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Singapore M3 money supply growth vs STI stock index

2008-04-11T16:45:00Z

With the benchmark Singapore Straits Times Index, the STI, down well over 20% from its previous high of 3,906.16 back on 10 Oct 2007, and M3 money supply growth slowing, it is time to take another look at the causal relationship between the M3 and the STI :

For this chart, I took a slightly different approach from my earlier study which used the rate of growth based off May 2005, which was an arbitrary starting point. For this study, I am comparing the percentage year-on-year (yoy) change for both M3 and STI, and plotting it on a time axis. The time series has also been extended back to Jun 2004.

As can be seen from the chart, the STI has been doing quite well since Jun 2004, giving investors a very respectable rate of return of 10% to 20% from year to year, with the M3 money supply growth rate hovering below 10%. GDP growth was starting to recover from the period of the SARS outbreak. With increasing GDP growth and a rather stable M3 money supply, it was a rather benign environment for inflation then and economic prospects looked like they were getting better.

However, as far back as 2004 through 2005, I was already watching out for inflation. My blog post dated 2 Feb 2005 noted that "economists say there is little threat of inflation or other serious damage to the economic recovery". Watching the oil prices rise, I did not agree with that assessment, and on 30 Mar 2005, in a post titled "Oil prices starting to affect everything else", I observed the rise of oil prices to over $50 per barrel and said "when these price increases start to hit the rest of the economy, it's going to hit people hard".

Things started taking off together with the May 2006 general elections. The view of the contrarian community is that generally, elections tend to be inflationary. But leaving the politics aside, let's observe what happened after that. M3 money supply growth shot above 10% for the first time since the Asian boom and subsequent Asian financial crisis of the 1990's and continued accelerating through the end of 2006, then it powered above 20% y-o-y for nearly every single month in 2007. That was when I wrote my noted 23.62% M3 money supply growth blog post, and commented that "this is highly inflationary".

With such an outpouring of money supply into the economy, the stock markets responded, and the STI had an outstanding performance through the end of 2006 into 2007, growing at 30% to well over 40% year-on-year. I continued to observe the rise of inflation, while investors cheered the markets on.

And then the credit crisis struck in Aug 2007. You can see it on the chart as the point where M3 actually started to slow down and dipped below 20%, dragging down the STI with it. The sorry tale continued into 2008 where all the past gains of 2007 have been wiped out, as evidenced by the negative year-on-year figures for the STI. Housing prices started to soften especially on the high end, a process that is now filtering down the real estate food-chain.

But the billion dollar question now is, what next? Given the lack of a working crystal ball, I can only speculate that inflation will continue to be a persistent problem through 2008. The credit crisis will be papered over with increasing injections of liquidity into the system and this will lead to continued double-digit increases in the money supply globally. M3 may approach 10% for a while but the flood of unleashed liquidity leading up to the Nov 2008 U.S. elections and beyond will boost stock markets into Q2 and Q3 2008 (ie. Jim Puplava's "Oreo cookie theory") after the tough times they have been giving investors in Q1 2008. Towards the end of 2008, inflation strikes back with a vengeance.

The last paragraph above is pure conjecture and in all probability, I am as likely to be way off the mark than correct. Do not make investment decisions based on anything I write here unless you have also done your homework, and whatever you do, I am not responsible for any losses that you may incur. Standard disclaimer and all :)

See also :

1. Singapore STI versus M3 money supply

Re-post from lowem.log
Singapore M3 money supply growth vs STI stock index

ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 3

2008-03-23T12:11:00Z

Burning dollars. While this may largely be a metaphorical image at the point of writing for most, people did burn money for real during the German Weimar republic hyperinflation. At the time, it was actually cheaper to burn the paper money itself than to use the money to buy wood or fuel for the stoves.

Inflation drives people to do things that they might not ordinarily do - such as barter trade (as mentioned earlier), hoarding things like food and fuel, and, yup, burning paper money. These usually take place towards the middle to the end of a hyperinflationary cycle. So where are we now in this particular cycle? We are near the end of the beginning, as people worldwide are starting to wake up to the threat of rising inflation, and savvy investors, including fund managers of small private investment funds and gigantic pension funds alike, have already started to position themselves accordingly. It is becoming a political issue in many places, as witnessed in China and even in otherwise "politically-quiet" Singapore, where an unprecedented public march was held by the SDP opposition party to protest against price inflation.

Well, you need not necessarily go out into the streets to protest against inflation. If you feel like it, nobody's going to stop you (except the police who, of course, are just doing their job). Here is Part 3 of a more practical guide on how to beat inflation in Singapore (and elsewhere) :

Housing.

Real estate, or property, used to be a pretty good inflation hedge. Which partly explains why so many people, particularly Asians, are fixated on acquiring a piece of property or two. After all, so goes the conventional wisdom, it's not so easy to make land, is it? That was then. Now, you have to consider the housing bubble bursting, the mortgage / credit / subprime / CDO / MBS / SIV crisis (or whatever this whole collapsing pyramid of financial weapons of mass destruction is called nowadays). There *are* some places where you could possibly get a good deal on housing, perhaps a rental property in a good location, but for the most part, seeing how the looming recession could affect the rental market, not only in Singapore, but also elsewhere, I would recommend going neutral (staying in your present home) or short the housing market (selling, taking profit, moving to a cheaper location, downgrading). Besides, you wouldn't really want to be involved with the previous bubble, do you? Where you really want to be is the next bubble, and that is most certainly not going to be the object of the previous bubble.

Hoarding.

Hoarding is a strategy to deal with two issues that occur during periods of extreme inflation : soaring price increases and outright shortages. But the word "hoarding" has such a negative stigma associated with it, that we could perhaps call it setting up a strategic stockpile. You don't necessarily have to adopt a survivalist attitude - that might be called for later on, who knows. But you can always start "lite" - basic things like food (rice, biscuits, canned food, cooking oil), water (have some bottles of mineral, or better, distilled water, which you rotate through), and fuel (if you have a car, top it up to full when it goes below the half-tank level, so you don't need to join the long queues when something does happen). If you adhere to this consistently, you will be better prepared for many emergency situations in addition to hyper-inflation.

