Friday, March 8, 2019

Not Inflation, Not Deflation

The key focus for monetary policy is always price stability. In technical terms, it is called zero inflation, zero deflation.

Make sure that prices do not change, so that people can concentrate on increasing volume to satisfy rising population in an efficient manner meaning with less use of scarce resources at each increase in scale.

In stockbroking, I was shocked that the master market players were saying to clients that there was going to be inflation and it would be good for the market. Shock for proper economists; money for stockbrokers. Technically, this means negative interest rates: inflation rate higher than interest rates. The main goal of running quantitative easing is to create negative interest rates so that savers are punished and speculators borrowing cheap money think they are making money. In real estate, every idiot bought four properties: one for the wife and one each for the three children. They thought are set for life; no need to work and only collect rent.

The famous Japanese asset bubble burst in 1992 which meant it underwent deflation for more than two decades - that was how far assets had inflated and how long it took for asset prices to come down to be affordable for ordinary people. In the meantime, the economy underwent a recession which means more unemployment and lower wages until they created a category of workers called the working poor. In recent years, there has been some price increases due to increased government tax on consumption (which makes life harder for people with fixed incomes) and the attraction of tourists as well as foreign property ownership.

In Malaysia in January 2019, the consumer price index fell by 0.5% from December 2018 and 0.7% from a year ago when compared with January 2018. This was the first time in recent history and the media was calling this deflation. Sorry, no, this was just a decline in the CPI for the month.

Technically, deflation is a persistent decline in prices over a period of time, not a flash in the pan. So we do not know yet whether we are in a deflation period. We have just to see.

It is only logical that after several decades of inflation, ie persistent price increases culminating in the escalation in prices in recent years caused by outflow of cash which led to a sharp declining in the ringgit and now the refusal for ringgit interest rates to rise accordance to the rise in US interest rates, that we can only expect deflation to follow in the coming years and even decades. We may not like it but I think it is inevitable. Think of all the smart guys with there three extra properties for their children's future education now facing tenancy problems and loan repayments especially as interest rates on their loans start to climb.

It is one thing to not to wish for bad things to happen, but it is a different thing to ignore the inevitable. It is much better to be prepared. Well, I suppose many of us just love the cosy warm sand around our heads even if our arses are still sticking out.

Thursday, February 21, 2019

EPF & Housing Mortgages

It will be one of the greatest errors of social policy if the current proposal by housing developers for individuals to use their EPF to fund the mortgage repayments of their houses.

1. If demand for housing is poor and houses are not affordable to the ordinary person in the street, the logical thing to happen is for houses prices to fall and developers to lose money. We cannot afford to ask ordinary people to pay good money to overpriced properties so that profits from real estate projects can be sustained.

2. To release the bulk of the EPF to real estate will maintain property prices higher than warranted by the market, ie the incomes of the people. By not doing so, property prices will be lower and at a level that ordinary people can afford without having to raid the bulk of their EPF.

3. If EPF is used to fund housing mortgages, when there is a crash in the property market which it surely will, then ordinary people will be the victim of real estate speculation perpetuated by real estate developers.

4. I take the view that the real estate market, not only in Malaysia but around the major cities of the world - now happening in London, Brexit not withstanding - will take a major crash - put conservatively at at least 40% down. The situation is akin to the Japan asset bubble which has taken more than 30 years to recover.

5. I think the current EPF policy on housing should stay as it is. The EPF policy is probably one of the best conceptualised schemes in the world for the ordinary person. The only problem now is that wages have been too low and inflation due to the mismanagement of the economy since 1980 has a most devastating impact on the cost of living and the standard of living of the wage earning population.

6. Why is the government bolstering the profits of corporations and not taking a more social oriented stance on relative prices in Malaysia? Time to end politicking for profits for the elite.

Thursday, November 22, 2018

World Today November 2018

There are few trends going on around the world which I think are interesting.

