(22-10-2016, 10:05 AM)specuvestor Wrote: [ -> ]Welcome back Hyperion
The link you provided for the post Feb 2015 is incorrect
The 3% 10-year inflation is not a good indicator now because 1) globally we are indeed moving into the New Normal. Inflation expectations as well as equities return has to be adjusted downwards and that has implications across asset classes and policy making 2) Singapore inflation before 2014 was local asset prices driven. SGD adjustment could only adjust for gross margins ie imported goods but not OPEX ie rents. That's why it is unlikely property measures will be loosened soon cause MAS realised it couldn't control asset inflation through monetary policy. In fact the more one strengthens SGD to theoretically "soften economy", the more hot money is interested in SGD assets. That's why the ABSD and the holding period makes sense.
The weaker SGD is not meant to help exports. That's an econs 101 theory that we don't subscribe to since we moved from a manufacturing based economy cause our main export is not goods, even much so after we gave up on HDD industry. We are the intermediary in import and exports, adding value through logistics efficiency, legal structure, port of call, high value add-ones to imported goods to be re-exported. Our main local exports that we are / were focusing on are pharmaceuticals and semiconductors which are not that sensitive to FX pricing.
That said SGD will be depreciating because of our deflating environment. Our competitiveness is based on our value add to global trade flows and regional service demands. We are the canary in the coal mine. As I posted here a week ago, I already sense we are in a recession but I don't think it will be AFC. I'm not sure if u lived through that meaningfully (I had started work few years) and I don't see signs of that and I hope I don't see it again.
Hi Specuvestor,
Thanks for identifying the link error. Hahahaha posted wrong link.
Here is the correct link to the Feb 2015 article on ValueBuddies.com :
http://www.valuebuddies.com/thread-6228.html
Just for discussion sake please see responses below:
On 10 year inflation:
Hyperion like to add that Thailand experienced deflation almost the same time as Singapore last few years. Subsequently, Thailand normalised to inflation in April 2016 this year. This signaled a return of liquidity on the short end of the yield curve. Overall, the yield curve normalised from inverted in shape to flattened. Thailand has shown strong recovery since April 2016. One possible play on this was actually Thai Bev which is listed on SGX and they reported growth in the beer sales. Although Thai Bev management claims that it is due to their strategy, the overall recovery probably played a big part in boosting consumer consumption in Thailand which help beer sales. Hyperion bought some Thai Banks/Financial company shares in April 2016 and those banks have since appreciated alot.
As such, there is a probability that Singapore may not be in a New Normal and inflation will return just like the case of Thailand. Please note that in this crude model, inflation is used as an indicator that liquidity has returned and not linked to any monetary policy. As this is a real time experiment, in time we can see if there is a New Normal and permanent deflation.
Hyperion's money is that we will have inflation in Singapore and deflation will not be sustainable in Singapore because of the reasons in the crude model.
Regarding "In fact the more one strengthens SGD to theoretically "soften economy", the more hot money is interested in SGD assets.":
Tree likes to add that, if more hot money is interested in SGD assets, there should be no liquidity problem after netting out all push and pull effects of stronger SGD. The data shows that SG has lack of liquidity since 2 years ago due to the inverted yield curve. Even if you discard the yield curve theory because of New Normal deflation for next 10 years, the loan to deposit ratio is also signally that there is lack of liquidity. Thus, there is again a high chance that SGD is too strong. In short, despite money flowing into SGD assets, the flow is not strong enough to offset liquidity crisis. One possibility is the SGD is too strong so not enough is flowing in to provide liquidity, despite some flows.
Asia Financial Crisis
Tree added that due to the distortion by strong SGD, the economic crisis may only be contained in SG. This means lack of liquidity in SG does not mean lack of liquidity in other Asean countries so there is no Asia Financial Crisis, just a Singapore crisis. Malaysia show signs of overheating recently but the case of Malaysia is due to other reasons. In fact, Indonesia is recovering very strongly since Feb 2016, followed by Thailand in April 2016. Thus there is no lack of liquidity in the region, just in Singapore.
However, it would be premature to assume this economic slow down in Singapore is less severe than AFC because there are signs showing that the impact potentially will be huge and drag out over a longer period. The two indicators above were suggesting a problem for 2 years and yet SGD was strengthen during those years and only started to weaken this year. The issue is whether economic policy is worsening the slow down.
Thus, Tree is expecting a depreciation of USD SGD FX pair within 10% range for a bull run to start in the Singapore stock market.
Possible Scenarios
A prolonged liquidity crisis has the following possible development sequence:
1. Company lack money.
2. Fire some expensive staff.(note that wages have peak in Singapore since 2015 especially in the financial services sector in Singapore).
3. Staff lose job so live on savings while trying to pay of condo loans.
4. After 9 months, some staff runs out savings, so starts to sell condo.
5. A fire sale starts in the condo market in Singapore.
6. A downward feedback loop starts for condo market.
7. 3 big banks face huge bad debts.
What happen next is worse case will require a bailout, best case is just depreciation of USD SGD FX and removal of housing measures. Please note these are all hypothetical and may not happen exactly as discussed.
What to do?
If inflation returns and SGD weakens significantly, Hyperion suggests buying financial sector stocks to ride the recovery in the liquidity. As such, while local financials look cheap now, it is still too early as a liquidity crisis will cause more defaults and nobody knows for sure how much bad debts will appear especially in Condo segment. Hyperion's concern is whether banks have factor in the case that the borrower losses his income, or his income halves. No point stress testing at interest rate of 3% when the guy losses his income and can't even pay principle back.
Till then, sit tight for the ride down now.
Thank you.
Regards,
Hyperion & Tree