Singapore Shares vs. Gold

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

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

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

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

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

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

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

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

Thoughts on the PAP Manifesto

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

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

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

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

廉洁无私，心胸坦荡

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

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

生活简朴，清心寡欲

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

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

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

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

子曰、苟正其身矣、於从政乎何有、不能正其身、如正人何。

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

子路问政。子曰、先之、劳之。

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

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

Tharman Sees Global Inflation Risks

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

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

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

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

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

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

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

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

Global Imbalances

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

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

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

Better be prepared than be sorry.

WP's Transportation Proposal

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

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

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

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

Thoughts on the Opposition Parties

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

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

So much for now. :-)

Market Thoughts 20110409

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

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

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

Inflation Thoughts 20110402

2 issues: Strength of SGD and food inflation

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

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

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

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

Food Inflation

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

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

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

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