are part of the dialectical methods deployed in order to unsettle the people into various conflicts.

For me, respect for individual rights and freedom means not trying to tell others how to vote, but to allow them to make up their own minds.  If those who do not wish to vote for Dr. Tony Tan should split their votes amongst the other three candidates, who is temasekreview.com to disapprove of such actions and urge Singaporeans to unite behind their candidate of choice?  They may think that they are locked into some kind of warfare against the PAP, but the rest of us who are equally capable of making up our own minds may not share such sentiments.

And yes, labour unions and other civic groups should also stop endorsing Dr. Tony Tan, as they too have no right to try to influence how their members vote.

To my fellow Singaporeans - Make up your own minds.  Vote for the candidate you think can best represent your interests.

Storm in a Curry Pot

Some thoughts on the unhappiness of Singaporeans regarding the stupid decision of the Community Mediation Centre (CMC)  regarding the freedom of an Indian Singaporean family to cook curry.

• One of the mandates of the CMC is to resolve disputes between neighbours.
• While there was a dispute between the PRC family and the Indian Singaporean family in the sense of a disagreement regarding the cooking of curry, in a legal sense, there is no dispute at all.
• Cooking curry and emitting fumes with strong smell, as far as I can tell from our Common Law, does not constitute private nuisance, and so there is no tort committed here.
• Since in a legal sense there is no dispute, the CMC should have thrown out the application and not waste taxpayers' money hearing it.
• It's an affront to Singaporeans taxpayers that we are made to pay for the hearing of a case where no legal rights of the claimants have been infringed and then to arrive at a decision that is ridiculous.

I hope the CMC will apply commonsense when deciding whether to hear cases or not.

And to the PRC family, I have this to say: 入乡随俗

National Day 2011

It's been an interesting year both personally and for the country.  From where I am now, I can see even more interesting times ahead for our small, vulnerable country.  My hope is that we will be prepared for whatever comes.

In the past week, we have Dr. Tony Tan warning about a 'perfect storm' hitting the global economy, and so far he appears to be right.  We also have DPM Tharman warning about slow growth for Singapore for the next 4 years.

On the other hand, based on my observations on the ground, I see that

• Shopping malls and restaurants are still doing very brisk business.
• Property owners are still demanding very high prices despite a slowdown in the volume of transactions.
• Commercial property flipping is all the range now.
• People are paying as much for a piece of COE as gold.
• Retail investors are still seeing the latest market sell-offs as buying opportunities.

So, who has a better sense of reality?  I think I'd place my bets with the government officials this time round.  I hope my readers will be prepared for a more sombre year ahead.  Opportunities will avail themselves to those who are prepared.

In any case, here are my wishes for the country this year:

• That we will recognise and prepare for the reality of peak oil.
• That we will massively increase our gold reserves to protect against the collapse of the current global financial system, which is, in my view, a certainty.
• That we will realign our economy to prepare for zero growth, and find a niche for ourselves in the new world of resource scarcity and nationalism, and a roll-back of globalisation.

Majulah Singapura!

Gold Breaks Above US$1650

Gold has finally achieved the price target of US$1650 set by the legendary Jim Sinclair many years ago.  Based on the movements in the US stock market overnight, it appears that market players are fleeing risk and that gold has finally become a safe haven play along with silver.  Unlike the last time round, the USD has not really been a safe haven play.

While many people were relieved by the debt-ceiling agreement in the US, the fact remains that nothing has been fundamentally fixed with regard to the untenable fiscal position of the US federal government.  I expect a full blown crisis soon, probably within the next 2-3 years.  I hope to be able to write more about this issue when I have time from my work.

Over in Europe, we have more rumblings as markets now attack Italian sovereign debt.

I think we are in for a rough ride in the markets over the short-term.

Minister Khaw and the Local Property Market

A reader had asked me for my views on MND Minister Khaw Boon Wan's performance thus far and about the local property market.  In response, I must say that I am severely challenged in the area of property.  Not being a property owner and having no intentions to buy one any time soon, nor having the means to afford one given the sky-high prices (without become a debt slave), I must say that I have paid scant attention to this market.

With those caveats in mind, here are some of my general observations:

1. The mess left behind by Mr. Mah is a big one, and so it will take Mr. Khaw quite a bit of effort to clean up.
2. Mr. Khaw has rightly warned Singaporeans that the property market may suffer severe setbacks.  This is the right thing to do, given that sentiments seem to be similar to those near the 1996 market top.
3. I think Mr. Khaw is putting in genuine effort trying to give the people what they want, which is an important part of democratic politics.  That said, what they people want may not always be what's right or optimal, given perceptual biases and the general lack of rational decision-making processes.
4. Since I believe that the market is due for a correction, and that the global energy situation will have severe negative impact on our economy in the next few years, I have to wonder if building more flats to address the current supply-demand imbalances is the right thing to do.  But I won't blame Mr. Khaw for this - he is just giving the people what they want.
5. When peak oil's effects become apparent, I believe that there will be an outflow of non-citizens and this will create a big overhang in the property market.
6. I also wonder whether more fundamental changes to HDB housing policy is required, given that most young people, upon buying property, will be debt slaves for a long time, not having the means to save for their retirement.  One has to wonder whether that is sustainable.
7. Perhaps citizens should consider whether it is time to relook at the desire to form nuclear families, given our severe land constraints.  While having less foreigners will help improve things in the short-run, we have to look at whether or not as a society, we have massively misallocated resources into the property sector.  Is it time for us to discover the joys of living with an extended family, not only as a means of economising on housing expenditure, but also perhaps as a remedy to the growing litany of social ills?
8. If the government really wants to bring down prices, one way would be to further tighten monetary policy.  As far as the interest rate environment is concerned, Singapore is still in a negative real interest rate situation.  In such a situation, it is natural for speculative bubbles to form, given that saving money is unproductive in terms of protecting one's purchasing power.
9. We have to remember that our ability to cash out of our properties is dependent on future demand.  Since we are not reproducing ourselves, and since we don't want more immigrants, it is irrational to think that the property market's current underlying fundamentals can be sustained in the long run.  I believe I have written about this issue in earlier blog posts.

