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Category Archives: Economics

This is where we share our views on the respective economies around the world.

Greece a HOT TOPIC and clearly a disruptive element in the financial markets

I have been asked to give my 2 cents worth about the whole situation of Greece and the EU.

After Euro323Bn worth of financial support to Greece, EU and its member countries, together with ECB and IMF have proven their commitment to the Eurozone, however, this ‘bottomless pit’ cannot continue, as it will cause a financial drain to Euroland.

More importantly, the monies can be better allocated to other EU member countries for economic growth.

We know the debt is not sustainable and it needs to be restructured to include a ‘haircut’ and deferment, otherwise, anything else simply doesn’t work as Greece has no engine of growth.

What are the engines of growth for Greece; shipping, commodities and tourism.  Can these pillars of the economy generate sufficient income for Greece?  Structurally, the problem in Greece is the fact that civil service and pensions ballooned in the past 8 years, sucking the lifeline of the country.  Less and less people are working in the private sector as prospects are so poor, so all flock to become civil servants for the ‘iron rice bowl’.  The wealthy has always escaped taxes and probably will continue to do so.

What is interesting is that post EU in the early years after the millennium, capital and investments poured into Greece and it actually enjoyed prosperity in the early and mid 2000s.  What happened to all that good work?  Where did all the monies go?

Going forward, they are talking about ‘Marshall Plan for Greece’ where E35Billion will be used to rebuild the economy through investments.  The real issue is who is going to drive this?  Will the monies really go into the working wheels of the economy or just into the fat pockets of politicians and bureaucrats?  This is  dangerous proposition, and may well be another delay tactic to postpone the inevitable.

I feel that Tsipras should have a heart to heart discussion with ECB, EU and IMF about how to rebuild the Greek economy; identify engines of growth or potential engines of growth, invest in these potentials, as it will be the income generators for the economy.  Forget about collecting taxes and reducing outrageous pensions, these is only a stop gap measure.

There must truly be sincerity from both parties, not just more politicking.

FOMC Tonight! Any surprise from Janet Yellen?!

Alot of buzz in the media about Janet Yellen and FOMC tonight or rather 2am Singapore time.

Is she going to surprise with a rate hike?!

Market talk is July…………….September……………November………….take a dart and throw it on the board!

Personally, I don’t think she will surprise the market by hiking rates, although, I do believe she will shed some light on how she is going to access the US economic and interpret its projections going forward.  This should provide some clues as to when?!

Recently, she has been spending time talking about the world economy and how it’s not doing too well. While non farm payrolls has been trending above 200K, the last two months has been showing a slight downward movement despite the stronger number last month of 280K versus forecasts of 222K.

Housing is still a mixed bag of information.  Retail sales as well.

However, whatever Janet is going to say will provide CLARITY and that in itself will be USD positive.

Just checked to do a put option till Friday GBP and EUR averages about 80bps.  Am I prepared to gamble 80bps?

Let me think about it in the next few hours and update all of you.

Hollywood; The drama surrounding the debt ceiling limit

The Americans are so into the theatrics, they just love Hollywood, they love to create a Wow factor at the 23rd hour 59th minute………good or bad.

I believe the debt ceiling limit will be raised again, why?  Simply because it was raised twice before during the past 14 months; from US$14Tn to US$15Tn to US$16.9Tn.  However, as responsible people in positions of power and responsibility, they just can’t simply raise it without giving the impression to the public and the world that they have grieved over finding a solution and ‘cracking their heads’, and finally, they have no choice but to resort to raising the limit again.

The basic government revenue model is flawed as the inflows is less than the outflows with each passing year.  The government does not have any proactive revenues, all their revenue stream is the traditional passive; taxes and duties.  Until they solve the basic revenue and expense model, the deficit will never be reduced, unless, there cutbacks in the outflows.

Today, the US credit rating is not in question so far, though both Fitch and Moodys have changed their view to ‘negative watch’ but still ‘AAA’.  If the US doesn’t increase the debt ceiling limit, by the end of November when a huge sum of monies is required to pay for the coupon on the outstanding treasuries held by governments and central banks around the world, will not be honored.  This will have a tsunami effect across global financial markets.  Can the US really afford this to happen, let’s not forget that the backlash to the US will be greater than the pain caused by the US to the rest of the world.  Can the US afford to have a credit rating downgrade?  I do not believe so, the US will defend its AAA rating with its life.  Let’s not forget that Japan and China has majority stake in all outstanding treasuries around the world.  If they dump the treasuries, what will happen to the US?

The American people have been living off credit and borrowed monies for the past two decades, if there are going to be casualties, they can only blame themselves.  I mean the US government is the biggest culprit of living beyond their means and running deficit for the past 10 years.

However, because the the huge uncertainty, it is nearly impossible to work out a strategic potential trade.  Coming up with a risk adjusted trade idea based on fundamentals and or technicals is a better bet than betting on the whims and fancies of politicians……..we are guaranteed to lose………and lose big time.

One hour after Durable Goods Orders………..

One hour after the announcement of better numbers for the US durable goods orders, the current spot rates are as follows: –

EURUSD  1.3109

GBPUSD  1.5444

USDJPY  97.61

AUDUSD  0.9274

 

Basically, except for the EUR which continues to hold a weaker position down by 20bps from the time of announcement, the rest, that is, the GBP and JPY are flat and the AUD is 5bps higher than at 8:30pm.

Seems like the European and US markets are losing confidence in the US Dollar.  However, the Dow Jones is up 96 points this morning in New York.

I believe some calm or rationale has come back to the marketplace for now.

Update on Gold

dji and gold

The above is a chart that superimposes both the gold price graph and the Dow Jones Index.

Generally, there is a negative correlation between gold and the equity markets.

During the boom years of 2006 and 2007, look at how poorly performing gold was, and we see it again during the latter part of 2011 and this year.  Every time there is good economic data on the recovery of the economies and growth story, the price of gold will drop.

However, it is a reality today that gold is an asset class that is part of the asset allocation in an investor’s wealth portfolio.  It is no longer looked upon as a traditional hedging instrument.  It has come of his own in the past 12 years.  Today, there is a deep enough and broad enough market, that is, sufficient retail, corporate, institutional and government are and have invested in gold.

Today, it could be argued that gold is a pseudo currency, it has liquidity, it has an underlying value and it can be used in trade.  When the world is flush with liquidity and interest rates are low, confidence wanes in currencies as investors feel that the underlying value of the currency is weak, given that the global economies are weak, except for the emerging markets and Asia.

I believe the worse is over the the United States and for Euroland, there are still some bumps ahead, however, both economies have exhibited resilience and tenacity, they have turned the corner.  Now, just because they have turned the corner does not mean that the road to economic growth will not have hiccups, it will and we should expect it.

We believe the medium term 3 year outlook for gold would be that it will find a base at about $1,000/-.

Right now, institutional investors, that is, the fund managers are all selling gold or calling for a sell in gold.  The gold market is extremely bias short futures which will continue to add downward pressure to the price of gold.

What is the recommendation?

If you have gold holdings or gold ETFs, do consider rebalancing your asset allocation back to more equities.  The outlook for equities is positive and yet dangerous.

Right now, equity markets are driven and supported by liquidity and not by fundamental growth in the economy nor healthy earnings from corporates.

If the transition to a healthier economy and strong corporate earnings happen when QE is pulled back and interest rates rises, than equity markets will continue to rise.  If this transition is not handled properly, then, we may see some significant correction in the equity markets.