Enzo's Take On The Mess

Readers of this blog would have noticed that I haven't been writing much original thoughts of late - its tiring repeating the dire and tyrannical. Might as well let others whom I respect (definitely not Kudlow and Cramer, they are both better off as cartoon characters, wait a minute... they are! ..) to share their thoughts. Enzo von Pfeil has been an investment economist all of his professional life. Having studied under Nobel Laureate Friedrich von Hayek in Freiburg, Germany, he got his PhD in economics and then joined some of the major banks in their day: Morgan Guaranty, Schroders and Warburgs. He was Chief Regional Economist for major stock brokerages in Hong Kong since 1990. Excerpts from Dr. Enzio von Pfeil's December 11, 2008 appearance on CNBC Worldwide Exchange:

1. Governments are stepping up measures to ward off the worst financial crisis. How effective are these measures?
   • From a structural perspective, they can be only of limited use. As Robert Samuelson posited in the South China Morning Post, “Private behaviour is neutralizing public policy.” Indeed, The Economist’s illustrious editor, Walter Bagehot (1826-1877) arrived at the same conclusion in London’s City when he said that any money given to Central Banks was not finding its way into the private sector.
   • Thus, the current Economic Time™ is characterized by an excess demand of money. But the reason that Central Banks cannot create an excess supply of money is because commercial banks are the ones who refuse to lend - only, once they re-gain confidence can an excess supply of money be created.
   • So, current measures, are at best, bail-outs. Sadly, it seems as if politicians are privatizing the gains and socializing the losses in areas such as the US car and banking industries. Thus, I am not criticizing governments for acting; it’s just that their room for response is limited.
2. How deep are you expecting the recession to be, and what will be the impact on financial markets?
   • How long is a piece of string?
   • My guess is that the world is going to “L” and will remain there until at least the end of 2009.
   • Indeed, I have likened the current state of the market to that of a fish flopping around on a hot cement sidewalk (as opposed to a cat on a hot tin roof).
   • Leery lenders won’t budge for a long time.
3. When do you see the markets bottoming out, how much more downside is there?
   • Expect to see another 30 – 50% down, once earnings start hitting and analysts have to revise down their rocketing price earnings ratios.
4. What are you expecting from the FOMC meeting next week? A zero rate policy? Reality?
   • More quantitative easing from Bernanke-san.
   • As Robert Samuelson points out in said editorial today, “…the Fed’s new loans and credits easily exceed $1 trillion.”
5. What is your investment strategy, and some trends and themes for 2009?
   • Please see below.
   • The global Economic Clock™ will keep showing an excess demand for money and thus an excess supply of goods.
6. Are there any other topics you'd like to discuss?
   • The current bailout packages are creating scary consequences down the road.
     • On the fiscal side, the US federal budget deficit will balloon.
     • On the monetary side, as Samuelson points out in today’s editorial, the Fed has moved way beyond being a lender of last resort. Indeed, now it is a hedge fund with a) the most toxic assets and b) nobody who knows how to run this hedge fund!
   Excerpts from Dr. Enzio von Pfeil's November 18, 2008, appearance on CNBC Asia, Worldwide Exchange:
7. Asian economies are in technical recession - how does that impact your investment strategy and asset allocation?
   • Investors have discounted this mess for the past six months.
   • Thus, I have no major changes to my investment strategy/asset allocation.
8. What are some investment themes up to the first half of 2009?
   • The next bubbles that have to burst are:
     • Long-dated bonds, on account of the rising US and other budget deficits, and
     • The dollar itself.
9. Which markets and sectors do you especially like?
   
   • No markets, as the global Economic Time™ is virtually the same everywhere: the chickens of irresponsibility are coming home to roost.
   • If one must be in markets, then invest in “vital” sectors like consumer staples, food, healthcare. At least, they won’t get hurt as much because people still have to have these products and services.
10. Current earnings so far - what's your outlook going forward?
    • Earnings will go down even more. The Economic Clock™ is clanging for:
      
      • Excess demand for money, and
      • Excess supply of goods.
    • Under such a scenario, it is impossible for corporate earnings to improve. Indeed, “layoffs” news has just reached our shores in Hong Kong.
    • This implies that neither turnover nor margins can rise.
11. Is there anything else you may want to highlight?
    • Obama’s influence on China and vice versa. It seems like Obama will have to go protectionist, as many of his voters expect this. Meanwhile, Chinese officials will start taking their wrath out on the local operations of U.S. multinationals – something which my most recent book, Trade Myths: Globalization and the Trade Balance Fallacy, warns of.
    • Bond blow out. Seems like markets are not quite aware of the extent of public debt that is being created now that the chickens of irresponsibility have come home to roost.
    • Cost push stagflation. We have been bleating on about this since Spring 2006, so at some point this will occur. This will hit particularly those countries/areas whose currencies have fallen the most against the US dollar, e.g. Euroland (rapidly morphing into Neuroland).

p/s photo: Chen Kuang Yi

Singapore Property Outlook

Singapore property market is always very interesting. There is a high degree of speculation and much of excess liquidity would always find their way into properties there.

Thanks to its clear cut policies and very stable currency, Singapore properties attract investors from HK, Brunei, Indonesia and Malaysia as well. Hence, when it is hot, it is very hot. When it is not it can go south very quickly.

Its a very brutal market place. One that is not so dependent on "employment" as a main factor - i.e. if you have jobs, you still can make the installment payments. In Singapore, the dominant factor in properties has to be speculative element. The investors that buy 2 or 3 lots per launch. For them, the jobs factor is not in calculation but rather more important to predict the flow of capital. Prices of private homes have fallen for the first time in four-and-a-half years. This marks the end to the property boom that started since 2004.

