Art, 26 Mar 08
Aug08: When streams of poor US economic data keep pouring in, instead of parking more money into US treasury bonds, SWF and foreign capital will move out their funds in trickle to downpour into Sep08. FED will be forced to start printing large sums of money and to attract some foreigners to buy their US bonds; the yield has to increase significantly. The impact is US economy will experience higher interest (or borrowing) costs, thus further weaken the housing market rescue efforts, dragging it deeper into recession.
Oct08: When it becomes obvious to everyone that whatever US FED or government try to do, they will still not be able to hold up the US financial markets. By then, the world will finally come to the conclusion that US economic balloon has burst. US bond yields will climb above 10% (in the ‘80s, it touch 15%). US economy will no longer the most powerful or largest economy of the world. The markets may choose to switch to using EUR or some form of basket currencies as the standard of exchange, instead of USD. S&P500 will fall to 1000 or below and hard commodities will fall rapidly too, followed by the soft commodities (but to a lesser extent). The world stock markets will also be dragged down once again, but to a lesser degree, depending on the specific country’s economic strength.
Y2009: The world will be in full recession and stagnation, ie, stagflation for the next one year. We will see the mild recovery only in Y2010 onwards.
Y2010: The world will be quite a different place where three major economic blocs (Europe, Asia and US) will be jostling for economic control and command without any clear winners. Middle-East will not become a significant force with their oil as by then, nuclear energy will start to kick in, thus reducing the demand for oil, causing a drop in its prices and the wealth that was supposed to be generated for these countries. (Just like the fall of natural rubber prices, when synthetic rubber appears on the market). Japan will still maintain its significance while Russia will be an ambivalent force, being a European and Asian country at the same time, though it will exert some economy influence through its resources and technology. South America is a minor economic force due to its weak education system except for its farming and resources. Africa will remain as a continent for exploitation for its raw materials and with AIDS spreading wildly; it also limits its scope of economic influence.
Wednesday, March 26, 2008
Thursday, March 20, 2008
Turbulent Times ahead before the dawn of the Tri-polar Economic Order
Art, 20 Mar 08
Mar '08: FED cut rates, giving the stock markets some cheer. As a double edged sword, it also convinced the world that US has lost its interests in maintaining its USD value. As most things are traded in USD, commodities will be re-priced higher and higher by the day as producers know that they will be collecting a depreciating paper in their hands. In view of the premonition of high inflation period and subsequent economic slowdown, commodities are heading toward its peak, which is in a highly volatile zone, where soft commodities will gain more than hard commodities. Commodities related currencies (AUD, RUB ...etc) will also experience similar swings. Those USD pegged currencies will also be de-pegged or revalued up.
Apr '08: The US housing debts cannot be swept under the carpet for too long, as the foreclosed sub-prime houses will deteriorate to a point that it is better to demolish and rebuilt from scratch. It will take time and money which the US’ poor would not have. The US houses prices have dropped 20% and it is expected to drop further (10% or more). It will further depress the overall US housing assets values, spreading from sub-prime to alternate-A then to prime housing loans, forcing banks to further write off loans, as growing loans’ delinquencies turn to defaults.
May '08: As mentioned in my earlier blog, as inflation and unemployment build up, it will also trigger defaults of other forms of personal borrowings. US will try to stagger out the pain so as not to cause a US financial systemic failure. The FED will step in again to rescue by lowering rates further, but it won’t be of help as falling asset values or principal sum risk are much more detrimental than a few dollars saved from interest charges. USD will weaken even further against almost all other major currencies.
Jun '08: With a weakened US consumer demand, it will hit the corporate America, causing defaults of the US corporations that serve mainly American customers, e.g. the weaker American car-maker, housing companies…etc. (Though the international US MNCs will be able to survive through exports, which mean some companies will gain mildly during this period while others will fail miserably). The star of the show is US Treasury printing USD800 for each citizen to spend the money, but it will mainly be used to pay for interests to the bank with hardly anything left to spend on. Though USD has been weakened significantly over the last 7 years, from EUR/USD 0.85 to 1.6, the US export has improve marginally as the inflationary imports of oil and others has offset the export benefit, resulting in continuous high US trade deficit.
Another steriod injection of aggressive FED cuts, weakening USD, with the hope that US can export its way out of recession, but due to the above mentioned, it will only mitigate the trade deficit only to some extent but balloon the current account deficit in 2008, because, by weakening the USD too rapidly, it also pushes the USD off the cliff, ie, as the store of value, causing the world to diversify out of their high USD and US assets holdings (especially US government bonds).
Jul '08: With some free government cash in the pockets, some positive retail sales figure, and a normal cheerful summer mood, the US consumers and financial markets may gain its last confidence of the US economy.
....to be cont.
Mar '08: FED cut rates, giving the stock markets some cheer. As a double edged sword, it also convinced the world that US has lost its interests in maintaining its USD value. As most things are traded in USD, commodities will be re-priced higher and higher by the day as producers know that they will be collecting a depreciating paper in their hands. In view of the premonition of high inflation period and subsequent economic slowdown, commodities are heading toward its peak, which is in a highly volatile zone, where soft commodities will gain more than hard commodities. Commodities related currencies (AUD, RUB ...etc) will also experience similar swings. Those USD pegged currencies will also be de-pegged or revalued up.
Apr '08: The US housing debts cannot be swept under the carpet for too long, as the foreclosed sub-prime houses will deteriorate to a point that it is better to demolish and rebuilt from scratch. It will take time and money which the US’ poor would not have. The US houses prices have dropped 20% and it is expected to drop further (10% or more). It will further depress the overall US housing assets values, spreading from sub-prime to alternate-A then to prime housing loans, forcing banks to further write off loans, as growing loans’ delinquencies turn to defaults.
