Sunday, November 27, 2011

Market commentary 27 Nov 2011 - European debt crisis dominates

Individual stock picking has not been effective since August 2011. Market movement is dominated by events related to the debt crisis in Europe. When markets make big moves up and down, the source of the news is almost always traced back to Europe. In such a backdrop, macro-analysis makes more sense than bottom-up investing in individual stocks.

The Straits Time Index, along with most global stock indices, bottomed on 5 Oct 2011. A new rally began the next day, topped on 28 Oct 2011 after which it started its decline. From the STI chart, the market went into correction on 18 Nov 2011. It was a short-lived rally.

What happened near 28 Oct 2011 which marked the start of the decline? Global markets anticipated a European rescue plan which explains the rally which started on 6 Oct 2011. After the rescue plan was announced on 27 Oct 2011, global stock market began its descent again. The rescue plan was not enough to reassure the markets. On the day of announcement, global stock indices actually made a massive rally. Then, it looked like the rally that started on 5 Oct was here to stay. On the next day, new worries emerge when Italian 10-year bond yields tops 6%. On Nov 25, 10-year Italian bond yields reached 7.23% despite mighty ECB buying the bonds. This is serious because (1) Italian bond market is the 3rd largest in the world. A disaster there is highly contagious. (2) Greece, Ireland and Portugal were forced to seek financial rescues when their bond yields reached around 6.5%. Italy today is worse (3) Italy has high debt(118% of GDP) and slow economic growth. How can Italian bond investors be confident that their debts can be repaid in full? Besides, further austerity (demanded by Germany) may slow down growth further or even tip country into recession.

One feature of the rescue plan was that investors who bought CDS (credit default swaps) on Greek debt as insurance will not be paid because the deal agreed to was voluntary. Now, investors who hedge their sovereign debt risks using CDS are scared. If investors cannot reduce credit risk by buying CDS as insurance, then they have to reduce credit risk by demanding higher bond yields. I think this is a major reason European bond markets came under increasing attack almost right after the rescue plan was announced.

In the past weeks, every time European bond yields go up, global stock indices will go down. In the coming weeks, European bond yields should be the key indicators to observe for equity investors.

I am waiting for something to happen for global stock markets to have a solid rally. This something is Germany agreeing to print money. Printing money is the least painful way to repay debt. I am not sure whether money printing is a good economic solution because there are side effects like inflation. However, I am highly confident that once Germany agrees to money printing, a global rally in equities lasting months will follow. See what happened in 2009 after massive money printing by the Fed.

The alternative to money printing is austerity. It is by no means superior to the money-printing solution. When debt levels are too high (like the PIGS countries) and requires strong future economic growth to pay down debt, then austerity actually worsens chances of paying off debt by weakening the economy. Furthermore, austerity dampen domestic consumption by cutting spending and raising taxes. Therefore, economic growth must come from strong exports. Problem for Europe is, export to who? If everyone else is   tightening their belts for austerity, who is going to buy the exports? Germany? The great export-machine of Europe to transform into a big import-sucker? European demographics worsen the problem. Too many old people, too few young people is bad enough for growth. Protective labour laws and culture further worsens the situation by protecting the old workers who are hard and expensive to fire at the expense of young workers, many of whom are on contract work, don't get good training opportunities or simply unemployed. Today, Spanish youth unemployment is a whooping 21.2%. When corrective economic measures are too painful, it may cause social riots. The situation can be highly unpredictable and chaotic. The last time a great nation was subjected to great economic pain, the people elected a madman into power. That mad-man was Adolf Hitler.

Of course, the best solution is economic growth from the creation of real productivity from real products/services of high social utility and not financial engineering techniques like printing money. However, you need plenty of good engineers for that. Engineers have bore the brunt of retrenchments in recent recessions. I know because I am an engineer. This time round, I will not be spared. I have received notice I will be retrenched. Today, there are very few students who want to study engineering and many of the best engineers have switched lines to work in banks.  In fact, many engineering students went straight to the banks after graduation without ever working as an engineer.

