Thursday, November 24, 2011

The world of wild fiat currency fluctuations....

The chart above shows the movement of the Australian dollar vs the US dollar. If you take a closer look, you will noticed that the Aussie dollar is 10% down from one month ago and one month ago on end-Oct it was more than 12% higher than in early Oct.

Imagine if you're a US company that closed a contract worth a few million in Australia after months of negotiations with a 10% margin for profits, one month later your profits are are wiped out if you don't hedge your contract in the currency market.

If you go through the annual reports of smaller companies listed on the SGX, you find that many don't hedge their contracts. A whole quarter or even one year of potential profits becomes losses due to large foreign exchange movement.

The large movement can also affect the competitiveness of a country. If a country's currency falls, it makes companies in the country more competitive. For export dependent countries like Japan, the govt intervene regularly in the currency market to make sure the Yen does not rise too quickly.

The movement of a currency can reflect the economic state of a country. If you have a troubled economy, your cirremcy would fall. However, forex markets do not merely reflect the state of the economy, they can amplify the weakness in the economy and make it impossible for govts to fix their economic problems. Mahathir once said forex speculation is evil during the Asian Crisis. He was ridiculed and laugh at by western commentators. Today, we see the problems in the Eurozone amplified not by the forex market but the sovereign bond market - speculators have driven the interest rates for the bonds of troubled countries to historic levels ...these countries may have been able to service their debt at lower interest rates now have a high risk of defaulting because interest rates are so high...because there is higher risk of them defaulting, rates move even higher in a self-fulfiling manner.

Of all the currencies, I choose to show the Aussie dollar because it most clearly reflects what speculators think of the state of the global economy. The Australian economy stands at the cross roads - it is a developed economy that export resources to emerging countries and a western country located nearer to Asia than the other Western countries. When the Aussie dollar goes up, speculators think the global economy is in the pink of health but when the Aussie dollar goes down, it is because speculators think the global economy is getting worse. Speculators can be wrong and constantly correct themselves. 1 month ago, they the Aussie dollar was 10% higher and they thought the global economy was back on its feet today they think the global economy will falter due to the Eurozone crisis. The wild swings in the Aussie currency reflects the uncertain outlook of the global economy.

So how will things unfold in the coming months? Minister Tharman thinks a severe slowdown will occur, the property speculators queuing up in Bedok think that good times for property is here to stay, Warren Buffett sees no sign of economic recession in USA. In the 2008 recession, there was clear consensus that the world economy will enter recession several months before the recession came - the reason was the economy was firing on all cylinders in 2007 with low unemployment and high capacity utilisation. When aggregate demand fell, there was plenty of fat to cut and it became clear a recession was on the way.

Today the US economic activity looks like this measured by the real time Ceridian Index

What has happened is despite making record profits quarter after quarter, US companies refused to expand payroll and invest for expansion due to the uncertain outlook and this has gone on form more than a year since the Eurozone crisis started. Today US economic activity is where it was in end 2010 and it spent one whole year zig-zagging going nowhere. It has not even recovered fully from the 2008 recession. Economists have speculated that the US will slip into double dip recession since mid 2010.

The US economy is largely domestic unlike Singapore's which is export driven and will go where our major trading partners take us. As the US economy struggle sideways, the homebuilding and construction sector has been falling for the past 3 years. The wildcard is when this sector recovers it might give some lift to the US economy. However, it is likely the Eurozone problems tip the US into recession before the US housing sector recovers. It looks like Germany is playing hardball with errant EU countries forcing them into economic austerity and capitulate to more monitoring by the EC authorities refusing any quick fixes such as ECB printing money to ease the problem. Delaying the solution framework to squeeze some fiscal discipline out or EU members is a risky business as the fiaancial markets go into a tailspin.

The falling Aussie dollar in Nov 2011 shows that collective speculators' expectation has completely turned around from a month ago. Contrast that with the relatively stable level of economic activity. Because speculators operate in a herd like manner sometimes with expectations running ahead of reality,  some contrarian investors would position themselves against the herd to take advantage of these market "overshoots". The problem is speculators can get it right and their bets match up to reality and the markets go from one extreme to another. Speculators can also manufacture the reality they are betting on - a fall in a currency can cause investors to panic and take their money out of a country leading to more falls in the currency. Based on the Aussie dollar movement, we have again reached the point of high anxiety and fear in the financial markets - a point where the risk is high and so are the potential returns. While the global economy is certainly slowing, speculators seems to have bet on a more sinister outlook  some kind of more severe global economic disruption drom the crisis in the Eurozone.


Anonymous said...

The Sing $ also falls vs US$ and even the ringgit in recent days.

So does this mean the Singapore economy is heading for recession? Or is it already in recession? Will unemployment rise?

But it seems the MRT is as crowded as ever because of people going to work.

For my area, the resale HDB prices are the highest ever now. It is now 4 times the price I paid for a new flat nearly 20 years ago.