May '08: As mentioned in my earlier blog, as inflation and unemployment build up, it will also trigger defaults of other forms of personal borrowings. US will try to stagger out the pain so as not to cause a US financial systemic failure. The FED will step in again to rescue by lowering rates further, but it won’t be of help as falling asset values or principal sum risk are much more detrimental than a few dollars saved from interest charges. USD will weaken even further against almost all other major currencies.
Jun '08: With a weakened US consumer demand, it will hit the corporate America, causing defaults of the US corporations that serve mainly American customers, e.g. the weaker American car-maker, housing companies…etc. (Though the international US MNCs will be able to survive through exports, which mean some companies will gain mildly during this period while others will fail miserably). The star of the show is US Treasury printing USD800 for each citizen to spend the money, but it will mainly be used to pay for interests to the bank with hardly anything left to spend on. Though USD has been weakened significantly over the last 7 years, from EUR/USD 0.85 to 1.6, the US export has improve marginally as the inflationary imports of oil and others has offset the export benefit, resulting in continuous high US trade deficit.
Another steriod injection of aggressive FED cuts, weakening USD, with the hope that US can export its way out of recession, but due to the above mentioned, it will only mitigate the trade deficit only to some extent but balloon the current account deficit in 2008, because, by weakening the USD too rapidly, it also pushes the USD off the cliff, ie, as the store of value, causing the world to diversify out of their high USD and US assets holdings (especially US government bonds).
Jul '08: With some free government cash in the pockets, some positive retail sales figure, and a normal cheerful summer mood, the US consumers and financial markets may gain its last confidence of the US economy.
....to be cont.
Tuesday, March 18, 2008
Opportunity: Park into HongKong dollars, HKD
Art, 18 Mar 2008
HKD is pegged to USD and as such, it has fallen significantly against all other currencies. While US is trending into recession and thus, it will cools its economy, on the other hand, HK economy has been growing strongly.
The weakened HKD currency will have inflationary effect and also weakens its financial reserve positions vis-à-vis other economies like Singapore. The inverse economic trends between US and HK will put HK in a monetarily disadvantaged position and it is not likely to be in HK interest to continue its HKD pegged to USD as their two economic paths are diverging.
As China and many emerging economies have successfully adopted the trade weighted currencies’ peg approach, HK will have to seriously consider similar move.
The advantages will be to tame the HK growing inflation while allowing more flexibility in monetary management. It also strengthens its national reserves and allows HK to adopt similar model of growth by setting up the Sovereign Wealth Fund, SWF and invest overseas for diversified growth portfolio.
Basic HK economic strengths;
1. stable government
2. efficient civil servants and organisations
3. gateway between West and China
4. hard working labor force
5. China as hinterland and
6. great weather, which thus, ensuring sound HK economic growth for a foreseeable future.
SGD has strengthen against USD significantly for quite sometime, from 1.52 to 1.37 (10% gain) over the last 6 months. With Singapore’s negative labor productivity growth in 2007, Singapore government will be concerned about its relative competitiveness. Coupled with skyrocketing rentals and high inflation, Singapore government would be reluctant to let SGD strengthen much further, thus intervention is likely, so as to maintain USD/SGD rate at possibly 1.35 level for the next 6 months.
In conclusion, the SGD/HKD is likely to be in HKD favor when HK choose to de-peg from USD and adopt a weighted peg against major trading partners’ currencies. The timing of such a move is a challenge as it will be a HK major monetary policy change, though I expect it to be within this year. If you should decide to do it, do it only after US FED cuts their interest rate tonight. Since the downside is low and the upward potential is significant (assuming HKD revalue to the RMB level, the gain is 11% within the short period), it would be a reasonable bet. Another small plus for HKD is that it pays higher interest than SGD.
I would like to remind my reader that this is purely a personal assessment of mine and I have to repeat, there is no guarantee in any financial positioning except to weighs the advantages and disadvantages of each decision. Another suggestion is not to put all eggs in one basket, that is, a measured diversified investment approach is preferable.
(If you are not familiar on how to go about taking a position in HKD/SGD, please email at artlim66@gmail.com and I will provide some possible steps of doing so)
HKD is pegged to USD and as such, it has fallen significantly against all other currencies. While US is trending into recession and thus, it will cools its economy, on the other hand, HK economy has been growing strongly.
The weakened HKD currency will have inflationary effect and also weakens its financial reserve positions vis-à-vis other economies like Singapore. The inverse economic trends between US and HK will put HK in a monetarily disadvantaged position and it is not likely to be in HK interest to continue its HKD pegged to USD as their two economic paths are diverging.
As China and many emerging economies have successfully adopted the trade weighted currencies’ peg approach, HK will have to seriously consider similar move.
The advantages will be to tame the HK growing inflation while allowing more flexibility in monetary management. It also strengthens its national reserves and allows HK to adopt similar model of growth by setting up the Sovereign Wealth Fund, SWF and invest overseas for diversified growth portfolio.
Basic HK economic strengths;
1. stable government
2. efficient civil servants and organisations
3. gateway between West and China
4. hard working labor force
5. China as hinterland and
6. great weather, which thus, ensuring sound HK economic growth for a foreseeable future.
SGD has strengthen against USD significantly for quite sometime, from 1.52 to 1.37 (10% gain) over the last 6 months. With Singapore’s negative labor productivity growth in 2007, Singapore government will be concerned about its relative competitiveness. Coupled with skyrocketing rentals and high inflation, Singapore government would be reluctant to let SGD strengthen much further, thus intervention is likely, so as to maintain USD/SGD rate at possibly 1.35 level for the next 6 months.
In conclusion, the SGD/HKD is likely to be in HKD favor when HK choose to de-peg from USD and adopt a weighted peg against major trading partners’ currencies. The timing of such a move is a challenge as it will be a HK major monetary policy change, though I expect it to be within this year. If you should decide to do it, do it only after US FED cuts their interest rate tonight. Since the downside is low and the upward potential is significant (assuming HKD revalue to the RMB level, the gain is 11% within the short period), it would be a reasonable bet. Another small plus for HKD is that it pays higher interest than SGD.
