Jeremy Grantham’s Prediction of the S&P Crash!

 Jeremy Grantham, the legendary investor who has predicted the last three market bubbles, foresees the S&P 500 crashing almost 50%. 

The market historian said the benchmark index may slip to around 2,500 - a downside of roughly 48% from January's peak. This was in a recent Bloomberg interview.

In roughly 4,000 words, Grantham laid out the reasons why he is confident the latest "super bubble" will pop, just as its predecessors did in 1929, 2000, and 2008. For example, he noted the bull market's acceleration in 2020 up until February 2021, when the Nasdaq rose an astonishing 58% from 2019. He also touched on an occurrence that happened in 1929 and 2000 that is replaying today: the underperformance of speculative stocks as the blue chips rise. 

And the "touchy-feely characteristic of crazy investor behaviour" is indicative of a late-stage bubble, the 83-year-old added. Last year saw the rapid ascent of meme stocks such as GameStop and AMC in addition to crypto currencies like dogecoin as well as non-fungible tokens.

He compared this bubble to Japan in the 1980s, which saw two asset bubbles — real estate and stocks — together. The US, in contrast, has three and a half major asset classes — stocks, bonds, real estate, and commodities — bubbling simultaneously for the first time. And if valuations across all of these asset classes return even two-thirds of the way back to historical norms, total wealth losses will be on the order of $35 trillion in the US alone.

His advice to investors? 

Avoid US equities, invest in value stocks of emerging markets and several cheaper developed countries such as Japan. Plus, have some cash for flexibility, as well as a little gold and silver.

And as for crypto, that asset class leaves him "increasingly feeling like the boy watching the naked emperor passing in procession”.

What about Malaysia?

Jeremy Grantham did not speak about Malaysia, except to suggest emerging markets are safer than U.S. equities. But there will be an impact on the Bursa if U.S. markets crash. How much, is a good guess! In addition, when OPR rises to ameliorate inflation, markets are impacted. Value stocks will always be superior to growth stocks in such an environment.

Good luck in investing in the Year of the Tiger!

References:

Legendary investor Jeremy Grantham predicts S&P 500 will crash 50% after 4th US “superbubble” in the past century pops (https://markets.businessinsider.com)

Jeremy Grantham doubles down on crash call, says selloff has started, Erik Schatzker, January 21, 2022 (https://bloomberg.com)

Inflation: Is it a Monetary Phenomenon? (Part 2)

This is the second part of an article on inflation (Part 1 was posted on 9 Feb 2022).

In 2021, inflation (sustained increase in general price level of goods and services) rose by 2.5% according to the Department of Statistics Malaysia. The consumer price index (CPI), which measures changes in prices of consumer goods and services, is used to gauge the level of inflation. The CPI typically calculates the cost of a ‘basket’ of goods and services purchased by consumers. As can be seen in Table below, the main components of Malaysia’s CPI comprise food and non-alcoholic beverages, housing and utilities, transportation and other items.

However, for a consumer, depending on his or her consumption pattern, the actual rate of inflation that he or she experiences may be different from the official inflation rate as measured by the CPI. For example, as prices of groceries and dining-out expenses have been rising at a faster pace than the headline inflation rate over the years, an individual who dines out more often would find these meals more expensive due to the higher inflation, compared to others who rarely dine out.

For December alone, it (inflation) was 3.2%. Prices of chicken and eggs rose by 13.6% and 13.5% respectively. Meat rose by 8.3%, vegetables by 5% and fish and seafood by 4.2%.

The impact is severe for households earning below RM3,000 per month. Inflation by states also varied with highest for Terengganu (3.9%) and lowest for Sabah/Labuan (2.0%).

The above is compounded further by TNB’s “master stroke” of increasing tariffs in February 2022 on commercial and industrial sectors. That will effect through the economy in the coming months.

Meanwhile, what can the Government do? On monetary policy, BNM could act by raising Overnight Policy Rate (OPR) from 1.75% to 2% (or above) in March which may dampen demand, while businesses try to re-configure margins and costs.

