Global Slowdown

This week we hear quite a bit of news of global economic weakness. We have various central banks around the world cutting interest rates and taking other easing policy measures in the face of a rapidly weakening global environment.

China's GDP numbers came in weaken than expected while the US earnings season has been kicked off with more warnings of forward weakness.

Back at home, the Singapore economy shrank in the 2nd quarter at an annualized rate of 1.1%, although things appear not to be weak enough given the government's position that emergency measures are not needed as of now.

Despite this, though not unexpectedly, news of. Cut in COE quota has people all agitated about higher prices in the coming months. In fact, there appears to be signs of buyer capitulation, as reported in the news this evening on TV, wherein those who have been holding off buying new cars have decided to go ahead in fear of higher COR prices.

As I have maintained for a long time, that which is unsustainable will break eventually. Thus while the supply of COEs may be falling, I am expecting that demand would also be falling in view of the global economic situation. It is possible that we get a repeat of 2008 in late summer that will lead to a crisis of a more serious nature than the liquidity crisis back then.

Let's see what happens.

Record COE Prices - Again

Just saw an online article reporting that COE prices have just hit a 14-year high.  It now costs more to buy a COE for a car of 1600cc or greater engine capacity than to buy 1 kilogramme of gold.  My first thought when I read the article was this - If there were derivative instruments based on COE prices, I'd be shorting them, since talk about 'prices can only go up' are fairly good indicators of bubble tops.

To me, this is a somewhat tragic situation, for several reasons.

Firstly, given global crude oil production patterns, depletion will likely result in shortages worldwide in less than 10 years. It will not surprise me to see the government banning the use of cars that run on petrol within this period of time.  What this means is that those who paid for the COE now will basically have less than 10 years of usage for their cars if they had originally planned not to trade-in for newer models within 3 years.

Secondly, when these people realise how much they have overpriced COEs, there will bound to be a political backlash against the PAP government.  While one can argue that the government forced no one to bid up COE prices, the design of the current COE system is such that fair-minded people can reasonably suspect that the government is not only interested in limiting the car population but also in maximising revenue.  If the government were solely interested in suppressing car demand, all it has to do is to make a simple change in the car financing rules - Get MAS to bar financial institutions from including the COE price into the car loan quantum. Once such indirect financing for COEs is not available, one can be 100% sure that the bidding behaviour will change overnight, and prices will fall precipitously.

The reason why this would work is because car buyers have a tendency to think only in terms of monthly payments, much like those sub-prime borrowers in the USA.  Requiring them to pay for the COE upfront will price many of them out of the market, especially those young people who make $3-4K only a month.  This, in turn, will lead to lower COE prices as the artificial demand is removed.  The logic applies even if car dealers are still allowed to bid for COEs under the new system.

But I guess I can't stop people from willingly becoming victims of the government's policy errors.  I just hope that I won't have to bail them out.

Some Thoughts About COE Prices

Some random thoughts about the recent elevated COE prices:

1. Car dealers are partly responsible for the rapid increase in prices, even though reduced future supply has an important role to play. Yet, the same dealers are now asking the government to cut other car taxes so that affordable to not decrease further and discourage more buyers. This is a case of shooting yourself in the foot and then asking the government for help.

2. If the US military is right in its assessment of future world oil supplies, by 2015, there will be a 10 mbpd shortfall relative to demand. In Singapore, this will either mean shortages or very high prices. I suspect that if this scenario plays out, more than a few people will be wondering what they were thinking paying $70K for their COEs.

3. A $70K COE costs more than 1 kg of gold. To me, this is clearly a bubble. People's perception of value is severely distorted.