I would like to remind my reader that this is purely a personal assessment of mine and I have to repeat, there is no guarantee in any financial positioning except to weighs the advantages and disadvantages of each decision. Another suggestion is not to put all eggs in one basket, that is, a measured diversified investment approach is preferable.
(If you are not familiar on how to go about taking a position in HKD/SGD, please email at artlim66@gmail.com and I will provide some possible steps of doing so)
Saturday, March 15, 2008
In layman language; CDOs, CDS, ARM, house equity-loans, and all other US major loans
Art, 15 Mar 2008
With a $100K deposit collected, Bank A then lends $1million to person X to buy a $1million house. He then uses his one million house deed as collateral to borrow $800K from Bank B where he may splurge on holidays, car and even a down payment for a second or even a third house. Bank A buys a loan default insurance on the house, then packages it as an asset-security of AAA rating (Collateralised Debt Obligation, CDO), and sells it to hedge fund investors or other banks. These investors then buy ‘insurance’ (known as Credit Default Swap, CDS) against possible defaults against these CDOs from the financial market while Bank A gets his $1million cash into the bank. Bank A can now lend out $10 million to new house buyers and this can go on and on. If we assume a multiplier effect to the power of 3, from $100K deposit, the banks will be able to loan up to $100millions. Banking rules allow only about 20 times leverage (or 5% reserves against total loans), whereas, US banks, through the above off-balance sheet bookings, can easily operate at 100 times leverage.
In the meantime, Bank B will report profits from interests charged on the house equity-loans while X believes that the property market is rising and, as such, took up further loans with little or no down payment for his second and/or third houses since the 1st year interest charged is only 1% p.a. and the interest charge will increase significantly in subsequent years (Adjustable Rate Mortgage loan, ARM). Everything is fine as long as the house prices continue to rise and X remains in employment to pay for his mortgages loans and he is able to sell his houses and take profits before the new high interest charges kick in. At the same time, there is no inflation which can reduce X’s ability to pay for his mortgages in the meantime.
Currently, we are witnessing the reversal.
US housing loans
1. USD1 trillion of loans have been made to people without any proof of income or assets (Sub-prime loans)
2. Alternate-A mortgage loans are made to those with proof of income but without known assets ‘seize-able’ if the loan defaults.
3. Prime housing loans are made to those with proof of income and own assets that can be seized as collateral. Alternate-A and Prime housing loans total about USD5+ trillions.
4. Total equity-loans against the house value stands as USD635 billions.
5. CDS exposure now at USD40 trillions
6. Commercial properties exposure is significant, guesstimated to be at USD4 trillion. It has dropped by 2% followed by 5% in 4th Qtr 2007.
Other personal loans:
Credit Card loans of about USD800 billions
Cars mortgage loans of about USD800 billions
Corporate loans stands at USD40 trillions
Projected write-off from the above items: (assumed failure rate)
Sub-prime = USD300 billions (30% failure rate)
Alt-A & Prime = USD250 billions (5% failure rate)
Home-equity = USD127 billions (20% failure rate)
Commercial pty = USD600 billions (15% failure rate)
CDS = USD 17 billion (netting effect)
Car-loans = USD 80 billions (10% failure rate)
Creditcard = USD 80 billions (10% failure rate)
Corporateloan = USD500 billions (1.5% failure rate)
Total: USD1.954 trillions
To-date, sub-prime USD150 billions have been written-off whilst the rest are still hardly written down. US is about 15% from the total projected write-off. When bank write off loans (assets), recapitalisation is needed or new cash injection would be needed to meet the banking reserve requirement.
In short, it is far from over.
With a $100K deposit collected, Bank A then lends $1million to person X to buy a $1million house. He then uses his one million house deed as collateral to borrow $800K from Bank B where he may splurge on holidays, car and even a down payment for a second or even a third house. Bank A buys a loan default insurance on the house, then packages it as an asset-security of AAA rating (Collateralised Debt Obligation, CDO), and sells it to hedge fund investors or other banks. These investors then buy ‘insurance’ (known as Credit Default Swap, CDS) against possible defaults against these CDOs from the financial market while Bank A gets his $1million cash into the bank. Bank A can now lend out $10 million to new house buyers and this can go on and on. If we assume a multiplier effect to the power of 3, from $100K deposit, the banks will be able to loan up to $100millions. Banking rules allow only about 20 times leverage (or 5% reserves against total loans), whereas, US banks, through the above off-balance sheet bookings, can easily operate at 100 times leverage.
In the meantime, Bank B will report profits from interests charged on the house equity-loans while X believes that the property market is rising and, as such, took up further loans with little or no down payment for his second and/or third houses since the 1st year interest charged is only 1% p.a. and the interest charge will increase significantly in subsequent years (Adjustable Rate Mortgage loan, ARM). Everything is fine as long as the house prices continue to rise and X remains in employment to pay for his mortgages loans and he is able to sell his houses and take profits before the new high interest charges kick in. At the same time, there is no inflation which can reduce X’s ability to pay for his mortgages in the meantime.
Currently, we are witnessing the reversal.
US housing loans
1. USD1 trillion of loans have been made to people without any proof of income or assets (Sub-prime loans)
2. Alternate-A mortgage loans are made to those with proof of income but without known assets ‘seize-able’ if the loan defaults.
3. Prime housing loans are made to those with proof of income and own assets that can be seized as collateral. Alternate-A and Prime housing loans total about USD5+ trillions.
4. Total equity-loans against the house value stands as USD635 billions.
5. CDS exposure now at USD40 trillions
6. Commercial properties exposure is significant, guesstimated to be at USD4 trillion. It has dropped by 2% followed by 5% in 4th Qtr 2007.