On the supply side, it is to relook at food items that could be produced locally instead of being imported from Thailand (or other places). This will reduce risk of imported inflation. In 2020, Malaysia imported around RM55.5 billion in food items. And these items suffered from price hikes. In addition, the ringgit has depreciated from 3.27 in 2014 to 4.25 in 2020.

For January 2022, the Malaysian ringgit slid below other major currencies and will continue to do so unless capital outflows are mitigated, and the yields advantage is maintained with the U.S. dollar. Otherwise, we may see the ringgit hovering at 4.30 (or more) against the greenback with imported inflation rising further.

So, is inflation purely a monetary phenomenon? No, although monetarists like to think so. Modern Monetary Theory (MMT) flies against accepted wisdom – i.e. that printing money has no consequences since it is not backed by gold and is purely fiat. Can you believe this?

In summary, inflation in an economy can be grouped under:

(i) Demand-pull

This includes surge in money supply –“too much money chasing too few goods”

(ii) Cost-push

Increase in cost of production, i.e. input items including oil price rise.

(iii) Imported

Weaker exchange rate increases cost of imported goods, especially food items.

(iv) Structures

Cartels, monopolies, middlemen who may manipulate prices for their own benefit.

Can’t Governments do anything? Yes, they can set monetary policy, fiscal policy, moral suasion (jawboning) and market intervention to ease-up inflationary pressures. What specific tools to use? Well, that’s for another time!

References:

Inflation: merely a monetary phenomenon? Ariadna Vidal Martinez, Macroeconomics Unit, Strategic Planning and Research Department, CaixaBank

Statistics Dept: floods caused higher food prices, Malaysiakini, Jan 21, 2022

Understanding the factors that impact inflation (https://www. publicmutual.com.my)

Depreciation ringgit, role of middlemen likely reason for price hikes, accelerated inflation, say economists (https://malaysianow.net)

Prices aren’t going up, the ringgit is going down, K. Kathirgugan, FreeMalaysiaToday, January 20, 2022

Inflation: Is it a Monetary Phenomenon? (Part 1)

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output” (Milton Friedman).

This claim that inflation is a monetary phenomenon is based on the quantity theory of money, according to which prices vary in proportion to the money supply. This relationship is based on a mathematical identity.

M x V = P x Y or dM + dV = dP + dY. Where M is money supply (dM are the variations in this variable), V is the velocity of money circulation, P are prices and Y is GDP in real terms.

According to which the value of transactions carried out in an economy (understood as nominal GDP) is equivalent to the amount of money circulating in that economy (understood as the amount of money in an economy multiplied by the number of times this changes hands; i.e. the velocity of money). If we assume that the velocity of money is constant, in an economy without economic growth the inflation rate equals the rate of growth in money. Therefore, if money supply increases, there will be more money chasing the same goods, so prices will go up. Similarly, if the rate of growth for economic activity and the quantity of money is the same, prices should remain constant.

Friedman's statement has been backed by empirical evidence (especially in the U.S.), showing a positive relationship between inflation and growth in excess money supply (growth in money supply above the real growth in GDP) for a large number of countries. This relationship is strong and robust in the long term but, the relationship between both variables may weaken temporarily in the short term due to factors such as price rigidity and the velocity of money not being constant. For example, a reduction in the velocity of money in circulation would be compatible with an increase in the money supply without putting pressure on prices.

Based on the above, both the theory and empirical evidence suggest that, if growth in the money supply is greater than the actual growth in GDP, this should push up inflation in the medium term. However, in the U.S., since the start of 2012, the relationship between both variables seems to have weakened to the point of almost disappearing. On the one hand, growth in money supply has accelerated more than GDP growth while, on the other, core inflation has continued to fall. 

An analysis of the effectiveness of monetary policy and specifically how it affects monetary aggregates is essential. In general terms, when a central bank offers liquidity to the banking system, either by offering long-term credit or by directly purchasing some of its assets, the monetary base increases. Monetary base is understood as the amount of liquidity provided by central banks, either in the form of currency in circulation or bank reserves deposited with the central bank.