Hybrid cars.

Over the past few years, hybrid-electric cars have been alternately championed and panned. They have been praised for having low emissions and improved fuel consumption but were then criticized for being more expensive and not having high enough mileage to offset the extra cost. Some calculations pegged the payback period as long as 10 years. I guess they forgot to take into account the exponential nature of rising oil prices and the subsequent impact at the pump. The next generation of lithium-ion powered hybrid cars will help to address the cost issue since lithium battery chemistry is cheaper, lighter and more powerful than the Ni-MH being used in most hybrids nowadays (nickel being very, very expensive). The Chevrolet Volt, powered by an advanced A123Systems nanotech lithium-ion battery, will be one of the first of the next-generation hybrids. If you have to get a car in the medium-term, get one of these next-gen hybrids if you can. If humankind has enough time for even a partial fleet change, these will make a difference in the twin fights against rising petrol prices and global climate change. As for hydrogen cars, I'm much less sure about these for the mid-term. If, and that is a very big if, we have enough time to switch to these, such as the Honda FCX Clarity, it would be great. But I suspect that we would have come to one of two conclusions long before widespread adoption of hydrogen fuel-cell technology : a. we have somehow managed to solve our problems of energy, climate change, overpopulation and financial crises, or b. we have managed to hyperinflate beyond belief, collapse our global economy and eventually let nature take its course on population and climate.

Insurance.

Avoid insurance policies that lock you into multi-year or even multi-decade periods, and then give you returns that hardly give you much of a fighting chance against the rate of inflation. The problem is that most of these insurance policies, whether whole-life (living) policies or endowment plans, tend to invest most of their money in local government bonds. In times of low inflation rates, these insurance plans make some sense with government bonds returning yields of say 3%, 4% or thereabouts. But times are different now. Actual inflation rates are far outstripping the yields of government bonds. Taking a look at Fundsupermart's SGS bond yield tables, we see that the effective yield of a Singapore government bond maturing in 14 years' time is about 2.85%. Now compare that to the latest Singapore CPI inflation rate of 6.6% per year. Most local insurance products will invest in local government bonds. In other words - you lose. Plain and simple. It is a similar story for our American friends : ten-year Treasury yields are below official CPI inflation rates.

So what should one do? Here's the acronym for what one should do : BTAITR. Buy Term And Invest The Rest. Buy term insurance which gives you high coverage for a low price, and invest the rest of your money in investments with higher yield and higher performance. It might be worthwhile to hold on to one whole-life policy with a modest premium amount for the critical illness coverage, and one or two plans that cover healthcare costs such as hospitalizations, but that's about it. Don't waste your money on lock-in products. Especially those that masquerade as "enhanced savings accounts". They have been selling more of these lately. Beware of them.

Jobs.

What kinds of jobs will help you beat inflation? This one's easy - that would be CEO's, top lawyers, bankers, and those government ministers whose salaries are pegged to them. The people holding these jobs can look forward to, say, 33% pay rises, which puts them in a very good position to cope with rising costs of living. Well, not that they were in any sort of shabby position in the first place.

Okay, but what about the rest of us? I could look at this roughly the way that the S&P 500 stock sectors are sub-divided. With a looming economic slowdown, you might probably want to avoid jobs in the consumer discretionary industry which would be most sensitive to pullbacks in consumer spending. For obvious reasons, such as the subprime / credit / CDO / etc. financial meltdown going on, you might want to avoid looking for a job in the financial industry (unless you are a top banker but maybe not even then - just ask the top people at $2 Bear Stearns, for example). You'd want to be in companies which are able to pass on increased costs to the consumer, or that are protected in one way or another from rising costs. You could try consumer staples, or healthcare, or materials (which includes commodities - I hear that good geologists and petroleum engineers practically get to write their own pay cheques nowadays). You could try the government (which is the cause of inflation in the first place and is quite good at matching their own pay to compensate) or the military (which doesn't cause inflation per se, but is also very good at the latter). Call me biased, but I do have a vested interest in the last three sectors above.

Join (or form) a club, group or organization.

Why fight the inflation monster all by yourself? It's time to go get help, backup, and fresh ideas. Join a club or group or organization that talks about these things, or even better, acts on them. Together with a friend, I am co-founder of Contravestors Asset Management, a private investment club and investment fund. It helps to have people at your side fighting the same battle. For more ideas, there are online forums such as goldclubasia.com for the Asian (particularly Singapore) gold investor, and there is peakoil.com to talk to other people who are very knowledgeable about peak oil, the energy industry, and energy-related investments. These are a couple of examples - there are many more sites out there : pick some that match your style. Fight the good fight, but you don't need to fight all alone.

King.

You know what people say : cash is king. Or is it? Try putting your money in a savings account or fixed deposit at 1% or less, and see what happens to your money 20 years later - you might be lucky to be able to buy a banana with it. Cash is not always king. Cash is prone to being inflated away to nothingness. The history of cash, or fiat money, is a tale of collapses, with values going down to zero. On the other hand, gold is a much better king, and it always has been. The price of gold might go up and down, but it never goes to zero. And the chances are good that, in dollar terms, the price of gold is going to have more zeroes added at the end. Buy gold and hold on to it.

See also :

1. ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 1
2. ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 2
3. ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 3

Re-post from lowem.log :
ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 3

ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 2

2008-03-16T18:40:00Z

This is the second instalment of a 7-part series on how to beat inflation in Singapore and elsewhere. Take a look at the stack of paper in the photo above. That's the amount of Zimbabwe dollars in Z$500 bills that is needed to buy the beer in the picture. A million-dollar beer - that's one of the things that can happen when inflation gets out of control.

Inflation usually used to go out of control in just one country at a time. So, when the Zimbabwe economy went into hyperinflation, some of their people went over to neighboring South Africa - in some cases, to import needed goods for their own use or for sale to their fellow citizens, and in other cases, to flee the hyper-inflationary environment permanently. However, if this current wave of inflation were to take off and go exponential globally, there could be very few if any places left to hide. So, what can you do? Onward to the guide.

