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. :-)

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.

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.

Stocks - Time for Caution

In the week after the Sendai earthquake in Japan, there was a report in ST on 19 March wherein some market analysts were saying that the correction in the stock market presented a good 'buy on weakness' type of opportunity.  While some of the arguments were interesting, they appear to me to have seriously underestimated the risks from the unfolding events in the Middle East/North Africa as well as the ongoing sovereign debt crisis in Europe.

Furthermore, looking at the Singapore market action itself, there appears to be a mood of caution amongst the speculators, while the markets in the US shows hints of distribution.  The US markets, still leaders in terms of being able to influence global investor sentiments, show more signs of nearing a top than rather than good entry points for long-term holdings.  The only thing, some would argue, that is keeping the market from dropping is the billions of dollars funneled into the market by the US Fed via its QE2 programme.

As such, I would hesitate to say that now is the time for long-term investors to accumulate stocks.  This is a trading market.

SGD Exchange Rate and Inflation

On 1 Feb, the Standard Chartered Bank's Global Research team published a report on inflation entitled Inflation: illusionary, imflammatory.  On page 4 of the report was a table (Table 1) showing CPI inflation data of various countries in Asia.  Part of that table is reproduced below:

	2008 High	Headline	Core	Non-Core	Food/Energy Weight
China	8.7	4.6	2.6	8.3	0.44
Hong Kong	6.3	3.1	1.9	5.3	0.29
Singapore	7.5	4.6	2.1	10.0	0.41

From the above data, we can see that despite its hard USD peg which does not allow its currency to gradually appreciate in order to slow down imported price pressures, Hong Kong has achieved the lowest rates of inflation.

Looking at the Non-Core portion of the inflation data, which includes food and energy prices, the difference between Hong Kong and Singapore is even more remarkable.  Both territories import almost all of their food and energy, so in theory, an appreciating currency ought to ameliorate some of the effects of higher import prices.  Hong Kong imports most of its food from China, whose currency has actually appreciated relative to the USD and HKD, which adds to the cost pressures in the former.  And yet, it has a lower food/energy inflation rate than Singapore.

So unfortunately for us here in Singapore, the much steeper appreciation of the SGD does not appear to have helped as far as food inflation is concerned.

(As an aside, since the trade-weighted index used by the MAS is not public information, I chose to use the USD exchange rate as what I believe to be a reasonable proxy for the strength of the SGD, given that a very significant part of our trade appears to be denominated in USD.)

So it leads me to wonder whether there are domestic factors that have acted to negate the positive impact of an appreciating SGD on the inflation rate.  I have no answers, but it's something to think about, isn't it?

Video: US Fed QE and Food Inflation

A short but comprehensive explanation by Bill Fleckenstein on how the reckless money printing by the US Federal Reserve is causing food inflation and hurting the poorest people in the world.

Visit msnbc.com for breaking news, world news, and news about the economy

Food Crisis 2011 - Will Politics Trump Markets?

While we in Singapore complain about the high price of barbeque pork slices, a favourite Chinese New Year food, high food prices have had far less sanguine effects on the poorer parts of the world, as we have seen from the political turmoil in Tunisia, Egypt and the rest of that region of the world. Wheat prices have hit a 30-month high and have doubled since a low in mid-2010, and this has obviously had a negative impact on Egypt, who has to import around half of its annual consumption.

With developing countries close to screaming in pain from the inflation exported by the United States through Bernanke's disastrous quantitative easing policy, I have to wonder how much more food prices have to go up before Hillary Clinton tells Bernanke and the President's Working Group on Financial Markets (the so-called 'Plunge Protection Team') to step in and cool things down.

As an aside, I tend to think that Obama is a mere teleprompter-reading puppet who has neither the intelligence nor experience to deal with such complex issues, and that Mrs. Clinton is the real brains behind such matters. Being a Marxist agitator ('community organiser') in the Saul Alinsky tradition in Chicago is not a real job.