And BMW is the top selling car brand in 2011!

So how come like that? Does it mean even when times are bad in Singapore, everything still look prosperous? Because 60% voters are still prosperous?

Anonymous said...

When times are bad in Singapore, only 40% will suffer. They will also be very unhappy and not satisfied. But at most, they will just don't vote PAP, that's all. Not like other countries where they protest on the streets. But sometimes no use also.

60% will be happy and satisfied. Some may suffer because they are poor but they are still happy and satisfied.

That's why Singapore is so peaceful, stable and prosperous.

Anonymous said...

Aussie dollar is today linked to China economy. The recent drop in Aussie dollar is due to contraction of China economy. The US dollar has strengthened recently so it seems Singapore dollar falls and Aussie dollar is weakened. There are 2 factors here - China economy and US dollar strength.

Anonymous said...

If ever any of the 40% goes onto the streets, they will be met by the 60% head on.
This is the reality!

Anonymous said...

Simply put, the means by which countries were able to produce less and consume more has hit the wall.

The excesses of the globalisation was made possible via financial engineering where production was exported to countries with a lower cost base and consumption was maintained by countries who borrowed to sustain consumption.

Property prices now are fueled by credit, speculation and immigration. When all the big boys in the room develop similar vested interests, it is inevitable that prices will continue to bubble and pop only when triggered by external events. Remember 1997.

Anonymous said...

"If ever any of the 40% goes onto the streets, they will be met by the 60% head on."

Sure or not?

And which millionaire Minister will be leading the charge?

Or maybe the millionaires will volunteer you to lead the charge.

You can die for their greater good.

Anonymous said...

You are right. AUD is highly speculated because it is a so-called "carry trade" currency. Ultimately, when investing, look at fundamentals and value. And ignore wild short term market movements.

Lucky Tan said...

anon 17:02,

Let me explain why these wild fluctuations are useful for long term value investors and what is the use of the Aussie dollar.

In a crisis situation there is always value in the markets. But a value investor also wants to avoid catching a falling knife. As these carry trades are disrupt markets begin to move down day after day...and the downward move is serially correlate as well as correlated with the currency movements. You know the selling stops when the Aussie dollar rebounds strongly.

That is when the falling knife sticks to the ground at least temporarily until the actual crisis worsen.

For example, today there is a sharp rise in the Aussie and that could possible mark the end of the 3 weeks ferocious selling of global equities.

Anonymous said...

no one promises that life can be easy in singapore. life is tough everywhere even in us and europe. without a job (in canada, australia, us or europe), life is worst than living in singapore as one can easily freeze to death.

Anonymous said...


we need a little laugh from time to time lol

Winking Doll said...

At Anonymous at 24/11/11 17:53

"without a job (in canada, australia, us or europe), life is worst than living in singapore as one can easily freeze to death."

Yes and no. If you're willing to go to the various free shelters during winter and eat from the food bank, you won't starve or freeze to death even without a job in Canada. Of course, not forgetting, if you lost your job in Canada, you will get Employment Insurance payout to keep you going in the short-term (of up to 1 year). As for the "yes" part, all the above is available but you cannot force an ox to drink water if it doesn't want to.

Anonymous said...

Don't worry Mentor Millionaire.
I GongGong Kia will protect you against the 40%.

I have a 25 year bank loan on my HDB flat. If I die defending you, the bank can still squeeze the money from my wife and kids.

I will make sure I die defending you and my bank loan.

Your $10 million dollar fully paid-up bungalow is safe in my hands.

Singapore Man Of Leisure said...

Good tip on using the AUD as an indicator to see if it's "safe" to tip-toe back into the market!

I normally use crude oil futures and USD as my indicators for global sentiment.

Hmm... Maybe AUD does reflect the risk on risk off sentiments better!?

I will do some research this weekend. Thanks for sharing Lucky!

Anonymous said...

Dear Lucky, When will the property market in Singapore crash? I am waiting to a buy condo as I am not eligible to buy a HDB.

Anonymous said...

Moi Cher Monsieur Lucky, please tell me when will the property market in Singapore crash? I am waiting to a buy condo as I am not allow to buy a HDB although I am Singaporean with singaporean kids.

Anonymous said...

Countries around the world are not doing much to help PIIGS, yet everyone is quick to chastise Germany for playing a dangerous game of hardball.

We have to realize that it is unfair to expect Germany to help guarantee or shoulder the debts of others, just as how we are unwilling to do it.

If countries or companies are allowed to get away easily, there will be a moral hazard and no lessons will be learnt. Just look at the Wall St companies.

Allowing countries and companies to fall is the way of the true free market, and is the best way to ensure a healthier system emerge.

Theoretically it is possible to get there by taking the middle road of punishing the problem child but not too much, but in reality it will never work out, due to slippery slope issues and the inherent greed of Man.

