The Federal Reserve through two actions yesterday sealed its fate as far as raising interest rates in the near future.
In fact, its liquidity actions proves that the banking and financial markets in the U.S. is highly fragile and also that the U.S. requires financial support from external sources; the SNB and ECB.
Yesterday, the Federal Reserve announced that it will extend the repayment period for the repayment of its short term loans and extend more credit to banks and financial firms on Wall Street from its original expiry date of September 2008 to January 2009.
In a simultaneous move, the Federal Reserve also extended its credit facility with both the SNB and ECB for higher amounts.
What this also implies is that the U.S. Dollar’s strength will be capped and any move upwards should be an opportunity to sell the dollar. We believe the outlook for the U.S. Dollar relative to the other G7 currencies will be generally weaker over the next 12 months.
Thursday, July 31, 2008
Wednesday, July 30, 2008
The Situation with the GSEs
The Federal Reserve and the government of the United States have a very serious and delicate situation to handle and manage amidst its own primary issue of a weak and slowing economy plus a government that has no money as it is running deficits in both its domestic and external current accounts.
Freddie Mae and Freddie Mac gave birth during the Great Depression of 1938 to help get the U.S. economy and country back on its feet. The government sponsored enterprises – GSEs bought over all the mortgage portfolios from the banks, thereby injecting liquidity back into the banking and financial systems.
Looks like now, the reverse is happening; the government and the Federal Reserve needs to come rescue the GSEs. When a government is running a negative current account, how can it help, accept to ‘print’ more monies……………further weakening the U.S. Dollar or sell more securities and pay higher interest rates or worse still just book a ‘credit’ entry in its ledger. The government does not have a choice; its guarantee is being called upon to perform and it has to be very careful the option it chooses to raise capital.
However, some lawmakers and fellow congressmen in the Congress are taking up issue as to the manner in which the GSEs have fallen ill. The objective of the GSE is to underwrite mortgage loans. In fact, it has underwritten US$5 Trillion of the total US$12 Trillion mortgage market. However, when its books grew to a very large size, it decided to securitize the loans to create more ‘room’ to take on more mortgage loans. In the process, it also decided to invest and buy some of these securitized mortgage obligations, otherwise known as CMOs or CDOs in order to enhance its dividend yields to investors who have purchased its securities.
The end result is leverage upon more leverage and when the underlying values of the mortgage values started to shrink, all of a sudden the entire portfolio went into negative equity. Then, the defaults began, and then the write downs followed.
The point I am making is that the ‘core lender’ of the mortgage market in the U.S. is ill and needs government intervention. The government and the Federal Reserve had already intervened in the banking and financial industry; look at how it had lent monies to JP Morgan to buyover Bear Stearns………..and at less than 10% of market price………what a joke! Good for JP Morgan………bad deal for Bear Stearns and also for the Federal Reserve.
In aggregate, what are we saying? The health of the U.S. economy is balancing on the high wire! The U.S. economy is predominantly a domestic market driven by both consumer spending and real estate.
Consumer spending has fallen dramatically, consumer confidence has at very depressed levels and for very good reasons; job prospects are bad, job promotions are bad, securing new jobs are bad…………and lots and lots of people are getting laid off!
The real estate market has been falling in value for the past 18 months and we believe the worse is still not over. The Federal Reserve and the Government has a very difficult task trying to balance growth, inflation, a depressed real estate market and a consumer with the lack of spending power.
This implies that the US Dollar is not about to go anywhere but southwards for a while. Interest rates are also going to be kept on hold for a while as the government and the Federal Reserve needs to fund huge amounts of monies to bail out the GSE and it hopefully desires to do that at low interest rates……………the saga continues…………
Freddie Mae and Freddie Mac gave birth during the Great Depression of 1938 to help get the U.S. economy and country back on its feet. The government sponsored enterprises – GSEs bought over all the mortgage portfolios from the banks, thereby injecting liquidity back into the banking and financial systems.
Looks like now, the reverse is happening; the government and the Federal Reserve needs to come rescue the GSEs. When a government is running a negative current account, how can it help, accept to ‘print’ more monies……………further weakening the U.S. Dollar or sell more securities and pay higher interest rates or worse still just book a ‘credit’ entry in its ledger. The government does not have a choice; its guarantee is being called upon to perform and it has to be very careful the option it chooses to raise capital.
