A fortnight of banking crises and what did I learn?

Three signs of a banking crisis.

First is credit risk.

This is when loans turn bad and debtors are unable to make repayments.

Other assets can also turn bad and are unable to generate income required to make loan repayments.

We could see this playing out in the U.S. commercial real estate sector.

It also means it will be harder for certain borrowers to access credit.

Refinancing also becomes difficult as banks become more selective and risk averse.

Credit will tighten significantly as there will be heightened scrutiny of borrowers' credit worthiness.

Second is liquidity risk. 

We might see withdrawals by depositors exceeding the available funds held by the banks.

This could lead to panic and runs on banks.

We saw this happened to Silicon Valley Bank in the U.S.A.

Later on, we also saw depositors withdrawing large amounts from First Republic Bank.

Even the $30 billion infusion provided by 11 big U.S. banks was insufficient.

Both S&P and Moody's downgraded First Republic Bank to junk.

Third is interest rate risk. 

Rising interest rates reduce the value of long duration bonds held by banks.

This leads to weaker balance sheets.

In case many depositors need to make large withdrawals at the same time, banks might be forced to realize those losses by liquidating these long duration bonds.

Funding cost for banks can also rise further as they pay more to their depositors.

Funding cost could, in some instances, be higher than what banks receive in interest payments. 

This could be the case if many long term loans on fixed rates were taken by the banks' customers before the interest rate hikes.

What is a systemic banking crisis?

A systemic banking crisis occurs when a large number of banks in a country have solvency or liquidity problems.

It could happen because of external shocks or because failure in one bank or a group of banks spreads to other banks in the system.

So, this explains why the U.S. regulators took over Silicon Valley Bank and Signature Bank very quickly.

It also explains why they moved to guarantee all deposits, even those larger than $250,000 insured under the F.D.I.C.

It was to prevent the failure of these two banks to spread to other banks in the system although in so doing, the U.S. regulators created a moral hazard as bad actors are not punished but bailed out.

Systemic banking crises are financial nightmares. 

These crises often result in deep recessions for the countries concerned.

This is because banking crises usually affect consumer and business confidence.

Spending, investing and lending on all fronts reduce because of extreme fear.

Banking crises in major economies could also spread to other countries, resulting in a global banking crisis.

This is called a contagion.

This is why the Swiss authorities assigned partial blame for the collapse of Credit Suisse to the recent U.S. banking crisis.

After all, often, it is a crisis of confidence arising from heightened fear that is more damaging to the banking system and economy than any other crisis.

We could yet see Mr. Market going into another depression as an economic recession looks more likely now than ever to hit the U.S.A. in the not too distant future.

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Ticketing for "Evening with AK and friends 2023" is ongoing.

Reallocate as interest rate rises in a slowing economy.

Interest rate is rising.

PM Lee recently warned of a possible recession in the quarters ahead.

Put rising interest rate and a slowing economy together, we get a rather gloomy picture.

The evil which is inflation is preferred to the evil which is deflation.

Although inflation is the lesser evil, it isn't as benign when it is heightened which is what we are seeing now in the world.

We can reduce inflationary pressure either by increasing supply of goods and services which are in demand or tempering demand for such goods and services.

As it is difficult to increase supply right away, central banks are trying to tame inflation by increasing interest rate in an effort to reduce demand.

Increasing interest rate increases the cost of debt.

Credit is the lifeblood of commerce and most businesses are leveraged to some degree.

If the economy is healthy, businesses can pass on the higher cost of doing business to their customers and higher finance expense that comes from higher interest rates are naturally a part of such cost.

However, it becomes more difficult for many businesses to pass on such higher costs to customers if the economy is suffering from malaise.

Heightened inflation, rapidly increasing interest rates and low economic growth is not a good mix.

In such a situation, even very strong companies will not be spared a slowdown as most entities would be less ready to part with their money.

Already, we see some big name MNCs both in the old and new economies warning of very difficult quarters ahead.

Only the fittest will survive but even they might not emerge unscathed from such a toxic cocktail.

As an investor for income, I believe that businesses which are able and willing to pay a meaningful dividend should be favored.

To make sure that dividends are sustainable, these businesses should also provide necessary goods and services and have stronger balance sheets.

They too will take a few punches during hard times but they should be able to roll with the punches.

I think staying invested is still the way to go but, like I said, I should mostly be invested in businesses which are able and willing to pay dividends even during hard times.

So, with this in mind, I have taken a hard look at my largest investments since they impact the performance of my portfolio the most.