There is no automatic rise in the money supply, however. Traditionally banks would use the liquidity provided by central banks to increase the supply of credit (Money supply is understood as the currency in circulation plus currency in its most liquid form; i.e. bank deposits.) and movements in money supply were therefore in line with those in the monetary base, ultimately leading to an increase in consumption and investment and thereby pushing up prices.

In the U.S. (and many other places) a highly uncertain environment encouraged savings and postponement of consumption and investment. On the supply side, the adjustments banks have had to carry out in order to comply with the new banking regulations (Basel III), both in terms of solvency with higher capital ratios and also in terms of liquidity, have encouraged them to be very cautious when granting loans and to hold onto a considerable buffer of liquidity.

Given this scenario, many banks have opted to use the liquidity they have received to increase their reserves with the central bank. That helps to maintain some room to manoeuvre to handle any upswings in financial tension or further regulatory requirements. With the remaining liquidity, investors looked for a more attractive return-risk combination, either in other financial assets or in other economies that were growing. A lot of the liquidity provided by central banks has therefore ended up in the main emerging economies.

In short, although the relationship between prices and monetary aggregates seems to have dwindled this is partly due to temporary factors such as those related to the supply and demand for credit. Therefore, when economic recovery takes hold, both are likely to synchronise again. It is more difficult to determine the role played by the greater integration of global financial markets, although that needs to be borne in mind when looking at effectiveness of measures.

Having said all that, there are events that disrupt supply and hence increase demand of goods/commodities. These may include: floods, storms, strikes, transit or transport disruptions or new non-tariff barriers. Some may call this as cost-push factors as opposed to demand-pull. 

In Malaysia, various stimulus packages were targeted to raise domestic consumption, but its effect may not work through if people have postponed their expenditures due to uncertainty. This was in addition to monetary policy becoming more accommodative with the Overnight Policy Rate at 1.75% and a sharp increase of money supply by 4 times in 15 years (RM0.5 trillion to RM2.1 trillion – or 21% p.a. on average). That is well above GDP growth of -5.6% p.a. (2020) to 7.4% p.a. (2010) – the lowest and highest growth, respectively in the last 15 years.  So, does that mean it is purely a monetary phenomenon? (Please see tomorrow’s posting).

References:

Inflation: merely a monetary phenomenon? Ariadna Vidal Martinez, Macroeconomics Unit, Strategic Planning and Research Department, CaixaBank

Statistics Dept: floods caused higher food prices, Malaysiakini, Jan 21, 2022

Understanding the factors that impact inflation (https://www. publicmutual.com.my)

Depreciation ringgit, role of middlemen likely reason for price hikes, accelerated inflation, say economists (https://malaysianow.net)

Prices aren’t going up, the ringgit is going down, K. Kathirgugan, FreeMalaysiaToday, January 20, 2022

Have Rich Countries Drained the Global South?

Recent research demonstrates that rich countries continue to rely on a large net appropriation from the global South. This flow of net appropriation occurs because prices are systematically lower in the South than in the North. For instance, wages paid to Southern workers are on average one-fifth the level of Northern wages. This means that for every unit of embodied labour and resources that the South imports from the North, they have to export many more units to pay for it.

Source: https://vesabarileva.medium.com

Economists Samir Amin and Arghiri Emmanuel described this as a “hidden transfer of value” from the South, which sustains high levels of income and consumption in the North. The drain takes place subtly and almost invisibly, without the overt violence of colonial occupation and therefore without provoking protest and moral outrage.

In a recent paper published in the journal New Political Economy, the work of Amin and others to quantify the scale of drain through unequal exchange in the post-colonial era was established. The drain increased dramatically during the 1980s and 1990s, as neoliberal structural adjustment programmes were imposed across the global South. Today, the global North drains from the South commodities worth $2.2 trillion per year, in Northern prices. For perspective, that amount of money would be enough to end extreme poverty, globally, fifteen times over.

