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Monday, August 17, 2015

Stuck in the Middle of Nowhere

Based on the original post from The Economist :

My comments in blue.
  • Emerging markets (EM) squeezed by America’s recovery & China’s slowdownMalaysia is considered an emerging market.
  • Unexpected devaluation of the yuan this week fueled fears about China’s economy, caused falls in commodities & EM currencies.
  • America is the world’s biggest economy. Sets the tone for interest rates & currencies globally. 
  • China has been the fastest-growing big economy by a distance.
  • America’s recovery is gradually gathering pace, while China’s economy is slowing sharply. 
  • Divergence causing trouble in EM which have lived the high life on China’s investment boom and on a flood of cheap credit from America. Malaysia is such a market.
  • Healthy growth in the world’s largest economy is good news. However brings us closer to; possibly Sept - US Fed raises interest rates for the first time in almost a decade. 
  • That prospect has pushed up the dollar; risen by 15% against trading partners past 2 years.
  • Squeezed emerging markets in two ways. [1] capital is drawn towards higher-yielding American assets, rather than home [2] corporate borrowers in the developing world face currency risk on the $1.3 trillion of dollar-denominated bonds they have issued since 2010. 
  • Figures this week showed an 8% fall in Chinese exports in July and a 5.4% drop in factory-gate prices. Output prices have fallen for 41 straight months, overcapacity in much of China’s heavy industry. 
  • The impact of China’s slowdown is greatest for commodity producers (Brazil, South Africa, not so much for Malaysia). 
  • Fears that this week’s devaluation presages a determined effort to drive down the value of the yuan to benefit Chinese exporters—and squeeze other emerging markets all the more.
  • The yuan’s fall this week prompted declines in other Asian currencies against the greenback.
  • GDP growth in Singapore, a bellwether of the world economy, has slowed to below 2%, the lowest rate for three years. 
  • The lodestars of the global economy are moving apart, spelling more trouble ahead.

My thoughts : Am I worried? To a certain extent yes because apart from the super moron many of these external factors are out of our control. Furthermore we have severely incompetent folks running our country on auto pilot. No two crisis are identical. In 1998 it was really a currency crisis. Right now as I see it - we are in a confidence crisis as of now (Weekly Market Highlights August (1) - Special Malaysia Highlights). 

BNM continues to intervene day by day - though it is impossible for me to know how much it is. BNM will only publish the figures every end of he month. Whether they will run out of bullet in the reserve is still too early to tell. 
Technical Analysis - Defending the MYR
Back in 1998 - The Malaysian stock market dropped dramatically from almost 1,300 in February 1997 to a low of 262 in early September 1998, eighteen months later. The interest rate was raised to double-digit at 11% in an attempt to stop foreign funds outflow. It didn’t work and the stock and property market bubbles burst - hence the peg.

The "genius" Wahid (Minister in PMO) also justified that in 1997, the country’s reserve was below US$30 billion and borrowings among companies were high. True, Malaysia’s reserve is higher today but its depleting fast to US$96.7 billion as of July 31 from US$100.5 billion just 15-days earlier. And the central bank has burnt US$25 billion defending the ringgit since July 2014.

True, the borrowings among companies today are not as high as those during the 1997 crisis. But he conveniently forgets to mention about Malaysia’s household debt. The ratio of household debt to gross domestic product (GDP) rose to 87.9% in 2014, with total debt at “RM940.4 billion”. Most importantly, the ratio of household debt to income is 146%. Did he also deliberately miss out the government external debt, which has tripled to RM740 billion?

Note: Household debt to GDP 16% -> 87.9%, 
Now, do you know why Madam Zeti wasn’t in favour of raising interest rate, even though the ringgit is being slaughtered? Not only would it be an admission that the country is in trouble, but it would immediately send the country into recession. Why? That’s because a raise in interest rate would burst the RM940.4 billion household debt bubble, baby. The confidence crisis could very well become a classic credit bubble crisis.
Datuk Paul Selva Raj, CEO of the Federation of Malaysian Consumers Associations (FOMCA), said 47 percent of young Malaysians are currently in “serious debt” (debt payments amount to 30 percent or more of their gross income), something that could catch up with them very quickly. Ni bukan saya cakap kosong kie...Till debt do you part

But for how long can Najib administration resists a rate hike, considering the U.S. Federal Reserve is about to do so next month? The collapse in stock market is only the first step towards a recession. This time, you don’t need George Soros to send ringgit into toilet bowl. External (America and China) and internal factors (Super Moron & his gang of nincompoops) would gladly do the favor. 2017?

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