My apologies for the lack of organisation again.  As I have mentioned before, property is not something that I pay much attention to.

MAS Loses $10.9 billion

The media reported today that the Monetary Authority of Singapore lost S$10.9 billion for the last fiscal year due to the strength of the SGD.  This is somewhat disheartening given the fact that the loss could easily have been avoided by holding our reserves in gold rather than foreign currencies and their related debt instruments.  With gold, the central bank could easily have produced record profits instead of the record loss.

That said, I must say that I am not surprised at this outcome. I don't expect anyone in the central bank, given that most are trained in elite Western universities, to have a firm understanding of the Austrian School of economics necessary for prudent monetary policy management that will help Singapore navigate through the financial storms that are coming our way.

Record COE Prices - Again

Just saw an online article reporting that COE prices have just hit a 14-year high.  It now costs more to buy a COE for a car of 1600cc or greater engine capacity than to buy 1 kilogramme of gold.  My first thought when I read the article was this - If there were derivative instruments based on COE prices, I'd be shorting them, since talk about 'prices can only go up' are fairly good indicators of bubble tops.

To me, this is a somewhat tragic situation, for several reasons.

Firstly, given global crude oil production patterns, depletion will likely result in shortages worldwide in less than 10 years. It will not surprise me to see the government banning the use of cars that run on petrol within this period of time.  What this means is that those who paid for the COE now will basically have less than 10 years of usage for their cars if they had originally planned not to trade-in for newer models within 3 years.

Secondly, when these people realise how much they have overpriced COEs, there will bound to be a political backlash against the PAP government.  While one can argue that the government forced no one to bid up COE prices, the design of the current COE system is such that fair-minded people can reasonably suspect that the government is not only interested in limiting the car population but also in maximising revenue.  If the government were solely interested in suppressing car demand, all it has to do is to make a simple change in the car financing rules - Get MAS to bar financial institutions from including the COE price into the car loan quantum. Once such indirect financing for COEs is not available, one can be 100% sure that the bidding behaviour will change overnight, and prices will fall precipitously.

The reason why this would work is because car buyers have a tendency to think only in terms of monthly payments, much like those sub-prime borrowers in the USA.  Requiring them to pay for the COE upfront will price many of them out of the market, especially those young people who make $3-4K only a month.  This, in turn, will lead to lower COE prices as the artificial demand is removed.  The logic applies even if car dealers are still allowed to bid for COEs under the new system.

But I guess I can't stop people from willingly becoming victims of the government's policy errors.  I just hope that I won't have to bail them out.

Market Outlook 20110717

Since my last Market Outlook more than a month ago, things have deteriorated in the Eurozone, with a debt downgrade for Portugal while Italy's problems have come to the fore.  Despite attempts by politicians to postpone the day of reckoning in Greece, things have not worked out as planned either. When these are taken together with the ongoing budget theatrics in the US, it is easy to see why many in the Western world are fleeing risk markets and moving into the ultimate safe haven asset - gold.

According to trader Dan Norcini, the gold chart patterns are suggesting to him that there is real fear amongst speculators that big troubles in the global financial system are heading our way.

When I look at things from a political perspective, a debt crisis in the developed world is a certainty - the only thing uncertain is the timing.  The reason for this is that the people in the developed world have, for the most part, not woken up to the terrible state of their countries' public finances.  Having lived for so long in a welfare-state system, they seem unable to mentally process the simple concept of 'We are broke'. In Greece for example, they have rioted, blamed the Germans by appealing to their 'past sins', and now even tries to demonise the Greek Orthodox Church for failing to pay its 'fair share' of taxes.  They simply have failed to realise that even if they tax the rich and Greek Church at 100%, there would still not be enough money to pay for welfare in a country of 11.5 million people that has fewer people working productively than Singapore.  Furthermore, as pointed out by the legendary James Dines:

Clear-eyed perusal of Greece seems that an inventory is required of what that nation has to sell to the world in exchange for its imports, for example: energy, medicines and oil. Greece has no prominent industrial manufacturing base, so it is reduced to selling its climatic beauty and relics; with copyrights on The Iliad and Odyssey having expired long ago, and fabled Greek drama supplanted by robocop-like movies, Greece is at a crossroads of something dramatic, possibly penury.

Thus, I think John Hathaway, a top portfolio manager in the gold mining sector, was right when he stated that 'welfare state democracy is incompatible with sound money', which to me means that politicians will continue to implement unsound Keynesian policies to try to hide reality from their electorates, and to try to deflect blame from their own corruption and collusion with greedy bankers.

Given the high degree of uncertainty in the current environment, I continue to think that only nimble speculators should involve themselves in the markets.  Long-term investors who want to implement a 'buy-and-hold' strategy will find the stock market challenging, and the only place that I can see such a strategy work is the gold market.

As an aside, I picked the quote from James Dines above to show that far more intelligent and successful investors than myself are of the view that a service-based economy is not capable of sustainable wealth creation and will lead to long-run fiscal problems.  As I have stated previously, I think Tan Jee Say has got it wrong in this regard.

Temasek Holdings Unloads BOC and CCB stakes

It was reported in the mainstream media that Temasek Holdings had trimmed its stakes in both the Bank of China (49%) and China Construction Bank (8%), selling out at a discount to market price.  As I had written in an earlier post last November, our money appeared to have been used to partially pay for the fiscal stimulus of the PRC government through the funding of these state-owned banks.  Given Temasek's consistent claim of being a long-term investor, one has to wonder what horrors are found in the balance sheet of these 2 banks for our SWF to have changed its mind only slightly more than half a year after the purchase of the stake in CCB.

