Tuesday, August 08, 2017

2017 First Half Review - Part 2

This is a continuation of the previous post.

The last post we talked about the revival of tech brought about by multiple rounds of quantitative easing (QE). QE flooded the world with cheap money which ultimately went into investments in these tech startups (well, at least some part of it). There is a Cambrian explosion of new ideas and business models. We saw the rise of Grab and Uber, upending taxis. We have AirBnb for room-sharing, then office sharing, then now home sharing for people who don't want to buy properties ever. We have food delivery making waves and other ideas still embryonic but with the potential to further disrupt old economy business models. Then we had gaming taking over the world by storm. 

Gaming is now a $100 billion industry, bigger than Hollywood and music combined and is poised to become a huge sporting industry as well with the advent of e-sports. Already, the number of viewers on Youtube watching e-sports is reportedly more than the number of soccer fans watching the last FIFA World Cup. We might see the day when E-sports teams are worth billions (like soccer teams) and e-sports stars make multi-millions (like soccer stars) and their merchandise and goods are highly sort after by fans worldwide. Tencent and Activision Blizzard would be the stocks to play this secular trend.

Tech brands already started world domination in 2013

However, this tech revival had only benefitted a small percentage of the global population. Tech entrepreneurs and their employees have made a lot of money but not the regular workers on Main Street. In fact. many employees of the old economy had been dis-enfranchised by tech companies. Think how Uber destroyed Comfort Delgro. or how Amazon is killing the mom and pop retail stores or even Walmart. Tech, as with many things that had happened since the Global Financial Crisis (GFC) had widen the gap between the haves and the have-nots and contributed to the rise of populism (the political trend that allowed populist like Donald Trump and Rodrigo Duterte of Philippines to be elected).

There is a polarization between the haves and the have-nots globally. This is one of the huge side effects of QE. You see, Economics 101 tell us that when we print money, we should expect inflation and we did hve lots of inflation. This happened not the normal price inflation which we shall explain why later, but asset inflation. Thanks to the global central banks coordinating global QEs, we had massive asset inflation. That is why markets are hitting all time highs, art and wine and other collectibles are getting more and more pricey and Singapore properties had not decline much despite rounds and round of cooling measures.

With money flooding the global markets, the rich or the haves are struggling to put their money into good investments. Hence they go for stocks, collectibles and properties. They are buying up prime properties in global cities. It was reported that Chinese accounted for 1/3 of all London building transactions in the last 12 to 18 months. Singapore is definitely on the priority list for the global rich to park money. Hence it might be time for Singaporeans to relook at buying condominiums or risk not being able to buy one ever again.

While asset inflation had taken over the world, price inflation had been mysteriously low. This goes against Economics 101. I believe this is linked to the tech disruption that we had discussed. Technology companies, flooded with liquidity, had been able to provide free services hitherto. Think of how Uber and Grab had subsidized taxi fares, how AirBnb made travel affordable and how Amazon made buying stuff so cheap and how much productivity had been gained with the use of technology. Robots are taking away jobs and pressing down wages. This would continue and hence price inflation might remain low for years to come. 

The Gig Economy

The gig and sharing economy had also suppressed wages for the blue collar workers globally and this is generally not good. Without wage increase, we won't get economic growth and inflation. Mild inflation is actually necessary to create a virtuous cycle of economic growth and wage growth. This is now being challenged with the over-extension of QE. Unfortunately, the workers for these gig economies are still thinking they are better off because they can work at their own time and "be their own boss". 

So, what's the solution?

Alas, there isn't a good one. This polarization between the haves and the have-nots looked like it might just continue, until the next Global Financial Crisis (GFC). It is true that the have-nots are protesting. That is how Trump won the US elections. But Trump was not going to help the have-nots. He might just make it worse for them. Hence some believed that the end game could be a mega GFC or WWIII. If that happens, then all that had been discussed on this infosite goes down the drain. Whatever we have in our banks, in custody of other banks or security houses would be worth nothing. Hence I have always advocated that as astute investors, we might want to consider having a good portion of our assets in physical gold.

Well, that's one nightmare scenario if we don't resolve our issues in the next 5 to 10 years. As for the rest of 2017 and 2018, we might see the markets getting healthier as US continues to break new highs, Europe is finally recovering from the Grexit scare and the Brexit uncertainty and China continues to maintain steady growth (despite its shadow banking problems being unresolved). As for Singapore, we should expect the STI to also do well given that 40% of the index is related to banks and properties and we should expect them to rally with the positive outlook of the global economy. 

But the trick is also to sell into strength as valuations don't look cheap and we are not sure how long this party could last. When the music stops and lights come on, we have to face the reality - we did not solve all the problems of the last crisis. 

Happy National Day!

Read from the first post.
Post a Comment