Eventually, I think Germany will allow money-printing to ease the European debt crisis because austerity is doubtful to be effective. I cannot think of other solutions that politicians can depend on now.


  1. I am not too sure I read you correctly. You are going to be retrenched??? Any plans then?

    By the way, banks are also retrenching people not only in Europe but also in Singapore (though the numbers are of course lesser than Europe), so I think it is abit unfair to say it is better for an engineer to join a bank.

  2. Hi,

    Yes, you are right. I am going to be retrenched. I work in the Electronics sector. The Electronics industry in Singapore has been in decline since the Asian Financial crisis and never really recovered. The big companies are moving out, the smaller ones(mainly local companies) are dying away. The smaller ones are dying because they mainly serve the big companies. Once the big ones move out, the small ones die away.

    Electronics is still thriving and is constantly improving our lives. Look at the iPhones, Android phones, tablets etc. Unfortunately, it is dying in Singapore. Any industry veterans out there to share their opinion?

    I think it is abit unfair to say it is better for an engineer to join a bank.

    I don't think I said that. I made a statement of my observation that many engineers have switched line to join the financial sector and several engineering students aspire to work in the banks upon graduation instead of working as engineers. This is not surprising at all given the salary gap between engineering firms and banks.

    Anyway, I am actually not sure whether it is better for an engineer to work in a bank in the future because of changes in the regulatory climate and global anti-feeling towards Wall-Street type of people. However, in the past, it certainly worked out very well for them.

  3. Take care. May all be well for you ^^


  4. So sorry to hear that. What are your future plans then? Still looking for a job in the Electronics Sector?

  5. I share your sentiments, as I myself have been working in the Consumer Electronics industry since 1997 and retrenched thrice. Currently still out of job since Apr 2010.

  6. Hi Anonymous at Thursday, December 1, 2011 11:50:00 PM GMT+08:00,

    I am so sorry to hear about your situation. Apr 2010 to now is quite a long time. It must be terrible.

    I think I am quite qualified to say I understand how you feel. It is not my first time to be retrenched. On both occasions, I was well-liked by my boss. The Electronics industry in Singapore is declining. We just happen to be in the wrong place at the wrong time. In such a terrible situation, it doesn't matter how hard you work and how smart you are. I hope you don't feel too bad. You've got company!

  7. Thanks for your kind words, hyom.
    So will this round of retrenchment be your 3rd one too? I feel sorry for your predicament too. What to do? Sometimes I couldn't help to wonder will I be in this were there no influx of low cost engineering staff from other Asian developing countries... haha! Anyway, just have to persevere and hope to find a job really soon!


  8. You may want to consider doing free lance training in ITE or Polytechnics

    It may not be constant, but the training assignments may offer some relief and you may like it.

    You would need to be registered with them first.. ask around.

  9. May all be well for you Ku as well.
    Not sure if you are kuiscool. trying to contact you for a while, but your blog is friends only. cant post comments ^^

    Buddha bless,

    Derrick (yyy)

  10. "Eventually, I think Germany will allow money-printing to ease the European debt crisis because austerity is doubtful to be effective. I cannot think of other solutions that politicians can depend on now."

    Seems like even Pimco's Neel Kashkari who was put in charge of the TARP USD800B bazooka also agrees with you on the need for money-printing to solve the European debt crisis.

  11. Hi Derrick (yyy),

    I think you got the wrong person. I am not kuiscool. Thank you for your words of encouragement.

  12. @Derrick (yyy), yes, you're right, kuiscool is my blog, thanks for your encouragements too. Have since changed my blog setting to allow comments from anyone.

  13. Well, you are right. We have just happened to be in the wrong time and in the wrong place. This world crisis devours many industrial spheres very greedily, even now. And believe me I know how it is difficult to be retrenched during this time. It took much time for me to recover after that. I was pretty sure I would have to cut my needs while I had been searching for the proper position. Fortunately, I turned to payday lenders who do not check credit score. I wasn`t sure how clear my credit history was to use another loans, so my decision about those loans was very opportune. It was a big luck that I have applied for them.