Dividends.

Dividends are coming back into fashion, and it is no wonder - in the uncertain and volatile world of stock markets during the unfolding credit crisis, investors want to be compensated for risking their money out in the markets. The price of a stock may change every moment of every trading day, but a dividend payout, once it arrives in your account, is real money. The better companies with higher dividend yields can actually keep you on par with the rate of inflation, and if coupled with stock price appreciation, could even put you ahead. As for which companies, here's a tip I've already mentioned earlier - Canadian energy income trusts : with their 12-15% dividend yields and linkage to crude oil prices, this particular asset class makes a pretty good inflation hedge.

Drinks.

Drinks can be a killer on your budget. They can cost from one-third to half the cost of your actual meal or perhaps even more, especially if you order a fancy cocktail at a restaurant. So, one could do without a drink for the usual office lunch at a coffeeshop, which I've noticed more people around me doing anyway nowadays - and mind you, these are mostly IT professionals and R&D engineers that you could find around the place where I work. And if you were to go to a restaurant, you could try asking for a glass of ice water - but be sure to first check if they charge for water - some of them do, and the price being charged for plain or mineral water can be an absolute rip-off. As for alcoholic drinks, personally I don't indulge - but if you do, keep in mind the million-dollar beer coming down the road, and note that we have started on our way there already.

Electricity.

Electricity prices are going up, and you don't really need me to tell you that. What you can do is to conserve as much as you can, and if you do need to change appliances, buy the most efficient replacement that you can. Here's my before and after story : before energy conservation measures, my household was burning up 700KWh per month, and now, we are regularly clocking in at 450KWh per month or less. Here's what we did : we disposed of a second refrigerator, changed from an "always-on" electric air-pot to a thermos flask for our hot water, got a more efficient clothes dryer when the old one spoilt, changed the living room TV and the computer monitors from CRT's to LCD panels, and very importantly, turned off electric appliances at the wall socket instead of leaving them in standby mode. We have not turned on the aircon for years, and we use fans exclusively. If the night is slightly cooler, we turn off the fans as well.

ERP.

This is mostly a unique Singapore phenomenon, though it is being copied or emulated by other cities in other countries as well : Electronic Road Pricing. The idea is that motorists get charged whenever they enter certain regions during busy hours, such as the entire downtown area during the entire morning and evening periods (and beyond), or the shopping belt during most of the day. What can one do? Avoid working in the city area, perhaps. Or at least try not to drive there - take public transport, bus or train. The season parking charges are getting prohibitive anyway - last I heard, they were rising to $200, $300 per month and beyond. I keenly await the first $1000 season parking lot. As for shopping and running errands, try planning these for Sundays where they give the drivers a respite from the charges. Be sure to get up earlier though, especially if you use the CTE expressway - it virtually becomes a parking lot from around mid-morning onwards. There is also a "blank period" between 10.00am to 12.00 pm on weekdays where there is no ERP charged in the city area. You can try to run your errands during this period. When I used to work in the city, I staggered my working hours to arrive after 10.00am and to stop work after 7.00pm, instead of the usual 9 to 6, making full use of the flexi-hour policy. It may not apply to all jobs or even most jobs, but if you are in a position to do this, just do it.

Education.

Education is another big worry when people talk about inflation. It pains me to see people trying to plan for their children's education costs for the next, what, 10, 15 or 20 years when inflation or perhaps even hyperinflation will wipe out the effort. It pains me to try to plan for my own children's education knowing that if I do not succeed in fighting this inflation thing, I can get wiped out too. One thing I can tell you for sure - forget about those endowment plans that insurance companies try to sell to you. A while back, I briefly looked through the prospectus for one of these - it said, in language that could best be described as tentative, that I *may* get 4% annualized returns at the end of the endowment term. But, I pointed out to my friend, who was an aspiring financial planner and attempting to sell me that plan, isn't college education inflation currently running at 6% annually? If I were to put money into this plan, I will be losing 2%, or quite likely even more, as inflation takes off. She had no answer to that one. My advice : plan for your own education needs yourself, do not rely on insurance companies, and wage your own war against inflation.

Food.

The rising cost of food is another big worry. So what can you do? Stop eating? Not really. There are a few things to be done here - less dining out, no fancy restaurants or upscale places like that, more cooking at home or at the very least eating at cheaper places. At the supermarkets, the government of Singapore wants you to buy house brands - that's one way, but keep in mind that you get what you pay for. I find that house brands work best for the really basic commodities like rice and sugar. I am usually a little disappointed with the other house-branded products where they cut corners in the product specifications or quality of materials. But if you have no choice, then you have no choice. House brands it is. And stay at home and cook. Don't eat out at all if you can help it, or as little as you can help it. Yes, that's a recipe for economic disaster for the food & beverage industry if everyone adopts this attitude, but hey, you are watching out for yourself here, and who's watching out for you? Just do it.

For those of you with spare cash to invest, take a look at the agricultual commodities and agiculture-related companies. There's your hedge against food price inflation. There are quite a few ways to play this, you could do either a pure play via futures trading, or via the agricultural ETF's such as MOO, RJA or DBA, or you could buy stocks in the companies that are involved in one way or another. It's rather similar to investing in crude oil - go upstream. As high upstream as you can.

Gold.

Gold is the ultimate inflation hedge. And 6000 years of human history have proven gold to be the money of choice, both as a medium of exchange and as a store of value. Whenever there are wars, crises, or upheavals of one kind or another, humankind has always sought the safety of gold. Governments may come and go, entire civilizations may come and go, but the gold that is left behind remains as unchanging and as valuable as it always has been. Think about it : every single form of paper, or fiat currency, ever invented, has collapsed to zero or nearly so. Always. The "mighty US dollar"? It has already lost over 95% of its purchasing power over the past decades. And it's on its way to losing the remaining 5%. It is the same story with every other currency around the world. They are all going down together. Some might be going down slightly slower or faster than the rest, but, as governments continue to print money and and financial institutions continue to create credit out of thin air, they are all going down. It is the proverbial race to the bottom.