Other personal loans:
Credit Card loans of about USD800 billions
Cars mortgage loans of about USD800 billions
Corporate loans stands at USD40 trillions
Projected write-off from the above items: (assumed failure rate)
Sub-prime = USD300 billions (30% failure rate)
Alt-A & Prime = USD250 billions (5% failure rate)
Home-equity = USD127 billions (20% failure rate)
Commercial pty = USD600 billions (15% failure rate)
CDS = USD 17 billion (netting effect)
Car-loans = USD 80 billions (10% failure rate)
Creditcard = USD 80 billions (10% failure rate)
Corporateloan = USD500 billions (1.5% failure rate)
Total: USD1.954 trillions
To-date, sub-prime USD150 billions have been written-off whilst the rest are still hardly written down. US is about 15% from the total projected write-off. When bank write off loans (assets), recapitalisation is needed or new cash injection would be needed to meet the banking reserve requirement.
In short, it is far from over.
Thursday, March 13, 2008
The end of NEVERLAND is near!
Art, 13 Mar 2008
US excesses will not get off the hook, except that the world will bear some of the fallouts due to their exposures in US assets (mortgages, bonds and equities). Given the extreme leverages by the US economy, we should be looking at least, 3 to 5 years of recession or close to zero growth and inflation.
US is determined to weaken their USD against all other major currencies, cutting interest rates in the face of inflation, as a way of exporting their way out of recession. By pushing it too hard, in the face of credit seizure, it will instead drive out investors of their bonds (US bond prices will drop significantly soon), thus pushing their US bond yields to even higher levels, which will further aggravate the mortgage, personal and corporate borrowing problems.
Europe is a close competitor, e.g. Unilever vs. Procter and Gamble. Unilever will suffer a loss of its competitiveness vis-à-vis the exchange differences. Fortunately, as all their productions are in third countries, China or India, the costs will be the same for either the US or European firms. As long as the Europeans are able to manage their overhead costs, Europeans will still be quite insulated from the US onslaught. They will not be competitive outside of EU countries due to transportation costs, except for those that have production in other major emerging countries. US will improve their exports, but at less than its weakening USD rate, given that their products face low-costs substitutes from emerging markets' products too.
Japan has been on the quiet, but not for long as their JPY has also been rising. Japan was not as successful as the US or Europeans in tapping on the Chinese and Indian production engines due to cultural and political factors. As Japan still maintains a sizable production within the country, as such, their costs will rise with the rising JPY, thus weakening their competitiveness. For other Japanese MNCs that have diversified their production centres, they will be in a position to compete well, against the US companies, e.g. cars though Japan still faces stiff challenge from the European counterparts.
As Middle-East oil money builds up, with crude oil at USD100 per barrel and at the rate of USD800 billions excess fund a year, it will a major source of fund for investment. Given the high holding of three key USD, EUR and GBP asset holdings, they will be diversifying into emerging markets for better yields of their funds.
BRICs will slowdown significantly for 2008 but they will gradually pick up in 2009 on the strengths of their own economies as they learn to manage their internal economic growth.
Investment opportunities
1. Buy value-for-money business, eg Wal-mart which offers no frill products as economical prices and MacDonald for economical food. Dump companies selling mid-range brands as income and asset values fall
2. Buy companies that offer low fuel consumption companies, e.g. buy trains or bus services, and dump US car making, airlines or taxi companies
3. Buy emerging markets utilities, eg Telcomm and power stations
4. Buy medical care companies, those that are well managed and with good brands
5. By generic drug producing companies
6. Buy companies with high cash hoard, eg tobacco companies
7. Park into emerging stable countries currencies.
In short, in difficult times, people go back to basics as they still need to eat and sleep to stay alive.
US excesses will not get off the hook, except that the world will bear some of the fallouts due to their exposures in US assets (mortgages, bonds and equities). Given the extreme leverages by the US economy, we should be looking at least, 3 to 5 years of recession or close to zero growth and inflation.
US is determined to weaken their USD against all other major currencies, cutting interest rates in the face of inflation, as a way of exporting their way out of recession. By pushing it too hard, in the face of credit seizure, it will instead drive out investors of their bonds (US bond prices will drop significantly soon), thus pushing their US bond yields to even higher levels, which will further aggravate the mortgage, personal and corporate borrowing problems.
Europe is a close competitor, e.g. Unilever vs. Procter and Gamble. Unilever will suffer a loss of its competitiveness vis-à-vis the exchange differences. Fortunately, as all their productions are in third countries, China or India, the costs will be the same for either the US or European firms. As long as the Europeans are able to manage their overhead costs, Europeans will still be quite insulated from the US onslaught. They will not be competitive outside of EU countries due to transportation costs, except for those that have production in other major emerging countries. US will improve their exports, but at less than its weakening USD rate, given that their products face low-costs substitutes from emerging markets' products too.
Japan has been on the quiet, but not for long as their JPY has also been rising. Japan was not as successful as the US or Europeans in tapping on the Chinese and Indian production engines due to cultural and political factors. As Japan still maintains a sizable production within the country, as such, their costs will rise with the rising JPY, thus weakening their competitiveness. For other Japanese MNCs that have diversified their production centres, they will be in a position to compete well, against the US companies, e.g. cars though Japan still faces stiff challenge from the European counterparts.
As Middle-East oil money builds up, with crude oil at USD100 per barrel and at the rate of USD800 billions excess fund a year, it will a major source of fund for investment. Given the high holding of three key USD, EUR and GBP asset holdings, they will be diversifying into emerging markets for better yields of their funds.
BRICs will slowdown significantly for 2008 but they will gradually pick up in 2009 on the strengths of their own economies as they learn to manage their internal economic growth.
