Choppy, choppy, chop, chop.

Global stock markets weakened today after strengthening the session before on news that the debt ceiling in the USA would most likely be raised successfully. Why?

Fundamentally, raising the debt ceiling means that the USA would not default and they will be able to continue paying their bills. Sounds like a good thing. However, closer at hand are still many problems which are worrying Mr. Market.

1. US credit rating could still suffer a downgrade. This could make borrowings more expensive.

2. Manufacturing has weakened in global economies. This could make debt problems worse.

Read full article here.

3. With all eyes on China as the bastion of economic prowess, news that its manufacturing growth slowed in July tempered sentiments.

Read full article here.

In response to a reader who said that the USA is the strongest country in the world since the day he was born, I put forth the question as to whether it still is the strongest country in the world today.

It is clear to me that USA's strength is an illusion built on borrowed funds and borrowed time. In fact, Putin calls USA a parasite which is unable to live within its means.

"Putin was insistent Monday that the world should be seeking new reserve currencies for trade and savings." Read full article here.

What about the Chinese? They are the largest holder of US Treasuries worth some US$1.16 trillion (more than a third of its US$3.2 trillion reserves).

A declining US$ is most damaging for the Chinese and they are not impressed by efforts in the USA which it says "was hiding "risks and troubles" for the world economy" and that "its sovereign debt problems remain unresolved". Read full article here.

If anything, global stock markets are likely to continue seeing choppy action. It is important for us to remain calm and collected in the midst of this.

I am ready to add to my long positions if I see value. If there should be some crazy run up in price, I am ready to reduce my long positions.

Anything else? I think that's about it for retail investors like us.

Sheng Siong's IPO and the American debt ceiling.

I received two emails today from readers. The first asked me about Sheng Siong's IPO and the second commented on how the Americans have come to a compromise on raising the debt ceiling.

To the first reader, I said that it has been a long time since I took part in any IPO, believing that they do not offer good deals for investors most of the time. I rather wait and see if I could get the shares when they provide better value for money.

Many believe Sheng Siong's business to be recession proof and that is probably correct. However, the business might be recession proof but the share price could be less so.

The business could be quite robust but negative sentiments in the broader market could drive prices down all the same during hard times. Mr. Market is given to extreme emotions, after all. I would buy if the shares become undervalued.

To the second reader, I said that I would not be too sure about the Americans raising their debt ceiling successfully until President Obama signs on the dotted line. After all, remember how "rebels" within the Republican ranks were unhappy with the compromises made?

Now, how will the Democrats react to some concessions made by President Obama to the Republicans? Apparently, he gave in and agreed not to increase taxes on the rich.

Of course, I am playing the Devil's advocate here but, like I always say, never say never. We can only hope for the best.

Read article here.

U.S. Senate scuttled emergency legislation!

So many want to have a two party government in Singapore. Personally, I always say that if something is not broken, don't fix it. Seeing how the two parties in the US government are acting, I am thankful Singapore is not on the same boat.

With National Day just round the corner, a week after the 2 August deadline for the US to raise its debt ceiling, I am counting our blessings. We never know we have a good thing until we have lost it. Let's not lose it.

Latest update on the US situation:

In an unforgiving display of partisanship, the Republican-controlled House approved emergency legislation Friday night to avoid an unprecedented government default and Senate Democrats scuttled it less than two hours later in hopes of a better deal.

"We are almost out of time" for a compromise, warned President Barack Obama as U.S. financial markets trembled at the prospect of economic chaos next week. The Dow Jones average fell for a sixth straight session.

Lawmakers in both parties said they were determined to avoid a default, yet there was little evidence of progress -- or even significant negotiations -- on a compromise during a long day of intense political maneuvering...


...Administration officials say that without legislation in place by Tuesday, the Treasury will no longer be able to pay all its bills. The result could inflict significant damage on the economy, they add, causing interest rates to rise and financial markets to sink.

Executives from the country's biggest banks met with U.S. Treasury officials to discuss how debt auctions will be handled if Congress fails to raise the borrowing limit before Tuesday's deadline.

But Carney said the administration did not plan to provide the public with details Friday on how the government will prioritize payments...

Read full article here.

How will a default by the US affect Singapore?

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?

Banks are slashing jobs!