That said, I am of the view that the purchase of the CCB stake was more likely to have been a political decision rather than an economic one.  My reasoning is very simple: If a layman can pay US$30 to buy the book Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, read it and realise much bad debts there are in the PRC's financial system, there is no reason our SWF, with much better access to information and expertise, should have failed to discover the same facts.

The consolation for Singapore is that Temasek managed to make money this time round.  So we know that the Chinese are better friends to us than the Americans.  The last time we helped bail out 2 US institutions during the 2008 financial crisis, the Americans made us eat their losses.

2011 Presidential Elections

I have thus far taken only a tangential interest in the positioning moves of the various potential candidates in the upcoming Presidential Elections, the reason being having other issues to deal with and also due to the fact that I think it's not particularly an important thing given Singapore's current constitutional arrangements.

Some of the potential candidates appear to believe that the office of the President has more power than are actually allowed for in the Constitution.  Such beliefs appear to pander to the desires of some segment of the electorate for another alternative voice to the PAP government.  Whether or not the President should have the powers that these people think ought to be invested in the office is another story, and should rightly be dealt with either through a referendum or through Parliamentary Elections.  It's a sign of the increasing irrationality of our politics that there are citizens and politicians who believe that they can and should push for things that are not allowed under current law, without going through the due process of changing those laws.  The people who harp on the rule of law somehow feels that they should be exempt from the same.

One of the things that the PAP government use to stress the importance of the Presidency is that this office holds the metaphorical '2nd key' to our country's financial reserves.  While there is some truth to that claim, I would argue that this is an inferior form of safeguarding the country's wealth.  There is no guarantee that the President will always be independent.  And even if he is, there is no guarantee that he will not share same similar ideological positions with the government of the day when the time comes for him to exercise his discretionary powers in respect of the reserves.

If we are really serious about protecting our national wealth, I would suggest amending the Constitution again to take away the relevant financial powers of the President and instituting instead a gold-back currency.  Using the financial markets as an external check on government financial policies is the best way to achieve our goal of protecting national wealth.  This is because markets express the collective views of the multitude of market participants and are less likely to be subjected to direct political influence.  Furthermore, many of those market participants will be overseas and thus cannot be influenced by domestic politics.

Given the financial mess that the world is in now, having a gold-backed SGD will help Singapore to navigate through the storm that will hit us in the coming years, as the developed world struggles to maintain the current unsustainable fiat currency system that has helped them live way beyond their means.  With a gold-backed SGD, Singapore will be able to secure its future after passing through the crisis, irrespective of what the likely future global financial architecture.

As we prepare to vote for the next President, let us keep our eyes on what's really important.  The current constitutional powers of the President are neither here nor there, and should be abolished in favour of a truly independent and objective mechanism for protecting our national wealth.  The Swiss are already looking at re-establishing a gold-backed currency.  If we want to be like them in terms of financial status, shouldn't we be doing the same?

SGX: No lunch for you

SGX has finally decided to go ahead with implementing all-day trading by removing the 1.5 hours lunch-break, claiming that it will allow investors greater flexibility to react to market-moving news that may happen during the lunch-break hours.

I am neutral regarding this measure, but to me, it would appear that the folks running SGX simply have run out of ideas.  Having not succeeded in anything of note in recent years, I feel that the senior management team at SGX should either be replaced or the exchange should just content itself with being a 2nd-tier market, and stop trying. Singaporean investors have suffered enough by the 'geh kiang' ideas such as allowing rubbish PRC companies to list.

Oil Supply Disruptions Likely - US Military

Following the Joint Operating Environment 2010 report by the US military warning of supply shortages in the oil market of up to 10 mbpd by 2015, the US Department of Defense's latest Operational Energy Strategy report to Congress has again highlighted the risk of disruptions to global oil supplies.

Page 8 of the report states:

The volatility of oil prices will continue to be a budgetary challenge for the Department, and the realities of global oil markets mean a disruption of oil supplies is plausible and increasingly likely in the coming decades. The Services have already taken steps to certify aircraft, ships, tactical vehicles, and support equipment to use alternative liquid fuels, a prudent insurance policy against future oil supply disruptions and high prices.

The reason why I think we should pay attention to what the US military says is that these people tend to take a hard, long-term view of things when it comes to assessing threats to their country.  For example, more than 20 years ago, they were already warning Congress about American foreign dependence on Rare Earth Elements technology in US weapons system.  Of course, now that risk has come to pass has China effectively controls 97% of the REE market.  Given such a track record of long-term thinking, I tend to take their views seriously.

The full OES report can be found here.

A Good Summary of the Troubles in the US

I came across the follow passage from this month's edition of The Dines Letter, published by the legendary investor James Dines.  It provides summary of the challenges facing the US in the coming years, and is the basis for much of my investment think:

A richly-endowed America drained the bulk of its inherited reserves of
crude oil long ago, along with many of its other resources, well ahead of the
rest of the world. Now, with its work force priced uncompetitively higher than
hungrier labor in world markets, it is basically out of business and in
forebodingly deepening trouble. Why is that not more widely evident? By
historic accident the United States owns the world’s "reserve currency" such
that it can print as much money as it chooses, which we described clearly in
our Goldbug! book.

America can still use its great intellectual resources to create games and
social websites, much as a comparably hollowed-out England became the
world’s balladeers (exemplified by Beatle mania) after World War II. But
every action has consequences, and the racket of just printing money and
borrowing has never ended well. America scurries about to spend its wealth
on wars – justified or not – and nobody inquires as to where those dollars
wind up. Worse, to crown the spending, America additionally borrows over
$40 for every $100 it spends, a clearly unsustainable folly.