The strategy to increase my investments in DBS, OCBC and UOB during the COVID-19 induced bear market has turned out well and sticking with this strategy makes sense to me especially with interest rate rising.

I am also interested in increasing my investments in ComfortDelgro and CLCT on weakness as they seemed to have lagged in price recovery while their businesses look more attractive to me in recent times but for different reasons.

I am leaning more towards ComfortDelgro which has a stronger balance sheet and also because looking at the numbers which have improved, there is a fairly good chance that future dividends will be higher and could even go back to pre-pandemic levels.

CLCT's plan is to increase the proportion of new economy assets in their portfolio and I foresee more fund raising in the future.

So, I will increase my investment in CLCT slowly and not bulk up in a hurry.

REITs are required to pay out at least 90% of their operating cash flow to investors to enjoy tax benefits and this is a source of comfort to me.

The REITs in my portfolio are rather conservative when it comes to debt and in the case of IREIT Global, some of their rental income is linked to the German consumer price index and higher inflation could see a greater increase in income.

In my list of largest investments, the only entity which did not pay a dividend during the last bear market was Centurion Corporation.

Amongst my largest investments, Centurion Corporation also has the weakest balance sheet apart from Wilmar International.

However, Wilmar International is in the business of food production and distribution which, in my opinion, is recession proof. 

Given their size and market dominance, they should be able to charge higher prices.

Wilmar also has good options available to unlock value for shareholders and they were paying dividends even during the pandemic.

I increased my investment in Centurion Corporation as Singapore decided to live with COVID-19.

For those who are interested in my thoughts on the matter, read:

1Q 2022 passive income.

In an environment of rapidly increasing interest rate and slowing economy, however, with a rather weak balance sheet, it could be harder for Centurion Corporation to bring home the bacon.

In my original blog on why I invested in Centurion Corporation, I crunched some numbers on how rising interest rate could impact Centurion Corporation's interest cover ratio.

For those who are interested, read:

Added Centurion Corp to portfolio.

Of course, if they are able to increase asking price per bed meaningfully to balance the increase in the cost of debt, then, they should be OK.

Although they would be able to do so easily in a healthy economy, it might not be so easy during times of economic malaise.

Wait, didn't Centurion Corporation do quite well even when the economy was unhealthy?

Yes, they did but they didn't have to deal with rapidly increasing interest rates.

I don't know everything and I might be missing a few things here.

So, I have decided to only reduce my exposure to Centurion Corporation and not go to zero.

As my total passive income held up quite well during the two years when Centurion Corporation suspended dividend payouts, I doubt reducing my investment would have any meaningful impact in terms of passive income generation which makes this decision an easier one for me.

Although Centurion Corporation still looks undervalued to me as it trades at a huge discount to NAV, to be honest, this discount could reduce as valuation of their assets could take a hit.

It would be interesting to see how the management navigates the challenges ahead and how they might unlock value for shareholders.

They are trying to sell some assets in the USA now which if successful should help in reducing leverage and unlocking value.

To this end, I believe they should ramp up their effort and sell more assets.

Like Phua Chu Kang said at the onset of the COVID-19 pandemic, "Things different already."

In the grand scheme of things, this is a relatively minor shift of resources but because I am more inactive than active as an investor for income, it might seem like a big event.

Remember, mentally unstable AK is just talking to himself, as usual.

Have a plan, your own plan.

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Recession is coming and cash is trash (but only for some.)

In an inflationary environment, I hear so many people saying cash is trash all the time.

Do you believe me if I tell you only the rich can afford to say that?

For those of us who still depend on our salaries and who have loans to service, we better have more cash on hand.

In fact, we better have much more cash on hand in case another recession hits.

PM Lee has recently warned that a recession is  possibly coming and economists think it could last two to five years. (Source: CNA.)

Yes, two to five years.

Some gurus will tell us not to worry because we can always borrow money.

Well, those of us who have tried to borrow money before will know it is not easy to do so especially in an environment where credit is tight.

Coincidentally, central banks are tightening money supply to fight inflation.

Banks are fair weather friends and they mostly prefer to lend money to people who already have money.

Even if we manage to borrow some money, it is likely to be costly.

With interest rates going higher, it would definitely be the case.

To those who can afford to say cash is trash, please remember that most people are not in a position to think that way.

Making them think that way is irresponsible and almost wicked.

To those who are listening to people who say cash is trash, consider our circumstances.

No one cares more about our money than we do.

Things are likely to worsen in the next two years or more and we must do what is right for ourselves.

