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.

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.

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. :-)

Causes of Slow Future Global Growth

I am currently reading the latest book by prominent deflationist A. Gary Shilling entitled The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. Table 6.4 of the book shows 9 causes which Dr. Shilling believes will be responsible for slower economic growth for the global economy in the years ahead. I reproduce the causes below:

1. US consumers will shift from a 25-year borrowing-and-spending binge to a saving spree. This will spread abroad as American consumers curtail imports of the goods and services that many foreign nations depend on for economic growth.
2. Financial deleveraging will reverse the trend that financed much global growth in recent years.
3. Increase government regulations and involvement in major economies will stifle innovation and reduce efficiency.
4. Low commodity prices will limit spending by commodity-producing lands.
5. Developed countries are moving toward fiscal restraint.
6. Rising protectionism will slow, even eliminate global growth.
7. The housing market will be weak due to excess inventories and loss of investment appeal.
8. Deflation will curtail spending as buyers anticipate lower prices.
9. State and local governments will contract.

With regard to point 3, this issue has also been raised by others like Russell Napier, Harold James and Ian Bremmer.

I disagree with point 4 as I believe that peak oil and resource scarcity will drive up prices relative to industrial goods and other services.

As someone who thinks our future will be one of inflation rather than deflation, I would disagree with some of the positions taken by Dr. Shilling. That said, I still take his views seriously as they are well argued and reasonable, and I want to be aware of the risks if his deflation thesis were to be correct. One risk that comes to mind is Singaporeans' ability to service their mortgages in a deflationary world. That's a big red flag for the Singapore economy, in my view.