Unlike George Friedman's more optimistic analysis of the prospects for the country in the next decade, Mr. Dines is decidedly less enthusiastic about his country's future.

In the same article, he also predicts that we will soon see the end of free markets as nations scramble for the remaining resources of the world.  This line of thinking is similar to those of historian Harold James, who sees a general move towards state-directed capitalism, the type commonly practised in this part of the world.

Market Outlook 20110605

In recent weeks, a few friends had asked me whether it was time to put more money into the stock market.  Due to the risks that I see out there, I had told them that I'd prefer to be cautious when it comes to committing funds on the long side.

Some of the risks that I see are:

• Sovereign debt crisis in Europe - risk of bringing down many European banks
• Continued deterioration of the US debt situation
• Slowing global economy, as evidenced by indicators from various countries
• Runaway inflation in many developing countries
• Unrest in the Middle East and the resurgence of the Muslim Brotherhood
• The nuclear disaster in Japan
• Power shortages in China and failure to fix the real estate bubble there

In recent days, even mainstream investment experts such as Mark Mobius of Templeton has publicly talked about the risks of another global financial crisis due to the fact that none of the ills which caused the 2008 crisis has been resolved.

For myself, I continue to favour physical gold as a way to tide through the current period of volatility.  It also has the added advantage of not requiring my constant attention, as I've really been busy with work lately.

Woodlands Water Tank Saga: More Singaporean Stupidity

The Straits Times reported that the Public Utilities Board had announced steps to tighten control of the access to water tanks installed in HDB apartment buildings, in response to the recent security incident at a block of flats in Woodlands.

Following this, people who appear to enjoy throwing stones at the PAP government immediately came out to post negative comments online, basically wondering why it took 50 years for the PUB to realise that there was a security problem, why the civil service is always reactive, and why taxpayers are paying high salaries for such incompetence etc.  When I saw those comments, my initial response was this: These guys obviously do not understand basic risk management.

One of the most basic concepts in risk management is that a risk should be treated if the cost of treatment is less than the expected cost of the detriment suffered should the risk event occur.  For the past 50 years, the PUB has had no major incidents that exposed our water supplies to the risk of serious contamination, and so I think it is fair to ask if a tighter security posture was appropriate, given that more taxpayers' money would have been spent on what appeared then to be a very low risk event.  Furthermore, knowing the typical Singaporean mentality of blaming all bad things on the government, in all likelihood some stone throwers would have asked why money was 'wasted' on security to guard against low risk events.

I am not trying to exonerate the PUB here.  I think that given what has already happened, it is appropriate to do a reassessment of threat levels and then to respond accordingly, which the PUB has apparently done.  It is also without doubt that all relevant government bodies could have handled the Woodlands incident better.  What has been disappointing but unsurprising is the knee-jerk response of some Singaporeans in blaming the government apparently without trying to understand the situation from a risk management perspective.  To me, there are far too many Singaporeans who believe that life should be without risks, and that the government's job is to help us eliminate those risks. And we wonder why foreigners think we are living in a cocoon.

Long-term Strategic Issues and The 1-trick Pony

I stopped expending effort on reading temasekreview.com a very long time ago.  The reason was quite simple: After several weeks of reading articles on the site, I realised that they essentially attributed all of Singapore's problems to 1 thing - the lack of opposition representation in Parliament to serve as a check on the PAP government.  Having thought long and hard about the variety of issues and challenges facing the country all my adult life, I found such thinking to be rather ridiculous.

I had not wanted to broach this issue for a long time on this blog since its main focus is on the energy and resource scarcity issues facing Singapore, and not on politics.  However, today, Google News Search returned an article from that site discussing the long-term strategic and economic issues facing Singapore which also covered the issue of energy and resource scarcity.  And so I decided to do a very quick scan to see what it was about.  What provoked this blog post response from me was the following passage from that article:

This election, did NOT discussed these medium to long-term strategic issues. I believe we have NOT the right political structure and institutions of essential checks, balances and even the much-desired provocation of directional input in the opposition to drive our economy in these times of great turbulence.

Having concerned myself with the energy and resource scarcity issues for the past 6-7 years as well as being a keen student of global macroeconomic developments since my JC days, I found the aforementioned assertion to be patently absurd.  If having the 'right' political structures and institutions with checks and balances were the solution, then:

• Why can't the USA come up with a credible energy policy to wean itself away from crude oil imports, a promised repeated by every president since Richard Nixon?
• Why can't EU countries face the fact that they are fiscally bankrupt, with public-sector workers deep in denial when fiscal austerity was attempted?

I can list a whole host of strategic economic and resource issues faced by the democracies in the developed world for which there is no political will on the part of these countries to confront, but the 2 above should suffice for illustrative purposes.  There are obviously many other factors besides the lack of checks and balances that account for these problems not being addressed.

While the benefits of checks and balances are undeniable, blaming all of our problems on their absence is stupid and unhelpful.  But for a site which dares to publish unverified rumours as if they were true and then not apologise when found later to be false, I guess expecting mature and responsible behaviour is asking for too much.

Michael Snyder: A Food Crisis is Looming

Many Singaporeans have been complaining about rising food prices in the past 2 years and many have put the blame on the government. As is typically Singaporean, we prefer to look for someone else to blame rather than recognise the fact that irrespective of blame, the most urgent thing to do is the protect ourselves and our families by taking steps to ameliorate the effects of more expensive food.

