MAS responds

Looks like MAS had 2 busy months preparing their response to the 50 years loan incident which probably caught them by surprise. Now housing loans are effectively limited to a maximum of 30 years where it had been predominantly 35 years before. Looks like they really want to jolt speculators into thinking twice before taking the plunge, though i suspect that other than hitting home the idea that another round of cooling measure have been introduced, the reduction in the loan tenure does not really hinder the speculators. The main hurdle in buying a property remains the down payment, be it 20% or 40%, and people who have the ability to cough up this amount will usually not be deterred by the increase in monthly instalment due to a 5 years reduction in loan tenure, which is likely to be anything from $100 to $500 for a typical mass-market private property.

Meanwhile, we hear news (or is it an advertisement?), at the same time as the report on MAS’s action, on how well properties are doing. Personally, I think the idea is to encourage properties to continue to do well, but avoiding bubble formation. Immediately after the announcement of QE3, Hong Kong authorities responded immediately with policy changes (more or less the same ones MAS put into effect). Sounds like they have been through this often enough to be driven to action so promptly, perhaps justly so, since Hong Kong is the freest economy in the world. One is forced to react when others don’t play by the book.

In choppy waters


The recent weeks have been some of the most volatile ones as the fear of the European financial crisis ripples through the economies of the world, resulting in a massive flight to safety to the USD and funds being drawn out of troubled countries, pushing up the USD and triggering bank runs. The rise in the USD depressed commodity prices, including that of gold, though as at the time of writing this, gold just shot up about US$50 (3%) on news of US jobs data being weaker than expected, thus sparking speculation of possible monetary easing to come. So it seems gold is seen as a safe haven again relative to the USD.

With oil prices down significantly (reads low inflation) and unfavourable jobs data, whom the Feds chief mentioned as a criteria for introducing more accommodation, it does seem like we are getting set for QE3. Things has to look good in an election year.

One can imagine that the magnitude of funds movement happening currently must be quite sizable, given that the rise in the USD/SGD rate was fast and furious, going from 1.24 to almost 1.3 within a month, despite MAS’s plan to allow SGD to appreciate. This is of course due to the fact that most, if not all currencies have fallen against the USD, so SGD moves in tandem. Interestingly, SOR has fallen in the past week (from 0.419 to 0.307) despite the steep increase in USD/SGD. Going by how SOR is supposed to be derived, this should mean that USD borrowing rates have come down.

SOR soars above 0.5%

SOR rises above 0.5% for the first time since June 2010, as the USD/SGD moves close to 1.3 again and LIBOR hit 0.54% on its continued steep incline, while SIBOR remains muted at 0.38%. The massive flight-to-safety from the Eurozone’s trouble pushes the US dollar higher as investors piled into Treasuries. This, the result of ECB’s stubborn unwillingness to print money, though, as widely expected, they did further cut rates by another quarter points to 1%.

Their American counterparts are, on the other hand, expected to start a new round of Quantitative Easing aka money printing, to cushion the weakening economy. Central banks around the world are also expected to reduce borrowing costs to help with the slowing economy. Just a wild guess, but this might explain the relatively lower SIBOR.

At this point, interest rates are still low by historical standards, so there should be little to worry about. The thing to worry about is probably inflation, which, relative to income, is becoming more and more significant, so much so that raising real incomes is highlighted as a key challenge for Singapore.

Stimulus idea floated


Even as stimulus packages were announced for the US and much of Europe, the idea seems to be hinted at for Singapore as news of economic turmoil start to trickle in. Around the region, the Philippines has announced its plans for a stimulus package, and Indonesia has it in the works also, almost in a chorus.

It seems that a “stimulus package“ to a large extent means Quantitative Easing in the US. Where does funding for a stimulus package come from, if the US is already in a lot of debt? By getting into more debt of course. This is possible by creating money out of thin air to buy the treasury securities used to fund the US government. Something doesn’t sound right when you hear that about half of the US public debt are owed to the "Federal Reserve and intragovernmental holdings". If they have the money, why do they need to borrow? That’s because they don’t actually have the money, and everything is on credit. Repaying the debt was probably never part of the plan, which means the money that was created out of thin air stays.

Now, it’s just my guess, but i think governments around the world have to have a response to what their counterparts in the US and Europe are doing, since I would imagine that Quantitative Easing should have an impact on money supply and exchange rates. The Eurozone debt crisis and the slowing global economy seem to present themselves as good excuses and an opportunity for doing something (drastic). In any case, do get ready for a rough ride ahead, as businesses slow, while, i suspect, prices of goods will not come down despite that. Some belt tightening may help.