Investment opportunities
1. Buy value-for-money business, eg Wal-mart which offers no frill products as economical prices and MacDonald for economical food. Dump companies selling mid-range brands as income and asset values fall
2. Buy companies that offer low fuel consumption companies, e.g. buy trains or bus services, and dump US car making, airlines or taxi companies
3. Buy emerging markets utilities, eg Telcomm and power stations
4. Buy medical care companies, those that are well managed and with good brands
5. By generic drug producing companies
6. Buy companies with high cash hoard, eg tobacco companies
7. Park into emerging stable countries currencies.
In short, in difficult times, people go back to basics as they still need to eat and sleep to stay alive.
Tuesday, March 4, 2008
Navigating through tumultuous economic uncertainty, which stars do we follow?
Art, 2 Mar 2008
(In November ‘07, when I called for a US economic recession, heading towards stagflation, some readers thought I was extremist, too pessimistic in my views. Now, US recession is an accepted fact, though many are still doubtful of a US stagflation. In my analysis, I seek to be a realist, as my FX and stock market investment do not have room for wishful thinking. US being the largest world economy, has been the engine of growth for the rest of the world and as such, a major change of US economy will inadvertently affect the global economy till a new economy order arises and that will take a while.)
The changing economic stars, where a key star has risen but many still don’t believe in what they are now seeing with their eyes, choosing to believe it is only a comet that burn brightly and will vanish in no time and on the other hand, one key fading star was cling to religiously where it is in fast decline.
The new rising star of inflation will be here to stay for a while. As surely as you can observe the Arius star during the winter, the global inflation will become clearer by the weeks. (Please note that the period of inflation is not at the similar length to that of the stars in the sky as major economic cycle varies from 3 to 15 years)
What is the basis of the new sightings? Many would ask. It is back to the basic of demand and supply. (In economics, it only seeks to measure real demands, not wants which the poor Africans have, but do not count as they do not have the money to pay for their wants)
Global demand shift
1. The growing middle class in China, India (which has 1.3 and 1 billions populations respectively), Russia and Brazil, or BRICs will push demand to the limit where the CPI data generally represent.
2. The changing global demographics of the economic well to-do (high to middle income) baby boomers (age 45-55) are shifting its growing demand to health care from goods and other services purchases (and baby boomers are also in productivity decline too). Would you be chasing the latest iPhone/fashionable restaurants or you would rather walk the gardens or catch up with friends, when we are in our sixties or above, in view of the declining health?
Global supply shift
1. China and India, the world’s two largest producing nations for the last decade or so have been experiencing rising wages, especially the last three years. It has come to the point that these wage increases are pushing the final manufactured goods and (through the IT and related services) other services prices rapidly upward. The long declining birth rate of middle incomes and one-child China policy has been reducing young bodies for work (or growth)
2. Given the limited global land and raw materials, the growing surge of demand is pushing supply catch-up to its limit too. Land that was set aside for crops and animals’ raising and the mining of raw materials is not able to expand proportionally to meet the demand surge, causing the raising prices of commodities.
The fast fading star of economic growth will be greeted with great disbelieve. Many cling on to it as if it is the permanent star of heaven. Why should it fade off, when it has been around for years, (since 1993). It shall return in due time, in different form, but not in the near future. The current rapid decline is due to man’s folly of greed and trickery.
Just a quick important side-track, that is, growth comes in two forms. One is through headcount growth, which increases total growth, assuming stable employment, but it is actually zero growth per capita. The more important growth is productivity growth where the same person is able to produce the same quantity of goods/service at lesser time, thus allowing him to produce more with the usual amount of working hours.
One of the main global growth drivers was man’s invention of computers and internet which has significantly increase productivity, thus growth for the last fifteen years. The productivity has since then comes to gradual plateau. Recently a reputable financial news channel sang a new hollow song of growth engine through alternative energy technology. It is not to be believed. One of their anchor hosts keep harping the belief of goldilocks’ US economy of growth, where there is virtuous growth cycle in US economy and downturn is always shallow and short before US economy returns to healthy growth again.
The truth is that man has also planted its own seed of fast economic decline. The main culprit lies in the creation of money through complex financial engineering to its extreme where poor quality assets are sold off as top grade assets and rehashing them in different forms to the maximum, thus leading to rapid expansion of money. The global slowdown will be severe. The new economic order will likely to be multi-polar, consisting of Europe, Asia and America, instead of one main economic engine of US. The likely outcome will contain certain similarity to the old classic Chinese text of the three states’ rivalry. I will stay to the economic (and financial) course in this series, while the political and cultural rivalry will form a body of interesting discourse, should there be any interest by my readers.
As a seasoned navigator, how are we to chart the course, so as to avoid the treacherous water, so that we are able to continue our journey, till dawn breaks and the new found land is in sight? While we care about the distant future, we also need to pay attention to the immediate waters around us. I will seek to offer some suggestions in the following series of articles as to what choices of investment are available, even in uncertain markets. The Chinese word for danger is risk and opportunity and I seek to propose those opportunities that are available in current times like this.
(If you are still in the camp of Jack Welch, ex-GE’s chairman and CEO, believes that some of the US corporates have strong balance sheets that will power US economy back to health, I can understand that persuasive viewpoint. The missing element in that view is the balance sheet is not strong anymore where valuation is done in the new light and US’ demand deteriorates rapidly, leading to machineries that stand still, though still showing a great balance sheet figure of capital in the books. Till the new economy order is in place where the flow of global demands build up, and growth of capital in appropriate machinery, intellectual knowledge (in this generation, it will be medical) and services, we will be still be facing the tumultuous ocean of change that will last for many years to come.)
Art, 2 Mar 2008
Delta Fund Investing
(In November ‘07, when I called for a US economic recession, heading towards stagflation, some readers thought I was extremist, too pessimistic in my views. Now, US recession is an accepted fact, though many are still doubtful of a US stagflation. In my analysis, I seek to be a realist, as my FX and stock market investment do not have room for wishful thinking. US being the largest world economy, has been the engine of growth for the rest of the world and as such, a major change of US economy will inadvertently affect the global economy till a new economy order arises and that will take a while.)
