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 Reading: The Crash Course

I have just completed the book entitled The Crash Course: The Unsustainable Future of Our Economy, Energy and Environment by Dr. Chris Martenson.

This is my second contact with Dr. Martenson's work after watching his highly educational documentary DVD of the same title. The documentary is available for free legal download here.

The strength of the book is the presentation of the linkages between energy, the environment, and our debt-based global monetary system. It shows how given the way the monetary system is currently set up, exponential economic growth is required. Unfortunately, since no system can grow exponentially in a world of finite resources, the monetary system will HAVE TO implode at some point when hard resource limits are hit.

The other strength of the book is its simple but comprehensive coverage of Peak Oil and related energy issues, which for me was a good 'revision' after following this issue for more than 5 years.

I believe that once we understand the link between finance/economics, energy and the environment, we will see why the 2008 Global Finance Crisis has not actually been properly fixed, and that something bigger will be coming our way.

The book is available for loan from the NLB.

My First World Parliament

Since this has been in the news lately, I'd like to add my voice to the matter.

To me, a so-called First World Parliament should ideally have the following characteristics, irrespective of who its members are:

1. MPs spending most of their time doing grassroots work, e.g. Meet-the-People Sessions.

2. Be in recess as frequently as possible - the less the MPs meet, the fewer the laws they pass, and the more freedom and liberty citizens will enjoy.

3. MPs should only be limited to serving only 2 terms - so that vested interests will never gain a permanent constituency inside Parliament, and people not facing re-election risks can freely speak their minds.

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. :-)

Why We Need Manufacturing and Economic Diversity

This is a follow-up to my earlier critique of Tan Jee Say's economic blueprint, specifically dealing with the issue of having a manufacturing sector in the economy. Here I offer up some points for consideration as to why a service-only economy is not the way to go.

Resilience

Without a manufacturing sector, we will lose the knowledge of how to make things, and this will make us more dependent on trade. In times of peace and prosperity, this may not be a bad thing, as we seek to maximise the Ricardian benefits of trade. However, I don't believe we are in such times. In fact, quite the opposite: I believe that we are moving into a time of great uncertainty, conflict and war.

That having manufacturing improves a country's resilience was amply brought home to me when I saw factories in Japan cranking out essential items to support the victims of the earthquake and tsunami in Sendai.

Imagine what would happen if Singapore is hit with a large-scale disaster and we have to wait for outsiders to send us materiel needed for life support because we have neither knowledge nor industrial capacity to make them.

Peak Oil

When the effects of peak oil (and relative energy scarcity) becomes widely felt, there will likely be a widespread collapse of trade, tourism and other services, since the growth and sustenance of these are highly-dependent on the availability of cheap fossil fuels.

What do you think will happen to demand for healthcare and education (2 sectors favoured by Tan Jee Say) when the world struggles to cope with energy scarcity? When energy and food consumes more and more of people's incomes around the world, what do you think will happen to the amount of money left over for discretionary items such as vacations and financial services?

If we have only a service economy, this means that the impact of such a collapse will hit us disproportionately. A more diversified economy will allow us to work through the transition period while switching over the more sustainable forms of energy.

Income Inequality

My reading of Tan Jee Say's economic vision is that he desires to see a reduction in income inequality in Singapore. While this is definitely laudable, trying to achieve this outcome via a service economy is the wrong way to go. To take the closest comparable example, we see that income inequality in Hong Kong is higher than in Singapore, and it is largely a service economy.

Besides this, the evidence from the last century of economic development suggests that under the current global economic regime, a service economy almost always evolve into a FIRE (finance, insurance and real estate) economy. We can see this in places like the US, UK and Hong Kong. Such an economy invariably rewards speculation and punishes activities with long gestation periods, such an entrepreneurship. When speculation is rewarded over hard work, inequality always worsen because most people do not have the means or wherewithal to engage in those speculative activities such as trading futures or flipping condos. It also makes the economy more prone to boom-and-bust cycles.

On the other hand, economies where there is a healthy respect for manufacturing, such as Germany and the Scandinavian countries, appear to be less prone to speculative bubbles in recent years.

With regard to the argument that Singapore's manufacturing depends on cheap foreign labour in order to survive, and thus have a negative impact on income distribution, I would argue that the same can be said of our service economy, as evidenced by the legions of PRCs and Filipinos in many service outlets. In my view, this has to do with immigration policy rather than industrial policy.

As the government runs out of ideas on how to grow the economy, it has tried the brute force method of increasing factor inputs, which means ever greater manpower and capital are needed. And given that we don't have enough people, the obvious thing to do is to import them from abroad. If we reverse this policy and take the longer, tougher road of growth via productivity improvement, then this wage suppression factor would disappear, irrespective of whether we have a manufacturing sector or not.