Banks are retrenching. Should we be worried? Is a recession round the corner? Your guess is as good as mine. Best to have our emergency funds ready just in case. If we are thinking of buying shares on the cheap, make sure we have a war chest ready as well. Oh, make sure it is not empty. ;)

HSBC will slash more than 10,000 jobs as part of the global banking giant's recently announced cost-cutting drive, a report said.

Broadcaster Sky News said senior executives at the bank "are close to finalising costs cuts that will result in thousands of jobs being axed across the bank's sprawling global empire."

The report on Wednesday said London-headquartered HSBC may chop more than 10,000 positions across its operations, citing unnamed sources.

A bank spokeswoman in Hong Kong on Thursday declined comment on the report.


Read full report here.

Swiss banking giant Credit Suisse said on Thursday that its second quarter net profit plunged 52 percent, adding it would cut about four percent of its workforce worldwide.

Net profit for the three months ending June fell to 768 million Swiss francs (US$957 million, 667 million euros) from 1.6 billion francs a year ago, amid "disappointing performance" by its investment bank unit.

Concerns over the European debt crisis and weakening global economic indicators led to weak client demand and a poor trading environment, said the group.


Read full report here.

Good luck to us all.

Business Cycles, Fiscal Policies and Monetary Policies.

I have always maintained that having some knowledge of Economics is useful in the modern world.  A reader, Paul, happens to be a student of the subject at a higher level.  He has kindly emailed me some essays which he has given me permission to publish.  I hope you find them as interesting as I have.

Business Cycles, Fiscal Policies and Monetary Policies

Business cycle refers to economic expansions and recessions. Developed economies normally have a 3-5% GDP growth annually. USA's potential GDP growth is about 2.5%. A recession happens when an economy has 2 consecutive quarters of negative GDP growth. Depression is a recession on a larger scale. It refers to a period when the GDP output falls by more than 25% and when there is high unemployment rate of about 20%. Depressions are longer in duration, often lasting more than 4 quarters.

Economic recessions could be the result of internal shocks and external shocks. In a recession, there is a lack of effective demand for goods and services. Some economists view recession as a natural occurrence as the economy goes through structural changes, as moving from sun-set industries to sun-rise industries. A recession could also be caused by structural failures such as the banking system. In short, the economy has to shed its excesses to be healthy again.

In the years prior to the recent financial crisis, Robert Lucas and Ben Bernanke declared that the central economic problem had been solved, business cycles were tamed and severe recessions were things of the past. We all know what happened in 2008.

After the Great Depression in 1930s, governments worldwide actively tried to tame the business cycles. USA went through a strong period of recovery powered by the industrial sector. The recessions were short and mild, while the recoveries were strong and sustained. This led to questions if the business cycle was obsolete? The next depression in the US was in 1970s, caused by external shocks such as the high oil prices. In the 1990s, the world again went through another period of small recessions and strong economic growth, which led to the comments made by Robert Lucas and Ben Bernanke. Is complacency one of the causes of the recent financial crisis?

Fiscal and monetary policies are employed by governments trying to tame the business cycle. Fiscal policies refer to the G component, which is the government. In times of economic expansion, governments would raise taxes, and cut their spending to prevent overheating of the economy. These are called contractionary fiscal policies which could lead to a budget surplus. In recessions, governments have to lower taxes and increase spending to stimulate demand in the economy. These are called expansionary fiscal policies which could lead to a budget deficit. For example, lowering taxes for both consumers and producers would increase their real income, and increase their spending respectively, all else being equal. This would result in a higher C and I component which increase the national income.

Monetary policies involved using the money supply to influence the interest rates. When money supply increases, interest rates will fall. When interest rates fall, cost of borrowing for both consumers and producers will fall. For example, this could lower mortgage interest payment for consumers and make it cheaper for producers to borrow money from the banks. This would again boost demand through C and I. Lower interest rates would also weaken the currency of the country, which would be positive for the country's trade balance, all else being equal.

Central Banks would normally be responsible for monetary policies in a country and they are supposed to be independent from the government with the main objective of achieving price stability, with an inflation target of 1-3%. In the recent crisis, Central Banks around the work also resorted to different methods to increase the money supply, such as quantitative easing and the use of reserve ratios for commercial banks.

