Saturday, August 06, 2011

Recession Looms ...

Singapore appears to be on the verge of a "techincal" recession[Link]. I can't recall a time when analyst said we were on the verge of recession and did not enter one. The global recovery has been a fragile one fraught with numerous uncertainties and recurring "mini-crisis" as the economic problems in US and Europe surfaced, subsided and resurfaced.

In the 2008-2009 recession, we fell sharply then rebounded quickly. The pain was short and sharp as govts around the world worked to counter The Great Recession to by spending trillions to prevent what many fear could be a depression. The real problems with the global economy did not go away - high debt levels, high income inequality and trade imbalance. Aggregate demand was maintained by rising debt levels in western countries as manufacturing jobs shift to china to exploit the cheap labor there - this formula for global growth is unsustainable and we are seeing it unravelling fast. If and when the recession comes, with few options left for govts to stimulate the economy, we may not be able to get out of this one so easily.

In Singapore, rising costs and the strong S$ has already hurt our manufacturing sector which slumped badly in the last quarter. The corporations doing well are banks, property developers and construction companies that are riding high on the property bubble. Most if the lending in our banks is mortgage lending and the other profitable segment is unsecured debt which has grown spectacularly in the past 2 years (Read Personal Debt Tim Bomb). See the resemblance to the US in 2005 when the economic boom was led by housing and acrivities associated with housing? The high price of housing has caused great unhappiness among Singaporeans but that is only one side of the story. When property prices begin to fall from the high levels today, the negative wealth effect and impact to our economy will be widely felt.The strategy of always trying to grow our GDP fast  - by financialising our economy through deregulation, importing cheap labor, casinos, housing bubbles etc - has made us more vulnerable in the coming downturn.  The growth itself did not bring about an improved quality of life for many Singaporeans as wealth has been very unequally distributed.

About a year ago, I wrote about the dire warnings of ecnomist, Warburton who wrote the book "Debt in Delusion"[my earlier article here] in 2000 about the growing problem of govt debt and the illusion of wealth created by the debt. The book has been prophetic and foresaw the "end game" of govt trying to solve the debt problem by printing money leading ultimately ti catastrophic economic consequences.

Today we are seeing a slowdown in the global economy and appear to be on the verge of new recession. The slowdown comes after trillions of dollars was spent by govts trying to stimulate the economy which added to the debt of many govts. The trillions spent should have produced quick and strong recovery but sometime towards the end of 2010 the recovery lost momentum and we started seeing a slowdown. There are serious structural issues and imbalances that have not been addressed.

Unlike the recession in 2008-2009, the western govts no longer have the financial resources to fire up the economy. They are laden with debt and had to cut down on spending . The "end game" of printing money was played by the US Fed and the European ECB. Half of Europe is now in recession and economist estimate that the US has a 50% chance of going into recession. There is a high level of debt around the world - not just govt debt but companies and household debt - the highest since The Great Depression, A recession will lead to a cascade of problems because these debts become harder to pay down in recession - we may see a vicious cycle taking hold if a recession comes. ....it will be a long one and we may see some fundamental changes to the global economy.

More than 10 years ago, Warburton wrote that printing money will be a last resort to avoid a quick collapse of the fiancial system. Warburton also wrote that it can only postpone the inevitable by kicking the can further down the road. At some pointed, the quantitative easing will result in inflation and they will have to stop. The falling US$ means that  wage earners, pensioners and the poor have to contend with higher prices at a time when the economy is weak... exacerbating the effects of the imcome gap which is at the highest in 70 years. While Bernanke's QE1 and QE2 have been very unpopular, the alternative of letting the markets and economy sink back into recession is even less attractive. There are no good optoons left and time is running out. The ECB has been printing money to repurchase the debt of Greece, Ireland and Spain[Link] to prevent a collapse. They buy some time[Link] - hoping, perhaps, emerging countries in Asia and Latin America that are growing at 6% can offset the slow down in US and Europe....it is best not to be too optimstic that things will fall into place rather than fall apart as we go into 2012.

33 comments:

Anonymous said...

In Singapore, there may be a recession again but we will recover, just like in 2008/2009 or earlier cycles.

But recession or not, majority of people will still be OK so peace and stability will be assured, unlike other countries.

That's why Singapore is a good place to work and live, and also that's why so easy to attract so many foreigners, some good, some not so good, to come too.

Since majority of people are doing OK all the time, I think it is not that difficult to earn a living and live decently in Singapore or even live well.

Uniquely Singapore, including the coming unique Presidential elections. Because I think no other country has our type of elections and President.

Anonymous said...

Anonymous said...7/8/11 08:17

Singapore is basically selling stability & predictable structure which currently commands a huge premium resulting in more and more buildings being built up & up cramming the whole place and more and more vehicular traffic jamming the roads.

Like in anything, there will come a critical breaking point where things will start to get nasty & implode. As so many things are packed so tightly & intertwined, they will also get unwound quickly at some serious sign of crack in the future, be it social, cultural, economic, environmental, health, etc ....