Over the whole period from 1960 to today, the drain totalled $62 trillion in real terms. If this value had been retained by the South and contributed to Southern growth, tracking with the South’s growth rates over this period, it would be worth $152 trillion today.

These are extraordinary sums. For the global North (and these are the US, Canada, Australia, New Zealand, Israel, Japan, Korea, and the rich economies of Europe), the gains are so large that, for the past couple of decades, they have outstripped the rate of economic growth. In other words, net growth in the North relies on appropriation from the rest of the world.

For the South, the losses outstrip foreign aid transfers by a wide margin. For every dollar of aid the South receives, they lose $14 in drain through unequal exchange alone. This is not counting other kinds of losses like illicit financial outflows and profit repatriation. Of course, the ratio varies by country – higher for some than others – but in all cases, the discourse of aid obscures a darker reality of plunder. Poor countries are developing rich countries, not the other way around.

Neoclassical economists tend to see low wages in the South as “natural” – a kind of neutral market outcome. But Amin and other economists from the global South argue that wage inequalities are artefacts of political power.

Rich countries have a monopoly on decision-making in the World Bank and IMF, they hold most of the bargaining power in the World Trade Organization, they use their power as creditors to dictate economic policy in debtor nations, and they control 97 percent of the world’s patents. Northern states and corporations leverage this power to cheapen the prices of labour and resources in the global South, which allows them to achieve a net appropriation through trade.

During the 1980s and 1990s, IMF structural adjustment programmes cut public sector wages and employment, while rolling back labour rights and other protective regulations, all of which cheapened labour and resources. Today, poor countries are structurally dependent on foreign investment and have no choice but to compete with one another to offer cheap labour and resources in order to please the barons of international finance. This ensures a steady flow of disposable gadgets and fast fashion to affluent Northern consumers, but at extraordinary cost to human lives and ecosystems in the South.

There are several ways to fix this problem. One would be to democratise the institutions of global economic governance. Poor countries will then have a fairer say in setting the terms of trade and finance. Another step would be to ensure that poor countries have the right to use tariffs, subsidies and other industrial policies to build sovereign economic capacity. A global living wage system and an international framework for environmental regulations, and this would put a floor on labour and resource prices.

All of this would enable the South to capture a fairer share of income from international trade and free its countries to mobilise their resources. But achieving these goals will not be easy; it will require an organised front among social movements toward a fairer world, against those who profit so prodigiously from the status quo.

Reference:

Rich countries drained $152tn from the global south since 1960, Jason Hickel, Dylan Sullivan, Huzaifa Zoomkawala, 6 May 2021 (https://www.aljazeera.com) 

Has Our Higher Education System “Gone to the Dogs”?

Malaysia’s tertiary education was the envy of many countries in the 60s and 70s. With Mahathir as Education Minister and then Prime Minister, quality has been turned into quantity. That policy also stems from affirmative action. Mediocrity overrules meritocracy.

It was with pride that a son or daughter was able to make it to University Malaya (in the 60s and 70s). Those who couldn’t had to go to the U.K., U.S., Singapore, Taiwan or India. Today it is the other way around. An overseas degree is more valuable than the local one.

Source: https://unsplash.com

Ranjit Singh Malhi, an educationist wrote a good article on the state of our higher education. The quality of lecturers, professors and students are low. An investment of RM14.5 billion (higher education budget for 2022) is simply chasing “good money after bad education”. Graduates are produced in the container loads, PhDs graduating from one university in one year is in three digits and articles published reflect the low quality of teaching. We lag behind Taiwan, South Korea, Singapore by 2-4 times in the number of articles published in the arts and humanities area. A handful of scholars in the sciences are in cutting-edge research. That’s the view of an academic, namely Sharifah Munirah Alatas.

Many of the articles and thesis are bordering on comedy as far as expression is concerned. And it is this “tidak apa” attitude that encourages it. How will these degrees (or graduates) be recognised overseas?

