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Stakeholders should worry as credit is tightening.

Friday, November 18, 2011

Credit is the lifeblood of businesses and credit is tightening.

Banks in the eurozone are finding it harder to get funding and they have begun repatriating funds from overseas. These banks now refrain from lending and liquidity is drying up. Eurozone governments are also struggling to raise funds and even France was recently forced to pay higher interest rates on newly issued debt.

"The euro zone debt crisis is turning into a global liquidity crisis, and leading to a vicious cycle of intensifying funding tightness spurring dumping of risk assets," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ. Read article here.

Things could get a lot worse before they get better, it would seem.

I remember Margaret Thatcher, a former Prime Minister of the United Kingdom, once saying that she did not believe in "artificially formed" countries. The breakdown of the former Yugoslavia is a good example of how such entities would not withstand the test of time. The EC and the eurozone although not a country could be current day examples of such an entity.

Some believe that the ECB has to take more definite steps to shore up confidence in the eurozone. This probably means buying up bonds in a massive exercise. Germany, however, believes that the ECB cannot be expected to solve the problems eurozone is now facing by buying up massive amount of bonds.

Of course, some people would argue that the weak Euro is actually good for Germany as its export driven economy continues to boom and some would further say that Germany's prosperity is now built on the misery of weaker members in the eurozone. Divisive? I think so.

In an earlier blog post, I asked a question:
"In order to stay optimistic about Singapore's economy, we have to be optimistic about the world economy and we have to stay optimistic that there will not be any significant credit tightening in the world banking system. Do you think it is easy to be optimistic about these?"

With differences aplenty, one wonders if the eurozone would see more stresslines forming and if it could withstand the test of time. Stakeholders should be worried.

Do you believe that we are immune to the problems in the eurozone? Do you think that we are not stakeholders because we are not part of the eurozone?

"MAS highlighted that key risks facing Singapore included a protracted global economic slowdown, financial contagion and pressures in the property market. It warned that a protracted global slowdown could weigh on the domestic economy, cause corporate earnings to fall, with knock-on effects on employment and wage growth." Read article here.

Think again.

Related post:
Further credit tightening is almost a given.


Anonymous said...

I like this post.


INVS 2.0 said...

Hi AK71,

Although the SG gov controls the economy through MAS and other measures, it still cannot resist the impact from the weakening Eurozone and US. It will hit us, definitely, but in a matter of time.

AK71 said...

Hi Jaime,

I am glad you like it. :)

A reason for blogging is to share my ideas freely with more people and not just my family and circle of friends.

With this blog post, I hope to reach out to people who are still given to conspicuous consumption and who might be stretching their finances to the limits.

I am continually astounded by how many people I have talked to do not have an emergency fund or if they have some savings, it is usually grossly inadequate.

Please share this blog post with your family and friends. Thanks. :)

AK71 said...

Hi INVS 2.0,

A part of me is still hoping that the next crisis could be averted. There is always a little escapist in me. I suppose it is the same for Mr. Market and that is why a bear market goes down a river of hope. ;)

In the more likely event that the crisis could not be averted, Singapore would not be spared and we should make preparations if we have not done so already.

Anonymous said...

Hi AK71,
In terms of investment/life i agree we must be fully prepared for the worse and hope for the best.
We must learn how to hedge in such a way, head i win and tail i also win. Instead of winner takes all and loser knock out attitude; which is prevalent, normal happenings in casino.

AK71 said...

Hi Temperament,

I agree and I sleep better at night with a plan. :)

Sleep well at night with a plan.

I continue to hope for the best too. ;)

Hwang said...

i think they have started to do this considering the amount of outward fund flows, but will it accelerate?

for the time being they need to cover the holes in their balance sheet due to loses in home countries, but if they recall everything, they have no means to generate future incomes anymore. that is what those investments are for in the first place, no?

AK71 said...

Hi Hwang,

I do not know if the repatriation of funds will accelerate but it could continue. To shore up confidence in their banks, the eurozone is asking the banks to increase their tier 1 capital. As their share prices are depressed, it is unlikely that these banks will issue new shares. A recall of funds from overseas is logical.

Even if the eurozone banks were to recall all their funds from Asia (which is unlikely), I doubt that they would not be able to generate any income in future. It is unlikely that they do not have income streams from elsewhere in the world. ;)

Ah John said...

Now, a big news is Buffett bought IBM shares, here is a great article:

Do you think any similar stocks at Sg? 10 years continuously perform!

AK71 said...

Hi Ah John,

Buffet is in a class of his own and he is also very flexible and willing to make changes.

