Global Economic Perspective of a US spiral

World's GDP (or total global economic activities) per year is about USD60 trillions in Y2008. US GDP accounts for USD13 trillions (about 22%). Due to the US multiplier effect of about 4, a growth rate of 1% by US will increase US by 4% or world's GDP by at about 1% but vice-versa, a US drop of 1% will decrease global GDP by 1%.

US total debt to-date is about USD45 trillions; Corporate debt is USD18 trillions, Govt (or national) debt is USD11 trillions, and Personal debt is USD16 trillions.(11 trillion of mortgages, 4 trillion of credit card, 1 trillions of others). Of the three, the personal debt is of most concern.

Corporate debt is considered a form of capital investment and working capital. Given the USD18 trillions corporate borrowings to the annual activities of USD13 trillions, most analysts would consider the ratio of 1.38 times as very effective capital usage where the payback shouldn't be of any concern. The Corporate USA should be self financing as its projected future earnings is expected to pay for itself. The low capital utilization is due to US high service sector component of the economy.

As for national debt, it is assumed that most of the borrowings were used for infrastructure development which is also considered a capital investment too. US govt expenditure is an exception as a sizable portion of the infrastructure development is not paid by the US government. US govt spent most of its money on wars and its war machinery, health care and some basic education expenses and as such, a sizeable national debt are for consumption and not capital investment. The US baby boomers' generation is going into retirement and with the increasing demand on health care, which in turns will put further pressure on US national debt.

The total US personal debt of USD16 trillions without any savings poses the biggest hurdle to the return of normal economic cycle as US' individuals would not be able to sustain itself and repay its debt. Though USD600 billions have been written off, it is still far from over. The recent financial seizure is just the beginning of the spiraling downward of credit crunch. Now, there is hardly any interbank loaning activities. The US banks are cutting back of normal business loans to businesses (or companies) and also to individuals. This will leads to companies cutting back on employment which will result in sizable unemployment. Unemployment and lower personal loans availability will feed into fall of consumption which will further cause the drop of businesses and further cut back of employment. As such, companies' profits will be badly hit which causes the big drop of US share prices. This vicious cycle will not only affects US economy, but the world's economy as US is the largest consumers' nation.

In 1931 where US has 300% debt against its GDP, the economy simply collapse, resulting in the 1st Great Depression. At that time, there was global contagion, resulting in the collapse of the global economies, one after another which resulted in the 2nd World War.

Today, US has 350% debt, though with the benefit of advance economic and management theories, US will enter into a severe recession, but the bigger concern is will US drag the world's economy into the 2nd Great Depression?

Paper cannot wrap in the fire...an old Chinese saying

While the scientists are busying ramping up the CERN system, seeking to unravel the secrets to the universe's beginning, mankind on the other hand, through their greed, is also unraveling the economy (please note that it is not just the financial sector), unseen by any man that is still alive (unless he is still alive during the Great Depression era...according to Greenspan's assessment).

My Mar08 blog highlighted the key economic events which more less has come to pass. Since we are entering into the final phase of the global economic disruption, I hope to provide a roadmap of the likely outcome of the economic (including financial) meltdown as

1. Some large US financial institutions are falling apart
2. The big corporates are failing (corporate borrowings are now very constricted which will lead to corporate failures)
3. US jobs are disappearing
4. US consumers (which accounts for 70% of US economy) has decapitalated, as they have run out of assets to mortgage away while piling up credit card debt of USD4 trillions and USD12 trillions of mortgage debt with ZERO net savings and other debts of probably another USD 4 trillions.
5. US national debt stands at USD10.6 trillions or 11.3 trillions with the mortgage rescue package(US annual GDP is USD13 trillion) and still piling up USD50 billions deficit on a monthly basis.
6. Boeing machinists went on strike from recently, stopping the Boeing production over demand for higher salary and outsourcing practice.
6. Foreign investors are now having cold feet when it comes to anything American debt, as US are fire selling (or shutting down) some of the biggest companies; Lehman operations, AIG, ...etc

Many US companies and citizens are now banging on FED's door for 'rescue' money.

1. After receiving USD120 billions in May08, US citizens is asking for another USD120 billions or more (as tabled by the Democrats to the US Congress)
2. After 'footing' the bill (in the form of guarantee of bad debt) of USD30 billions for Bear Sterns debt, market is banging the door for USD85 billions in AIG bail-out and many more to come.
3. General Motors, Ford and Chyraliser are also asking for USD30 billions from FED
4. To-date, FED has dish out USD900 billions. The list will get longer as the weeks passes, as more and more companies tumble


Beside USA, Britain will be the next country that will undergo severe economic downturn. Europe will slowdown and Asia economic growth will also eases.

It is now a foregone conclusion that the developed economies are experiencing recession, but the big question is WHEN will the global economy recover from this downturn. Some are still holding to their dreams that it will be similar to recent previous recessions of 6 months, while others are looking at a 1990s Japanese recession that lasted for about 15 years. Recently, Greenspan (ex-chairman of FED) thinks that it is close to the 1930s Depression or may even surpass it (as he calls it once in a century event). Our deputy PM, Tony Tan highlighted the danger of economic meltdown effects on the global social and political stability.

I will try to offer my views on the likely outcome of this economic unraveling in my next blog.

Why 2008 US housing bust is different from the 1990-1

Art, 4 May 2008

The US unemployment or job loss in April'08 was milder, -20K than projected by the analysts, -70K. It gave hope to those who wanted to believe that the US economy is stronger than expected.

It shouldn’t surprise anyone as the USD 120 billion is about to be pushed into the pockets of consumers in May and June ‘08 and firms are gearing up to grab the that ‘free’ cheques with the buildup of their inventories. So, the 1st Qtr 08, US showed 0.6% growth instead of an expected contraction.