There was a time when we wanted to be an education hub. There was great fanfare and many students from African states turned up under Mahathir’s South-South initiatives. Today they have gone, because they too have realised that this (the degree) is just “form over substance”.

Many university students don’t have the critical thinking or writing skills in English or Malay. So, we get civil servants who utter nonsense about tigers will breed more with deforestation! Sloppy thinking, sloppy writing end up with sloppy policies.

Are the private universities in Malaysia any better? No! They suffer from commercialism. Students will tell lecturers their salaries are paid by them and they need the pass mark or a distinction because it is their fees that sustain the university. Many lecturers are pressured by their Deans or Heads of School to compromise. And these students come to the marketplace expecting similar handouts or “spoon-feeding” to move up the corporate ladder. In one seminar I did, the participants wanted only the “model” answers to the problems they faced at work. Why? Because that was how they passed SPM, STPM and the degree programme!

God help Malaysia!

Reference:

Has our higher education been mutilated? Ranjit Singh Malhi, Malaysiakini.com, 27 Jan 2022

The 3 Largest Private Military Companies (PMCs) in the World

Mercenaries are not a new phenomenon. They were available from ancient Rome, Ottoman Empire and to more recent times.

One of the most famous PMCs is the American security firm Blackwater. It was founded in 1997 by former commando Eric Prince, along with the shooting trainer El Clark. A few years later, another company was created, which was essentially its new branch, Blackwater Security Consulting, whose fighters took part in military operations in Afghanistan. However, there is practically no information on its activities during this period.

At the disposal of the company are many training bases not only in the United States, but also in other countries, where more than 40,000 people train annually. Currently Blackwater (Xe Services LLC, Academi as it is recently called) is the largest organization of its kind in the world. The company has a headquarters located in North Carolina.

Source: https://thepavlovictoday.com

The main income of Academi (Blackwater renamed) fighters is derived from participation in various armed conflicts, about 90 percent of the profits the firm receives from contracts with the US government. Statistically, the picture is as follows: if in 2001 the company received about $ 735,000 from the US budget, then in 2005 this amount increased to $25 million, and a year later it reached $ 600 million. Every day, one mercenary from Academi costs the US 

$1200 (for comparison: a soldier of the regular army — only 150–190 dollars).

The company Academi has great opportunities and resources and enjoys the patronage of the US government, so even after the massacres with civilians during armed conflicts, no mercenary was held accountable or even dismissed.

The second largest private security company in the world is the G4S. The number of its employees is over 650,000. It is a multinational firm that provides security services, its headquarters is in the United Kingdom.

Representative offices of the company exist in 125 countries. G4S was founded in 2004 after the merger of the Danish company Group 4 Falck and British Securicor PLC. 

The main activity of the company is focused on the provision of security services, the provision of money security services (transportation of valuables and money), the integration of security services. In addition, the company’s employees ensure the detention of the perpetrators on behalf of the police, provide security services at airports. The company is working on the introduction of security systems, provides logistical services to banks and provides money management, participates in consulting, risk management and security support in areas with limited security infrastructure. In addition, G4S personnel are engaged in ground clearance of munitions, train personnel, and provide a revenue protection service for British railway companies.

Among the clients of the corporation there are both the governments of many sovereign states, corporations, financial institutions and utilities, and airports and seaports, logistics and transport providers and private individuals.

Another American military private company — the so-called “Group R” (Fort Defense Group Corporation, FDG Corp.) — was founded in 1996 by Marines A. Rodriguez. A few years later his partner was Russian officer D. Smirnov. Its headquarters is in Jacksonville. The company has concentrated its main activities in virtually all hot spots in the world — Somalia, the Gulf of Aden, Iraq, Guinea-Bissau, Israel, Palestine, Gaza and Afghanistan. The company is engaged in the provision of services such as the protection of ships and cargo, military logistics, maritime and land transportation, the training of special units and security teams for operations in high-risk areas, military counseling. 

The company worked in the Gulf of Aden, assisting the Government of Somalia, in Guinea-Bissau, its staff assisted in the clearance and disposal of military waste and the organization of the Coast Guard.