For those who feel that something is not quite right but need a little bit of extra push to get going in terms of preparedness, here's a recent article on the possible global food crisis that we may soon have to face:

In case you haven’t noticed, the world is on the verge of a horrific global food crisis. At some point, this crisis will affect you and your family. It may not be today, and it may not be tomorrow, but it is going to happen. Crazy weather and horrifying natural disasters have played havoc with agricultural production in many areas of the globe over the past couple of years. Meanwhile, the price of oil has begun to skyrocket. The entire global economy is predicated on the ability to use massive amounts of inexpensive oil to cheaply produce food and other goods and transport them over vast distances. Without cheap oil the whole game changes. Topsoil is being depleted at a staggering rate and key aquifers all over the world are being drained at an alarming pace. Global food prices are already at an all-time high and they continue to move up aggressively. So what is going to happen to our world when hundreds of millions more people cannot afford to feed themselves?

The full article can be found here: 20 Signs That a Global Food Crisis is Coming.

How I Think About the Asset Enhancement Issue

At the request of reader 'Touzi', below is a rough mental framework that I use to think about the government's asset enhancement strategy in respect of HDB flats:

1. The HDB flat has a 99-year lease. In a static economy, the value of such a lease will decrease steadily as time progresses, all else being equal.
2. The value of such a lease can increase if there is higher demand for HDB flats over time. This can be brought about by higher population or economic growth.
3. The effect of economic growth on the prices of HDB flat, in a stable currency environment, comes via higher incomes of people.
4. Based on known data, in the past decade, HDB flat prices have risen a lot more than incomes. Thus, the increase in prices can only be partially accounted for by economic growth.
5. The population of non-citizens have risen significantly over the past decade. So this has definitely some impact on prices.
6. Money supply has been increasing at a brisk pace over the last 5-7 years, so part of the increase in flat prices can be attributed to monetary inflation as well. This gives the illusion of higher asset values when in fact the value of money is declining. This monetary inflation is tied to the global debt supercycle which saw central banks around the world trying to outdo one another in terms of keeping their currencies 'competitive', i.e. devalued and undervalued.
7. The availability of 30-year loans distorts perceptions of affordability, resulting in buyers willing to pay higher prices and sending false signals to the HDB regarding actual affordability.
8. Unlike productive farmland, which can produce cash-flows (if farmed properly) that can help to underpin the valuation of a piece of property, most HDB flats are owner-occupied and thus generate no cash flow. Valuation then becomes purely subjective and dependent on who is willing to be the 'greater fool'. Those of us who play the financial markets know that depending on someone else being the 'greater fool' can be a rather risky proposition.

Based on the above, I am of the opinion that it is a matter of time before the HDB housing market experiences severe dislocations.

Current Reading: The Crash Course

I have just completed the book entitled The Crash Course: The Unsustainable Future of Our Economy, Energy and Environment by Dr. Chris Martenson.

This is my second contact with Dr. Martenson's work after watching his highly educational documentary DVD of the same title. The documentary is available for free legal download here.

The strength of the book is the presentation of the linkages between energy, the environment, and our debt-based global monetary system. It shows how given the way the monetary system is currently set up, exponential economic growth is required. Unfortunately, since no system can grow exponentially in a world of finite resources, the monetary system will HAVE TO implode at some point when hard resource limits are hit.

The other strength of the book is its simple but comprehensive coverage of Peak Oil and related energy issues, which for me was a good 'revision' after following this issue for more than 5 years.

I believe that once we understand the link between finance/economics, energy and the environment, we will see why the 2008 Global Finance Crisis has not actually been properly fixed, and that something bigger will be coming our way.

The book is available for loan from the NLB.

My First World Parliament

Since this has been in the news lately, I'd like to add my voice to the matter.

To me, a so-called First World Parliament should ideally have the following characteristics, irrespective of who its members are:

1. MPs spending most of their time doing grassroots work, e.g. Meet-the-People Sessions.

2. Be in recess as frequently as possible - the less the MPs meet, the fewer the laws they pass, and the more freedom and liberty citizens will enjoy.

3. MPs should only be limited to serving only 2 terms - so that vested interests will never gain a permanent constituency inside Parliament, and people not facing re-election risks can freely speak their minds.

Current Investment Strategy

Disclaimer: By law, I am not qualified to give investment advice, so the following does not pretend to be such. Read at your own risk.

Someone left a comment on one of the blog posts here and asked what my investment strategy would be, so here's an outline of my current investment thinking.

Long-term Fundamentals

The longer term issues that underpin my investment thinking are:

• Peak oil
• Resource scarcity
• Sovereign debt problems in US, EU, Japan
• Instability in the Middle East
• Possible instability in China
• Collapse of the USD-based global currency system
• Possible global depression

Because of these issues, I tend to think that the Warren Buffett style of investing will no longer work. Notice that his track record has been rather poor in the past decade: Wells Fargo needed a US Federal government bailout. Citibank's liabilities far exceed its assets if they were marked to market.

Where possible, I will put my money in things which will appreciate in value should any of the aforementioned issues come to the fore. Given a more expansive idea of what constitutes investments for me, even buying additional bags of rice for storage (during sales) can be an investment in an environment where food prices are going up steadily.

Short-term Challenges

The biggest short-term issue is US Federal Reserve policy, namely whether or not it will continue to 'print money' and debase the USD against everything else. Overnight US markets have been very quiet, reflecting a wait-and-see attitude. If there is any hint of tightening, I think a lot of markets will come off. Hopefully things become clearer once the Fed policy signals become known.

The forces of debt deflation continue to be met with global central bank efforts to re-inflate the system, thus causing a lot of cross-currents which make investing a challenge for many people.

Some Other Thoughts

These are some other things that colour my investment thinking:

• Real estate in Singapore is currently priced as if nothing bad will ever happen to the global economy or our own.
• Singaporeans are over-leveraged due to expensive housing.
• CPFIS policies need to be updated. They still reflect a pre-2000 view of the investment universe. Unless they are revised to reflect the new reality, there will be a retirement funding crisis down the road.
• Unless you have more than S$1 million to invest, you are very, very likely to get poor investment advice from the professionals. Most of the financial advisors who are in the 'retail market' serving poorer customers (I am such a customer) are, in my view, not equipped to handle the complexity that we are now experiencing. As such, I think expending effort to take control of your own investments is the way to go.