1. Malaysian Economics
The Malaysian politicians seem to have stopped having any interest in the growth of the economy. Their prime concern has been on witch-hunt - which is a crucial enough job for cleaning up the house after the mess of a five decade prolonged party of hubris. Who is to blame? It doesn't matter, economically, for the impact is also being paid for by the ordinary people through high prices and a weakened currency as well as a slowdown in growth of economic activities. The bankers have also had a good time in playing the real estate market. It is now interesting to see how they are going to unravel the piles of tall bricks sitting in vacancy. They say developers have deep pockets, but then no one can live forever.

2. End of QE
Of course, the Malaysian economy has not been so clever as Malaysian politicians and policymakers who like to be imagine themselves to be. we are all being influenced by the mother of all policy, the US monetary policy. I am happy that at long last, the US Fed has decided to raise interest rates and slow down the growth of the money supply. We are now beginning to see the impact of this monetary tightening. Bitcoin crashed. Tech stocks plunged. Banks are beginning to see problems. The problem of monetary tightening is that it is impossible to do a soft landing. When the crack appears, the crash will follow. The US Fed has the tough job of having to raise interest rates which ensuring that there is sufficient liquidity to keep ordinary businesses going.

3. US-China Trade War
The problem of the world economy is that China, having expanded aggressively in the past, is now left with massive production over-capacity which it must sell. Because of their massive over-capacity, their cost of production is likely to be the lowest anywhere in the world, to which Trump is accusing them of dumping. For the US to produce its own basic industrial inputs now is not viable. So the US-China trade war will leave everyone very unhappy and possibly a global recession.

4. China Economy
The China economy is in a very bad state of health, with overspending by the GLCs and imprudent lending by its financial institutions, all funding over-capacity in industrial production and real estate. As we have seen elsewhere in Asia before, it is often that public institutions will suffer while gains will be made by private individuals. This is where the fight against corruption in China is so intense. It is a matter of national security as well as political vendetta. Punishing individuals is one thing. The crucial thing is to focus on the flow of money and see whether any new money is going into new economic activities. If not, recession.

5. Mass Migration
As with the massive flows of money around the world, there are also massive flows of people around the world, people looking for a better way of life. This was what the great Washington Consensus was out to do, to liberalise the world. It was a good idea, a good thing. In practice, however, when the great rush of people into a country is not officially recognised and followed by a massive programme of social housing and creating of jobs as well as of taxing new incomes, then the system will not be sustainable. There will be massive budget debts for social development which must some how be paid. It's an irony if the immigration does not boost GDP growth and raise government revenue. These massive migrations cannot in no way be unconnected to the previous massive increase in the supply of money in the world, which leads to greater economic disparity, greater flow of money into military weapons, and the maintenance of regimes by force because there is good money to be made.

6. Brexit
Theresa May comes out as such a tough cookie. Brexit becomes more complicated than as I have earlier imagined. It was supposed to be a simple case of immigration control. It spiralled out to be a total departure from the customs union, which may be so wise. Then, to checkmate the immigration control, the Europeans brings up in the border issues with Northern Ireland and Granada. If Brexit is seen as an economic issue, it may not have been that wise to bring it up in the first place. But if Brexit is seen as a fight for political independence, then it should be worth every penny of it.

It is good to be alive. But it is not wise to be influenced by the collapse of the total whole picture into a few stories in a blog or a website. Like chilli, you have to take a small dose of the real stuff at a time. Sorry for this summary of world events.

Saturday, November 3, 2018

Malaysian Budget 2019

Let me give a brief analysis.

1. The Malaysian Budget 2019 is contractionary on the economy because the government will take more from the general public than to pump money into it as it undertakes to reduce the federal deficit from 3.7% in 2018 to 3.4% in 2019, 3% by 2020 and 2.8% in 2021.