In order to avoid the fate of your currency going to zero with all the others in the inflationary spiral that is coming, buy gold. As much as you can afford, in whatever form you like. And not buy in order to trade in and out, but buy and hold it and keep it. That last point is something I really want you to know. I tried trading in and out of the gold ETF earlier - I made 40%. Not bad. But my physical gold, which I don't trade, which I just sat and sat on? It is up way over 80%. And as the gold price hits $1000 per ounce and vaults over the $1000 level, remember one thing : it is not the gold that is going up in price. It is the dollar that is going down in value. So buy gold and hold on to it.

ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 1

2008-03-08T11:54:00Z

This is the first of a 7-part series on how to beat inflation in Singapore or just about anywhere else for that matter. As inflation takes off and goes exponential worldwide, individuals and investors alike will need to develop personal strategies to cope with and to fight this insidious enemy that is inflation, which reduces the purchasing power of the money that you have every hour, every minute, and every second of every day.

It does not matter whether you are rich, middle-class, or poor, it is more of a matter of degree. The wealthy will rightly worry about the value of their assets in an inflationary environment. With a high-enough inflation rate, even the rich can get wiped out, if they do nothing to preserve their assets - just take a look at Zimbabwe, where a banana now costs more than what a house used to be.

If you are a middle-class person, congratulations, you are part of the most rapidly disappearing section of the population. If you carry on with life as per normal, then as inflation takes its toll, your lifestyle will be no longer be what it used to be. You will find that things are getting more and more expensive, while your income does not seem to be able to catch up. You will find yourself falling further and further behind. Little luxuries that you used to be able to afford, like, say, dining out regularly at restaurants, or going for a family tour every now and then, will start to slip out of your grasp. You will start to cut back on your expenses, only to find that even that is not enough. You will find that things you need, whether it is food, transport, education, or healthcare, will take up a bigger and bigger chunk of your monthly budget, squeezing out everything else until, it seems, you no longer have room to breathe. This is what inflation can, and will, do to you.

If you are not so well-to-do, it will not get much simpler than this : as inflation takes off, the fight against inflation will literally be a fight for survival. Let's take food for example. For the middle-class folks in a middle-class society such as America or Singapore, the cost of food typically takes up around 10-15% of the total monthly income. If the cost of food doubles, this ratio goes up to 20-30%. But for the poorer folks, whose food expenses take up one-third to one-half of the total income, with rental and utilities taking up the rest, and with no further room to cut back on expenses, what happens when the cost of food doubles? Life will get very hard, very quickly. You will have to make some extremely hard choices : do you want to eat, or do you want to pay the rent - and what about the utilities?

So as you can see, no matter what economic class you are in, we have the same common enemy : inflation. Here's my A-Z guide on how we can fight inflation. I hope it helps.

Awareness.

If you have landed on this page, whether from a search engine query, or from some other link, you are already aware that you need to do something about this inflation problem. As they say, being aware is half the battle won. Now is the time to fight the other half.

Aggressiveness. Attitude. Ability.

You cannot enter into a fight half-heartedly and expect to emerge victorious. It is the same in the fight against inflation. You must be aggressive. Don't say things like, "oh, it will go away eventually" or "oh, there's nothing I can do about it". You must have the right attitude and believe you can beat this thing. And as for your ability to win this war, it is a function of the resources available to you and the skills that you have. All the best in this regard. Now, let's get on with it.

Buy Nothing. Or Buy Less. At the very least, Buy Wisely.

From time to time, the shopping malls will hold sales. Maybe it's 10% off, maybe it's 20% off. But the way I see it, if you don't buy something, you will save 100%. So before you rush off to buy something, think about it. Do you really need it? Can you save 100%? The next best thing you can do is to buy less. Inflation simply cannot hurt you if you do not buy, and it will hurt less if you buy less. But then again, if you have to buy something, buy wisely. It does not make sense to buy, say, a cheapo pair of shoes if it does not last you even one year. Buy a good pair, and make it last. I wore my previous pair of Clarks shoes for five years and the soles were threatening to spring leaks before I reluctantly parted with it for a new pair.

Barter Trade.

As the price of goods and services go higher and higher with no end in sight, people might find it worthwhile to engage in barter trade, which lies outside of the economic system and its crazy prices. As Wikipedia puts it : Barter crosses over to the spheres of trade with money when economies are suffering from a very unstable currency (as when hyperinflation hits). It could be anything : a daily ride to work for your neighbour's husband in exchange for her help in doing accounting for your small home business, or fixing your friend's cousin's computer in exchange for a couple of anime DVD's that you'll have trouble importing yourself because of high shipping costs. As inflation takes off and goes into hyper-inflation, this kind of thing could become more and more common. And now that we have the Internet, as compared to the bad old days, entire barter marketplaces could spring up.

Cash. Currency.

Six words : Get The Hell Out Of Cash. Okay, a bit more on that. Treat cash and currency as what it is - a medium of exchange, nothing more. The way it is being inflated away, cash is certainly not a store of value. Keep just enough of it around for your daily transactions, and maybe a small buffer to tide you over in case of emergency. The exact size of the buffer depends on your comfort level, maybe 3 to 6 months worth of expenses. Try to keep as little cash as you can in your wallet (0% interest), or in your savings account (0.25%), or in fixed deposits (1%+). You could keep some emergency funds in money market funds (1-2%) but that's it. Look to invest the rest of your money in stuff that will give you higher returns. The race is on. As of Jan 2008, the official Singapore CPI inflation rate is 6.6% - you have to beat at least that. For myself, I am setting a slightly higher standard. I benchmark my investment performance to the M3 money supply growth rate - which can be between 14% to 23% per year.

Consolidate Errands.

When you go off downtown, or go anywhere else which involves transport expenses, it would be wise to consolidate your errands. Try to plan your trips such that you accomplish more than one thing at a time. It will take some planning and good timing to pull off, but you will become a lot more efficient, and save both time and money.

Cooking.