The changing economic stars, where a key star has risen but many still don’t believe in what they are now seeing with their eyes, choosing to believe it is only a comet that burn brightly and will vanish in no time and on the other hand, one key fading star was cling to religiously where it is in fast decline.
The new rising star of inflation will be here to stay for a while. As surely as you can observe the Arius star during the winter, the global inflation will become clearer by the weeks. (Please note that the period of inflation is not at the similar length to that of the stars in the sky as major economic cycle varies from 3 to 15 years)
What is the basis of the new sightings? Many would ask. It is back to the basic of demand and supply. (In economics, it only seeks to measure real demands, not wants which the poor Africans have, but do not count as they do not have the money to pay for their wants)
Global demand shift
1. The growing middle class in China, India (which has 1.3 and 1 billions populations respectively), Russia and Brazil, or BRICs will push demand to the limit where the CPI data generally represent.
2. The changing global demographics of the economic well to-do (high to middle income) baby boomers (age 45-55) are shifting its growing demand to health care from goods and other services purchases (and baby boomers are also in productivity decline too). Would you be chasing the latest iPhone/fashionable restaurants or you would rather walk the gardens or catch up with friends, when we are in our sixties or above, in view of the declining health?
Global supply shift
1. China and India, the world’s two largest producing nations for the last decade or so have been experiencing rising wages, especially the last three years. It has come to the point that these wage increases are pushing the final manufactured goods and (through the IT and related services) other services prices rapidly upward. The long declining birth rate of middle incomes and one-child China policy has been reducing young bodies for work (or growth)
2. Given the limited global land and raw materials, the growing surge of demand is pushing supply catch-up to its limit too. Land that was set aside for crops and animals’ raising and the mining of raw materials is not able to expand proportionally to meet the demand surge, causing the raising prices of commodities.
The fast fading star of economic growth will be greeted with great disbelieve. Many cling on to it as if it is the permanent star of heaven. Why should it fade off, when it has been around for years, (since 1993). It shall return in due time, in different form, but not in the near future. The current rapid decline is due to man’s folly of greed and trickery.
Just a quick important side-track, that is, growth comes in two forms. One is through headcount growth, which increases total growth, assuming stable employment, but it is actually zero growth per capita. The more important growth is productivity growth where the same person is able to produce the same quantity of goods/service at lesser time, thus allowing him to produce more with the usual amount of working hours.
One of the main global growth drivers was man’s invention of computers and internet which has significantly increase productivity, thus growth for the last fifteen years. The productivity has since then comes to gradual plateau. Recently a reputable financial news channel sang a new hollow song of growth engine through alternative energy technology. It is not to be believed. One of their anchor hosts keep harping the belief of goldilocks’ US economy of growth, where there is virtuous growth cycle in US economy and downturn is always shallow and short before US economy returns to healthy growth again.
The truth is that man has also planted its own seed of fast economic decline. The main culprit lies in the creation of money through complex financial engineering to its extreme where poor quality assets are sold off as top grade assets and rehashing them in different forms to the maximum, thus leading to rapid expansion of money. The global slowdown will be severe. The new economic order will likely to be multi-polar, consisting of Europe, Asia and America, instead of one main economic engine of US. The likely outcome will contain certain similarity to the old classic Chinese text of the three states’ rivalry. I will stay to the economic (and financial) course in this series, while the political and cultural rivalry will form a body of interesting discourse, should there be any interest by my readers.
As a seasoned navigator, how are we to chart the course, so as to avoid the treacherous water, so that we are able to continue our journey, till dawn breaks and the new found land is in sight? While we care about the distant future, we also need to pay attention to the immediate waters around us. I will seek to offer some suggestions in the following series of articles as to what choices of investment are available, even in uncertain markets. The Chinese word for danger is risk and opportunity and I seek to propose those opportunities that are available in current times like this.
(If you are still in the camp of Jack Welch, ex-GE’s chairman and CEO, believes that some of the US corporates have strong balance sheets that will power US economy back to health, I can understand that persuasive viewpoint. The missing element in that view is the balance sheet is not strong anymore where valuation is done in the new light and US’ demand deteriorates rapidly, leading to machineries that stand still, though still showing a great balance sheet figure of capital in the books. Till the new economy order is in place where the flow of global demands build up, and growth of capital in appropriate machinery, intellectual knowledge (in this generation, it will be medical) and services, we will be still be facing the tumultuous ocean of change that will last for many years to come.)
Art, 2 Mar 2008
Delta Fund Investing
If u want 2 punt the mkt, watch out for the 5 bullets that can hurt the bear badly
Art, 14 Feb 2008
Please be careful on buying for the up move as any more credit problem announcement will cause stock markets to slide down anytime; orThe 5 strong bullets that can injure the stock market bull, bringing in the bear;
1. Downgrade of Ambac, MBIA, Financial Guaranty Insurance (FGIC) …mortgage guarantee companies, (by Fitch, or Moody or S&P rating agencies)
2. increase provision of credit card losses, (by Amex, First Cap Corp, Mastercard, Visa or the banks that are issuing these cards)
3. housing loan (prime and sub-prime) defaults (by housing loan companies, eg Freddie, Finnie Mae, banks)
4. general loans (car, personal…etc) default (by GM, Ford, Chrysler loan companies, and the banks
5. corporate loans defaults (from SIV, eg StdChart's Whistle, Fitch possible downgrading of US Airlines bonds, Moody or S&P, and banks announcement, eg Credit Suisse write-offs. Most of the banks announcements are during their quarterly reporting which has a time-table. The Fitch, Moody and S&P downgrading is hard to time as they decide as and when to announce their own assessments without a published time-table.These are all loaded bullets that are waiting to be fired anytime, though without doubt it will be fired, except the timing of the announcement is hard to assess.