As mentioned earlier, adopting expansionary fiscal policies could lead to deficits. Budget deficits could be funded by surpluses from previous budgets or the issuance of bonds to borrow from the market. As mentioned in earlier blog posts, most governments resorted to the issuance of bonds to finance budget deficits in the recent crisis. These bonds can be bought by domestic or foreign investors. Hence, we have the figures of debt to GDP ratio. When foreign investors are involved, it would cause movements in the exchange rates, due to changes in demand and supply of the home currency. This is one of the reason why Japan is upset when the Chinese government bought much more Japanese government bonds( JGBs) recently.

These policies are called demand side management policies, as they are used to stimulate demand in the economy. If fiscal spending is carried out to improve supply in the economy, for examples, through education and infrastructure spending, which would increase the future productivity of the country, then, these would be called supply side policies. The Singapore government has been constantly engaging in supply side policies through retraining programs for workers, investments in the education system, construction of new infrastructure such as metro rails, implementation of tax incentives for engaging in R&D activities etc. This would boost the country's productivity and competitiveness in the future.

The readings below focus on debt issues, and fiscal, monetary policies.

Sovereign Debt
http://www.economist.com/node/16397110?story_id=16397110
http://www.economist.com/blogs/buttonwood/2010/06/indebtedness_after_financial_crisis
http://www.economist.com/node/16397098?story_id=16397098
http://www.economist.com/node/16397086?story_id=16397086

Corporate Debt
http://www.economist.com/node/16397174?story_id=16397174

Consumer Debt
http://www.economist.com/node/16397124?story_id=16397124

Fiscal and Monetary Policies
http://www.economist.com/node/16943569?story_id=16943569

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Hope this helps to refresh your "A" Level Economics!
USA, a rock and a hard place: Paul opines.

Hope this helps to refresh your "A" Level Economics!

The title of this blog post is exactly the same as the title of an email sent to me by a reader, Paul.  I like how it neatly encapsulates his good intention with a dash of cheekiness. I try not to take myself too seriously most of the time. Haha... I have reproduced his email with his permission:

Ways to Boost National Income

As we have learnt in basic economic theory, C+I+G+(X-M)=Y, I will now discuss issues which are restricting the major economies such as US and the EU to grow, and some of the policies which have been undertaken by them.

C stands for domestic consumption. In recessions, consumption is usually hit badly. As the consumers are busy deleveraging to pay off their debts, they cut down on their income elastic consumption which is normally the luxury goods.

I stands for investments, aka private sector. During recessions, there is a lack of incentives for investment by the private sector due to excess capacity therein. Furthermore, margins could thin due to lack of pricing power in times of recession. In addition, due to consumers deleveraging, there could be a lack of demand from consumers.

G stands for government spending. In normal recessions, a country's government is able to execute expansionary fiscal policies through spending in sectors such as infrastructure, education, health or military. These deficits could be financed by previous budget surpluses (which many of these big countries do not have), or borrowings through issuance of government bonds. Most countries adopt the issuance of government bonds approach to finance their government spending. However, as mentioned in an earlier post, governments in major economics like the UK, Japan and the USA have been incurring budget deficits for the past few years, which limit their ability to borrow more money. In the case of the US, the government debt is expected to double over the next decades, with majority of the debt caused by interest payment. The austerity program adopted by the major economies limit the governments' ability to prop up growth.

(X-M) is net export. One of the most basic ways to boost the (X-M) component is to have a weaker currency, which would make a country's exports relatively cheaper compared to other countries. Currently, governments worldwide are turning to this as a solution. Instead of focusing on productivity to boost exports, governments take the easy way out, by “manipulating” the strength of their currencies. For example, USA forced the revaluation of the Japanese Yen in 1985 to boost their exports. Currently, USA is trying to do the same to the Chinese RMB.

In this world, there is never a case of a balanced trade accounts, there will always be imbalances, some countries having surpluses, some having deficits. Trade account surpluses and deficits are not a problem in economic studies. But for political reasons, it has been a problem. Recently, Japan central bank also intervened in the FOREX market to weaken the yen. This has led to what is called "competitive devaluation", a race to the bottom, where countries will try to make their currencies relatively weaker to boost exports.

Another method to boost (X-M) is the implementation of trade barriers, which would again result in trade wars. Already, there are signs of protectionist measures in the USA through the “Buy Made in US” campaign. Trade wars would hamper global economic growth, especially those of emerging markets which are reliant on exports.