Peace of mind is priceless.

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What BREXIT means for my money?

Many are worried about BREXIT and what it could do to an already anemic global economy. Many are also worried about the high level of liquidity in the system becoming more elevated and how ineffective it is in addressing the global economic malaise.

• Reader:
  

  
  

  
  

  Notice that you have been accumulating stocks. Do you think that in the current climate the prices are distorted? The sentiment and the stock price seem to diverge. Also there is no optimism and extreme pessimism. But there are some heighten risk. Eg. Long term bonds seem to be over valued, EU seem weaker with the BREXIT and may trigger the rest of countries to exit euro, euro banks having high NPL, and current monetary policy seem ineffective.
  
• Are you only nibbling? Or buying in big quantities? Mind if you share how the allocation of cash in this climate i.e. Your warchest. Small, moderate or large amount of cash allocation?
• 
  
• 

  11:23am
  

  Assi AK
  

  
  

  
  

  There is ample liquidity in the system. With BREXIT, there will probably continue to be more liquidity. Money needs to go somewhere.

  
  

  Global economic growth is anemic and the fundamentals are not fantastic. However, money still needs to go somewhere.

  
  

  There are relatively inexpensive offers in Singapore's stock market. Despite the negative news, I believe that DBS is now a bargain and at the current price, OCBC is also looking interesting.

  Nibble or gobble? Still nibbling.
• 
  

What I am more concerned about is where my money should go for it to be treated better. 

Money needs to go somewhere and the next stock market rally here will most likely be a liquidity driven one.

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How to be truly "rich" when the world collapses?

There is a very interesting article in the weekend edition of The Business Times. It is by Cai Haoxiang and he asks the question "What asset do you flee to when the world collapses?"

We have heard people saying that bonds are now a bad idea and that equities are preferred. So, many are invested and even fully invested in the stock market. No emergency fund? No war chest?

Singaporeans, of course, have a never ending love affair with real estate with many thinking that real estate prices on our tiny island will only see prices going higher. 

Someone told me that there is never a bad time to buy a property. Well, never say never. Those who bought a property here before the Asian Financial Crisis in the late 90s just broke even recently.

Then, there are the bears who believe that a correction is overdue and that the longer the bulls continue charging, the bigger the correction is going to be. 

There are people who do not believe in the rally. What are they doing? Staying 100% or close to 100% in cash and waiting to buy assets on the cheap.

However, in a situation where the world economy really collapses like in 1929, who wins?

"... how long can Singapore survive if there is a sustained global economic crisis? With zero natural resources and an economy heavily dependent on global trade flows, Singapore's economy is especially vulnerable when nobody wants to trade and people worry about clean water and edible plants, not chemicals and electronics.

"In rich, sophisticated Singapore populated with financiers, lawyers and plenty of middle managers, skills actually useful to survive an economic collapse might be startlingly in short supply...

"Build up a set of skills and contacts that people will want in good times and bad and you will never go hungry for as long as you live."

We could have tons of money, even gold and silver coins. Could they be worth more than food and clean water if these should suffer from scarcity? If Singapore's economy should go into a tailspin, would the FTs still want to come here? Who would rent all the spanking new condominiums which have been built? Could we see vacancy rate in the double digits?

"... gold can't be eaten... try convincing the chicken rice seller to take your Bitcoins as you fend off squatters from your multiple properties."

A sobering read with a dash of humour. Get a copy of this weekend's edition of The Business Times. The article is on page 5.

Disclosure:
AK71 is a shareholder of SPH. Every copy of The Business Times sold could contribute to AK71's financial well-being.

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Tea with Matthew Seah: Thoughts on having a regional common currency (Part 2).

Is a common currency for member nations of ASEAN feasible? Matthew goes through some pertinent points:

Economic development

ASEAN countries have highly diverse economic development stages. According to the International Monetary Fund (2011) Singapore and Brunei, the richest countries in ASEAN, has a GDP (PPP) per capita of $59,936 and $49,517 respectively. In comparison, Myanmar’s GDP (PPP) per capita is a mere 2% of Singapore’s at $1,327. In fact, the sum of GDP (PPP) per capita of the other 8 countries namely, Malaysia, Indonesia, Thailand, Vietnam, Philippines, Laos, Cambodia, and Myanmar is less than Brunei, at $43,676. 

This degree of diversity in income could make it near impossible to sustain a monetary union amongst ASEAN countries. Just like how the PIIGS of the European Union (EU) is causing the richer nations in the EU to pay for their fiscal incapabilities, the “less fiscally endowed” countries will cause Singapore and Brunei to pay for their debt in the event of an economic shock.