USA had their turn. Some countries in Europe had their turn. Japan had their turn. The magic question is when our turn will come ? Do we have the big space for some unwanted steam & tension to be diverted, unlike in some other bigger countries.

Anonymous said...

"The magic question is when our turn will come ?"
Anon 7/8/11 08:48

For 46 years, it didn't come. So I don't think our turn will come, even for the next 46 years!

And 46 years is quite a long time.

Anonymous said...

We always say "This Time is Different" - all political leaders are like the captain of Titanics as they navigate frigid waters and deny existence of icebergs or fragility of their vessels ......Try reading Rheinhart and Rogoff

http://www.nber.org/~wbuiter/cr1.pdf

Anonymous said...

"For 46 years, it didn't come. So I don't think our turn will come, even for the next 46 years!

And 46 years is quite a long time."

That is what I am so afraid of people who are so sure of themselves.

For someone who has lived for 80 to 90 years, do you think he or she will continue to live for the next 80 to 90 years. 80 to 90 years is definitely a long time, almost twice 46 years.

An analogy from an insight that I come to know from Black Swan.

Even some supposedly too-big-to-fail companies & countries did fail and had to come to an end or be rescued.

A big system run by not infallible humans may fail if it cannot adjust with time because of some dominating stasis or some enthusiastic wrong activity masking as solution or action.

Anonymous said...

If only govts around the world in 2008/09 had not used artificial money printing and debt monetization aka quantitative easing. True, we would have gone into a terrible Great Depression with 30%-50% unemployment rate. But the world system would have been cleansed and we would slowly be climbing out of the pit now in 2011, instead of talking about the next recession that will be worse because govts around the world have run out of bullets.

Anyway with such a self-serving system and self-serving elites, I don't give a crap anyway and I'm looking forward to another 60+% drop in stock market.

Pro Recession... said...

Certainly, there is too much at stake

The unequal distribution of wealth is a key factor in providing the will to put things back to 'normal'

People with high incomes and wealth will soon realise that their participation is required in order to enjoy the status quo.
Failure to participate will confirm their demise.. a notion that is extremely uncomfortable.

It is like a pyramid. The wealthy are at the apex, the poor at the base.. remove the base ( recession) and the apex collaspes.

people in the middle ( middle income ) will suddenly find themselves that they are now the "new" poor.

So, in their own interests, the wealthy will engineer another bail out ( QE3 or some other form of providing more $$, but still incuring even more debt )and life will coast along again.

I dont like this.

I prefer that pain, deep recession must be allowed to blossom.

In the process, war, riots need to be managed..a new order will emerge and a new generation of ipad zombies will be fully engaged.


In the past, it was students who engaged the politicians and forced a change.

At this moment, undergraduates in the universities are all asleep after a full night of playing WoW.

Apathy is a new norm.

Anonymous said...

And for the next 60+% crash in stock market, I don't want the same as 2008/09 where stock market crash 60% and then start to recover 100% almost immediately. This is bullshit recovery --- artificial and non-sustainable.

For the next crash, I want stock market & the economy to stay crashed for the next 3 years. Like that, when the recovery begins, it will be REAL and SUSTAINABLE recovery.

Anonymous said...

"In the process, war, riots need to be managed..a new order will emerge and a new generation of ipad zombies will be fully engaged."

Yes, very cyclical relative to time - civil strife, war, new order, growth, unfair & greedy exuberating & obscene accumulation, downfall, etc - either @ the local level or international level.

Just pray that this careful management will not result in yourself personally standing in the unfortunate line of fire (crossfire) - either real bullets from civil strife & war or economic retrenchment from structural re-balancing and realignment - whatever these big jargons mean.

Anonymous said...

By now the speculators (high end property aha!) should have run out of bluffs; when magnates skip the musical chairs during the busrt, those dicks, hairies that come out to short the movers shud make it faster than samantha sam did at the start of this land is o for opportunity buzz. Business as usual rain or shine; in fact i love the rainy days alot more. You bond better when you are hungry.

Anonymous said...

If we accept that economic cycles are here to stay, then we should accept recession and subsequent recovery as facts of life. The fact that globalization has resulted in a more interdependent world means that Singapore will not be spared. Question is how painful the coming recession will be and how the present govt address these challenges. The magic 46 years or 88 years are irrelevant to me. Come 2016, i.e 4.6 years from now is to me more relevant and optimistically hopeful.

Anonymous said...

"If we accept that economic cycles are here to stay, then we should accept recession and subsequent recovery as facts of life."

Well said. The problem is that wealth (or the cycle of growth & recession) is not accumulated, concentrated or equitably distributed in a way to match nicely the cycle of different individuals (best for the rich, average for middle class or worst off for the lower class) and the cycle that they need to feed their stomachs 2 or 3 meals a day (7 days a week, all year round till they expire from their natural usefulness which in biological terms means the need to survive or fight to survive).

Anonymous said...

wah all the bears are out in force! hahaha

Anonymous said...

A Lucky Tan once claimed that Obama is the bestest POTUS ever? No?