Art, 14 Feb 2008
Delta Fund Investing
Please be careful on buying for the up move as any more credit problem announcement will cause stock markets to slide down anytime; orThe 5 strong bullets that can injure the stock market bull, bringing in the bear;
1. Downgrade of Ambac, MBIA, Financial Guaranty Insurance (FGIC) …mortgage guarantee companies, (by Fitch, or Moody or S&P rating agencies)
2. increase provision of credit card losses, (by Amex, First Cap Corp, Mastercard, Visa or the banks that are issuing these cards)
3. housing loan (prime and sub-prime) defaults (by housing loan companies, eg Freddie, Finnie Mae, banks)
4. general loans (car, personal…etc) default (by GM, Ford, Chrysler loan companies, and the banks
5. corporate loans defaults (from SIV, eg StdChart's Whistle, Fitch possible downgrading of US Airlines bonds, Moody or S&P, and banks announcement, eg Credit Suisse write-offs. Most of the banks announcements are during their quarterly reporting which has a time-table. The Fitch, Moody and S&P downgrading is hard to time as they decide as and when to announce their own assessments without a published time-table.These are all loaded bullets that are waiting to be fired anytime, though without doubt it will be fired, except the timing of the announcement is hard to assess.
Art, 14 Feb 2008
Delta Fund Investing
Aftermath of the falling knife
Art, 22 Jan 08
Since I last wrote about a week ago, the market did dropped like a very sharp knife, but what will it be like from here on? The latest sell-down over last few days in Asia is triggered by fears and margin calls, given the significant drop of the most markets.
The decoupling theory is dead. US is still the leading stock market and any crashing will leads to further crashing of almost all other markets. As such, I will from hereon assume global coupling markets.
The mid-term view, or three months' view is still down. What about this week?
No major US econ news till Friday, Existing home sales and Weekly unemployment claims benefits. Home sales is expected to stablised and Unemployment claims is expected to be increased (ie. more unemployed) but it is a weekly data, not so consequential, unless it is much worst than expected. Stimulus budget is still cooking (earliest March08) and FED rates cut is end Jan08, next week.
Key to this week US stock market's retracement, or moving UP slightly will come from corporate results on Wed evening (Sgp time) of APPLE, Johnson & Johnson, Dupont (DJ component stocks) which will likely meet expectation, but it is their projection of next 2 quarters that will greatly affect the sentiment. Given that their businesses are global, they are likely to be more sanguine about business growth than the CITIs and Merrill. BOA will reports weaker results, though not at the same level as CITIBANK.
Friday evening may be a challenge, Microsoft may report poorer results which can affects market sentiment again and US econ data of unemployment and housing sales may weaken the sentiment. By then, Asian markets will be close and all investors will be holding on to their chairs (or pants) hoping that the following week, Bernanke, FED chairman is gutsy enough to cut .75% instead of the current market expectation of .5% on 30 Jan08. A cut of 0.75% will give US stock markets a short term boost.
If you trades short term, you might consider buying calls option which is cheap and should the market totally goes against you, you only lose the option premium, eg STI at 3200 level is valued at .015 cents (expiring 28Feb08). As long as the markets move up to 3000, your call options will be about .025 (40% gain) or even more if above 3200 level, and should it falls all the way to 2000, your call option is worth 0 cent, comes end Feb08.
(If Bernanke cuts 0.75%, the USD will weaken and if you have some cash, it is worthwhile to consider the dual currency (AUD/SGD) that yr private banker can offers you. Eg. AUD/SGD is at 1.2400 and if it is for one month, certain bank is willing to pay you 9.5% interest p.a. pro-rated, but if it drops to 1.2250, your SGD will be convert to AUD. Current SGD deposit rate is 1% or less
Gold has dropped from USD913 to USD880. Is the story of as good as GOLD over? No, by next week when Bernanke cut FED rates by .5%, it will stablise, but if it cuts .75%, Gold will climb again. Now, there is a 50% chance that FED may cuts .75%)
Art, 22 Jan 2008
Delta Fund Investing
Since I last wrote about a week ago, the market did dropped like a very sharp knife, but what will it be like from here on? The latest sell-down over last few days in Asia is triggered by fears and margin calls, given the significant drop of the most markets.
The decoupling theory is dead. US is still the leading stock market and any crashing will leads to further crashing of almost all other markets. As such, I will from hereon assume global coupling markets.
The mid-term view, or three months' view is still down. What about this week?
No major US econ news till Friday, Existing home sales and Weekly unemployment claims benefits. Home sales is expected to stablised and Unemployment claims is expected to be increased (ie. more unemployed) but it is a weekly data, not so consequential, unless it is much worst than expected. Stimulus budget is still cooking (earliest March08) and FED rates cut is end Jan08, next week.
Key to this week US stock market's retracement, or moving UP slightly will come from corporate results on Wed evening (Sgp time) of APPLE, Johnson & Johnson, Dupont (DJ component stocks) which will likely meet expectation, but it is their projection of next 2 quarters that will greatly affect the sentiment. Given that their businesses are global, they are likely to be more sanguine about business growth than the CITIs and Merrill. BOA will reports weaker results, though not at the same level as CITIBANK.
Friday evening may be a challenge, Microsoft may report poorer results which can affects market sentiment again and US econ data of unemployment and housing sales may weaken the sentiment. By then, Asian markets will be close and all investors will be holding on to their chairs (or pants) hoping that the following week, Bernanke, FED chairman is gutsy enough to cut .75% instead of the current market expectation of .5% on 30 Jan08. A cut of 0.75% will give US stock markets a short term boost.
