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The way forward By Colin Twiggs August 30th, 2011 3:00 a.m. ET (5:00 p:m AET) These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use. There were plenty of central bankers and economists with glum faces at Jackson Hole, Wyoming this week as speakers reviewed the challenges ahead. So far the global economy has not responded to various rescue plans, with GDP slowing and national debt rising across a whole slew of economies. Before we look at the daunting challenges ahead,we should review what has already been achieved. We avoided a global banking collapse, an accompanying deflationary spiral and a depression similar to the 1930s. There have been a few side-effects, but do not underestimate the importance of avoiding a deflationary spiral. Deflationary Spiral In times of uncertainty, households and corporates save at higher than normal rates. Savings contribute to economic growth when channeled through the financial system into new investment, but in a financial crisis they are applied to pay down debt, causing a savings-investment mismatch. Any amount saved that is not re-invested in the economy, whether it used to pay down debt or buried in a tin at the bottom of the garden, causes a fall in national income. If 2% of every trillion dollars earned, for example, is used to repay debt, then people who would have supplied 1 trillion dollars worth of goods and services will only receive $980 billion in income. That doesn't seem so bad, but if 2% of the reduced income is similarly applied to repay debt, then income available contracts to $960.4 billion. And keeps contracting each time income is recycled. In extreme cases the above scenario could be replayed many times over before the behavior ends, causing a sharp fall in national income. Repetition of the above cycle twenty times, for example, would reduce available income by a third. That is a deflationary spiral. Something to be avoided at all costs. Side-effects The proven antidote to deflation is to run a fiscal deficit: government expenditure in excess of revenue helps to offset the savings-investment shortfall. Stimulus programs, however, have been badly managed, with no thought as to how the burgeoning national debt would be repaid. Mountains of national debt were incurred to head off the deflationary spiral, but there is very little to show for it. Deficits spent on school halls, public fountains, checks in the mail and tax cuts offer no means of repayment. Investment in infrastructure projects that offer a market-related return on investment — that can be used to repay the debt over time — have so far been scarce. The result of a weak fiscal balance sheet is instability. High unemployment, low consumer spending, restricted consumer credit, and a falling housing market are all consequences of increased uncertainty. Also, private capital investment remains scarce despite super-low interest rates and cashed up corporate balance sheets. For the same reason that cashed up banks are not lending to small business: uncertainty. Both banks and business face an unpredictable environment, with the possibility of further falls in employment and consumer spending, restricted consumer credit, a falling housing market, unsustainably low interest rates, and the threat of increased taxes. Uncertainty equals risk, and any CEO worth his/her salt would scale back on expansion plans until they have a clearer picture of what the future holds. Unemployment will remain high and GDP growth low until capital investment is restored. The problem is: how? Possible solutions The answer may sound simplistic, but we need to reduce uncertainty to provide business with a stable foundation on which to plan future investment. There are four possible solutions, but none of them are pretty. The first is austerity: cutting government expenditure to match revenues. Austerity is important but on its own is likely to deliver even lower growth than at present — and risks a deflationary spiral. Cutting government expenditure while private savings are being used to pay down debt, without an equivalent cut in tax revenues, would court disaster. Raising taxes is another popular option: getting everyone to pay their fair share. Though the notion of fair share varies widely depending on who the speaker is — and who pays their campaign contributions. Revising the tax code to achieve a more equitable distribution of the tax burden may contribute to long-term stability — a fair tax system is more likely to stand the test of time — but increasing tax revenues to repay national debt would also risk a deflationary spiral. A third solution is massive public works programs similar to those undertaken by China during the GFC. Infrastructure projects directly stimulate local business and increase employment while also delivering savings in unemployment benefits. Government infrastructure investment, however, has a checkered history. Cost overruns and failure to meet revenue projections make private sector funding difficult to obtain. And government funding would further increase the national debt. The fourth option, a soft default on existing debt, through inflation, is obviously tempting. Debasing the currency by selling Treasurys directly to the Fed, for example, would:
The way forward While each of the options has their downside, a combination of the first three seems to offer the best solution. Funding infrastructure investment through a combination of private sector funding, austerity cuts and increased taxes could avoid the risk of a deflationary spiral, with minimal increase in the national debt. It would also facilitate direct channeling of private savings into investment, reduce wasteful government expenditure (through an austerity drive) and could be used to justify a more equitable distribution of the tax burden (if we all benefit we should all expect to pay). The fourth option, a soft default through inflation, should be seen as a last resort. And is probably why QE3 was not put forward at Jackson Hole last week. Once you awaken the (inflation) dragon, he can prove difficult to slay. Leave a Comment Wisdom consists not so much in knowing what to do in the ultimate as knowing what to do next. ~ Herbert Hoover |
According to CB Richard Ellis’ (CBRE) Business Footprints survey, Hong Kong and Singapore were the world’s top two destinations for international office setup. The survey, which encompasses 232 cities, looks into office locations of 280 of the world’s largest firms, many of which are Fortune 500 companies. 191 companies have set up in Hong Kong, representing 68% of this list. Singapore came a close 2nd by a nominal 0.5%, marked by difference of two companies. The other two of the top five cities in CBRE’s Business Footprints list included Tokyo, with 179 companies and Shanghai, with 172 companies. London was the only non-Asian city in the top-four list, with 177 companies.