Economic structures and business cycles

The income differentials across countries within ASEAN also reflect the dissimilarities in the economic structures as well as business structures across countries. This could impede relative price movements and production outputs across the countries.  Singapore and Brunei is probably at a peak-contraction transition phases, while countries like Malaysia, Indonesia, Thailand, the Philippines, and Vietnam are in the expansion phase of the business cycle. Myanmar, Laos, Cambodia are undergoing the trough-expansion transition phases.

The business cycle is affected by the forces of supply and demand. A country that is more exposed to the international market will thus be more affected by the global market. Civil unrest in countries like Laos and Cambodia in recent years have dissuaded investors from investing in them thus creates a void in economic growth, even a decade after the Asian financial crisis in 1997.

Stabilised transfer systems

Due to the differences in business cycles and income differentials, it has proven to be difficult to have a centralised banking system to make transfers of resources across countries. Fiscal irresponsibility also undermine the monetary cooperation of the members within the currency union as witnessed in the EU where Germany has been reluctant in bailing out PIIGS. Much reformation and restructuring in the financial sectors and government policies is required before a common currency could be adopted.

Legal, cultural, and linguistic barriers

South East Asia is home to myriad cultural and linguistic differences. Unlike Singapore which promotes mutual respect and racial harmony, as well as having a common working language (English), the other ASEAN countries have been intolerant to other races and religions as can be seen in Indonesia and Malaysia to say the least. Political unrest also plagues countries like Laos, Cambodia, Myanmar, and Thailand.

It would be a high bar to reach for ASEAN nations to achieve cultural and religious tolerance. Most of the natives of the ASEAN countries also speak a different language across countries. A linguistic barrier would dampen the mobility of workers across countries. Hence, it would be hard for a Thai or Viet to find a job in an MNC in Singapore where the common language is English even if they may be highly skilled.

Yet, if the economic advantages of a regional monetary union are large, it is possible that countries may make political compromises so as to reap the economic benefits. Economic interests may persuade countries to set aside political differences and forge strategically beneficial political alliances. Economic and political integration in the region may span perhaps decades.

Though a common currency area seems improbable now, as the ASEAN nations become more developed, it may then be feasible to create a common currency area in ASEAN.

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Tea with Matthew Seah: Thoughts on having a regional common currency (Part 1).

Tea with Matthew Seah: Thoughts on having a regional common currency (Part 1).

The Euro is a common currency for members of the European Union. When it was implemented, there was much hype on the new currency. However, over the years, the member nations are in a state of inequality in income, welfare, employment, prices, etc.  Is it really feasible to have a common currency? Should ASEAN have a common currency like the Euro? 


With the integration of our stock exchanges, one might be thinking about whether a common currency is feasible in ASEAN, especially those in the upper echelon within each member country in ASEAN. (I think policy makers in Singapore are probably thinking of integrating, and they are using the European Union as a case study.)

I would go through the pros and the cons of having a common currency. Let’s start with the advantages:

A common currency creates ease of trade and investment among countries under the common currency area. This allows for the facilitation of trading of material goods as well as services, thereby promoting income growth within the region, by the reduction of transaction costs in cross-border trades, removal of exchange rates’ bid-ask spread, and the removal of the exchange rates’ volatility. 

A single currency also implies having a central bank (like that of the European Central Bank). Having a central bank with note-issuing powers provides the necessary liquidity to cater for inter-ASEAN payment using a single currency.

Under a floating exchange rate system, volatility in exchange rates tends to be disproportionately greater than the underlying economic fundamentals of the affected economy. We can see this in the day to day fluctuations in the exchange rates between member countries even though the economy of each country is pretty much the same (just like a business, the underlying fundamentals of a country takes a long time to change, perhaps even longer than individual companies). This volatility creates much uncertainty, which in turn, creates unexpected losses and diminishing returns on investment. As a result, a floating exchange rate system discourages cross-border trade and reduces overall economic growth, especially among small and medium sized enterprises. A common currency can therefore potentially negate the adverse effects of having a floating exchange rate system, where there is no worry of potential losses caused by exchange rate changes.

A common currency area allows factor mobility within the ASEAN region, factors such as labour and capital. As such, individual ASEAN nations can focus on developing their comparative advantage while workers immigrate through the region to countries where the workers feel can develop their niche in specialisation. Wages and price flexibility further improves labour mobility within the region.