Those of you who cook, or are fortunate enough to have someone cook for you, you know first-hand that it is a lot cheaper to cook than to eat out. Still, there are some ways to cut down expenses further when cooking - for example, try recipes that do not need a long time to heat things up, or to boil and simmer for hours - which uses a lot of gas. Try getting an induction cooker, which runs on electricity and is 90% efficient in terms of energy usage (as in conversion to heat), as compared to the usual gas cookers, which are only about 50% efficient. As gas and electricity prices rise in tandem (80% of Singapore's electricity comes from natural gas anyway), you will find that this price differential will widen further.

CPI.

CPI stands for Consumer Price Index. It is a weighted average of various prices in a basket of goods and services and it is regularly compiled by the government, and it is what you see being reported in the news media. When they say, for example, inflation in Singapore is at 6.6%, CPI is what is being reported. However, you must take the CPI figure with a grain of salt - perhaps more than a grain. I'm talking about 5-kg bags here. As inflation takes off, the reality of actual street prices and the inflation rate as reported in official CPI figures will begin to diverge more and more. This is because the CPI calculation is a complex process, and is subject to more human interpretation than you might have imagined. Besides, CPI is a political figure. What I mean by that is simply this : there is every incentive amongst the governments of the world to report a lower CPI figure, in order to try to hide the actual rate of inflation. As the real rate of inflation takes off, governments have to come clean eventually regarding their official CPI figures, or they will end up like Zimbabwe's case, where the government has been reporting 8,000% CPI inflation whereas an independent IMF study has concluded that the actual rate of inflation is closer to 150,000%.

- Okay, we'll stop here for now. I hope you have found this useful. Keep posted for further updates to this A-to-Z guide on fighting inflation.

Hyper-inflation : early warning signs

2008-03-03T05:30:00Z

Earlier in the day, I went to a shop in Hougang to buy a light bulb. One of the lights in the kitchen was flickering and due to be replaced. I already had one in the inventory at home, bought about half a year ago, and the next one is supposed to go into storage to await its turn.

It's an ordinary thing, this fluorescent light - it's a circular tube type, white daylight, power rated at 32W, and it is made by Panasonic. I usually go back to the same shop since a. they usually have lower prices than other shops, and b. I pass by this place now and then to run errands.

Ordinary light bulb, ordinary day. Here they are, the two of them :

Exact same shop. Exact same item, down to the brand and model number - I've checked : Panasonic FCL32EX-D/30 (it's this Japanese penchant for detailed model numbers on everything). The prices though, are another thing altogether. Are you sitting down yet? Right, good. Because what I'm going to put up next is a close-up of the price tags :

Yep, you saw right. The fluorescent light on top, bought about half a year ago, was going for $5.50. And the one I bought today had gone up to $8.00. That's a 45% rate of inflation. 45% !!!!! Heck, not even the government ministers' salaries are going up by 45% (just up to 33% only).

I am shocked. I am stunned. I am flabbergasted.

Not at the difference of two dollars and fifty cents, but at the rate of change this implies. I think this is one of the early warning signs of what may turn out to be something much more ominous : hyper-inflation.

As I have said before and definitely more than once, inflation in Singapore, and not just in Singapore, but practically everywhere else too, is taking off and going exponential.

I have been monitoring this inflation situation for quite some time now. There were signs that it was getting worse and worse with each passing year, every passing month, and now it seems, every passing day. Just take a look at the prices of oil and gold, the classic indicators of price inflation. They are setting new records practically every day nowadays. Price inflation as indicated by the official CPI figures released for every month, is setting new multi-decade highs : from 3.6% in Oct 2007 to 4.2% in Nov 2007, to 4.4% in Dec 2007, and now it is at 6.6% in Jan 2008.

I have spent a lot of time talking to people about this inflation problem, and how it was going to get worse. Friends, family, colleagues. Few listened, fewer understood. And to a person, nobody that I knew took any action whatsoever.

But I did. I wrote blogs. I read up whatever I could on money supply (all the M's : M1, M2, M3), on inflation, on history's sordid tales of hyper-inflationary episodes, from France, to Germany, to Argentina, and, more recently, Zimbabwe. I continued to talk to anyone who would listen. I started to put my money into investments that would serve as a hedge against inflation.

I will continue to put up blogs on this site tracking the progress of inflation in Singapore and elsewhere. This time, it's war. We are going to have to wage our own personal war on inflation. This time, it's global. Whether you live in Singapore, Malaysia, US, Europe, or elsewhere in Asia. And this time, if things continue to roll down the slippery slope like they are, it's going to be exponential.

This past week has been a watershed on the inflationary front. Things seem to be happening faster than before. I have been observing the markets, and what the markets seem to be saying, is this : certain lines of resistance which have not been broken before, have broken down. The price of crude oil is now well over $100 a barrel. Oil at $100, instead of being a line of resistance, has become a support level. Oil is on its way to $120 and then $150, and then $200. Matt Simmons, investment bank CEO and energy advisor to George Bush, has been quoted as saying oil could go to $300. Gold has broken through resistance at $950 and is now at $974, on its way to $1000 and beyond. Platinum has breached $2000 and it keeps going. Wheat, the stuff used to make flour, and noodles, and bread, is setting records beyond $12 a bushel, (it was $3 to $4 a couple of years ago) and on certain exchanges has gone well beyond $20. The forex exchange rate of the Euro to the US Dollar (EUR/USD) has broken through 1.50. The US M3 money supply growth rate has hit 18.6%, and USDX, the weighted US Dollar Index, has broken down below 74.

And then there was this light bulb.

If there is any time for your personal light bulb to go off in your head, this is the time. I hope I am wrong, and this is one of the things that one really wishes one is wrong about, but if I am right, and that the early warning signs of an impending hyperinflation are here, it's going to be get rough. Be prepared.