Such an intervention in the commodities market is not without precedent. It had happened before in 2008 during what Donald Coxe, chairman of Coxe Advisors LLC, called the 'Saturday Night Massacre', where it was thought that the US government, working through its Wall Street connections, hammered down commodity prices through the futures market. The only difference between now and 2008 was that the US political class had a vested interest in having commodity prices down due to the then-impending Presidential Elections. As for the present situation, I would argue that being the sole (albeit declining) superpower in the world, the US has a vested interest in trying to keep things under control, especially when it comes to the Middle East, where it is engaged in protracted wars in Iraq and Afghanistan that it has no hope of winning. Allowing things to further deteriorate will definitely have a negative impact on the global economy, on the stability of the Middle East and possibly on the supply and price of oil.

Be that as it may, looking at the various charts of agricultural commodities, rice has just broke its sideways pattern to move up to a 27-month high while wheat and corn may still have further upside. That said, I am wary of getting into long positions, as my sense of the consensus view is that too many people think prices will keep going up due to supply challenges underpinning the fundamental picture of food commodities. The fundamentals are correct, but with the CCI breaking record after record on the upside, I am just worried that the opinions are too one-sided and that there is a speculative frenzy feedback loop fed by the ongoing social unrest. Since I am somewhat a kiasu person, I am most likely going to sit out this episode of price movements.

And given that rice prices have start to move, we need to be on a lookout for protests and social unrest in those parts of the world where rice is the major staple food. So far, our region has been spared unrest, but don't count on that to continue if rice prices start to move aggressively up like wheat and corn.

In the meantime, I'll be thankful for the abundant food available here in Singapore and enjoy my Chinese New Year.

A More Expensive Cup of Coffee

Some people have been complaining about the increase in prices at Starbucks and other coffee-shops. As far as coffee is concerned, here's the reason why these establishments have to raise prices:

 Prices have doubled over the past 18 months thanks in no small part to Mr. Bernanke's reckless money printing.

The Road to Madness is Paved with $100 Bills

Thoughts on the Property Cooling Measures

Following the announcement of the latest measures to cool the speculative bubble in the real estate market here, much of the debate continues to centre around the role played by speculators, immigration and foreigners. What I have not seen discussed in detail is the role played by the negative real interest rate environment.

From an Austrian School perspective, negative real interest rates tend to foster bubbles through mal-investments. In my view, Singapore's current monetary policy has to some extent been held hostage (due to export competitiveness considerations) by the US Federal Reserve's zero-interest rate policy as well as the People's Bank of China's USD-peg policy. This has resulted in a negative interest rate environment that is 'conducive' for the growth of speculative bubbles.

If the latest measures by the Ministry of National Development are effective in cooling real estate demand, the continued existence of negative real interest rates could well see hot money moving into the local stock market or other asset classes.

Gold and Silver Very Strong

Gold and silver were showing significant price strength in New York trading on Friday, as can be seen from the 2 Kitco charts below:

This move appears to have negated the Head & Shoulders formation that I had thought might form in the daily gold chart:

This was a costly mistake as I had traded out of a small speculative gold position, and I wasn't quick enough to buy below the 1390 level last night during NY trading. Not too sure whether a short-term top is near though, as the momentum indicators in the chart above are not at oversold levels yet.

On the macroeconomic front, the ECB's backdoor QE programme appears to be winning approval from the stock market, even though it is sign that the EU's debt problems are too serious to be solve with austerity alone. On the US side, the bad unemployment numbers also did not appear to have discouraged the bulls.

To me, this is a very confusing market environment.

China's Bubble Economy

Below is a video about the current state of China's economy, casting doubt on the widely-accepted belief in China's 'economic miracle'. The analysis, in my view, is fairly consistent with the Austrian School's analysis of malinvestments due to excessive credit growth. For those who are familiar with Frédéric Bastiat's 'Broken Window Fallacy', it's also featured prominently in the analysis.

Debt Crisis Will Continue

Even as EU ministers rush to cobble together a bailout package for Ireland before Asian markets start trading tomorrow morning, one has to really wonder about the effectiveness of bailing out banks as a means of solving the ongoing debt crisis in the developed nations. Such bailouts merely shift the debt onto the taxpayers of the problem countries, who are themselves hard-pressed to solve their own financial troubles. Furthermore, the EU's bailout fund basically involve financial contributions from EU nations that are all in financial dire straits. Again, this does not make sense to me.