With a single currency, a consumer can easily compare prices of a product between countries, creating efficiency in market pricing. Thus a single currency would create a more uniform price within ASEAN and enhances competition among business entities.

Skilled labor and experts in various fields such as pharmaceuticals, petrochemicals, finance etc. can better serve member states and provide their expertise to benefit the region as a whole.

Although there are benefits, there are many challenges and obstacles hampering the integration of a common currency area in ASEAN. It is also not feasible for ASEAN to have a common currency area for now. In order for a common currency area to be successful, the member states must have similar business cycles, economic development and structures, absence of legal, cultural, and linguistic barriers that would limit mobility, wage flexibility, and a stabilised transfer system.

In Part 2, Matthew considers the challenges to having an ASEAN common currency: Part 2.

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Mr. Lee Kuan Yew on the Eurozone crisis.

Consumers in Singapore to spend less in 2013.

I keep hearing how most businesses found 2012 more difficult compared to 2011. I am in agreement. Now, to dampen spirits further, if a report by Nielsen's is correct, 2013 could be even tougher.

In a survey carried out, it seems that consumers in Singapore are cutting back on discretionary spending in 2013. The top 3 areas of cut backs:

1. New clothes (55%)
2. More expensive grocery (47%)
3. Utilities (47%)

If we think that it is probably due to a lack of job security or the rising cost of living in Singapore that is causing consumers here to cut back, we are not wrong.

However, it was also found that consumers will remain cautious in their household expenses even if there should be an improvement in the economy. I believe that this hints at a general feeling of pessimism and a distrust of the economy that runs deeper than what we might believe to be the case.

To cut back on consumption is an important step in individual wealth building efforts for ordinary people but I do not think that wealth building was on the minds of most of the respondents in the survey. Why? In the same survey, the respondents also revealed that they would be cutting back on investments too.

Economics 2012: Off the top of my head.

I have been doing more thinking. OK, so what's new?

In recent weeks, the stock markets rallied and with the strong closing on Wall Street last night, they look like they could move even higher next week.

The bulls say that the tide has turned and things are moving higher from here and that we should buy stocks on pull backs. The bears say that what we have seen recently is just a bear market rally from oversold positions and that stock markets will see new lows in time.

Both bulls and bears are looking into their crystal balls and coming up with reasons why they are going to be right. My own crystal ball is cloudy and I doubt it works at all.

However, drawing from what I have read in the news, it seems like the eurozone crisis is far from over. Banks in the eurozone are still trying to shore up their capital requirements and being significant lenders in Asia, accounting for some 20% of commercial loans here, negative ramifications could manifest themselves more remarkably in time. Being asked to write off huge chunks of Greek debt has made a difficult situation worse. Now, they are worried about Portugal.

Long-term interest rates of Euro countries, 1993-2011

The eurozone's unemployment rate has hit a new high and in Spain alone, unemployment stands at more than 22%. Recessionary pressure in Europe has already affected Asia as export volumes in China shrank. Smaller companies are experiencing problems with cashflow and a lack of credit. Countries here are all forecasting lower growth in 2012 with a possibility of even negative growth if the eurozone crisis should escalate.

Apparently, the ECB has been providing very low interest rate loans to eurozone banks in recent months. Instead of lending to businesses and individuals, however, the eurozone banks are parking the money in government bonds with higher interest rates. They would have to think twice about such a strategy. If they could be arm twisted into accepting a Greek debt haircut, it could happen with Portugal or even Spain and Italy, couldn't it?

The eurozone is a mess but it is an important part of the global economy. As a bloc, it is the largest trading partner for many countries here in Asia. Its problems are not its own as they will overspill and take on new forms in Asia.

Already, shipping firms are not going to do well due to excess capacity, anaemic demand and higher operating costs. I just learned that the anticipated pick up in demand from China after the holidays did not materialise and this is a cause for worry. Firms which are heavily leveraged could even go into bankruptcy if credit dries up.

Property developers are not going to do well due to government intervention in efforts to subdue runaway prices. This has both social and political considerations as well, of course. In China, the government has expressed its desire to keep measures in place as it feels that home prices should fall another 30% or so. Many investors in various guises will feel the pain and some might even die from it.

Banks have been under pressure as the very low interest rate environment affects their earnings while deteriorating macro economics could see a slow down in demand for banking services in their various forms. Already, investment banking has seen massive retrenchment exercises and it does not look like it is going to stop.