Current Portfolio

Some of the things I currently hold:

• Gold and silver
• Mining shares

I am looking to get into positions in energy once the uncertainty over US Fed policy has abated to some extent.

Finally, the most important 'asset class' for the future - trusted friends and family. This may be the most undervalued 'asset class' in Singapore right now.

Pardon the lack of fluency and organisation in this piece. :-)

Why We Need Manufacturing and Economic Diversity

This is a follow-up to my earlier critique of Tan Jee Say's economic blueprint, specifically dealing with the issue of having a manufacturing sector in the economy. Here I offer up some points for consideration as to why a service-only economy is not the way to go.

Resilience

Without a manufacturing sector, we will lose the knowledge of how to make things, and this will make us more dependent on trade. In times of peace and prosperity, this may not be a bad thing, as we seek to maximise the Ricardian benefits of trade. However, I don't believe we are in such times. In fact, quite the opposite: I believe that we are moving into a time of great uncertainty, conflict and war.

That having manufacturing improves a country's resilience was amply brought home to me when I saw factories in Japan cranking out essential items to support the victims of the earthquake and tsunami in Sendai.

Imagine what would happen if Singapore is hit with a large-scale disaster and we have to wait for outsiders to send us materiel needed for life support because we have neither knowledge nor industrial capacity to make them.

Peak Oil

When the effects of peak oil (and relative energy scarcity) becomes widely felt, there will likely be a widespread collapse of trade, tourism and other services, since the growth and sustenance of these are highly-dependent on the availability of cheap fossil fuels.

What do you think will happen to demand for healthcare and education (2 sectors favoured by Tan Jee Say) when the world struggles to cope with energy scarcity? When energy and food consumes more and more of people's incomes around the world, what do you think will happen to the amount of money left over for discretionary items such as vacations and financial services?

If we have only a service economy, this means that the impact of such a collapse will hit us disproportionately. A more diversified economy will allow us to work through the transition period while switching over the more sustainable forms of energy.

Income Inequality

My reading of Tan Jee Say's economic vision is that he desires to see a reduction in income inequality in Singapore. While this is definitely laudable, trying to achieve this outcome via a service economy is the wrong way to go. To take the closest comparable example, we see that income inequality in Hong Kong is higher than in Singapore, and it is largely a service economy.

Besides this, the evidence from the last century of economic development suggests that under the current global economic regime, a service economy almost always evolve into a FIRE (finance, insurance and real estate) economy. We can see this in places like the US, UK and Hong Kong. Such an economy invariably rewards speculation and punishes activities with long gestation periods, such an entrepreneurship. When speculation is rewarded over hard work, inequality always worsen because most people do not have the means or wherewithal to engage in those speculative activities such as trading futures or flipping condos. It also makes the economy more prone to boom-and-bust cycles.

On the other hand, economies where there is a healthy respect for manufacturing, such as Germany and the Scandinavian countries, appear to be less prone to speculative bubbles in recent years.

With regard to the argument that Singapore's manufacturing depends on cheap foreign labour in order to survive, and thus have a negative impact on income distribution, I would argue that the same can be said of our service economy, as evidenced by the legions of PRCs and Filipinos in many service outlets. In my view, this has to do with immigration policy rather than industrial policy.

As the government runs out of ideas on how to grow the economy, it has tried the brute force method of increasing factor inputs, which means ever greater manpower and capital are needed. And given that we don't have enough people, the obvious thing to do is to import them from abroad. If we reverse this policy and take the longer, tougher road of growth via productivity improvement, then this wage suppression factor would disappear, irrespective of whether we have a manufacturing sector or not.

Singapore Shares vs. Gold

When you buy commodities, you're selling human ingenuity. - Dylan Grice, SocGen analyst

Over the past 2 years, I have often heard market analysts and investment advisors argue that the stock market is in a bull market on the backs of the strong recovery of the Singapore economy from its crisis lows. Similar arguments have also been made regarding other Asian and emerging economies. Recently, a market commentator from a well-known online fund distribution company even went so far as to say that because the markets stayed resilient in the face of the ongoing EU debt crisis and the Japanese disaster, he was of the view that a new bull market has started.

Since I am of the view that the performance of global markets since Mar 2009 has been due to relentless global central bank liquidity injections (aka QE), I decided to plot the following graph as a sanity check:

This shows the ratio between the EWS ETF listed on the NYSE to the price of gold. I chose the EWS as a proxy for Singapore shares instead of the STI because the latter is denominated in SGD and it would make no sense to calculate the ratio of 2 values denominated in different currencies that are floating against each other.

From the graph, one can see that during the credit crisis, gold outperformed Singapore shares as market participants deleveraged their positions and seek safe-haven assets. From March to August 2009, Singapore shares outperformed gold as they corrected the oversold conditions that occurred during the crisis. From August 2009, we see that Singapore shares, while rising in nominal terms, has stayed relatively stagnant when priced in gold.

What this shows is an arguable case that Singapore shares have been a good inflation hedge relative to gold. However, I believe that it also shows that we are not in a new secular bull market, but a liquidity driven inflationary situation were risk assets can correct should central banks such as the US Federal Reserve decide to slow down quantitative easing.

To further check the validity of my thesis, I downloaded monthly M3 data from the Monetary Authority of Singapore and did a quick year-on-year change calculation, using data from March 2007 to March 2011. The year-on-year change from March 2008 to the present has a minimum value of around 7% and a maximum value of around 12.5%. With this M3 data, I believe that my conclusion of a liquidity-driven stock market rally is a valid one.