There are only 2 ways to solve problem of too much debt: Either default or monetise it. A default will likely mean a breaking up of the Euro grouping, and so politicians may be tempted to follow in the footsteps of Bernanke's 'QE2'. Who knows?

I just wonder how long more such schemes can last before the current financial system crashes once again, possibly with a ferocity that greatly surpasses that of 2008.

$10.2 trillion problem in 2011

The Wall Street Journal has reported that the developed countries of the world will need to raise US$10.2 trillion in 2011 to finance their budget deficits as well as to repay maturing bonds issued previously.

Given that many investors are now aware of the fact that most of the developed countries' governments are bankrupt, and that China may be increasingly unwilling to buy such sovereign debt as a result on the ongoing currency and trade wars, this could mean another round of shocks to the global financial system next year. If investors fail to show up for those bond auctions, there will either have to be debt default or monetisation. In the US case, the outcome is already clear - the US Federal Reserve will act as the buyer of last resort, buying up US Treasury debt in order to monetise it. As for Europe, I am not sure what will happen, as national politics between the different EU nations are involved. Austerity measures aren't getting much traction so far given the scale of protests that are happening across the EU. So, perhaps the EU may also be tempted to monetise debt? Who knows?

Whatever the case may be, it will definitely mean more 'interesting' times for investors as governments get more and more interventionist.

US Federal Reserve QE2 looks set to fail

Since the US Federal Reserve announced its US$900 billion 'QE2' programme of buying US Treasury debt and other mortgage-backed securities, stocks, bonds and commodities have moved violently in response. Looking at the intra-day actions on Wednesday and Thursday (US time), the market seems to be signalling failure of the new policy. Here's why.

Whatever the ostensible reasons for 'QE2', one important reason for the Fed's actions is to prop up the US stock market, using the 'reflation trade' to try to create enough wealth effect to stimulate household consumption, and thus get the US economy moving again. This is typical Keynesian thinking.

However, when we look at the market movements in the latter part of the week, we find that while US stocks have moved up, commodity prices have increased to an even greater degree. Since commodity prices influence cost-of-living, it means that the weak wealth effect has been more than negated by pipeline inflation. Thus, the market appears to me to be saying that the Fed's leveraging up of its balance sheet ultimately is a lot of 'noise' but no real impact is achieved. This is exactly what economists of the Austrian School have predicted together with some of the more savvy market participants.

For us here in Singapore, what this means is that we have to discount most of the 'good news' that the mainstream media is feeding us about the effectiveness of the Fed's latest policy move in helping the US economy to recover. The risk of a 'double dip' is still out there, probably in 2011.

Korea Considers Capital Controls

In a move that appears to bolster my belief that the boom in the emerging market economies and stock markets are due more to the US Federal Reserve's quantitative easing rather than improvements in the global macroeconomic fundamentals, South Korea is reportedly considering measures to curb capital inflows, as reported by the Chinese edition of FT.

韩国透露了实施一系列新的资本管制措施以应对投资流动激增的可能性。

这意味着亚洲第四大经济体可能采取与巴西、泰国和印尼相似的防御性政策。

The full article can be found here.

And as a further sign that the underlying structural problems in Europe has not been addressed, let alone resolved, budget talks in Portugal aimed at implementing austerity measures to satisfy the bond market have made little headway so far.

Now that the US Fed is expected to announce a new round of quantitative easing, we need to watch to see what impact that policy will have on stock markets. We live in very interesting times indeed.

Stock Market and Gold Performance

Here's a chart of the Straits Times Index (STI) with data for the last 3 years.

It shows that the market rally from the March 2009 lows have recovered a substantial part of the losses since the late 2007 highs.

Here's another chart showing the same STI data divided by the price of gold.

Using the price of gold as a rough measure of the extent of monetary inflation in the world (and to my mind a more accurate reflection of inflation than the Consumer Price Index), we see that the stock market has actually not done all that well in real terms.

The STI has been relatively flat throughout 2010 in gold terms, meaning that all the price rises so far are likely caused by monetary stimulus, or 'liquidity' in other words.

To me, this shows that the massive money printing by the central banks of various countries have not been effective in dealing with the global financial crisis of 2008. It looks like we are still in the midst of what could well be a depression in the developed economies of the West and Japan.