Saturday, 21 February 2015

Crystal Ball Gazing - Goat/Ram/Sheep

I'm no prophet.

Don't ask me for 4D numbers. If I know what's the winning number, I'd tell my mother. She buys 4D.

But here are some "Crystal ball gazing" based on trends or signs that are obvious. At least, obvious to me.

First, China. There are several things happening here.

There are signs that the economic miracle that is China may be getting a reality-check. This is dangerous for China, and for the region, and likely, the world. As China's economy slows, the danger is that the people will become restive, and this may lead to political instability, and this in turn will lead to government action to restore stability.

There are many reasons for slowing growth. Part of the answer is that some of the growth was "engineered" as local govt did what was necessary to "generate" growth. The easiest of which was development projects. Leading to a housing bubble. Or an oversupply of homes.

Related to this may be stock market bubble. Which regulators are trying to rein in.

China is also recognising that corruption is crippling or undermining their development. The campaign against corruption seems to be going well, or there is at least explicit signs of progress, however, it also means that the truth about some "growth" may soon be revealed. It may also become clear that capable people are also most likely to be corrupted because of the system and removing the corrupted also means removing the capable. And growth will slow.

A China without high economic growth is not simply an internal issue. It may well be a regional issue, as China may a) seek to distract her people from internal woes with an external "manufactured" crises (i.e. do a "Galtieri"); and b) have a knock on effect on all the other economies depending on a growing China to buy their goods, or to visit their countries as tourists.

The problem with "China is Crashing!" predictions is that one has to wonder how much of it is jealousy, ideological ("no communist/centrally planned economy can succeed without democracy!"), and fear of change and a desire to return to the status quo.

So you have to look at the various reports, analysis, and commentary and decide which is real and which is hype, and which is fevered fantasy or wishful thinking.

The slowing economic growth is a fact, and even the most optimistic projection is for growth of just over 7% for 2015. Add to that, governments initiatives to fight corruption, rein in speculative froth in the housing and stock markets, and if China can come in for a soft landing, it would be a best case scenario.

Now, some "good" news.

Second, Oil Prices - falling and what does it mean? For the US? For the Middle East? For Russia? For China?

Thomas Friedman obviously thinks this is bad news for the "petro-dictators".

Russia is also concerned. Their military adventurism could be curtailed.

The US could become a major oil producer, although most of their production will be for domestic consumption. BUT, when the US is not buying oil, it becomes available for others, and suddenly, there may be too much oil for the world. The sheer volume and supply will dampen oil prices, reducing the income of "petro-dictators" and curtailing their projects.

Oil producers like Saudi Arabia are in a quandary. Should they drop prices and retain market share, or raise prices to maintain profitability? They have decided to let oil prices drop to maintain market share. They also hope that falling oil prices would mean "new oil"- shale oil, fracking oil, tar sands, - would be too expensive to be worthwhile, and those supply will cease, returning the world to previous state - dependent on Old oil.

However, they are trying to put the genie (of "New Oil"), back in the bottle and it is not going to work. "New Oil" is more expensive to extract, but the major expenses (investment) had already been spent. So lower oil prices will not stop New Oil.

On the whole this is (or should be) good news for China, Asia (except petroleum exporting Asia - Russia, Malaysia, Brunei?). Costs decrease and inflation falls.

Lower inflation is good, no?

Third, Deflation and the (Singapore) economy. Singapore experienced deflation for the first time in 5 years in Nov and possibly Dec 2014. If you think deflation is great 'cos prices will be lower... its good to be that innocent, still. Innocent? I meant naive.

Do I need to tell you that deflation is bad for a country? More than a decade ("lost decade") was lost to Japan because of economic stagnation, characterised by deflation. It sounds good, and if deflation were a stand-alone act, it would be great - like losing weight.

Except that deflation is like losing weight because of dengue. It is only a symptom or a side effect, and it is happening because horrible things are happening elsewhere. Deflation usually means that the economy is stagnating or even shrinking.

Europe is in danger of deflating because of unwise/indulgent policies. An Europe (or EU) in a recession has implications for world trade.

The problem is that there is too much capacity, too much supply, and not enough demand.Economies are slowing and central banks hope to boost their respective economies with unconventional measures, such as devaluing their currency.
However, this is a zero-sum game that merely exports deflation and recession to other economies.
In this race to the bottom, the key issue of not enough demand is not being addressed. If it could be addressed. (The best solution is infrastructure development. Maybe?)