He didn't want to invest in IT companies before, saying he didn't understand them. He has changed his mind with IBM.

This is not the first time he has changed his mind about something.

The lesson for me here is that as investors, we want to keep an open mind and adapt to changing circumstances.

Two companies I have invested in for many many years are ST Engineering and SPH. I think more than ten years in both cases probably. They have constantly delivered good results and I have received consistent and meaningful passive income from both.

INVS 2.0 said...

Hi AK71,

I am still thinking whether to sell my shares when they are still at normal levels or not. Sell now and buy when economy depression arrives next year? But what if there is none? Or simply hold it, earn dividends and be positive of the economy outlook? Hmm...

AK71 said...

Hi INVS 2.0,

Personally, I am staying partially invested. We can never be too sure of anything. :)

Drizzt said...

the one that made the decision to invest in ibm is likely to be todd combs not buffett.

Anonymous said...

Hi AK71,
Regarding the behavior of MR Market and what we should do, May i share a quotation:-

“Bull markets are born on pessimism, grow on skepticism, matured on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
----- Sir John Templeton, 1994
There you have it. It seems so simple. But it's actually not so in practice. Ha! Ha!

Mental head.... said...

Eurozone has no assets to back up their debts.

It is dependant on just promises.

In such a case, they cannot pay for KepCorp's oil rigs, they cannot pay for hard disk drives.

Many industries will be in a situation where they cannot collect money or do not feel confident to ship products to them.

How will companies here respond to this?

What opportunities are there in such a scenario for investors?
Will it be just "cash" only transactions? ( and only in US$??)

After all, the Greeks need to eat dont they? they need to celebrate x'mas dont they? A new pair of jeans? shoes? a haircut?

If they rent to us land at US$1 per year.. maybe we can set up a factory to make BMWs and ship them to Singapore.. and sell them at very high mark-ups, but lower than Bangkok's Toyota Vios...

But, I dream...

AK71 said...

Hi Drizzt,

I don't know who that is but Buffet was the one who was interviewed. However, you are the one in the know when it comes to IT. So, I will find out who Todd is. :)

AK71 said...

Hi Temperament,

Indeed. Buy at a price we would not sell at and sell at a price we would not buy at. How easy is that in practice? ;)

AK71 said...

Hi Mental head,

Yes, Greece is insolvent no matter how they package and name it. Problems in the eurozone are likely to get worse. Unlike the USA, it is made up of so many countries, each with its own vested interests.

In the last global financial crisis when credit froze, many companies stopped credit to customers too. In cash they trust. I wonder if it would ever come to that again.

I would like to have a BMW that costs less than a Vios too. :)

financialray said...

I think when we put ourselves in Germany's shoes, we will also act like them. We insist all the other European countries account for their actions and take fiscal prudence.
Perhaps it will take another Lehmann to jolt the Europeans into a final drastic action.
In the mean time, we enjoy our Christmas and fish for more news.
Lim Swee Say says this time will not be as bad as 2008-9. That is a valuable clue.

AK71 said...

Hi financialray,

Of course, if I were the Germans, I would say the same thing. Few in this world are altruistic. :)

I don't know if Lim Swee Say has perfect foresight but Lee Hsien Loong warned that things could get much worse. So did Tharman S.

I just read this earlier today:
Singapore braces for sharply slower growth in 2012.

Slower growth but not negative growth. I guess this would already be a blessing. :)

financialray said...

Ha ha

It does not matter whether it is LHL, Tharman or LSS.
As long as all agree the direction is still down over next 6 mths or so, we wait patiently.

AK71 said...

Hi financialray,

Yes, patience is a virtue.

Have a warchest ready and act decisively if opportunities present themselves. :)

Drizzt said...

todd combs is the one buffett brought in to take over his investing scope most probably. this is his baptism of fire. look at the picks. pretty different from buffett. if buffett doesn't understand apple, its even harder to understand ibm.

AK71 said...

Hi Drizzt,

I suppose we should expect more "radical" thoughts from Buffet in the coming months. Thanks for the insight. ;)

trade futures said...

It appear funny to us, because there were a lot of free printed money flowing around for the past 2 years, and the banks chose to use them to play the stocks markets rather than lending them out, and now with the tightening, stakeholders are getting worried. They should have enforced that the free money goes to the rightful places.

AK71 said...

Hi trade futures,

Yes, that was a big issue and still is. Much of the liquidity injected into the system was used in speculative activities. Many of those activities were in Asia as money tried to look for higher returns, causing massive inflationary pressure here. How will things turn out next?

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