If you trades short term, you might consider buying calls option which is cheap and should the market totally goes against you, you only lose the option premium, eg STI at 3200 level is valued at .015 cents (expiring 28Feb08). As long as the markets move up to 3000, your call options will be about .025 (40% gain) or even more if above 3200 level, and should it falls all the way to 2000, your call option is worth 0 cent, comes end Feb08.
(If Bernanke cuts 0.75%, the USD will weaken and if you have some cash, it is worthwhile to consider the dual currency (AUD/SGD) that yr private banker can offers you. Eg. AUD/SGD is at 1.2400 and if it is for one month, certain bank is willing to pay you 9.5% interest p.a. pro-rated, but if it drops to 1.2250, your SGD will be convert to AUD. Current SGD deposit rate is 1% or less
Gold has dropped from USD913 to USD880. Is the story of as good as GOLD over? No, by next week when Bernanke cut FED rates by .5%, it will stablise, but if it cuts .75%, Gold will climb again. Now, there is a 50% chance that FED may cuts .75%)
Art, 22 Jan 2008
Delta Fund Investing
The global stock markets have corrected significantly since the beginning of the year. Is it time to jump in now?
Art, 16 Jan 2008
The answer is a big NO. US economy has just experienced the classic economic downturn with the falling house prices, which have hurt the banks badly. Economically speaking, this is just the beginning of the downturn. The next thing to come is the growing default of car loans (GM finance mentioned that the 3rd Quarter default was up slightly from 2.4% to 2.6%, but no mentioned of the 4th Quarter default rate). Credit card default will be the next to fall invariably as it is used to ‘support’ other outstanding loans until it cannot be done anymore. Credit card loans is estimated to be close to USD1 trillion currently outstanding. Capital One (US-based credit card company) is already reporting higher delinquency rate. With a 24% to 30% charge rate, it can come very fast. Even the prime housing loans default will not be spared subsequently, though at lesser degree but from a very sizable amounts base figures. Finally, the corporate loans default which is currently almost at all time low is likely to rise to the ‘normal default rate of 1.25% (or equivalent to about USD500 billions) as reported by FT, 12 Jan 08’ or likely to overshoot it, (it is beginning to hurt some Credit Default Swaps, CDS issuers).
I repeat, we are currently ONLY just after the first stage, the sub-prime housing loans. Who is going to save the US economy from recession? There will be some false dawning from FED rates’ cuts and fiscal stimulus. Don’t bet on it that it can be easily overcome the grip of US recession by the cutting of FED rate to even 0%, (despite the financial futures market having already priced in a 0.5% cut to 0.75% by end Jan 08 (to 3.75% or 3.5%), and yet last night Dow Jones Index was down by 280 points.) Though last night, PPI came in tame, but with the raising commodities’ prices, CPI will have a problem of staying low for too long. Some economists now are talking about stagflation though undoubtedly US recession is here. Like an auction party during this US presidential election year, the presidential candidates are all shouting higher and higher rescue fiscal stimulus package to the tune of USD75 billions coupled with more tax cuts. How much will the world stomach the borrowings to fund the world largest, which is US economy (or merry-making) this time round when US has already accumulated trillions of fiscal deficits (currently about twenty over percent of her GDP, of about USD12+ trillions?
Has the world economies decoupled? Just look at the stock markets around the world where last few nights of drops in the US stock market triggered dropped of almost all other markets which is very telling that it is not as decoupled as many have hoped for.
A last word of advice is, taken from the fund managers, ‘never try to catching a falling knife’.
Art, 16 Jan 08
Delta Fund Investing
The answer is a big NO. US economy has just experienced the classic economic downturn with the falling house prices, which have hurt the banks badly. Economically speaking, this is just the beginning of the downturn. The next thing to come is the growing default of car loans (GM finance mentioned that the 3rd Quarter default was up slightly from 2.4% to 2.6%, but no mentioned of the 4th Quarter default rate). Credit card default will be the next to fall invariably as it is used to ‘support’ other outstanding loans until it cannot be done anymore. Credit card loans is estimated to be close to USD1 trillion currently outstanding. Capital One (US-based credit card company) is already reporting higher delinquency rate. With a 24% to 30% charge rate, it can come very fast. Even the prime housing loans default will not be spared subsequently, though at lesser degree but from a very sizable amounts base figures. Finally, the corporate loans default which is currently almost at all time low is likely to rise to the ‘normal default rate of 1.25% (or equivalent to about USD500 billions) as reported by FT, 12 Jan 08’ or likely to overshoot it, (it is beginning to hurt some Credit Default Swaps, CDS issuers).
I repeat, we are currently ONLY just after the first stage, the sub-prime housing loans. Who is going to save the US economy from recession? There will be some false dawning from FED rates’ cuts and fiscal stimulus. Don’t bet on it that it can be easily overcome the grip of US recession by the cutting of FED rate to even 0%, (despite the financial futures market having already priced in a 0.5% cut to 0.75% by end Jan 08 (to 3.75% or 3.5%), and yet last night Dow Jones Index was down by 280 points.) Though last night, PPI came in tame, but with the raising commodities’ prices, CPI will have a problem of staying low for too long. Some economists now are talking about stagflation though undoubtedly US recession is here. Like an auction party during this US presidential election year, the presidential candidates are all shouting higher and higher rescue fiscal stimulus package to the tune of USD75 billions coupled with more tax cuts. How much will the world stomach the borrowings to fund the world largest, which is US economy (or merry-making) this time round when US has already accumulated trillions of fiscal deficits (currently about twenty over percent of her GDP, of about USD12+ trillions?
Has the world economies decoupled? Just look at the stock markets around the world where last few nights of drops in the US stock market triggered dropped of almost all other markets which is very telling that it is not as decoupled as many have hoped for.
A last word of advice is, taken from the fund managers, ‘never try to catching a falling knife’.
Art, 16 Jan 08
Delta Fund Investing
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