2. With the economy expected to grow slightly from 4.8% in 2018 to 4.9% in 2019. This means that the private sector has to do a lot of the heavy lifting of the economy. If the government continues to politicise its policies by behaving as if it is still doing election campaigning rather than managing investor confidence, it is unlikely that the private sector will invest in amounts that will overcome the fiscal consolidation. The world economy is slowing down and there are attacks on palm oil. The only consolation in the horizon is the oil price.

3. The budget is an eye-opener for those who had hoped for a miracle to happen to their lives in the last general elections. The sore truth is that life for ordinary people are going to be hard hit by the attempt by the government, any administration, to try to raise its revenue. It is a rotten state of affairs in Malaysia that the government thinks that it is the great determinant of our prosperity. No, it is no, any administration. The government has been good in taking from the general public to line the pockets of the elite. This is not changed.

4. Times are going to be hard for a long time as the US is determined to reverse the Quantitative Easing of the money supply raising interest rates. Malaysian monetary policy will continue to be "accommodative" (the central bank has no new word for its monetary policy since its opened its doors) which means keeping local interest rates unchanged which in turn means the ringgit will continue to tank, just purely on interest rate differentials. Investor confidence has not been fully discounted yet.

Monday, October 8, 2018

US-China Trade War

I must apologise for being long absent from here, by desire. As the political loop now goes through its second iteration, there is nothing to hope except the recycling business.

I must thank walla and James for keep faith with this blog. I have reclaimed the links for you walla and I am writing this for James and everyone else who are interested in the above topic. I do not profess to be the expert on the subject matter, but I have my views which are formed quite ephemerally.

The trade war is started by Trump who as a businessman does not give any shit to the economics of interest trade. He thinks that if I have a trade deficit, then I am on the losing end. I must make profit and therefore I must accumulate international reserves.

This is where knowledge of economic theory triumphs business common sense. (Some MBAs may think they are economists and the current state of Malaysian economy is to some extent the influence of these business administrators influencing greedy politicians. I had argued with that administrator in person when he first mooted the implementation of the GST.)

The problem for Trump is that he does not realise that the current US deficit is financed by US printing money. This money was printed by Greenspan who has been panned as the man who knew everything. If Trump were to reduce the US trade deficit, then he has to take back all the US dollars that Bush, Clinton, Obama had printed. You start that by stop printing money and raise interest rates. This I am glad the US Federal Reserve has already started doing this, raising US interest rates for the third time this year and which Mr Trump is very unhappy about.

Trump wants to reverse the trade deficit because he wanted to jobs back in the US. This is true. You run a trade deficit because you can afford to consume without having to work. Americans are almost all obese except for those in movies and TVs. There is the privilege of consuming without having to work because the government can afford to give unemployment benefits. The privilege of being the issuer of the international currency.

Now he wants Americans to work and be great again. Good for Americans who want to work.

Strategically, the stage is now being set for the turning point in global economy history - the rise of the China economy as a world economic power. As the US reduces its trade deficit, it reduces the volume of US currency circulating around the world. This is now time to give the US dollar back to the US as the US interest rates go up. This should flush the US banks with cash. Whether small businesses should do well depend on how they are going to create their new domestic markets or to try to export to China which may not be easy. The stronger US dollar does not help.

The Chinese has been trying to dump the US dollar by buying up real commodities such as land and minerals around the world which dismayed the governments of the free world. This is of course strategic. By controlling global resources, they are positioning for future growth.

The China economy is slowing down because of the political spring cleaning that Xi Jinping has been doing for so many years. This cleanup is necessary for long term growth, as you cannot have multiple factions in the undercurrents disturbing your long march. The old guards who benefited from the previous economic surge of China are the real political masters as they have money to buy power. This needs to be "rebalanced" in favour of the incumbent regime. This is a significant makeover. (Which by the way is what seems to be happening in Malaysia in order that the original UMNO can come back in a different guise and it will champion the Bumiputra Policy.)