However, some lawmakers and fellow congressmen in the Congress are taking up issue as to the manner in which the GSEs have fallen ill. The objective of the GSE is to underwrite mortgage loans. In fact, it has underwritten US$5 Trillion of the total US$12 Trillion mortgage market. However, when its books grew to a very large size, it decided to securitize the loans to create more ‘room’ to take on more mortgage loans. In the process, it also decided to invest and buy some of these securitized mortgage obligations, otherwise known as CMOs or CDOs in order to enhance its dividend yields to investors who have purchased its securities.
The end result is leverage upon more leverage and when the underlying values of the mortgage values started to shrink, all of a sudden the entire portfolio went into negative equity. Then, the defaults began, and then the write downs followed.
The point I am making is that the ‘core lender’ of the mortgage market in the U.S. is ill and needs government intervention. The government and the Federal Reserve had already intervened in the banking and financial industry; look at how it had lent monies to JP Morgan to buyover Bear Stearns………..and at less than 10% of market price………what a joke! Good for JP Morgan………bad deal for Bear Stearns and also for the Federal Reserve.
In aggregate, what are we saying? The health of the U.S. economy is balancing on the high wire! The U.S. economy is predominantly a domestic market driven by both consumer spending and real estate.
Consumer spending has fallen dramatically, consumer confidence has at very depressed levels and for very good reasons; job prospects are bad, job promotions are bad, securing new jobs are bad…………and lots and lots of people are getting laid off!
The real estate market has been falling in value for the past 18 months and we believe the worse is still not over. The Federal Reserve and the Government has a very difficult task trying to balance growth, inflation, a depressed real estate market and a consumer with the lack of spending power.
This implies that the US Dollar is not about to go anywhere but southwards for a while. Interest rates are also going to be kept on hold for a while as the government and the Federal Reserve needs to fund huge amounts of monies to bail out the GSE and it hopefully desires to do that at low interest rates……………the saga continues…………
Thursday, July 24, 2008
USD/SGD confirm to hit 1.33 by year end 2008
The Strong Singapore Dollar is set to achieve 1.33 by the end of 2008
Since our last blog article on the Singapore Dollar where we forecasted 1.33 for year end 2008, we are now more confident that this will be achieved even before the end of the year.
There are a number of reasons that supports the strong Singapore Dollar, namely;
• Strong capital inflow from foreign investments
• Strong NEER monetary policy to keep Singapore Dollar strong and to ward off inflation
• Strong capital inflow from immigrants making Singapore their home and country
• Relatively strong economic growth compared to other first world countries
There are also a number of dangers out there for Singapore which may negatively impact the Singapore Dollar, and they are;
• Inflation is spreading into wages and prices of our basket of necessities which escalates to wage price spiral, this is the worst sign of ‘runaway’ inflation
• Real estate correction
The strong NEER monetary policy is not coincidental, we believe Singapore has been battling with inflation for the past 5 years, it just didn’t seem so apparent because productivity was high. Now, the situation is starting to change.
Don’t we find it strange that the government keeps on announcing inflation at 2% each year for the past 11 years till December 2007, where it announced inflation at 3.5%, then in January 2008, it announced inflation at 4.6%, then outlook for the rest of the year is 7.5%. How can this be when inflation supposedly has been so stable at 1.8% to 2% for the past 11 years, fundamentals and the structure of the economy cannot have changed so dramatically in such a short time?!
The fact that the government has been raising the NEER monetary policy both on a parallel shift of the curve and also to widen the trading band through the years are clear signs that it was fighting off inflation.
Taking global inflation into perspective, almost every developed, developing and emerging country is experiencing inflation from higher fuel and food prices. The higher fuel prices is still something difficult to understand given that we have an abundance of crude, we believe it is more because of the complex speculation available through the futures market that has caused such a spiral in prices to US$140 per barrel. The rising food prices are really a function of poor weather and lower yields plus growing population around the world.
Comparatively speaking, even with significantly lower growth of 3.5% for the second half of this year, Singapore will still do better than most developed first world countries and with a huge current account balance and large national reserves, it is in a better position to weather a global downturn compared to the likes of U.S. and Europe who are running negative deficits.
Of course, what is the greatest concern at this moment is productivity in Singapore………….it is slipping and sliding downwards, and this maybe the knife at our jugular vein. It is alright to be more expensive cost wise as long as productivity is high, but this is not the case with Singapore today. More importantly, true and fearful inflation happens when it seeps into a price-wage spiral and it is happening in Singapore. We will need to do a further analysis to ascertain the possible medium term effects.