Re-post from lowem.log :
Hyperinflation : early warning signs

Singapore economy stuck in mud : inflation rising, M3 falling, GDP crashing - the stagflation formula

2008-02-25T05:18:00Z

mas.gov.sg -> mas.gov.sg (pdf) :

The latest Singapore money supply figures are out. For the month of Dec 2007, the Singapore M3 money supply growth has continued to slow, and it now stands at 14.14% year-on-year. However, real inflation shows no signs of abating because we are at the point where economic growth is falling (crashing) faster than M3 money supply growth is slowing. The Singapore economy is thus stuck in mud, and the stagflation formula goes as follows :

14.14% M3 growth - (-4.8% economic growth) = 18.94% real inflation rate.

For your reference, the money supply figures for the year of 2007 are as follows (click here for the spreadsheet if the inline frame is not shown) :

As you can see, in 2007 we have been roaring along with an average M3 money supply growth of 20.6% year-on-year. It was only in the last 3 months (Oct-Dec 2007) that the money supply growth has slowed down considerably.

However, if anything else, this is even worse than the time where it was reported on this blog when M3 growth hit a high of 23.62% back in Jun 2007. At the time, GDP growth was reported to be a still-healthy 8.6% so the M3-to-GDP differential was 23.62% - 8.6% = 15.02% then.

Hence, for myself and for those of you readers who subscribe to the classic Austrian-school definition of monetary inflation as money supply growth relative to economic growth, the fight to maintain our purchasing power has just gotten a lot harder, and this stagflationary environment just makes things even worse.

Re-post from lowem.log :
Singapore economy stuck in mud : inflation rising, M3 falling, GDP crashing - the stagflation formula

US M3 hits 18%

2007-11-15T05:37:00Z

peakoil.com (thread, thread) -> nowandfutures.com :

For most of 2007, US M3 money supply growth was hovering around 12-14%. That was already quite high. But in the past month or so, M3 has gone vertical and is now hitting 18%, as seen in this chart :

- Since we don't have instantaneous 2007 Q4 GDP figures, let's use, for now, 2007 Q3 GDP growth which was 3.9% year-on-year. That is, if we take the government's word for it. Supposing that we do that, we divide 18% by 3.9% to get 4.6.

So, on a year-on-year basis, US M3 money supply growth is outrunning GDP growth by over 4 times. That is highly inflationary, going by the classic definition of inflation. You see this manifest itself in higher prices : all the way from the NYMEX exchange to the increasing gasoline pump price, all the way from the wheat futures markets to the increasing price of bread at the supermarkets.

Is 2007 Q4 GDP growth going to make up the difference and bring down the M3-GDP outpacing? It could, but that is not likely. Despite a confident outlook by Sony's president, the heads of various logistics companies are reporting incoming shipments into ports such as Long Beach, California have "fallen off the charts". The traditional build-up for the Christmas shopping season doesn't seem to be happening this year like it should.

The ongoing housing market bust isn't helping either, and neither are the problems in the sub-prime and derivatives markets. Not to forget that next year, 2008, is an election year for the Americans. Elections are highly inflationary.

Crude oil hits $98.03

2007-11-07T04:26:00Z

bloomberg.com :

Crude oil rose above $98 a barrel for the first time in New York as the dollar tumbled to a record low against the euro and a storm disrupted output in the North Sea. BP Plc and ConocoPhillips evacuated oilrig workers, adding to concern that supplies may be insufficient. The U.S. Energy Department is set to report today that inventories fell for a third week, according to a survey of analysts. Crude oil for December delivery gained as much as $1.33, or 1.4%, to $98.03 a barrel in after-hours electronic trading on the New York Mercantile Exchange. That's the highest since trading began in 1983. Futures have gained 66% in the past year.

The dollar's decline increased the attractiveness of commodities as alternative investments. A weaker dollar reduced the costs for buyers paying in other currencies. The dollar slumped to a record low against the euro on speculation interest rate cuts by the U.S. Federal Reserve will prompt investors to buy higher-yielding currencies. The dollar declined to $1.4666 per euro at 11:31 a.m. in Tokyo, the lowest since the 13-nation currency started in January 1999, from $1.4557 late yesterday.

"The supply and demand situation in the oil markets is super tight, we really have no wriggle-room whatsoever," said Brian Hicks, president of the Wealth Daily newsletter. "Any threat to supply is enough to send the price of oil up a dollar, two dollars every single day." Oil may reach $100 by the end of the week if the North Sea storm cuts production significantly, Hicks said in a televised interview.

- From a technical point of view, $98.03 is 40% above the 200dma. The RSI is hitting 69-70 and the Stochastics are hitting 89-90. The indicators are screaming overbought and yet it continues to power higher. At times, records are being set every minute. This is crazy. This is a runaway bull.

While the contrarians are cheering this on, we are also getting increasingly frustrated. We are pacing up and down. We are wondering, where, oh where the hell, do you make an entry point in this kind of market?

I'm looking back at my support levels chart. It bounced off $89 and I didn't even draw it. The blue lines are staring back : $85, $78, and $70. It would be absolutely freaky if I had to come back here and write that $100 is the new floor (!!!)

See also :

1. "It's going crazy" ($93.80) (29 Oct 2007)
2. Another day, another record ($92.79) (29 Oct 2007)
3. Oil rises to record $91.10 (26 Oct 2007)
4. Crude oil reaches record $90.02 after dollar drops against euro (19 Oct 2007)
5. Oil surges to record $88.20 (17 Oct 2007)
6. Oil futures hit new record above $86 (16 Oct 2007)

20.57% : Singapore M3 slows a tad

2007-10-26T05:28:00Z

mas.gov.sg -> mas.gov.sg (pdf) :

This could have been titled : "Do you hear anything?" You could almost hear the screeching of brakes as the Singapore M3 money supply growth rate slowed down, year-on-year, from over 23% to a 20.57% rate as presented in the Sep 2007 edition of the MAS Monthly Statistical Bulletin, for the month of Aug 2007.

The other sounds you hear might include the crash back on 17 Aug 2007, fading into the distance, accompanied by hushed whispers from some property agents about a softening housing market.

Poetic license aside, here's the M3 data (click here if you don't see the table in the IFrame below) :

Singapore's 2007 Q3 GDP growth was 9.4%, and if we take the two figures we do have for Q3 and divide by that, we find that M3 growth is still outpacing GDP growth by a factor of some 2.3x. Which is still inflationary, according to me (and those who follow Austrian economics).