As for Singapore,  we are a small economy with no significance in the world. We can only take what comes our way. That said, we are reasonably in good shape and condition, but being small, we are agile, but we do not have a lot of stamina.

I believe the government is aware of the various problem and can respond to the problem. But we (and by "we" I mean the government) may have over-compensated. Especially with Housing.

Or maybe that was the plan because housing has surged too far ahead of median income? (See chart below).

From Prof Tan's presentation at Singapore Perspectives 2015.

Prof Tan suggests that HDB resale prices have surged too far ahead of the rise in median salary and so there is a greater imperative to restrain property prices.

Over-supply of housing is one way I guess.

Another way is to increase the cost of borrowing.

Which brings us to fourth, Interest rates, the end of US Quantitative Easing, and SG's housing market/prices. This is important if you have a commercial mortgage with more than 5 years on it. Maybe.

The main concern for rising interest rates is the impact on your mortgage, the cost of home ownership, and the housing market. Those of you still hoping for the housing market to help make you your fortune - 2015 is not your year.  Or if it is the year you made a fortune in the property market, likely there were other reasons.

The US is planning to let interest rates rise. However, at the same time, the Euro is depreciating. And MAS has decided that the SGD will appreciate on a shallower slope.

The problem simply is that the much of the world is still in the grip of a "balance sheet recession". The debts arising from the 2008 crash have not been forgiven, and continues to hang over the economies of the world. The usual solution is to forgive the debt and move on. But "an excess of virtue" is killing the economies of the world.

Instead the Central Banks are trying unconventional strategies to boost their economies. It is not working.
Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. However, this is a zero-sum game that merely exports deflation and recession to other economies.
In summary, every economy thinks that the way to get out of their economic slump is to allow their currency to weaken, thuse making their exports cheaper and boost their economy. BUT... that is the same strategy ALL other economies are trying. And if everyone is trying to weaken their currency, nothing  happens.

It is a race to the bottom, and the central banks are getting desperate and reckless. So we see negative interest rates for savings.

Would there be negative interest rates in SG? There should not be. Our economic foundation and fundamentals does not seem to be lead to that. BUT, SG is a small country, a small economy, and a "price-taker", not a price-setter. So who knows how we will be affected. On the one hand we want interest rates to rise (to dampen housing "investment". But interest rates seem headed in towards negative territory for a lot of country. If we maintain even a small positive interest rates, will this attract foreign currencies, and raise the value of the SGD? What would that do to our competitiveness? What must we do to remain competitive? Let the SGD devalue? Have negative interest rates?

Unconventional economic strategies are not going to work.

And there is no will (or sufficient "vice") to forgive debts. So that is not happening soon. So 2015 will be a year of stuttering economic growth for most of the economies, and there may even be deflation. China is likely to stall and that may lead to "adventurism" in the region, but I seriously doubt it. Whether my doubts are based on clear rationality or incredulity borne of emotion, I cannot tell. Certainly, it is not in China's interest to destabilise the region, BUT, there are some crazy people out there.

Then again, the ornery and the contrarian in me wonders if there might be opportunities and advantage in a military conflict. It would soak up capacity and raise demand. WWII boosted economic activity. But starting a war to boost your economy, is like setting your house on fire so you can be rescued by the hunky fireman.

So, 2015 - the Year of the Goat/Ram/Sheep - Lower your expectations.

In SG, growth will be low - about 2%. Worldwide, growth will also be anemic. Inflation though, should also be low. The problem is actually deflation, stagnation, or even negative growth. Interest rates are supposed to rise, but there are signs that there are countervailing forces that will resist rising interest rates. Housing will be adequate. Even abundant. But "invest" in housing wisely.

China will likely restrain her ambitions, unless social unrest leaves her with little choice but to do a Galtieri. 

On a separate though related matter, the World Economic Forum (WEF) has identified 10 top trends for 2015. These are:
  • deepening income inequality
  • persistent jobless growth
  • lack of leadership
  • rising geopolitical competition
  • weakening of representative democracy
  • rising pollution in the developing world
  • increasing occurrence of severe weather events
  • intensifying nationalism
  • increasing water stress
  • growing health concerns, plus an emerging concern over immigration.
We should track these in the coming year.

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