Return to normalcy


Oil hit aboove US$94 per barrel today. For some time, it hovered around US$88 and refused to go down. USD/CAD went below parity (didn’t hold though) for the first time since Sep 21. SOR rose from under 0.2% to almost 0.35% in a little over a week, even as USD/SGD fell from 1.3 to 1.26 in just over 2 weeks. As mentioned in a previous posting, SOR and SIBOR were expected to be going up. SOR is probably tracking the climb in LIBOR, which increased quite significantly in the past 3 months. Treasury yields have been on an uptrend as well.

These look to me like the unfolding of the flight to safety in July, which is in a sense, a return to normalcy. As at now, the price of gold is also picking up. I would personally look at the price of oil as a good indicator of reality, since it is consumed by everyone in the world, though it is also subject to some measure of speculation. Based on known facts such as the increasing world population and stagnating oil production, i would guess that the “normal trajectory” of the price of oil should be upward (assuming that whatever tricks they throw at the monetary system cancels out eventually), which we’re seeing in the current price movement. As usual, these are just my personal opinion, coming from someone without credential, so, with a pinch of salt, please.

Hats off to a great Inside Job

Inside Job

The documentary that won an Oscar. The very country that plunged the world into recession is the same amazing country that allows such a film to be made and screened. This is Reality TV at its best, featuring a truly stellar cast of real politicians, Wall Street executives and other characters of international fame.

This movie explains economics without treating you like an idiot (at least i didn’t feel that way). It puts together the bits and pieces of news you’ve probably heard over the past 5 years so that you’ll have much greater clarity on who did what which resulted in the mess we are in now.

On a “kay poh” note, it happens that the attempted rape case against ex-IMF chief Dominique Strauss-Kahn, who was one of the interviewees in the movie who appeared to be critical of Wall Street, was dropped just today. Christine Lagarde, who took over as the present IMF chief, who was even more outspoken in the movie, also ran into some trouble after her appointment. Coincidence? Maybe they could make a sequel.

The movie opened in the US on 10 October 2010. I doubt it will ever make it to the silver screen here, but the internet-savvy you should know how to get hold of it, if you’re ever so interested.

World’s End Close

DSC_0088 World’s End Close, Edinburgh

The events in the past week may be telling us that we could be one step closer to the end of the world. Ok, that’s a bit of an exaggeration, but these were significant events. US just lost its AAA rating for the first time. That means a loss of confidence in the US in their ability to repay their debt, and more so, a loss of confidence in the governance of the country. This has major repercussions on the financial system, especially the currency.

At the core of the currency system is trust. A currency note is only worth how much you believe it says it’s worth. If you believe a dollar note is only worth half its supposed value, and everyone thinks likewise, then it becomes so. It’s evident that the general perception of the value of the US Dollar has been on a downward trend. This spells trouble to a lot of people, especially to those holding a lot of US financial assets, since wealth held in such forms are now in greater danger of being wiped out, which happens on the day when they cannot be converted into any other forms of wealth.

The doomsday scenario that could happen is, the currency/monetary system breaks down. Everything you have in the form of cash turns into vapour. This may sound far fetched but it has literally happened before, in the Weimar Republic, where banknotes were burned for warmth.

In the near term, by logical deduction, what should happen is, as US treasuries loses its appeal, its value drops and the the yield goes up in tandem (the opposite is happening right now because there seems to be no safer alternative for parking money). There is no choice but to print more money to salvage the economy (i.e. QE3). Deflation could set in due to the slowing economy, but there is a likelihood of inflation as well, as the availability of physical resources diminish.

For SIBOR and SOR, the factors involved are the competing forces of the falling USD and rising interest rates. For now, the guidance on the Fed rates remains as to be kept at record low for “an extended period”. The current low treasuries yield is probably helping to keep SIBOR and SOR low as well. For the time being, it is looking good for SIBOR or SOR pegged mortgagees.

Quantitative Easing

QE_seatrials QE3

Probably by now, the term Quantitative Easing (QE) is familiar to most people, having been widely publicized in the media. It is the “tool” employed by a central bank to revive the economy, by printing money.The aim is to get money flowing and thereby get the economy going. QE also keeps interest rates low as banks are flooded with money to be loaned out.