Similarly, the upcoming month’s economic figures on production should become more positive than initially thought, though April 08 sales will still be weak (but not bleak) as some consumers may even spend ahead of their cheques’ receipt. We should also be expecting another ‘healthy’ looking US economic data in the month of Jun 08 and Jul 08 (though slightly weaker due to its secondary effect). Aug 08 economic data will be dim, causing most investors to turn cautious. Sep 08 is where the further weak economic data starts to shaken investors’ confidence. Oct 08 is when the doubts turn into fear followed by panic, which will result in the rout of the US financial markets.

Many want to believe it is a passing storm, just like the 1990-1 housing bust.

In 1990-1, similar housing loans collapsed led to a 3 quarters’ US recession, which did not led to a global recession. Many believed it is the same this time round, but it is NOT going to be the same as the major negative factors are much amplified.

The main difference between the current 2007-8 and 1990-1 US housing loans collapsed are:
1. Income grew only 0.25% leading up to Jan 2008 vs. 1.3% before the 1990 recession
2. Savings rate is 0.3% in past six months end Jan 2008 vs. 7.1% during 1990 (In 2008, 80% of US population earns only 10% of GDP)
3. Consumer spending is already down by 0.2% at this early phase of 2008 downturn vs. down 0.1% in 1990 at its weakest moment (consumer spending account for 70% of GDP)
4. Consumer inflation, CPI is 0.3% in Mar 08 and is expected to deteriorate further with heighten food and energy prices, sucking in large portions of the expendable income, thus reducing consumption for all other items.
5. Shiller US house prices Index declined 21% from the high in 2008 vs. 4% in 1990
6. Corporate profits dropped by 17.6% in 2007 vs 15.7% in 1991. (2008 is expected to be even worse off)
7. Domestic investment is projected by some analysts to drop only by 8.9% in 2008 vs. 12.7% in 1990 but if businesses expect a weak consumption after the hand-out, and profits is falling with PPI growing at 13% annualized, then the projected 8.9% drops in 2008 is not realistic. It will be worse off.

Fed is left with only 2% and due to inflationary pressure, it has entered into a lose-lose situation where any further cuts will trigger heighten inflationary expectation, and on the other hand, tightening will weaken consumers and investment demand.

The weights of the negative factors in US will be too strong, it will go on to destroy many economic activities in its path before US economy can stabilize, possibly 3 years from now.

So, before the expansion can take can place from the USD1 trillion to USD10 trillions, the global economy will have to go through a traumatic phase of stagflation. Though Asia has reduced its exports to G3 (US, Europe and Japan) over the years, it is still at 61.3% and US accounts for about 1/5 of the Asian exports. US slowdown will also drag Europe and Japan down, though at a lesser degree. Asia will slowdown by at least 1/4 effect of US slowdown from its export pace. Singapore having high export exposure (about 70% export and re-export) to US market will suffer more.

The missing USD 1trillion—IMF thinks it's gone..... Really?

As mentioned before, with $100 billion in depos, these days, banks create money to the size of $10 trillions (100 times; 10 times from money creation and a multiplier of another 10 times through loans' securitization).

Now, $1 trillion turns bad/rotten. $1 trillion will be needed to be put back into the banks. Though the house buyers had signed the papers, they hardly had paid for it and they merely declared themselves bankrupt. In US, houses have gone 'bad' or unlivable anymore as they were damaged so badly that it is better off to build from scratch. BBC reported that copper pipings and any items in these houses that are worth some money have been ripped off to be sold as scraps. In short, the supposedly created asset (or house) has been wiped out, becomes non-existent and now run down like ghost houses.

But don't forget, the $1 trillion loans that turned bad had already gone to somebody else's pockets, as the banks had already paid out that money.
20% to the contractors
20% to material suppliers
10% to lawyers
10% to salesmen
10% to land owners (who sold the land)
10% gone to the government in taxes
20% to the bankers and the CEOs' bonuses
(The percentages may differ among the parties but this does not matter. What matters is that the money has gone to somebodies' pockets)

Banks need to top up that $1 trillion by asking from investors. Who are they? Most of the above listed has spent the money to pay for workers' salaries, others are spent on oil, goods and services. At the end, who is holding the money? Middle East oil men has lots of it, China, India, Singapore and Japan have some of it, but not forgetting the US bankers, hedge fund managers (Soros earns 2.9 billions last year), lawyers, and salesmen have a hand in it too. They will put in some money, for example, GIC & Temasek put in about $30 billions or so. Others like Buffet, bankers, and Middle East Prince Alayweed …etc are supposedly buying in cheap now. But it won’t be enough. The god-fathers will have to print money at the later stage to top up, they are, the central banks and a rough guess, it will be about $300 billions. The $1 trillion top-up will be re-cycled to create more loans, which probably will be 20 times this time from its original value or $20 trillions to start with.

In short, with the $1 trillion "write-offs" which will be topped-up or recapitalised (banking term), the global economy will be flooded with $20 trillions (from the same process of money creation & securitization) in probably 3 years. There will be some assets creation, but others are in a form of more paper money (like the "banana" money kind with G. Washington face on it). The world is now growing doubtful of these green papers, so, the smarter ones have already parked their money in REAL assets, cold hard gold (not cash, unless you are holding the correct currency), copper,...but you can't really eat them when you need it. So, others would prefer soft commodities, soybean, pork, wheat...etc, since the middle class of Indians and Chinese, BRIC and other oil-based nations are demanding it. Of course, black oil is still one of the favourite until the nuclear power stations litter all over the world in 5 years' time. By then, probably starting 5 years from now, oil will start its decline.

So, in view of the extra $20 trillions flooding the market, “where to make the money” you may ask. ….to be cont.

Tri-polar Economic Order--final part.

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.

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.

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)