The China economy will take a dip for a few more years. This does not matter, for China typically takes a long term view. The China economy will recover by fueling its own domestic markets through the production of needed goods with resources that are already in place globally. The infrastructure is now being built through the One Belt Road which is none other than rekindling the golden age of China in days gone by. When the pieces are in place, China will wake up again and come into action like a newly minted sex doll. When the global economy is in the depth of recession, the China economy will smell like a rose.

We have only about two kingdoms. The third kingdom is not EU or UK, although the EU like to think that they have a solidarity that can conquer the world. The current of the UK with the UK is the unfinished business of WWI and WWII. The EU as originally conceived is the dream of Germany and France to make the UK an appendix. But the British will always find a way to survive, being islanders.

The third kingdom is Russia and Putin is now acting up. On the fringe but not to be left out. Our Cao Cao? Russia is trying to come into the world picture and they can always work with China being of similar ideology and probably psychological twist. That paints half the world red. The fight with the "free war" than goes on in earnest again. The US will rope in its allies - EU+UK and Japan - and I think the dynamics will work first at the economic level and if fails, then militarily.

This may be a good time to be prepared to be a Tao or Zen master.

Hope this satisfies you James. I have been meaning to meet up with walla but I am wallowing in my own mud for now. One day.

Monday, June 25, 2018

Malaysia Policies: New First Steps

I am sorry if I am stating the obvious. But sometimes what is obvious is not obvious when we are inclined to delude ourselves.

1. Basic Premise

Where Malaysia is now at is the result of bad thinking - that the Malays are the rightful inhabitants of Malaysia and that Chinese and Indians are immigrants.

Even this simple statement is erroneous if you take into consideration the orang aslis, the babas and the nyonyas and others in Malaya and not excluding the 30 to 40 ethnic groups in Sarawak and Sabah.

There is a correction to be made in the basic premise of the nature of Malaysia - that obviously Malaysia is the homeland of each and every Malaysian, i.e., anybody who is born in Malaysia and anybody whom one parent is a Malaysian or any foreign born who has been granted Malaysian citizenship.

If we can't get this simple sentence right in our head, then I don't think we are going to get this country right in any direction but self-destruction.

2. NEP

First, they said get the colonists out so that Malaysians could rule ourselves and enjoy the keep the fruits of our own labour. Let us fight the colonists together. Independence was won.
Second, by year 12, it was decided that the Chinese were doing too well and the Malays were not. Therefore, redistribute wealth as a matter of national policy. We control all policies and use government tax revenue to acquire Chinese assets for the Malays, i.e., the UMNO elite.
Third, the eventual purchase by Petronas of the KL Twin Towers woke up the Sarawakians and the Sabahans that they had also been plundering the wealth of the Borneo states.

The rot started in 1970 with beginning of the systematic replacement of Chinese and Indian bureaucrats with Malay ones, coinciding with the replacement of English with Malay as the medium of instruction in schools. This created an insular civil service and brought about the closing of the Malay mind. With that began the Malayanisation of Malaysia. As the East Coast rejected KL and with the ascent of PAS, this evolved into an Islamisation of Malaysia when UMNO strived to be more Islamic than PAS.

There is a need now to level the playing field for everyone and abolish the NEP immediately. Except social services for the very old and very young and those who are incapacitated. Pursue economic efficiency as the instrument for economic restructuring, not restructuring while championing inefficiency.

The rise of the power of senior civil servants and political dynasties led to the creation of GLCs who are now monopolising the entire economy, in the name of NEP. The cost of living in Malaysia has escalated because of these monopolies which must pay annual dividends to the government for the politicians spend on big projects. The GLCs should be privatised or dismantled and the government should retreat from business. There should be a clear separation of politics from business and business from policies. While politicians will operate according to the law, businesses must operate according to policies.

3. BNM

The head of the central bank is called the Governor. The designation is given to signal that the politicians including the Prime Minister or the Fiance Minister cannot intrude upon the duties of the Governor. There is a separation of the central bank from the finance ministry.