If you think about it, isn’t it scary to have such huge sums of money (to the tune of hundreds of billion dollars/euro) created out of thin air? In fact, it is scary to have any amount of money created out of thin air at all, which is what our fiat currency economic system does. Here’s how i would reason about how it works (by the way, i’m no economist, so everything i say is just my own logical thinking and i can be wrong): Population growth means more resources are needed to meet the needs of every individual. There is a price tag on every resource, thus as resources are consumed, the money supply has to keep up such that every one has the money they need to purchase the resources they need. As long as the two move in tandem, the economy would remain healthy (as in everyone can live happily). Unfortunately, this equilibrium is quite fragile.

The most basic resources everyone needs are very aptly summarized in the Chinese phrase 衣食住行, meaning clothing, food, shelter and transport. Among these, the biggest ticket item is obviously, shelter. Even with free market at work, It is not always possible to ensure that the demand and supply of houses are balanced. When demand outstrips supply, prices move up. Given that houses cost a lot to begin with, the price increase is naturally also a lot in absolute terms. The fractional reserve banking system allows for such big price increases, whereby credit is created out of nothing, to pay for the house. This is how the money supply increases tremendously and how it becomes disproportionate when compared to the resources consumed. Under free market forces, the divergence is then mitigated by price increases across the board. This is called inflation.

Such a fiat currency system breaks down when people are unable to pay back the loan they took up (say they lost their job). In technical terms, this is called a default. If the banks who loaned out the money are unable to cover the bad debt, they may themselves default on the loans they took up from the central bank. When this happens, money is basically destroyed. This has happened with the Bear Stearns and Lehman Brothers incidents, which resulted in a worldwide economic recession and triggered unprecedented quick fix measures such as QE to be implemented by central banks. In a sense, QE does solve the problem by “replacing” the “lost” money. However, it’s not right to just write off bad debt. In essence, what it does is to force the people who make an honest living to pay off the debt problem created by the careless speculators, fraudsters and schemers on a very very grand scale. As we can see, the fiat currency system doesn’t work well. In fact, no system can work, because the heart of the problem lies in human greed and self-indulgence.

As at the time of this writing, we are hearing news of the possibility of QE3 as the debate over the debt ceiling rages on. Allowing the debt problem to roll-over and to continue to snow ball is seen as the way out, and the support cited for such a “solution” is simply that the problem is too big to be solved any other way. Gone are the days when people work hard to pay off their debts first before going on to spend what they have in excess. Instead, consumerism is the mandate now – spend your way out of economic problems.

By the way, taking a voyage on the other, probably lesser known, QE3 (the ship) may be a good way to spend your money.

Sibor and SOR holds below 0.9%

Sibor and SOR rates seem to be consolidating and staying low this week, both (3-month rates) maintaining below 0.9% consecutively for the last 3 days. There is perhaps a lack of driver, with Libor rates (3m USD) hovering around 2.15% – 2.30% and USD/SGD exchange rates holding at 1.53 for now. News of impending Fed Funds Rate cut, possibly to 0.5%, might just help to keep Sibor and SOR below 1% for the months ahead.

Meanwhile, we are seeing more signs of the recessionary economic landscape, with pay cuts at Temasek, fall in top civil servants’ pay, falling private home prices, $2 COE, among other interesting news reported the past week. It is also interesting to note that more advertisements are being put up for luxury items such as high-end cars. There is indeed cause for worry as none will be spared, but lets not forget happiness is a choice.

Singapore not spared from the inevitable

Looks like it started to hit home in a big way – DBS cuts 900 jobs. Earlier on Chartered Semiconductor implemented temporary salary reductions of 5-20 percent. Elsewhere in the world, AMD lays off 500 staff, Nokia Slashes 600 Jobs, HSBC cuts 1100 and the list goes on.

Central banks are slashing interest rates in the race to zero, but face “an uphill battle as consumers and businesses show greater interest in saving than spending, and banks hoard capital rather than lend it”. The problem can only get worse in a vicious cycle of people losing jobs, cutting back on spending and companies going out of business. My fellow blogger lowem calls it “falling off the cliff”.

On a positive note for home owners, interest rates are falling. SOR has fallen to the lowest levels. In a time like this, perhaps the best, or the only thing you can do, is to hang on to your job (and house), save as much as you can and not forgetting to enjoy life for what it is.