Tuesday, January 29, 2008

Decoupling & Globalisation

Blogger bantersy said...


that was a long post!!! good work with patience!

btw, i wish to bring the your attention to the following.

"Lukewarm - Rest of Asia will have to come to terms with inflationary pressures as local currencies may not rise enough to counter imported inflation, thus hurting outlook for local equities."

will asia currencies rise as much and pick up steam to match the rising inflationary pressure. bearing that asia export to US is not as dependence as before, the rise of asia currencies will hurt its export to US. although euros, yuan and other major trading partners in east asia, the rising trend in their currencies is seen, thus mitigating the effect of losing its export competitiveness.

You also mentioned oil will stay above 100 and probably settling in that range for year 2008. The thing is, with global economy coming to a slowdown, wouldnt you think it will cushion the consumption of oil though it is the basic neccessity of our life. wouldn't OPEC be wary of "engineering" a high oil that will stay, for as high as possible for as long as possible, will just kill themselves in return. when everything come to a stop, their black gold will also be cheap gold? with all the curbs, measure to cool, china for one, should also tapping their brakes in an effort not to be so jerky. thus, i may be wrong, for i see oil may stay below 100 for year 2008. unless opec is so stubborn to ignore the global issues many are facing. by taking 1 dollar off the oil price, it allows many in the world to have a bit more to spend.


bantersy, i think the currencies that were strong in 2007 will continue to be strong. Dependence on US demand is central to the decoupling theory. I agree that most economies have been less reliant on US demand for trade. However, the flip side is the rise and rise of globalisation - which basically links all markets. A major correction in one will affect the rest.

The question which you want answered is would other markets which are more vibrant be unaffected economically. If the situation is just housing weakness in the US, I would agree to that. However, this is a credit bubble imploding owing to money supply growth for the past few years. All vibrant economies have been tainted with money supply growth as well.

Though we may see vibrancy in Europe and emerging markets, needless to say, the consumer side have been leveraging on the easy money policy as well. Just look at Singapore's luxury market and even houses costing above RM600,000 in Malaysia which is the norm now. My guess is that the "en-bloc sale" gains have been leveraged onto additional new luxury property speculation. My guess is that in Malaysia, the majority of buyers for properties more than RM600,000 over the past 2 years have more than one property and have geared up. Realistically, you need a household to have RM10,000 monthly income to afford funding a RM600,000 or higher property. Judging from the plethora of launches, I very much doubt the long term affordability. Just glance at the sale ads of new properties anywhere. Hence vibrancy in economic trade may cover the excess leverage of debt into other areas masked as positives. That's why I have not been a bull on Malaysia or Singapore property in 2007.

Your other query lies in excluding US from the global trade equation, since they are all vibrant they should be able to continue to have vibrant trade with each other - that could be the case, but not likely. If it was just US housing weakness, maybe that fairy tale scenario can pan out.

I still see delayed sub prime mess hitting European banks as they report half yearly unlike the US banks which makes quarterly reporting. Hence Europe will be affected badly in the coming weeks. This weaken the trade equation further if US and Europe experience similar problems together. Next we have Japan exhibiting another slowdown phase. Just from that, who will China, India, Malaysia export to?

Why a major correction elsewhere would affect vibrant economies elsewhere is hard to fathom as things look rosy and secure in other markets. Problems unwinding elsewhere may not hit us is the initial feeling. As you can see from the chain of events above, US-Europe-Japan, it will hit the rest of BRIC.

The problem is not in trade but "the leverage on inflated assets", that is the critical thing about a credit implosion. Housing is the easiest example to show, but there are other inflated assets that have been leveraged upon for the past few years. Things like credit card and home equity refinancing. Just look at our household debt and you can sense it.
The money supply growth has pumped so much inflation into our system, everyone can feel the price of goods and services rising much faster than our salaries. Official CPIs are twisted. If the emerging markets and Europe currencies did not go up by so much, the actual inflation may have been worse.

One of the biggest con in 2007 have been the surge in almost every currency other than USD. Take USD out of the equation, we are basically ranking parri-passu with AUD, Euro, pound, yuan... when all move up, who is to say we have actually strengthened. We all strengthened against ONE currency only: that is why the Fed has done one very smart thing, being able to export inflation away to the rest of the world. Yes, US still has inflation owing to weaker USD but in a slowing economy, settling for lower growth, they will actually have less to lose.

As for the price oil, whether it averages 110 or 90, does it really matter? There are bigger problems already within the system. Even 80 won't cure inflation worry already in the system.

1 comment:

bantersy said...


well said again. i remember about the ppty posting you made last year on why msia ppty market wont be bouyant. then, you did mention about singapore having various factors that will be quite vibrant and quite a good asset class to invest in? anyway, i may have got it wrong.

yes, the world today is very different from the past. we are so connected. although i mentioned the reliance of export to US has lower but i think say, msia export to US is xx% and its export to china is yy%. but china export to US is zz%. thus, a slow down in US will affect the direct export market from msia to US and indirect export to US through China exposure to US. like accounting standard, associate company, subsidary...etc.

may i ask your opinion on the following. in view of the high volatile market, do you think one should continue to invest in warrant as doing warrant will increase one's exposure to higher volatility in the already highly volatile market. i had a discussion with on fren on that but i disagree with him on the current situation that we should be buying the underlying instead of adding more volatility by leveraging on warrant. my view is that we cannot lower the volatility through warrant but we can control the risk exposure by lowering the trade value of warrant and yet achieve a comparable risk/gain/loss. am i right to say that?

An example would be a $20 share and a 10c warrant with June/July expiry, out of money warrant. Conversion is 10. A very vague guide but what i want to say is by varying the trade size, we can achieve good exposure with comparable risk.

hope you get what i mean. tq!