Fundamentally, I find it hard to be optimistic about 2012. Technically, I feel that the stock market could see a test of its lows once more before moving higher. I know I am sticking my neck out and putting it on a chopping block here but it is just how I feel right now.

In case you are wondering, I still believe in being pragmatic and not being bearish or bullish. Hence, although I have been divesting as the stock market rallied, I remain more than 50% invested. Yes, I still believe that 50% is a good number in such uncertain times.

People who have exited the market and are 100% in cash will see their wealth being eroded in time by higher inflation. The longer it drags on, the more detrimental it is going to be. As a prominent banker once said, it is very expensive to be in cash these days.

People who are almost fully invested in the market are shouldering a heavy risk premium too. If things should take an abrupt and powerful turn for the worse, they could lose much of their wealth in a very short time. They would also lack the resources to buy stocks on the cheap.

In the weeks prior to the current market rally, I accumulated various stocks at lower prices including the purchase of LMIR nil paid rights. As prices rose, I divested either wholely or partially to lock in gains.

As prices rose higher, I even cut some losses on some badly timed purchases months ago. As you can imagine, I have been recovering quite a bit of money from the stock market.

So, do I think this is a time to sell and not to buy? Nothing like that. I simply think it is a time to go back to being 50% invested. Since I was more than 70% invested after all the buying I did in the weeks leading to the current market rally, the thing for me to do was to sell. I might sell more next week if prices go higher.

On hindsight, which is always perfect, I started selling a bit too soon. Quite a few counters saw higher prices after I sold at what I thought were strong resistance levels. Do I chase and buy back? Nope. Why?

Buying as prices go higher is similar to selling as prices go lower. I don't do it. I buy at supports and sell at resistance. It is not a perfect strategy, surely, as supports and resistance could give way. However, going against this strategy has proven more damaging than beneficial most of the time. This is true for me, at least.

Now, with my war chest fuller, what do I intend to do? As usual, look ahead and wait for opportunities to buy again at supports. Patience is a virtue and mostly a rewarding one too.

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Mr. Lee Kuan Yew on the eurozone crisis.

I just received the latest copy of Alumnus in the mail and on page 4 is a one page write up on what Mr. Lee Kuan Yew said during LKY School of Public Policy's 7th Anniversary. He said something about the eurozone which got me interested enough to search for more details online.

The one liner that got me interested was: "Mr. Lee thinks European leaders will try very hard to prevent the collapse of their currency union but he does not believe they will be able to keep it going." So, does he think that the eurozone will ultimately dissolve?

Searching the internet, I found a website with the details:

... European leaders will try to save the euro zone from collapse, because a collapse of the currency union would be “an admission that their aspiration for one Europe is not achievable”.

.......

“A fundamental problem of the euro is that everybody, every European country, march to the same drummer whereas each country has its own tempo and you cannot expect the Greeks to march like the Germans, so the problem will not go away”.

Therefore, he added, “a two-tier Europe or even a three-tier Europe is possible but a one-tier Europe with different spending habits, thrift habits and discipline is too difficult to achieve”.

The euro came into existence in 1999 with the aim of increasing economic cooperation and growth in Europe, and upping Europe’s presence on the world stage.

With the recent debt crises, the currency union forces other European countries to bail out troubled  members and policymakers are denied the flexibility of monetary policy as a tool to fight recession.


Read articles: here and here.

So, will the eurozone go the way of the Dodo? If it will, when will it happen? 

Your guess is as good as mine. 

One thing is for sure, Mr. Lee Kuan Yew has spoken and I will take note.

------------------------------

Seven eurozone countries had their ratings confirmed while nine were downgraded by S&P on 13 Jan (Friday). It downgraded France's top AAA rating by one notch to AA+, with a negative outlook while  Italy went down by two notches to BBB+, negative outlook, and Spain was also down two notches to A, negative outlook.

Read article: here.


BREXIT!

Updated on 25 June 2016: Prime Minister David Cameron is to step down by October after the UK voted to leave the European Union. Speaking outside 10 Downing Street, he said "fresh leadership" was needed. The PM had urged the country to vote Remain but was defeated by 52% to 48% despite London, Scotland and Northern Ireland backing staying in. (Source: BBC)

The UK is likely to lose its AAA credit rating after it voted to Leave the EU. Moritz Kramer, chief ratings officer for S&P, said on Friday morning that the UK's AAA rating was “untenable under the circumstances”. German daily newspaper Bild quoted Kramer as saying: “If Great Britain decides for a Brexit in the EU referendum on Thursday, then the AAA credit rating would come due and would be downgraded within a short period of time.” (Source: Independent)

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Stakeholders should worry as credit is tightening.