Of course, if one looks strictly at nominal values, then the claims of a bull market by mainstream analysts are not wrong. But what's the use of such a 'bull' market when the price of your food and PUB bill keeps going up? It only means that you have to take on more risks in your investments in order to protect your purchasing power against the ravages of inflation. A Pyrrhic victory, in my view.

Thoughts on the PAP Manifesto

The thing that struck me most regarding the PAP Manifesto for the coming GE was PM Lee's reminder to PAP members of the need to maintain a sense of service and humility. Given that I personally know several long-time PAP members, I can safely say that the sense of service and humility is definitely there amongst this small group of people.

Having said that, I wonder how much of this sense is imbued into PAP candidates who are 'parachuted' into the political system without having gone through the grind of serving in grassroots organisation from the ground up.

I also wonder the extent to which multi-million dollar salaries help to undermine that sense of service and humility. Looking at it from a Confucianist perspective, I personally would be convinced of the humility of our ministers if they were to follow the example of one of ancient China's legendary minister, 晏婴 (yan ying) of the Qi Kingdom during the Spring and Autumn Period of Chinese history.

Yan Ying was a capable minister who lived a simple and contented material life, always looking out for the interest of ordinary people. As described by Baidu Baike:

廉洁无私，心胸坦荡

晏子辅佐齐国三公，一直勤恳廉洁从政，清白公正做人，主张“廉者，政之本也，德之主也”。他管理国家秉公无私，亲友僚属求他办事，合法者办，不合法者拒。他从不接受礼物，大到赏邑、住房，小到车马、衣服，都被他辞绝。不仅如此，晏子还时常把自己所享的俸禄送给亲戚朋友和劳苦百姓。

Yan Ying assisted 3 rulers of the Qi State as a hardworking official of utmost probity.   He dealt with affairs of the state in an impartial manner, helping friends and family only when their requests were legal.  He never accepted gifts and bribes, and even gave away his salary to help family, friends and those in need. 

生活简朴，清心寡欲

晏子生活十分俭朴，吃的是“脱粟之食”、“苔菜”，可谓“食菲薄”，用现在的话说就是粗茶淡饭素食当家；穿的是“缁布之衣”；上朝坐的是弊车驽骊；住的是“近市湫隘嚣尘，不可以居”的陋仄之室。他不仅如孔子所说的“戒得”，也十分注意“戒色”。景公见晏子妻“老且恶”，欲以爱女嫁他，他坚辞不纳。他说；“去老者，为之乱；纳少者，为之淫，且夫见色而忘义，处富贵而失伦，谓之逆道”。

Yan Ying lived a very frugal life, eating coarse foods for meals and wearing simple clothing.  He lived in a shabby dwelling and rode on an inferior carriage when attending court.  Once, when Lord Jing saw that Yan Ying had an old and ugly wife, he desired to betroth his beloved daughter to the latter, but was politely turned down.

In the old days, such great virtues of simplicity could be found in the likes of our founding fathers like Dr. Goh Keng Swee. Unfortunately, I can't say the same of the current crop of PAP politicians.

If we want to convince others, it is best that we lead by example. For politicians, that means understanding and applying the following words of Confucius:

子曰、苟正其身矣、於从政乎何有、不能正其身、如正人何。

The Master said, 'If a minister make his own conduct correct, what difficulty will he have in assisting in government? If he cannot rectify himself, what has he to do with rectifying others?'

子路问政。子曰、先之、劳之。

Zilu asked about government. The Master said, 'Go before the people with your example, and be laborious in their affairs.' 

Notes: Translations added for those who can't read Chinese.

Tharman Sees Global Inflation Risks

Singapore Finance Minister Tharman Shanmugaratnam chaired the 23rd Plenary Meeting of the IMF's International Monetary and Financial Committee this week. As reported by iMarketNews.com, speaking to reports at the communique briefing, our finance minister had this to say:

Indeed, Shanmugaratnam, described the global economy as being in "a fragile situation."

Responding to questions, he seemed to focus more on looming inflation threats than on anything else.

Shanmugaratnam said "a combination of strong credit growth and some economies approaching an overheating situation, together with supply shocks in the commodity field (pose) a risk of inflation and rising interest rates globally, not just in emerging markets."

There is a "danger of spillovers" of inflation from the emerging markets to the rest of the global economy, adding that "we've learned from very painful experience in the last few years that nothing is isolated ... . (A problem in one region) rapidly gets transmitted to the rest of the world."

Shanmugaratnam said the stage could be set for "global inflation and possibly an interest rate problem."

From a Singaporean perspective, it is interesting to note that the government appears to be quite aware of the inflation problem and has taken steps to tighten monetary policy by allowing the SGD to appreciate more rapidly, especially against the USD.

Given that General Elections are coming soon, what I would like to see are longer term plans to fight inflation, as I firmly believe that this is going to be a structural rather than cyclical issue. Getting hawkers to hold off on price increases is not the right solution, as it merely results in their margins being squeezed and does nothing to address the underlying structural issues. Much as I am an advocate that Singaporeans take steps to defend themselves against inflation, I believe that it is realistic to acknowledge that given the government's command of vast economic resources, it does have the policy tools to address inflation at a structural level if it decides to do so.

Global Imbalances

On the related note, the minister also raised his concern about global unemployment and the fiscal problems of the developed world when he spoke earlier in the week at the Bertelsmann Foundation conference.

To me, this signals the government's awareness of the need for rebalancing in the global economy, with the emerging countries moving away from an export-led growth model and the West accepting the fact that it has lived beyond its means for many decades now. While the minister has to be polite and politically-correct when addressing this issue in public, I wonder if he or the government really thinks that rebalancing can be done without significant upheaval to the global economy in a manner that would adversely affect Singapore as well.