When there is a recession caused by a financial crisis, it takes longer than usual to recover due to the freeze in credit lines and financial system. Actually, US is doing comparatively better than the recovery from previous financial crisis led recession.

In the case of Singapore, we are fortunate enough to have a good public financial system. Any sales of Singapore assets such as land are being kept in the “treasury” under the care of the President and not the government. 50% of the returns from investments such as those from GICs are also channeled into this “treasury”.

Hence, when the Singapore government want to tap into this reserve in 2008 or 2009, it had to seek permission from the President. The budget surpluses which are usually stated by the government, do not include the increase in the reserve funds. Therefore, “short term pain, long term gain” has served Singapore well in saving for the rainy days and having the fiscal policies to help the economy. Most western economies do not have this privilege due to the asymmetrical nature of fiscal policies. Easy to cut taxes, hard to raise taxes, which sort of validate Singapore government's stand on retaining the GST even during the economic hard times.

Related post:
USA, a rock and a hard place: Paul opines.

Money management: Needs and wants.

I first learned about needs and wants more than twenty years ago in an Economics class when I was a Junior College student.  During the class, a female classmate told an irritating guy that he needed medication and asked if he wanted some.  That made the distinction between needs and wants very clear to us all and we had a good laugh.

There will always be things out there to buy in the modern world.  The question to ask is always whether we need these or we want these.  The question seems innocent enough at first glance.  However, one person's needs might be another person's wants. Do I hear some readers going, "Huh?"

Human beings have various needs for survival.  In my mind, at the most basic, we need air, water, food, shelter and clothing.  Some might say that the last item is debatable and it might be a want that has become a need due to the evolution of human society which invented the notion of modesty.  Here we start to see a blurring in the line separating needs and wants.  However, we should have an idea of what are needs and what are wants for us to do a good job of managing our money.

Recently, I was asked how much of my income do I save.  Off the top of my head, I said I probably save about 80% of my annual income and that received some incredulous expletives.  Is it possible?  Yes, it is.  How could we achieve this?  It is through a combination of increasing our income and reducing our expenses.  This post is about the latter.

In business, we very often hear how efforts are being put into increasing revenue.  Rarely do we hear how efforts are being put into decreasing costs.  Somehow, increasing revenue is more glamorous than decreasing costs.  It is when times are bad that businesses start decreasing costs in the hope of preserving their bottomline.  

I believe that cost control must always be an important consideration in business. Costs should always be kept low, in good times and bad.  This is especially true when we are looking at fixed costs or costs which cannot be adjusted downwards in the short run, at least not without incurring some kind of penalty or monetary loss.

Similarly, in our personal finances, if we keep our living expenses low, we do not have to worry during bad times if our income level takes a dip or, indeed, disappears over a period of time.  We would have ample reserves to see us through.  In the world of business, these are called retained earnings.

Making money is an important skill in modern society but managing money is an equally important skill and, very often, neglected.  We can make a lot of money but we can easily squander it all through mismanagement or, indeed, no management.

Do you believe me if I tell you I know of someone who made $10k a month but spent it all, habitually? Seemingly flying high, he had a really rough landing with a few broken bones thrown in when the wind was taken away from under his wings.

So, what we have to do is to have quite clearly in our minds what are needs to us and what are wants.  We should cut back on our expenditure on wants.  Sounds simple enough, doesn't it?  Maybe not.

As mentioned earlier in this post, the definitions of needs and wants can be quite subjective.  We need transportation but do we need to have a car?  For a businessman, he probably needs a car.  Or, indeed, do we need to take a bus if the destination is only a few stops away?  For an old granny, it's probably a need.  Defining our needs and wants, this is the tough bit and I leave it to you.

Assuming we manage to sort out our needs and wants, what's next?  Once we have amassed some "retained earnings", look at how to put them to good use.  It's time to increase our income.  A company that is sitting on a lot of cash and not doing anything with it is doing its shareholders a grave injustice.  Similarly, just keeping all our wealth as cash in a bank account is doing ourselves a great disservice.  That's another subject and if you are interested enough, you might want to read a couple of my earlier posts below.  Have a good weekend and I will talk to you again soon.

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