Total Defence Day 2014

I was reminded that today is Total Defence Day by the Prime Minister's Facebook post:

With the choice of MacDonald House as the focus of the photo, I guess the PM wanted to use the recent diplomatic spat with Indonesia to remind Singaporeans of the importance of national defence.

What the PM appears to have ignored is the fact that due to the government's bad economic policies of the last 2 decades, Singaporeans' economic position have been weakened considerably.  The reckless importation of middle-class foreigners have pushed up asset prices while the unmitigated reliance on low-end foreign workers have suppressed the wages of lower-income Singaporeans.  As such, due to these policies, the economic resilience of Singaporeans have been very much weakened.

Related to the above is the negative psychological impact on Singaporeans of feeling that we are 2nd class in our own country.  As a foreign friend of mine who had recently left Singapore told me - "I came to Singapore because your government treated me better than citizens".  So here, the psychological defence of Singaporeans has been seriously undermined by the government's single-minded pursuit of GDP growth.

With so many foreigners in our midst, and many of them carrying the 'I am here because I am a talent and better than you locals" attitude, our social fabric has been damaged by the increasing conflict between natives and aliens.  As such, on the social defence front, we have also regressed.

In conclusion, if the government wants to move beyond rhetoric in the area of total defence, the first thing to do is to change its economic policies and take measures to heal the damage done to the aforementioned 3 pillars of total defence.

Hopefully, Total Defence Day 2015 can be a happier one for Singaporeans.  希望新加坡人不用再面對外人喧賓奪主的情況。

Private Property Market Up 20% in Next 3 Years?

Just came across a new piece reporting that real estate industry analysts publicly suggesting that despite the government's cooling measures, land prices in the private property market could go up by 20% in the next 3 years, with finished products going up between 10-15% in prices.  The crux of the argument is that Singapore's population will continue to increase.  In recent weeks, I have heard this bullish argument repeatedly from various quarters.  How strange, I thought, that people have such short memory about the public outcry against the Population White Paper published earlier this year.  I am not sure if the government can 'pull a fast one' on Singaporeans in this matter, although I would certainly be disappointed in our democracy if we can be so easily hoodwinked.

In any case, when it comes to the state of the real estate market, I don't trust the analysis of those within the industry.  They often appear to me to be no more than advertorial writers 'preaching the party line' with constantly bullish views.

Economically, I see a lot of issues in the next 2-3 years globally. I doubt Singapore can escape unscathed.  In fact, the initial salvos of the next crisis may already be upon us, with the weakening of the ASEAN economies in recent months.

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. :)

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.

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.

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.

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?

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.

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 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. :-)

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. :-)