The U.S. is not about to raise interest rates in any significant way given the poor health of the economy. More importantly, the situation with the GSEs, plus the further weakening of the real estate market, plus the current account deficit, plus the sickly banking and financial industry, plus the weak and near negative growth all mean a very dangerous and explosive situation for the U.S. Therefore, the U.S. Dollar will stay soft for the rest of the year.
If you are holding on to more U.S. dollars then you care to hold, please begin to diversify into other alternate currencies like AUD, EURO, CAD and JPY. The CAD and JPY will prove to be good currency hedges as inflation continues to persist globally.
Of course, you can also invest in our USD/SGD Booster Protection Note, whereby, you give us your USD and we will return you SGD in 12 month’s time at a high rate than the current spot rate. For example, spot rate is 1.3585, at the end of 12 months we will return you in SGD at 1.4140 which is double US time deposit rates and also puts you in a better position to recover some of your losses from holding USD at previously higher exchange rates. This is the only value added proposition available in the marketplace.
We will be launching a tranche of the USD/SGD Booster Protection Note shortly and will email all of you.
Since our last blog article on the Singapore Dollar where we forecasted 1.33 for year end 2008, we are now more confident that this will be achieved even before the end of the year.
There are a number of reasons that supports the strong Singapore Dollar, namely;
• Strong capital inflow from foreign investments
• Strong NEER monetary policy to keep Singapore Dollar strong and to ward off inflation
• Strong capital inflow from immigrants making Singapore their home and country
• Relatively strong economic growth compared to other first world countries
There are also a number of dangers out there for Singapore which may negatively impact the Singapore Dollar, and they are;
• Inflation is spreading into wages and prices of our basket of necessities which escalates to wage price spiral, this is the worst sign of ‘runaway’ inflation
• Real estate correction
The strong NEER monetary policy is not coincidental, we believe Singapore has been battling with inflation for the past 5 years, it just didn’t seem so apparent because productivity was high. Now, the situation is starting to change.
Don’t we find it strange that the government keeps on announcing inflation at 2% each year for the past 11 years till December 2007, where it announced inflation at 3.5%, then in January 2008, it announced inflation at 4.6%, then outlook for the rest of the year is 7.5%. How can this be when inflation supposedly has been so stable at 1.8% to 2% for the past 11 years, fundamentals and the structure of the economy cannot have changed so dramatically in such a short time?!
The fact that the government has been raising the NEER monetary policy both on a parallel shift of the curve and also to widen the trading band through the years are clear signs that it was fighting off inflation.
Taking global inflation into perspective, almost every developed, developing and emerging country is experiencing inflation from higher fuel and food prices. The higher fuel prices is still something difficult to understand given that we have an abundance of crude, we believe it is more because of the complex speculation available through the futures market that has caused such a spiral in prices to US$140 per barrel. The rising food prices are really a function of poor weather and lower yields plus growing population around the world.
Comparatively speaking, even with significantly lower growth of 3.5% for the second half of this year, Singapore will still do better than most developed first world countries and with a huge current account balance and large national reserves, it is in a better position to weather a global downturn compared to the likes of U.S. and Europe who are running negative deficits.
Of course, what is the greatest concern at this moment is productivity in Singapore………….it is slipping and sliding downwards, and this maybe the knife at our jugular vein. It is alright to be more expensive cost wise as long as productivity is high, but this is not the case with Singapore today. More importantly, true and fearful inflation happens when it seeps into a price-wage spiral and it is happening in Singapore. We will need to do a further analysis to ascertain the possible medium term effects.
The U.S. is not about to raise interest rates in any significant way given the poor health of the economy. More importantly, the situation with the GSEs, plus the further weakening of the real estate market, plus the current account deficit, plus the sickly banking and financial industry, plus the weak and near negative growth all mean a very dangerous and explosive situation for the U.S. Therefore, the U.S. Dollar will stay soft for the rest of the year.
If you are holding on to more U.S. dollars then you care to hold, please begin to diversify into other alternate currencies like AUD, EURO, CAD and JPY. The CAD and JPY will prove to be good currency hedges as inflation continues to persist globally.
Of course, you can also invest in our USD/SGD Booster Protection Note, whereby, you give us your USD and we will return you SGD in 12 month’s time at a high rate than the current spot rate. For example, spot rate is 1.3585, at the end of 12 months we will return you in SGD at 1.4140 which is double US time deposit rates and also puts you in a better position to recover some of your losses from holding USD at previously higher exchange rates. This is the only value added proposition available in the marketplace.
We will be launching a tranche of the USD/SGD Booster Protection Note shortly and will email all of you.
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