And that is not exactly helped along by high wheat prices, which have doubled in the past year to over US$9 per bushel, driving up the cost of flour, which, you know, is made from wheat, and therefore also driving up the cost of bread, which, you know, is made from flour. A loaf of my favourite Gardenia high-fibre white bread has gone up from $1.70 to $1.80, then $1.90, $1.95 and now it is $2.00. I fully expect it to hit $3.00, then $4.00 some time later on, and patiently await the arrival of the $10 loaf of bread.

While we are talking about inflation, have you noticed the price of crude oil recently? I woke up early in the morning to a new record high in NYMEX crude oil prices - US$90.60 per barrel. Which was promptly broken a few minutes later, and the record (at the time of writing) is now <strike>$91.10</strike> <strike>$91.19</strike> <strike>$91.29</strike> $91.40 (shucks, it keeps hitting new record highs as I am writing this). A hint to motorists reeling from the recent 5 cent petrol price hike (from $1.910 to $1.960 for RON98 and from $1.836 to $1.886 for RON95) : you ain't seen nothing yet. I patiently await $100 oil. And then $150. And then $200.

A friend once asked me, so how do we stop all this inflation? I promptly replied : they have to stop printing money. He said that's not possible. I replied, yes, unfortunately, you are right.

A fund of my own

2007-10-24T05:18:00Z

When you start investing, usually you might start with a number of shares in some company that you somehow pick out, among the thousands of choices out there. Some time later, you might buy a few more shares, in a few more companies. Then you'd have a portfolio.

What happens if you continue, and buy yet more shares, until you find yourself holding shares in some 10 to 15 companies or so? At this point, you will either find yourself owning a complete mess, or you will find that you have started your own little mutual fund.

This is the point where I currently find myself. Excluding about 20 stock exchange and commodity indices and 6 currency pairs, I am tracking 38 stock symbols, out of which I own 19.

Personally, I find it amazing that I have gone so far (2-3 years) without having anything resembling a plan for asset allocation, although in my defence I am happy to say that I do have something of a strategy, which goes something like this : route all available firepower to the junior resource sector, lower shields to minimum, and charge ahead at maximum warp speed! Yes I know, that's crazy, and it's a wonder I haven't been blown to smithereens yet.

So, what is an aspiring fund manager to do? I have read quite a bit of the literature regarding asset allocation strategies : by country, region, sector, market cap, by value versus growth. But first, the most basic, most simple question : what is my current asset allocation like?

For that, I went to Google Docs and created a new Google spreadsheet. I used the GoogleFinance functions to enter price and market cap, and added my own data, including share symbols and number of shares owned. After that, I added categories and a formula to determine whether a particular company is small-, mid-, or large-cap. From my point of view, I defined small-cap as a company with a market capitalization smaller than $300 million, large cap as larger than $3 billion, and a mid-cap as being in between. Add to that 2 pie charts, one for asset allocation category and one for the small/mid/large cap division. Voila. And while the markets are running, the figures automatically update in near real-time. Very cool. The only minor issue is that I had to enter the currency exchange rates manually. I hope Google will later let me add automatically updated figures for USD/SGD and CAD/SGD. That would be nice.

So, what do I have? Without being too specific about it (and it keeps changing anyway), I have roughly 30% in uranium companies, 30% in hybrid/multi-resource companies, 20% roughly divided more or less equally between gold, silver, oil and natural gas, and the rest has gone equally into energy income trusts and cash holdings. Incredibly, that's quite close to what I should be aiming for, with just a few tweaks needed - maybe a little less uraniums and a little more income trusts would do it.

The market cap is another story altogether. I have a whopping 80% in small caps. That's, how shall I put it, borderline insane, though it *is* consistent with my strategy so far. Which has led to some spectacular successes (300% gains), and some equally spectacular blow-ups (80% losses). Perhaps I might want to dial back the aggressiveness a little bit. I maintain that the better juniors still have the best chance of the explosive upside that I crave (100%, 200%, 300% or better), but maybe that could be balanced by having some larger caps in the mix, but still within the resource sector. With peak oil, peak food, peak *everything*, and an ever-expanding money supply, the entire strategy remains, as it has been, resource-centric. Something like a 50-20-20-10 (small-, mid-, large-cap and cash) mix might do it.

So there. I have a fund of my own now. I have an overall theme, an asset allocation strategy, and I know what needs to be done next. If this were to be a commercially available fund, it would probably be classified as narrowly-focused, high-risk, sector-specific, with a risk rating of 10 out of 10, and the fund literature will mention something about a massive exposure to the Canadian dollar.

Exactly the way I want it.

Onward! :)

Singapore : Electricity price increase - 2007Q4

2007-09-26T05:01:00Z

Thanks to Simon Tay for the heads-up :

singaporepower.com.sg (chart) :

For the quarter 1 Oct to 31 Dec 07, the electricity tariffs will be increased by an average 4.29% or 0.86 cents per kWh due to the higher cost of electricity arising from higher fuel oil prices.

For the period 1 Oct to 31 Dec 07, tariffs are pegged to a higher forward fuel oil price of US$58.06 or S$87.46 per barrel. The forward fuel oil price is 12.91% higher than that of US$51.42 or S$77.45 per barrel for the current quarter. The electricity tariff is reviewed quarterly and adjusted accordingly in line with the fluctuation in the cost of electricity.

- For residential electricity, the new rate will be 21.38 cents per KWh compared to the current rate of 20.52 cents per KWh. No surprise to peakoilers, really. We've been up and down around the $75 level for this past quarter (2007Q3), and it was about $65 the quarter before that (2007Q2). Let's see if that hits $85 for this coming quarter. That will happen if NYMEX crude bounces between the $80 to $90 levels.

If you're talking inflation, that's a 4.19% increase over a quarter. But before you yell at gov.sg, consider that the crude oil price has gone up roughly 15% over the same period, which more or less tallies with the benchmark they use, the forward fuel oil price, which as they said is up 12.91%.