Further credit tightening is almost a given.

I was talking to a friend whose family controls a public listed company in Singapore and he is very optimistic about Singapore, very confident that we will not suffer a recession. Although I reminded him that in the last global financial crisis, only China, India and Indonesia escaped a recession, he remains very optimistic. Is this optimism the norm?

Many think that the housing prices in Singapore are being driven up by foreigners. Numbers released not too long ago shows that foreigners accounted for some 16% of condos sold so far this year. The rest were sold to Singaporeans and PRs. If I remember correctly, PRs accounted for 5% or less of total HDB flats transactions. So, the vast majority of transactions in residential real estate here belong to Singaporeans. Logically, a great number of Singaporeans are doing well.

Indeed, if the recent astronomical COE prices are anything to go by, I would say that people and companies here are doing extremely well. Therefore, a pervasive sense of optimism and even invincibility is not difficult to understand.

Personally, I have a blog post not too long ago which questioned whether there would be a double dip recession or whether we would simply see very slow growth. Do I have the answer? If I were to say I do, would you believe me?

Do I know anything for sure? I know that if there should be a prolonged slowdown in the world economy, Singapore will not be spared. I know that if there should be a credit tightening in the world banking system, Singapore will not be spared. Singapore has a very open economy and to think that we will be spared any negative ramifications is simply naive.

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?

"In July, banks and insurers agreed to contribute to reducing Greece's debt via a 21-percent writedown on their holdings of Greek bonds... But recently there has been growing speculation that Athens needs to reduce the value of its debt by 50 percent -- or perhaps even more -- to make its finances sustainable." Read article here.

This speculation is likely going to be a reality.

"Diplomatic sources said Europe and the IMF would only proceed with a second planned Greek bailout of 109 billion euros if banks accepted losses of "at least 50 percent" on their debt holdings." Read article here.

This is going to be disastrous for European lenders holding Greek debt. How would this affect us in Asia?

In a discussion I had with my father a few weeks ago, I told him that we could see European lenders tightening on credit and recalling funds from Asia where they have a significant presence.  Although this could be a welcome development as Asia is sloshing in funds in search of higher returns, resulting in strong inflationary pressure, people and companies who have thus far done well by leveraging on cheap money could suffer.

I am not an economist but some form of credit tightening with the proposed Greek "debt haircut" of 50% is more likely to take place than not. I can only hope that the negative effects will not be as fearsome as some have made them out to be.

For any who recently borrowed to the max buying a dream private property or a dream car at record high prices here on our tiny island, I can only hope that the dreams will not become nightmares.

Double dip recession or just very slow growth?

Stock markets around the world had a very bad week. Everyone it seems is expecting a global recession and the accompanying deflation.

In a truly deflationary environment, all assets will suffer and see their prices fall. Equities and precious metals were all sold down across the board, therefore.

However, reading an article in Bloomberg, it is interesting to note that in the USA, "railroads shipments are the highest in almost three years." This defies concerns of an impending double dip recession.

Art Hatfield, a transportation analyst in Memphis, Tennessee, at Morgan Keegan & Co: “We’re not seeing declines in rail volumes that are synonymous with a recession... We remain in a slow growth environment.”
Read article: here.

If we were to look at the Baltic Dry Index (BDI), we see it rising in recent weeks and I wrote a piece on whether it could be time to load up on shares of Courage Marine again not too long ago.

The suggestion is that there is an increase in demand for shipping capacity and because "dry bulk primarily consists of materials that function as raw material inputs to the production of intermediate or finished goods, ... the index is also seen as an efficient economic indicator of future economic growth and production. The BDI is termed a leading economic indicator because it predicts future economic activity." Source: Wikipedia.

So, is there going to be a double dip recession after all? There are analysts who believe that a recession is a given and some who believe that Europe will get its act together and a recession will be averted. With such conflicting signs, at this point in time, however, it is just a sea of opinions.

Personally, I do not believe in being overly bullish or overly bearish. I believe in being pragmatic. Putting all our chips on a single bet either way could be quite disastrous if we should be proven wrong.

What is being pragmatic? Knowing what the current conditions are, what kind of investments are likely to do better and act accordingly. It is about wealth preservation, if not growth.

Related posts:
1. Courage Marine: Added at 10.5c a share.
2. Should we be staying invested or in cash?
3. Sleep well at night with a plan.
4. Why do I not panic?

