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.