Side note : You know what, somehow I don't think gov.sg will want to do this for much longer - i.e. dampening the price movements for the benefit of the people.

23.62% : Singapore M3 money supply growth

2007-09-12T05:37:00Z

mas.gov.sg -> mas.gov.sg (pdf) :

The latest available Singapore M3 money supply growth figures are in, and the year-on-year M3 growth rate is a whopping 23.62% (June 2007 compared to June 2006). The GDP growth in Q2 2007 was 8.6%, and assuming we take gov.sg's word for that, this means that the total money supply is expanding at a rate of 23.62 / 8.6 = 2.7 times faster than the rate of expansion of the total economy of goods and services.

Monetary inflation is due to the rate of growth of the money supply being greater than the rate of growth of available goods and services in the economy, so this is highly inflationary.

The list below shows M3 growth rates in recent months (click here for the historical M3 growth figures dating back to Jun 2004) :

Note how it has stayed above 20% for each and every month this year, so far. Also note how it really picked up pace in May 2006 where it jumped above 10%, and then the next acceleration happened from Jan 2007 where it jumped above 20%.

We're looking in the rear-view mirror here, so the figures due to the Aug stock market crash aren't in yet. Will have to check back in a couple of months to see what effect that had on the money supply.

The Day After

2007-08-16T00:49:00Z

As the body count on hedge funds pile up, investors are eager to exit. To do so, they have to notify their fund managers by 15 August, in order to pull their money out at the end of Q3. I was wondering if this is the reason why 100s of billions injected by central banks worldwide since last Thursday.

Fun and interesting times

2007-08-13T04:54:00Z

You might know what they say about the famous ancient Chinese curse : "may you live in interesting times". The saying may be famous but it is in fact neither ancient nor is it Chinese, but the times, they are quite interesting, aren't they? Perhaps even fun. But I guess it all depends on your definition of fun.

Subprime loan problems? Hedge fund collapses? Credit crunch? Trillion-dollar stock market wipe-outs? Hundred-billion-dollar "liquidity injections"? Fun. Quite fun. I hear that people are calling up their brokers and yelling stuff like : "Sell everything. Get me out of all my positions". For the slightly (*cough*) more volatile stocks that I follow, this can result in, for example, charts that look like this :

The company has got properties in gold and oil and gas and uranium and has an oil services division that's actually bringing in regular cash flow. Did all that suddenly go away? I guess not. So there I was :

That's the intra-day chart, and that's me, together with some other buddies I do not know, buying in at $0.65 on a fine Friday afternoon (over that side). Shrug, it was on sale at 50% off - if you consider the recent prices in the first chart, where *somebody* was doing trades at $1.30 just less than a month ago.

Okay, so this is my definition of fun : selling when people are buying, and buying when people are selling. What do you think, *somebody* had to be on the other side of the trade, right? For folks like us, as legendary contrarian Doug Casey puts it :

"... when people are desperate to sell their possessions, he appears with cash - the very thing they want most. When they change their minds and clamour to buy those things back from him during good times, he once again graciously accedes to the desires of the majority ... if he wasn't there to buy, perhaps no one would be, and sellers would be really in trouble."

Well. Most people, including many who say they swear by technical analysis (TA), would be terrified. It's a complete breakdown, they might say. It's crossed below the moving average. It's gapped down. It's a double top. The internal indicators are bearish.

Yes, I know all that. And I went in to buy. It's all part of the fun to me, and you want to know why? Because I know one thing. The ounces of gold, the barrels of oil, the pounds of uranium in the ground, that these companies own, are exploring, or drilling for - these resources do not increase their supply at 10%, 20% a year. Literally, what you drill is what you get. But the money supply that underwrites our entire economic system, can, and does, grow at 10%, 20% per year. U.S. M3 is growing at 12, 13% per year. Singapore overtakes that, with 22, 23%. China is at 20-odd%. I hear that Russia is chugging along at 50%. I don't know about Zimbabwe, last I heard their *price inflation* was doing 5000% so their monetary inflation figure is probably even higher than that.

Limited physical resources, meet unlimited money supply.

It's going to be a grand collision. It's going to be fun.

Contrarian investing is fun

2007-08-12T02:19:00Z

The Contravestors Club now stand at a membership size of two (2): Lowem and myself. We meet weekly at Compass Point Starbucks Saturday mornings at 10am unless one of us have something on. And, we just chat away on the week’s market over our favorite cup of coffee.

Yesterday, something came up that compelled me to write this blog.

The thing is that if you’ve met a contrarian, you’d most likely want to avoid him. That’s because he’d be the one person at the party who’d be talking about the hurricane season, the middle east’s inability to increase production, list the names of hedge funds that’s since succumbed, etc, ad nauseam. The fact is most contrarians lose their audience even before he can get to the second part of his spiel.

Hence, what we decided is to focus Contravestors on that second part, i.e. the fun part. Lowem and I spoke of it as the ‘silver lining’. Everyone has faith that there’s always one. Here it is.

Contrarian Investing is fun, period.

Here’s how it works for me. First, I’ve done enough research to know that the world is now well on it way through a major commodity bull. Of all the commodities out there, my interest sits with gold, for two primary reasons: saving in gold as a hedge against monetary inflation (case in point, due to the subprime mortgage problems, the European Central Bank announced some 94B euros available to European banks. MAS has just announced that it has ‘some’ on standby too), and investing in the right gold mining companies who’s stock prices will multiply as more go for gold.

Second, which I believe is more important, is the spirit of my investing. Because of what I know, I cannot make a wrong bet (I hope I don’t sound cocky but this is truly how I feel): when I buy something, the price can only go up or down. While I’m instinctively happy when it goes up, I’m also thrilled when it goes down because my next batch of troops are going to get it for less! When I sell something and price goes up, I’d see it as an opportunity to research the stock a little more so I get better at it. The comfort that I have in me is that my troops are fully committed in this and I am taking 100% responsibility on how they turn out. This is about getting my power over my money back back from the banks, financial advisers and stockbrokers. It’s my money and if anyone who should be having fun with it, it’s me.

Shooperman