Although Hong Kong has emerged tops in this list, Singapore’s office spaces are still less costly. Hong Kong’s property prices have increased by 30% in spite of its devalued currency over the past year. Singapore’s property prices, on the other hand, have increased by 23% in spite of its currency appreciation. As a result, Singapore’s property prices are more competitive than Hong Kong’s over the past year. The awareness of lower office prices bodes well for MNCs but it holds more weight for SMEs and start-ups as savings in office rental translates to real, potential savings that directly affect the bottom line.
However, it is not enough for an entrepreneur to secure a cost-effective office space. The cost has to correspond to the quality of one’s office location i.e. it has to be good value for money. More importantly, the location and perceived quality of one’s office is most vital to giving potential clients a good first impression of the company even before they set foot in the office. On this front, Singapore trumps Hong Kong as it has an abundance and wide variety of commercial and office spaces in the heart of the city’s Central Business District (CBD). While Hong Kong has a limited and competitive supply of office spaces even in its newest business hub, Kowloon East, the Singapore government had anticipated a growing demand for commercial space and reclaimed land near the CBD a decade ago.
Additionally, Singapore has increased the pace of new office developments to cater to the growing demand. As a result, an estimated 3 million square feet of office space is projected to appear on the market this year. On the other hand, Hong Kong’s office supply will rise by only 1.3 million square feet and outside of the Central area to boot. An entrepreneur wishing to secure an office space in the heart of a city’s business district has a higher chance of realizing that dream in Singapore than in Hong Kong. Furthermore, Singapore’s air quality adds to the value of its office property and quality of living vis-a-vis Hong Kong’s air density and pollution.
On these counts, Singapore supercedes Hong Kong as a office setup destination due to its ability to better manage its land resource as well as to provide high-quality office spaces, especially for SMEs.
Singapore has a high density of banking, financial and industrial goods and services-related companies so entrepreneurs specializing in these services are in good stead to setup a Singapore subsidiary or opt for Singapore branch registration. Businesses specializing in the industrial goods and services sector converge in Singapore to take advantage of its deep talent pool of skilled and low-cost manpower. Those in banking and financial services are attracted to Singapore’s prudent investment strategies and less risky banking policies such as the higher capital adequacy requirements.
Other than offering an abundance of affordable, high-quality office spaces, Singapore remains as a top business location as it offers entrepreneurs and investors a diverse and robust talent pool. Between December 2009 and 2010, the number of foreign workers and professionals in Singapore grew by 530,000 or 0.7% y-o-y. According to Singapore’s Ministry of Manpower, employment has risen by 28,300 over the first quarter of this year. Just last month, Singapore updated its immigration policies to attract professionals and highly-skilled talent to Singapore. Prior to this, requirements for the Singapore entrepreneur visa (EntrePass) has been tightened as well. However, the Ministry of Manpower saw no less than an average of 3,000 applications annually, indicating an unwavering confidence in Singapore as a business hotbed.
Last but not least, Singapore offers assurance to businesses in its transparent and efficient style of governance. Following the latest elections, Singapore’s younger and newer government are more than keen to ensure that enterprises in budding industry sectors receive the seed funding and framework needed to develop themselves into globally competitive companies. In the wake of newer government, Singapore’s low taxation policy remains unchanged as is its priority in developing investments domestically and abroad. GuidemeSingapore is confident that Singapore’s reputation as a business magnet is set to flourish in years to come.