Tharman Shanmugaratnam has spoken.

I think Tharman Shanmugaratnam is a really brainy guy. He also did our country proud when he was selected as the Chairman of the International Monetary and Financial Committee.

When Tony Tan talks about the economy, I listen. When Tharman S. talks about the economy, I listen too and he has spoken.

"Tharman Shanmugaratnam told a conference that the world has now “entered a phase where there is a self reinforcing cycle” of a loss of consumer confidence, which is leading companies to hold back on investing.

“Asia will not be immune to a global slowdown,” Tharman said. The Singapore economy is highly reliant on international trade."


Related posts:
Wage slaves should be fearful.

Singapore says global recession more likely than not
Tuesday, 06 September 2011

© 2011 - The Edge Singapore

Money continues to flow into Singapore.

Singapore continues to attract inflows of money. I have friends from USA and Europe who are parking their money in savings accounts in Singapore although they get only 0.1% interest. Why? The Singapore Dollar has been appreciating against their home currencies and is likely to get stronger.

Singapore also has a AAA rating when it comes to sovereign bonds. This has been attracting much attention. The latest to announce intention to invest in Singapore bonds is Schroder Investment.

Does it stop at bank deposits and bonds? Emphatically, no. Hot money is hungry for productive assets in Singapore. The rising supply of money has kept interest rates low, creating a credit boom. This is a big reason why prices of condominiums, especially those in the luxury segment, have shot through the roof in recent times.

The last I heard, some people with a lot of money have turned their attention to industrial properties in Singapore as yields on residential properties are relatively low at about 4% now. Will industrial properties see their prices pushed up next?

The rising value of the Singapore Dollar and continuing inflow of money into our country has created problems for our industries as well because our exports become less competitive. As it is, our GDP shrank 7.8% in the last quarter.

I believe that the Monetary Authority of Singapore has to limit hot money inflows or cap gains on the Singapore Dollar and soon.

Singapore bonds attract Schroder with Asia’s sole AAA ratings
Thursday, 25 August 2011

© 2011 - The Edge Singapore

Should we be staying invested or in cash?

All of us know how pathetic interest rates on savings are for quite some time now and with the U.S. Fed pledging to keep interest rates low for another two years or so, it does seem as if low interest rates are here to stay, even in Singapore.

We also know that the ultra low interest rate environment is pushing up prices of almost everything. Inflation? You bet. Is this going to persist? It certainly could. If it does, then, my decision to sell my properties in recent months might not be that brilliant after all.

However, if we remember basic economics, we will recall that prices are a function of supply and demand. With many more new homes to be completed from 2012 to 2015, we could very well face a supply glut in future. This is probably quite well documented by now but I will run through the numbers once more:

Year 2012: 
15,457 new homes to be completed.
Year 2013: 
17,111 new homes to be completed.
Year 2014: 
21,680 new homes to be completed.
Year 2015: 
22,520 new homes to be completed.
We should also bear in mind that, currently, there are still more than 30,000 completed homes unsold.
(Sources: URA, DTZ and Nomura.)

As long as demand remains strong, the supply could be well-absorbed. This would depend on the state of the economy and the level of confidence amongst buyers, of course.

To add to the supply glut concern, the very well publicised recent decision by the government to build more HDB flats and to build them faster is likely to weigh in on the matter. Read HDB has promised 25,000 more new flats next year, based on what it said the construction industry can handle.

So, when people ask me for my opinion on whether it is a good time to buy that investment residential property in Singapore, I usually would reply in the negative. However, when people ask me if it is a good time to buy their first home, that is a bit trickier. It really depends on how urgently they need that first home. Sometimes, if we have to pay a premium, we just have to do it. Who knows? Price could keep going higher although I do not think it likely through 2015.

What about me? I get the sense that many readers are wondering what I am going to do with the cash that will be coming in from the divestment of my properties. To be quite honest, I am not going to keep too much cash in my savings account for too long as inflation would rapidly erode its value. To that, some might say that because they are in cash, their cash is now able to purchase many more shares than it could a month ago. This is certainly a valid point as well.

So, what to do? I must have said this a few times before but there is no other option for me than to stay invested but have a war chest ready. We want our money to work hard for us. At the same time we want our money to be able to purchase more shares at lower prices. Why? So, that our money could work even harder for us. Therefore, in the final analysis, whether we stay invested or in cash, the objective is the same: to make our money work for us.

While I was holidaying this weekend, I noticed that I have a lot more white hair. Family and close friends know that I think a lot. I think I think too much. ;)