Saturday, November 8, 2008

Market Downturn – Talk by CIMB 21 Oct 08

The talk was about the current market downturn. In gist, it talked about the history leading to the current crisis and what was ahead for investors. The speaker was Mr Victor Lye, Founder & Head of WMG – Wealth Management of CIMB.

Why US Hegemony?
In order to understand the current crisis, there was a need to why the US dollar is the global currency, the reasons behind US hegemony. History has it that US being not so adversely affected by World War II, emerged stronger economically compared to other world countries and hence, called the shots.

In an attempt to rebuild the international economic system even as World War II ravaged, the Allied nations assembled in a small town, Bretton Woods, New Hampshire, United States. The meeting resulted in the signing of the Bretton Woods Agreement in July 1944. It was essentially a fixed exchange system whereby US dollar was pegged to gold – at US35 per oz, and all other currencies tied to US dollar. Hence, US dollar became the de facto “international” currency.

The agreement eventually broke down in 1973 mainly due to the divergence between the focus of the US monetary and that for the agreement. For the agreement to work, US central bank, Federal Reserve will need to monitor the growth of the US money stock with respect to its gold stock. On the other hand, the Federal Reserve was more into managing the US domestic economy – after all, this was their home ground. US consumers were great spenders, using not just their own money but also someone else’s money – borrowed. Other countries were too happy to lend US by buying US Government bonds – IOU by the US government. So much money floating around that there was not enough gold to guarantee the gold convertibility of US dollars at US$35 per oz. gold. The Bretton Woods Agreement eventually gave way to a mix of floated and managed float exchange systems adopted by different countries today.

What Caused the Credit Crisis?
With this background, the speaker argued that much of the current crisis was due to the many years of unbridled spending by the US consumers since Bretton Woods’ time. The housing bubble that pricked was the final straw that broke the camel’s back. Of course, as the crisis continues to unfold, we now also know that another major reason is the lack of financial oversight by the Federal Reserve.

Will US Hegemony Continue?
Before the financial tsunami came in full force, there were many talks about the decoupling theory. The verdict is now out. When US sneezes, the rest of the world will catch a cough. US is still one of the largest economies in the world, if not the largest. When US consumers tighten their belts, export sector of the rest of the world tightens too. With the rest of the world buying so many of US assets, we just cannot sit back and watch US fall. So things have fallen apart and the Federal Reserve alone cannot hold. Outgoing US President, George Bush has called for the world’s great economic powers to gather in early November to discuss on new strategies to tackle the current situation. Perhaps, this will mark a new era of International Monetary System.

What Should Investor Do?
The speaker ended his talk by saying that while the emerging economies will be affected, they were still a force to be reckoned with. In the case of Asia, most have learnt the lessons from the 1997 Asian Financial Crisis well. Asian banks have sufficient deposits to fund new lending. Hence Asian economies, while will not be unscathed, will emerge stronger when the credit crisis stabilizes. If you could stomach the volatilities investing in these economies could reap good results. However, do not jump onto the bandwagon just yet. Wait for the outcome of the meeting in Nov. And also to invest in money that you do not need and have a time horizon of at least 3-5 years.

My Take of the Talk
After the heavy downpour, rainbow will come and hopefully, there is a pot of gold at the end of the rainbow. As the recent DBS High Notes and Lehman Minibond show that this may not be always the case. So only invest with money you can afford to lose and level up your investing knowledge.

A good outcome from this event will probably be various Government agencies coming together to provide a more focused approach to bring up the financial literacy of Singaporeans. Right now, though we have MoneySense, I cannot but feel that the outreach is limited and from I have read, there seems to be a lack of continuity in the topics that it rolled out. Of course, it takes two hands to clap. This crisis will serve as a wake-up call to investors to do their homework before investing their hard-earned money.

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