This time is different?

Bloomberg came up with a very relevant article on why where we stand is different from the Asian Financial Crisis of 1997.

In a nutshell, here is the gist of it:

What is happening?

The recent devaluation of the RMB and a strengthening USD, in anticipation of a rate hike (that didn't happen) has resulted in SE Asian currencies such as the Indonesia rupiah, Malaysia Ringgit, and Vietnamese Dong tumbling to levels seen during the 1997 Asian Financial Crisis.

How is this time different?

• These countries have lower external debt burdens.
• Exchange rates are now flexible; they were fixed and indefensible in 1997.
• They have more dry powder this time - higher foreign currency reserves - to shore up their currencies if required. In Indonesia and Thailand, for instance, there is room for further rate cuts, while Jakarta and Bangkok have announced higher domestic spending to boost their economies. Meanwhile, Kuala Lumpur has also announced a higher spending plan.
• Current account surpluses for these countries - exports are greater than imports.
• Asian banks are stronger - higher quality loan portfolios and regulations

In light of the above factors, analysts say that the drop in currencies is actually a healthy realignment that would help boost exports amidst a commodity slump. However, I'd like to add that there are now new factors in the equation:

What's new this time?

• It is a matter of time before the US starts raising rates, thereby exacerbating the outflows from emerging markets in search of safer havens and higher returns. 
• The slump in commodity prices have added on to the woes of Indonesia (coal) and Malaysia (oil).
• Loss of confidence in the Indonesian and Malaysian governments could lead to further political turmoil.
• China's slowdown, exporting deflation with it. 

All this volatility in the markets is not helping confidence, which is a prerequisite to boosting much needed investment and consumption. Surprisingly, 7 years from the crisis, we are still hearing about massive job cuts (read Deutsche, HP, Standard Chartered) with the only bright spot coming from Silicon Valley, widely touted to be approaching bubble territory. 

All eyes will be on the US and Chinese governments if they can bring their economies out of the deep end. It would also be crucial these new factors do not throw their economies out of balance; because this time it may be different ... a different crisis. 

If not now, when?

Not now! Market watchers, including myself, will be dissecting Yellen's statements word for word after the Fed made the decision not to hike rates. Here are some excerpts and my interpretation of them:

The Fed could still hike rates next month in its October meeting. The decision to hike will not hinge on any data release, but a broad range of economic and financial indicators. Her main concerns were inflation running under 2%, a depressed housing market (all time low 30 year mortgage rates and slowing housing starts), as well as volatile markets caused by China and commodity prices. The Fed has discarded negative interest rates as a possibility, adding that its goal is to put people back into jobs, not increase income inequality.

At least this gives us a clearer picture of the Fed's considerations. So...if not now, when?

US Fed - To raise or not to raise?

Come September 18, the most hotly debated decision will be known: whether the US Fed will raise its interest rates. Here is my cow sense on what will happen and why:

The Fed is likely to raise rates, if not this time, at least by 2016. Rates have been held close to zero since December 2008. Amidst a lamentable recovery, the Fed's dual mandate of employment and price stability have been about met: Unemployment has halved to 5.1% since its peak in 2009, and inflation, at 0.2% (for the last 12 months till Aug 2015) is slowly approaching its target of 2% (Inflation for a large part of 2014 was nearer 2%).

In addition, assets are reaching "bubble" territory. In her July 15 semi-annual testimony to the Senate Committee, Janet Yellen has alluded to this herself by warning that she sees signs of asset price bubbles forming in some markets such as those for leverage loans and lower rated corporate debt, while indicating that stocks aren't overvalued. Car sales are rising at the quickest pace in a decade (also fueled by low pump prices), while commercial real estate prices are going through the roof.

Detractors (i.e. the World Bank, Lawrence Summers, Lloyd Blankfein) claim that raising rates would hurt a fragile recovery and impact emerging markets; the higher interest rates would cause outflows from emerging markets into the US. However, as pervasive as the impact of this decision may be, the US has to tend to its own backyard in order not to sow the seeds for runaway inflation and asset bubbles, as during the Greenspan era.

Whatever the case, it is most certain that a rate raise will happen; if not in September, at least within 6 months. Should it happen on September 18, it will be largely priced in as the Fed has done a good job of preparing the markets for it. If it doesn't, the markets will likely continue with its upward trajectory.

2015 SG elections - takeaways for the incoming government

In Singapore, we are heading into the elections held every 4 years. This time, the elections were held much earlier than the legislated date of January 2017, presumably on the back of raging patriotism stemming from the country's 50th anniversary festivities, and death of Lee Kuan Yew, widely recognized as the nation's founding father.

Singapore has the shortest election campaign of 9 days, including a day for "cooling off", compared with around 40 days for the UK, 180 days for the Philippines, and more than a year for the US (http://www.bloomberg.com/news/articles/2015-09-08/quirks-of-singapore-s-elections). No, I don't think this is proportional to the size of the country,but the strength of the opposition. 8 days were more than enough for the various parties to harp over the same issues (mismanagement of constituency funds, CPF, election protocols) and towards the end, launch into unfounded personal attacks.  In Singapore, there is yet an opposition party which can match the incumbent Peoples' Action Party (PAP) in size, strength, and resources...but we are getting there.

From the various campaigns and my observations of what has happened, the following are my takeaways for the incoming government:

1) Be forward looking - 

Do not plan without ensuring that there is support to put the plans in place. Do not tell your people you will squeeze 6.9m of them into the country without ensuring there is adequate infrastructure (especially transport and healthcare) to support their needs. This will only lead to widespread discontentment and resentment, especially in the age of Social Media where every incident spreads like wildfire. Do not forge ahead only to walk into a sinkhole. 

Succession planning is critical too. Let us know who is taking us forward and why. Hopefully, someone with a different surname. 

2) Ask for consensus -

Let your people know you value their opinions, that you are not this iron-fisted autocrat; because times have changed: a highly educated populace will not put up with this. 

3) Transparency - 

The controversy surrounding the 2 state funds, GIC and Temasek arose because people didn't know what was happening with them. Where the money went, where it came from, and how much is made or lost. We get vague and inconsistent results such as 10 year, 20 year returns or whichever paints a better picture. Give us an annual breakdown of fund inflows, outflows and performance, in good times AND bad.  

This is my cow sense on what I hope the incoming government can take note of. A penny for your thoughts?