Consultants say prices are likely to keep falling well into next year. Overall prices of private homes slipped 1.8 per cent, after flattening out in the second quarter. Consultants called it a turning point after almost a year of deadlock between buyers and sellers. Citigroup analyst Wendy Koh predicts that high-end home prices will fall by 25 per cent, the mid-end by 15 per cent and mass market by 5 to 10 per cent.

On the jobs front, Singapore has been the strongest beneficiary of hedge funds setting up shop there. Thanks to proactive measures, many hedge funds have chosen Singapore as their base. The pollution in HK has also seen some relocations from HK to Singapore. The number of expatriates, in particular from India, have also boosted inherent property demand. The events over the last few weeks would have put a halt to many of the expatriate postings. The more severe effects have been from those linked to hedge funds.

A cursory glance would reveal that more than 50% have closed shop over the last few months, no kidding. More are likely to close due to a huge loss in assets under management, poor performance and redemptions. The fact that Singapore dollar has held up the best among major currencies will only cause many of those affected by the crisis to sell Singapore property first to get cold very hard cash. I mean, who would want to sell their OZ properties now if they were a foreign investor?

The last 4 years have seen the Singapore mid-high end market being beneficiary to the enbloc sale phenomenon. Older condominiums were sold enbloc for premiums (to prevailing market prices) from 50%-100%. This freed up a loy of capital and saw much of the seller buying back into the private high end market with their windfalls. The first 3 years were very profitable for these players as they could buy and sell for a quick 30% gain after just a few months. As usual, greed takes over and you will find the same buyer now having 2-4 such properties for speculation (they'd call it investments). How fast can you scale down to protect your capital? First out best dressed.

The other related problem is the ruling that you can pay 10% deposit and nothing till the property is completed. Well, that sounded like a great idea before. Now a lot of properties will be completed in 2009 and 2010 and even 2011. If you have that, you are like holding a call option until the property is completed. The danger is that many would still be able to make the installments but would you be happy to make the payments if your property by then had sunk by 20% in value? First out best dressed again.

Evidence that more downside is to come: a blogger went to a couple of launches and was given the aggressive sales pitch. As long as you can put down 30% as deposit, they can arrange for a line of credit amounting to your yearly income. Hint, hint! You know where this is going. Its almost like maxing out your credit card on cash advance to put as down payment, something's gotta give. Desperate times call for desperate measures.

Naturally, there will be a lot of those who will come in to defend that property prices won't fall by that much, and that things are different in Singapore. I would like to remind all that we are going through a massive de-leveraging process globally. There is a huge aversion to leverage and credit, and the first asset to get de-leveraged will always be property to individual investors. But you say that Asian players are not that affected by the US subprime and CDS crisis. Really?? Asian markets have already tried to factor in the massive downswing. Asian markets have actually fallen more than the US markets dollar for dollar, and if you take in the dollar effect, the market cap loss is even higher. As you all know, Asian economies are tied very closely to their stockmarkets. Many have been able to avert the large losses as there was plenty of time to scale down your stock holdings, almost all could see the correction before it actually happened. Safe to say that the huge wipeout in market values over the last 6 months have been on institutional investors and die-hard traders only. Most of the individual investors have largely been unhurt.

Having said that, most of the rich individuals with substantial equity portfolio have seen their value being decimated. Though they may still have cash and not reached pauper status yet. Their net worth may have shrunk by 50%, just ask Lee Shin Cheng or Lim Kok Thay. Try and sell them a few Sails condo, they would wave you off as being stupid,.... unless it was at least 30% cheaper.

It is very hard to write negatively about properties, even for consultants, journalists and analysts, as most have properties of their own, and would be loathed to write anything bad about it. So, beware of those who try to mount a defensive argument.

p/s photos: Ema Fujisawa

Buffett Likes The Mess The US Is In

SMH: Warren Buffett, the world's richest man in the Forbes magazine list, said in a newspaper commentary yesterday that he is buying US stocks even though the American economy is in a "mess".

Mr Buffett, 78, who became known as the Oracle of Omaha because of his fortune-building skills, said he has been buying into US companies even as "fear spreads".

"The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy and the leaks are now turning into a gusher," the head of the Berkshire Hathaway Inc conglomerate wrote in The New York Times.

"In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

"I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy). If prices keep looking attractive, my non-Berkshire net worth will soon be 100 per cent in United States equities."

The reason, he said, is a key maxim in his outlook: "A simple rule dictates my buying: be fearful when others are greedy and be greedy when others are fearful.

"Most certainly, fear is now widespread, gripping even seasoned investors. But fears regarding the long-term prosperity of the nation's many sound companies make no sense," Mr Buffett said.

"These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, 10 and 20 years from now."

Mr Buffett stressed he could not predict how the market would ride out its roller-coaster days in the short-term. "What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."

Mr Buffett has supported Democrat Barack Obama in the race for the White House, but both Senator Obama and his Republican rival, John McCain, say they agree he would make a good treasury secretary.

Mr Buffett, who is noted for his personal frugality despite his huge fortune, has said in the past he believes the financial markets should be more tightly regulated.

Forbes's annual wealth list published in March, shows Mr Buffett's wealth jumped from $US52 billion ($75 billion) last year to $US62 billion, pushing Microsoft co-founder Bill Gates out of first place.

p/s photos: Angelica Lee Sin Je (this is what I meant by Malaysian girls' sweetness and unassuming beauty)