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How will a default by the US affect Singapore?

Friday, July 29, 2011

I read an article in the newspapers today and it confirmed my fears that Singapore could once again suffer a severe downturn if the US government does not raise its debt ceiling come 2 August. Many would have to face extreme hardship once more.

Salient points in the article:

1. US banks account for some 15% of domestic lending in Singapore.

2. If US defaults, US banks will withdraw their funds from Singapore.

'Should the US default and a credit crunch happen, it would make the fall of Lehman look like a picnic,' Robert Prior-Wandesforde, Credit Suisse.

I remember what happened when Lehman Brothers collapsed. The stock markets went into tailspins. All the buyers disappeared. Real estate was similarly affected as prices of condominiums here in Singapore declined some 30% in some cases.

I remember at the time, Soleil at Sinaran was newly launched and many buyers actually forfeited their 5% deposits and did not exercise their options to purchase. It was that bad.

My Geology professor once said to us that economists have made a mess of the world and it would be impossible for me to comprehend the mess totally. Thus, it would suffice for me to know what actions to take to position myself for whatever eventuality.

If the debt ceiling should be raised, the party will continue. Inflation could get worse and the stock market could see a new high. What to do? Stay invested.

If the debt ceiling fails to be raised, the party will end. Credit will become hard to come by or at least be more expensive. This affects costs in all its forms and will affect all businesses and individuals. What to do? Divest.

We should take a position that will allow us to benefit if either scenario should come to pass. How do we do this? The simplicity of my answer might just disarm you: be 50% invested.

Good luck.

Read article in The Straits Times here.

Debt ceiling gridlock: Who will get paid?

6 comments:

financialray said...

Gut feeling is that they will wayang wayang till the very last moment and then finally raised the debt ceiling.
US is TOO BIG TO FAIL.

Reason banks are retrenching is because no QE3 foreseeable by the banks and with no investment income forthcoming, cut costs first.

Will there be a QE3? If not, US will muddle through for another few years. If yes, time to exit.

AK71 said...

Hi financialray,

Some would have said that Lehman Brothers was too big to fail too. Never say never. ;)

Gregg said...

Hi AK,

I guess Property and Banking sector will hit badly.
Which stock that will the haven to protect our capital?

Will the sibor goes up (or down) in event of default by US?

Seem like Singapore is immune of this turbulence with the skyrocketing of COE and COV that keep breaking new record high....

Paul said...

Lehman *was* too big to fail but the Fed 'gambled' that a white knight would ride up and scoop it up. When no one did, the rest is history.

Learning their lessons, they did not let AIG, Feddie and Fannie fail.

Whatever wayang that may or may not take place, I think the damaged is done and a downgrade may be inevitable. So we will not get out of this unscathed.

AK71 said...

Hi Gregg,

My experience is that when the bear comes out of its cave, none will be spared. ;)

In case of a default by the USA, interest rates would go up as there would be more risk aversion. Liquidity could dry up once more.

Singapore is not immune. With its very open economy, any negative ramifications will be amplified here.

Everything is still shooting through the roof in price simply because liquidity has yet to dry up. ;)

AK71 said...

Hi Paul,

"Was" is only the past tense of "is". ;)

The US government was in a position to "rescue" those troubled financial institutions you mentioned. However, who is going to rescue the US government? ;p

Although I personally feel that the US government would probably raise the debt ceiling at the 11th hour, I am by no means sure it would happen. Anyone who says he is sure it would happen is being irresponsible. ;)

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