However, it is not enough for an entrepreneur to secure a cost-effective office space. The cost has to correspond to the quality of one’s office location i.e. it has to be good value for money. More importantly, the location and perceived quality of one’s office is most vital to giving potential clients a good first impression of the company even before they set foot in the office. On this front, Singapore trumps Hong Kong as it has an abundance and wide variety of commercial and office spaces in the heart of the city’s Central Business District (CBD). While Hong Kong has a limited and competitive supply of office spaces even in its newest business hub, Kowloon East, the Singapore government had anticipated a growing demand for commercial space and reclaimed land near the CBD a decade ago.
Additionally, Singapore has increased the pace of new office developments to cater to the growing demand. As a result, an estimated 3 million square feet of office space is projected to appear on the market this year. On the other hand, Hong Kong’s office supply will rise by only 1.3 million square feet and outside of the Central area to boot. An entrepreneur wishing to secure an office space in the heart of a city’s business district has a higher chance of realizing that dream in Singapore than in Hong Kong. Furthermore, Singapore’s air quality adds to the value of its office property and quality of living vis-a-vis Hong Kong’s air density and pollution.
On these counts, Singapore supercedes Hong Kong as a office setup destination due to its ability to better manage its land resource as well as to provide high-quality office spaces, especially for SMEs.
Singapore has a high density of banking, financial and industrial goods and services-related companies so entrepreneurs specializing in these services are in good stead to setup a Singapore subsidiary or opt for Singapore branch registration. Businesses specializing in the industrial goods and services sector converge in Singapore to take advantage of its deep talent pool of skilled and low-cost manpower. Those in banking and financial services are attracted to Singapore’s prudent investment strategies and less risky banking policies such as the higher capital adequacy requirements.
Other than offering an abundance of affordable, high-quality office spaces, Singapore remains as a top business location as it offers entrepreneurs and investors a diverse and robust talent pool. Between December 2009 and 2010, the number of foreign workers and professionals in Singapore grew by 530,000 or 0.7% y-o-y. According to Singapore’s Ministry of Manpower, employment has risen by 28,300 over the first quarter of this year. Just last month, Singapore updated its immigration policies to attract professionals and highly-skilled talent to Singapore. Prior to this, requirements for the Singapore entrepreneur visa (EntrePass) has been tightened as well. However, the Ministry of Manpower saw no less than an average of 3,000 applications annually, indicating an unwavering confidence in Singapore as a business hotbed.
Last but not least, Singapore offers assurance to businesses in its transparent and efficient style of governance. Following the latest elections, Singapore’s younger and newer government are more than keen to ensure that enterprises in budding industry sectors receive the seed funding and framework needed to develop themselves into globally competitive companies. In the wake of newer government, Singapore’s low taxation policy remains unchanged as is its priority in developing investments domestically and abroad. GuidemeSingapore is confident that Singapore’s reputation as a business magnet is set to flourish in years to come.
another thing to note..
most (if not all) of the july data were very promising..
but at the same time, august's sentiment/indicator are extremely bearish.. tat's y we have the bull n bear playing along..
next week we will start to have the real august numbers.. which i am still quite bearish about tat...
i suspect many companies, including the local banks (i am quite sure for one bank at least) hold hiring in August..
and with all the news about foreign banks/corps cutting cuts.. seriously how bullish can we get here?
BUT
it isn't only sifu risktaker's statement tat scares me.. it's my over bearishness scares me cause i might be wrong n get my killed..
i might keep my stop loss tight this time, unlike earlier when i dared to bet on wilmar.. need to prepare for a higher juicy peak
Gaecia ( Date: 27-Aug-2011 23:01) Posted:
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master gaecia,
i have 2 readings which make me quite worry.. (as u can see) :P
the first resistance for S& P will be 1180-1185 which's still holding last thursday after buffet announced investing into BOA..
the strong resistance will be at 1240-1250 (the neckline).. tat will be another JUICY peak..
if tat breaks we might really have a short double bottom @_@..
Gaecia ( Date: 27-Aug-2011 23:01) Posted:
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Roti, you need to relax in spite of sifu risktaker telling us get ready to be fried alive. :( You can find me in the wok too wat. Why not consider leaving the forum in the interim if seeing what you read gets to you? Cos it only burdens your state of mind.
Anyone who plays the market, be it Long or Short also to prepare deep pockets. Why so? Its all in the bet size.
I'm hoping that Dow will top out soon that is, if i'm reading it right. Fri's rally in US equities was fuelled by forex @play (greenback dropped), nothing to do with any (promising) economic news and the present US market is highly speculative to daily news.
Now just how do we get our hands on a bloomberg news feed machine?
rotijai ( Date: 27-Aug-2011 21:56) Posted:
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