That said, I am not saying Germany is faultless, as the Germans played a key part in happily lending money at low rates to their neighbors to boost demand for their exports.

Anonymous said...

The property market won't crash so soon. Not with government intervention.

The government is trying to delay the inevitable. It's aim is to clear its own BTOs first then let the market crash.

That would be 2 years, give a few months, from now.

Anonymous said...

Singapore property market will not clash lah simply because of strong demand and controlled supply. This is not really a free market. If the property market clashes this will greatly affect the GDP and the good show of this government. The population will have to continue to rise to 6m or 7m. With shortage of land and reducing size of the HDB flats, the property market is well supported. In fact, those who wants to stay on this rock should seriously consider buying a roof. Otherwise, it may be even more expensive and small size in the next 5-10 years.

Anonymous said...

Anon 25/11/11 04:09:

Yes, agreed. I seriously think the property market will stay as it is if not gong up further. The government is well known in manipulating property market to show a good GDP performance. The key question is: Will this government be so silly to let the property market clash knowing that its happening will cost them votes? If the property market clashes, it will be the end of MIWs in power.

Anonymous said...

"The property market won't crash so soon. Not with government intervention... The government is trying to delay the inevitable. It's aim is to clear its own BTOs first then let the market crash... That would be 2 years, give a few months, from now..."

Time to SELL when you see these smart writings on the wall.

Anonymous said...

Other countries I don't know but I can tell you Singapore properties won't crash!

To say it will crash is like saying our local banks will go bust.

Or no foreign talents or money will come to Singapore anymore.

Simply put, it means Singapore is not a place fit to live anymore, even to those foreign talents.

So if these things happen, it will be the end of Singapore. Other countries can still survive with such things but not SIngapore.

Anonymous said...

Keke! So many property agents on this site at 4am --- after whole night knocking on HDB doors and asking whether want to sell or not.

Aiyah S'pore banks will survive property crash one lah. When property crashed 40%-50% before, the banks still survive what. Govt even helped DBS to survive by giving POSB to it. So don't worry lah. Your HDB and condo can drop 40% over the next 3 years, the banks still there one. And ministers will still be getting multi-million dollars. Lagi best for them. They can buy GCBs for $15 million, when they need to pay $30 million today.

Anonymous said...

Hi Lucky,

I get your point about not catching a falling knife.

However, tracking the AUD isn't as easy as it looks. In FX, trend is your friend. But no "FX expert" out there can confidently tell you ex-ante whether a trend is turning. By the time they can confirm a turn in the trend, the equity markets would have moved as well. A rebound in AUD can be due to a myriad of factors. E.g. an illiquid market (24 Nov was US Thanksgiving and US was out), large profit-taking on short AUD positions by hedge funds, people buying the AUD after seeing it come off from high levels, etc.

IMO, any investment decisions made based on correlation of AUD to stock market is at best, a guess.

Anonymous said...

If economy turns bad, and the retrenchment and even lower pay checks becomes the norm, no one can afford the expensive HDB flats anymore. Those who are paying for it but because of losing their jobs will also also lose their CPF money along with their flats but thankfully for the gov, nothing, as the remaining money for the HDB will still be pegged to the unfortunate losers of this economy gladiator ring.

The gov will import more people, more of the richer kind who can afford the sky-high prices but when it reaches a point where even mid upper classes people gets dragged into the competition for jobs or even for businesses opportunities, things will get ugly, hopefully more for the gov.

There will be losers in this madness but hopefully, it will be the gov.

But with the gov being the card dealer, take your chances properly. There are very slim chances available, only the best and able, sad to say, can survive this economy and citizen genocide.

I do encourage locals to take another passport, by the way. Do it quietly. No one will check. It will come in handy in these economic madness.

Teddy Bear said...

You will not know death has crept in.

Slow & easy.. very comfortable pace.

There will not be any "bang!"..
each week, STi will slip gently 0.5%.... very, very slow...

Property market?.. it will also be very, very, slow.. each quarter the price will slip just 0.1 %... and lag behind the STindex.

Let me know if anyone is willing to bet on this.. odds on.

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Anonymous said...

Stock up on the usd period.

Anonymous said...

Stock up your rice and soya sauce.

Anonymous said...

I would think better to hedge all naked positions in AUD now. Basically the fundamental economic assumption that market is rational doesn't hold at all, especially so for a sentiment driven market like AUD. Now the market is in a risk-averse mode, with slightest news indicating deterioration in europe debt likely to cause down swing in aussie. Value investors who think they can see the true value of the AUD may come in. But how wrong they can be. Currency market basically is 80% sentiment, 15% intervention and 5% value. It's unlike equity market where you can go for fundamentals if investing on a long term horizon. Warren Buffet performed in equity investments going for fundamental value. But he flunked in the currency markets. George Soros made his name in currency trading not as a fundamental strategist but because he subscribed to the theory of behavioral finance.

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