Given the violent union protests in Europe and the inability of the US political elite to understand the concept of 'we are bankrupt', I would bet my money on greater instability in the global economy as people in the developed world continue in their denial of their parlous state of affairs. I would also adapt my investment strategy in response to such uncertainty. While it would be interesting to watch how our politicians (of all parties) react to this future upheaval, I won't be waiting for any of them to help me.

Better be prepared than be sorry.

WP's Transportation Proposal

Much as I am in favour of free markets, the Workers' Party's proposal to nationalise bus services does have some merits given the situation that we have now in our public transportation system.

The current duopolistic situation does not provide no real competition and the Public Transport Council is seen by the commuting public, rightly or wrongly, to more often than not act in the interest of bus operators' profits. The present regulatory regime appears to guarantee the operators level of profits, and given the level of risks that they undertake, one can make a reasonably strong case that the rates of return are excessive.

Operating bus services as a public utility on a cost-recovery basis, as proposed by the WP, makes sense to me in that there is no overt subsidy involved, and there is little or no risk of over-consumption. In fact, even over-consumption of public transport may not be a bad thing if it means lower car usage, which helps to lower our overall oil usage and potentially allow us to cope better with peak oil. Once the effects of peak oil becomes apparent, and it comes both strategically and economically untenable to allow precious imported petroleum to be burnt in privately-owned vehicles, the nationalisation of public bus services may actually be an inevitable means of dealing with oil scarcity.

The argument that profits will motivate the transport operators to provide better service is a tired one that's not borne out by 30 years of evidence. I feel that we should not revisit this issue given the evidence, unless we change the regulatory regime to inject some real competition into public bus services.

Thoughts on the Opposition Parties

Just a few random musings since I am currently quite tied up with work issues.

1. The SDP should stop whining about the state-owned media not allowing them their 'fair share' of air-time. Look, we are not kids and we know that the media is not unbiased. No point harping on the same issue. Try presenting some real policy thinking instead. And no, your so-called alternative Budget doesn't cut it. I could have assembled a few JC students to come out with something similar.
2. If the SDP wants to be taken seriously, they should get rid of Chee Soon Juan. He is a liability to the credibility of the party.
3. Apart from NSP's Goh Meng Seng (who was my peer in JC), there is very little evidence of lucid economic thinking. Many of the ideas are merely variations on the theme of 'we are rich so let us spend the national reserves', which is basically socialism in disguise and an indirect form of bribing voters with their own money. The interesting thing is that having accused the PAP of vote-buying through the HDB upgrading programme, they failed to see that their ideas are of a similar nature.
4. Kenneth Jeyaretnam should probably hide the fact that he studied economics at Cambridge. From my avocational reading in the philosophy and history of economic thought, I have come to the view that the economic theories taught at Cambridge have played a very big role in contributing to the economic malaise afflicting the Western world. Being a Cambridge graduate myself (thankfully not in economics), it is obviously not my intention to knock the school.
5. Another suggestion to Kenneth: Brush up on your organisational skills. Having so many people quit your party should be enough evidence that you need to change.

So much for now. :-)

Market Thoughts 20110409

Friday's action in the gold and silver markets worries me. The USDX is near to important support levels where things can easily get out of hand and the world tips over into another financial crisis.

It looks as if the market is trying to tell the clowns in the US Congress that they need to get their act together. Fighting over meaningless budget cuts when the country is drowning in trillions of dollars of debt make the political debates more like soap opera than anything else. If the Republicans want the Democrats to budge on social spending, they should also take the initiative to get the US out of the 2 useless wars in the Middle East. Then perhaps things can start moving in the right direction.

Q2 2011 could become a period for sovereign debt issues to come to the forefront of investors' concerns, along with the geopolitical problems in the Middle East.

Inflation Thoughts 20110402

2 issues: Strength of SGD and food inflation

First off, CNA has reported that SM Goh, who is also chairman of MAS, has expressed the view that while a stronger SGD will help to mitigate inflation, he is also wary about allowing it to appreciate by too much. This is the conundrum that the MAS has to face given the reckless money printing of global central banks.

On the one hand, the SGD exchange rate is a convenient tool for managing inflation, given that we are so dependent on imports. On the other hand, too high an exchange rate relative to our Asian neighbours would mean that Singapore exporters become less competitive. Furthermore, given our dependence on tourists from the region, it would also make Singapore a more expensive destination.

To a certain extent, our exchange rate policy is not totally free from the monetary policies of other Asian countries such as China, Japan and South Korea, given the need to maintain competitiveness. As such, my view is that unless China decides to stop clowning around with price controls and get serious about fighting its inflation problem through both credit tightening and the appreciation of the RMB, there is a limit to how far the SGD can be allowed to strengthen without hurting the economy.

Given the limits of the extent to which the SGD exchange rate can be used as an inflation-fighting tool, the government will need to implement policies that deal with some of the high-cost structures within the local economy, especially with respect to land and rental prices.

Food Inflation

Given how much the price of corn has risen recently, an agricultural investment analyst has noted that the price of meat will have to increase by around 50% in USD terms over the next few years for farmers to maintain their profit margins. Corn is a major animal feed in the production of beef and pork, amongst other things. Becoming a vegetarian looks increasingly attractive from a cost perspective.

As for wheat, this year's crop could be adversely affected by the worst drought in Texas in over 40 years. With the availability of wheat exports from Russia still uncertain and increasing imports by China, wheat prices could also continue to firm up.

More directly for Singaporeans, Thailand has raised the possibility of limiting its exports in order to keep prices low at home, as part of their security policy of keeping the poor people from rioting like those in Africa and the Middle East. This may mean higher rice prices in the coming months. Time to increase one's long-term storage of rice perhaps?

Short of a reversal in the money printing policy or the advent of Round 2 of the 2008 global financial crisis (which I believe is inevitable, only a matter of timing), we can expect more inflation ahead, regardless of what the government tries to do.