The job of the central bank is to protect the value of the local currency. The key method is to ensure that there is no excessive supply of the local currency as well as that there is no excessive and unproductive borrowing of foreign currencies. The central bank can implement monetary policies and the foreign exchange policy to protect the value of the ringgit, without resort to the government. If the government intervenes, the Governor can bring its case to parliament.

The deterioration of the value of the ringgit by 60% from 2.50 in its prime days to 4.00 today is a clear case of the bad management of the ringgit and poor monetary policies. We have been suffering from a prolong period of central bank silence, probably except on non-monetary issues.

I hope things will change and improve from here onwards.

For a start, raise ringgit interest rates in line with the US interest rates. BNM had said in the past that it cannot differ from the US Fed when rates fell. Ditto, the reversal. Otherwise, we will see another bout of ringgit deterioration, regardless of what the PM may say about its fair value. I would say the fair interest rate is 5% pa.

4. Growth, Growth, Growth

This cannot be over-emphasised. We heard in the 1980s that the government was prepared to sacrifice growth to achieve "fair" distribution. Today is what that looks like, and this is not what we want.

There are rich Chinese and there are poor Chinese. There are rich Malays and there are poor Malays. There are rich Indians and there are poor Indians. There are rich Ibans and there are poor Ibans. There are rich Kadazandusuns and there are poor Kadazandusuns. The same applies to all races.

Every population profiles fall into a natural distribution. You cannot create a perfect profile for your race at the expense of every other races because it will not happen.

The challenge for any government is to raise the economic profile of everyone so that Malaysia can really boast itself it be a nation that creates that the best economic opportunities for everyone. This will make Malaysia an attractive place for people to come and we should welcome them so that we can build the society together.

The urban-rural divide occurs everywhere because of the investments that are poured into the urban centres. The rural areas will always be caught in a material dilemma as they struggle to hold on to their traditional ways of life which have been encapsulated as their traditional cultures, which is correct, by definition. It is a good strategy if a good urban-rural balance can be maintained. I see the key instruments are education and technology.

Monday, June 18, 2018

Back To Square One?

We have a new old regime in Malaysia, where the old men (and old women) now have a second chance (what about young men and women do not?).

I am unsure what the current political agenda is all about. Is it to develop a new model of economic growth, or to continue to find fault with the preceding regime. Sometimes, it doesn't appear that they have realised that they have won the election and is not the government. They continue to behave like they are still in the opposition. An old opposition against the new opposition. Does it mean that there is now no government as such that we can rely on to look forward to? Apart from a zero GST, zero price reduction and another national car that we have to overpay.

Last time we had an immense oil reserve (amidst high oil prices). Now less, and therefore less degree for policy error to play with. After nearly forty years of one-man domination of a singular idea of a one-race supremacy without economic merit and the loss of one generation, the younger generation now have no idea how they have got to such dazzling heights, only to come crashing down when the hot air cools.

If all the wealth of the world has been made by the old generation, then the new generations do not have to work. The only thing they will need is labour-saving services which can either be machines or human services produced by poor or less rich third-world foreign workers. This dialectical process means the slave will eventually takeover the master's household and wealth.

The new situation requires a new infrastructure on which the new economy must be built. The new economy will need the banks and finance industry to re-skill themselves to know how to finance projects with feasibility and good prospects for success in order to create good jobs for the new generations. The handling of finance in the economy must now return from the government to the private sector if there is going to be any real prospect for growth of the economy on a sustained basis in future. We should get the politicians to lay out a level playing field for everybody, and stop creating a crooked frame which collapses under the slightest weight or pressure.

We have to move on. The perspectives of the old generations are now obsolete and irrelevant. The young must struggle to find their niche in the new world of technology. The global economy has changed. It will be sad if we here are still stuck in the mud of post-colonial preconceptions.