Treasury yield still very btw so I guess Mr Obama has to work even harder to bring down property prices in SG.

Ps: Do you miss Bush yet?

Anonymous said...

Hi Lucky,

"I can't recall a time when analyst said we were on the verge of recession and did not enter one"

ok, let me chip in abit

http://www.asiaone.com/Business/News/Story/A1Story20100810-231346.html

I think they predicted 10 out of last 4 recessions. :-)

regards

Ultraman

Anonymous said...

watch this http://youtu.be/XdVODFombco

A documentary on income inequality in US.

Anonymous said...

The fire must raze and burn everything down, only then a new begining can take place.

Throughout history this has happened

Hitler
Napolean
Ghandi

Even our own beloved LKY emerged when turmoil was the order of the day.
This current thinking that we can manage the injury and still continue to eat laksa will not allow a new leader to come forth.

Death must occur so that birth can begin.

http://veritas-lux.blogspot.com/ said...

The ghost of Karl Marx looms.

80 years ago, USA is having more trouble in the Great Depression, and yet its able to print to prosperity, but why not now?

The reason is simple. Rosevelt's printing target to create job for poor by means of production, this accelerate in WW2. The other critical component is protection of domestic market(so the money printing do not leak overseas), a high tax rate to the rich, finally regulation the financial industries.

Right now, our money printing goes into the rich at 0% interest--when the core reason for our crisis is income maldistribution. The whole world is gonna collapse on an even larger scale.

Anonymous said...

Let's see whether the foreign trash will sing praises of S'pore or start jumping ship when the shit hits the fan. I will have lots of questions for the MIWs when that happens.

Anonymous said...

"Let's see whether the foreign trash will sing praises of S'pore or start jumping ship when the shit hits the fan. I will have lots of questions for the MIWs when that happens."

Ask any questions you want but be prepared to accept any of the following final answers:

1. It shouldn't have happened, but it did, WHAT TO DO?

2. It was an honest mistake, LET's MOVE ON!

3. Tighten your belt please!

4. No amount of engineering could have prevented this!

5. We did the right things, the fault rests with the rest of the Singaporeans!

Anonymous said...

Let the foreigners leave. Sell their properties. Let prices retrace. Easy come easy go. Let those 2nd 3rd property owners who got fat profits also stomach the losses.

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Thrill seeker said...

Its just wonderful!

The ST index closed another 100pts
less... over 200points since last friday.
Finally, the days are getting a little less boring..

Other countries have:
Tsunamis
Earthquakes
Typhoons
Drought
Famine
Floods
Riots
Mass killings
Financial mayhem
Interest rate hikes

What do we have here?

Presidential Elections
Doom & gloom annoucements
1% fare increases..
Bloody hot weather
Traffic Jams
Absence of National flags
7th month getai noise
Property adverts in the tens

Singapore is sooooooo interesting..

Anonymous said...

"lack of flags"

i think it is getting worse and worse but on the bright side, can anyone explain why there are some who still decide to waste $10 for condoms on their side mirrors on the road? COME ON!

Anonymous said...

"waste $$ on condoms"

Singaporeans are wealthy people.. they go on holidays very often and they buy & sell properties like using tissue paper.

$10 dollars is cheap cheap cheap

Even taxi drivers choose their fares!

Anonymous said...

"Invest During Recession"

Good time now or should wait further?

Dividend King said...

"invest during recsession"

"good time to invest?"

Earnings reporting season over, dividends and results anounced.
There is another 6 months wait to hear any updates of any company's performance...

... the current market is still digesting the words of S&P and the US Fed Reserve..

Many bonds are maturing between now and end of the year.. all are waiting if the EU and US will be able to:

A) pay up
B) pay up by their Governments
C) default
D) re-finance

As of today, scenario B) is very likely with some in D)

Either way, the debt is just delayed of transfered to another book... usually the taxpayer.

So, invest? yeah sure. Just look for companies that are debt free and with products that people die, die must use... internet/electricity/buses & trains/medical/soap and shampoo..

Be patient ok?.. market ( STIndex) will drop more.. wait & see for another 2 months.. October is halloween.. plenty of spooks to scare the panties off.

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Captain Sail... said...

You cannot have a sale when no one buys.

So, if the index keeps going down, that means there ia someone buying but at a lower price than earlier.

During the depression in 1930s, the stock market in New York collapsed.
What do we mean by collapse?
No buyers?

Yes, but the shares of the company still exists along with the rights of ownership. The company ( which ever ) would have office equipment, paper, inventories and also unpaid invoices.

But most companies still had a price on their shares, just that they were worth 2cents. Like Singapore Airlines shares price may be sold as low as 20cents.

Would you buy them then?

All their aircraft, rights to land, rights to operate the particular route, all the engine spares, overseas properties, partnerships, software for bookings
and even customer database is worth more than 20cents per share
( even unused fuel!)

I am always intrigued by behaviour of people who react so mindlessly to market movements... whether its up or down.

Stay the course people... stay the course.. heading 360 degrees, steady as she goes.

I promise you the sun will rise tommorrow and also as long as you live.

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