PMCs provide operational advantages over regular military forces, such as:

• Being rapidly deployable;
• Lessening public concerns about the utilization of force;
• Counterweight to the local military in states with weak political institutions.

Whether or not these represent real advantages, most analysts hold that PMCs have a variety of operational disadvantages relative to regular military forces:

• motivated by profit instead of duty, their commitment is generally considered to be more limited than that of normal military personnel;
• employees outside the military chain of command;
• contracts cannot cover every possible contingency beforehand

Do they destabilise or stabilise regions of the world? It depends on who pays. It is normally the outsourced arm of the CIA or governments who require outside forces to remain in power! They (PMCs) make mistakes but there is no penalty/(ies) for that – e.g. Blackwater in Iraq. So long as America funds them and uses them, they are above local and international law. That’s where the danger lies.

References:

War for money, leading private military companies or the world, Alex Kemeroff, 16/2/2018

(https://medium.com) 

Private military companies: empowerment of state or privates? Parth Raman/Maria Diandra Opre, 23/8/2021 (https://thedailyguardian.com)

Will Cash Be Obsolete By 2030?

Eswar Prasad’s book, The Future of Money: How the Digital Revolution is Transforming Currencies and Finance, is a sweeping survey of fintech, crypto assets, and central bank digital currencies (CBDCs). Prasad, who has also written books about the Chinese renminbi and the US dollar, says the research that went into writing it has made him an optimist about the digital future.

The former head of the International Monetary Fund’s China division thinks innovation will bring many more people into the formal financial system. Prasad acknowledges there are hazards, such as the loss of privacy when everything we buy has a digital footprint, and the potential for some to be disenfranchised as physical cash is replaced with digital payments. But, overall, he’s betting the digital financial future will be better than the one we have known.

Source: https://www.toppr.com

Not only are there credit and debit cards, but there are also bank transfers, direct deposit, and online payments. It’s simply too convenient to make payments electronically, particularly with the Internet.

There is little doubt the elimination of cash would enable banks, credit unions, and other financial institutions to reduce staff. After all, it takes more people to handle the business of cash transactions. Though many believe a cashless society is inevitable, there are a few significant reasons why that may not be the case.

Despite the popularity of electronic payment methods among middle income and wealthy households, the poor remain disproportionately dependent on cash. The problem for many of the poor is bank fees. This can be compounded by low or unsteady income and deposits, resulting in non-sufficient funds (NSF) fees and even account closures by banks.

A study by the Pew Research Center found 11% of Americans don’t use the Internet. The percentage is even higher among the elderly and those who live in rural areas. Eliminating cash could potentially exclude this segment of the population from participating fully in the economy.

A recent study also indicated that 6.64% of consumers were victims of identity theft in 2017. That’s about one in every 16 people. Identity theft is one of the fastest growing crimes in America. Naturally, it’s closely connected with the increasing use of electronic payment methods, as well as the storage of financial data online. In certain financial transactions, the best protection against identity theft is to pay cash. The need or desire for privacy is a variable depending on individual preference. But there’s no doubt cash affords more privacy than electronic payment methods.

Ultimately, cash may in fact disappear. But it’s mostly a question of where and when. While it may disappear in some countries, it might remain in others. And if it ultimately happens in 50 or 100 or more years, it won’t matter much to anyone who’s alive today. In the meantime, take advantage of the best that cash and electronic payment methods have to offer. For my money, having both options is the best of all worlds, especially if there is any ang pow.

In Malaysia, BNM has been trying to reduce cash and cheque transactions with electronic payments. Many have it on their mobile devices. An area of concern is data breaches by hackers. Unless payment systems are foolproof, you may become a fool!

References:

Why cash will be obsolete within a decade, John Detrixhe, Sept 24, 2021 (https://qz.com)

The future of cash-will it disappear or become obsolete? Kevin Mercadante, Nov 3, 2020 (https://www.moneyunder30.com/what-is-the-future-of-cash