For a long while i have refrained from writing my views about the economy and market conditions. Firstly, work picked up or more importantly i picked up. I focused on what was within my control and i was striving as many were slowing. It felt good. Secondly, it was so much more fun and meaningful to write about things that was important to me.
Let me stress, Work is not Life and its good to understand that. I am still driven and still feel a need to accomplish and influence at my chosen field but i understand that my main accomplishment is my family.
So why now do i feel the need to write again on market conditions?
In one word - Caution. And as i have been asked " Is this rally real?"
I have found the hope that people are feeling is reassuring and right. BUT, it is wrong to believe that all is well. Market conditions are far from well and we need to clearly define a line between asset prices and real prices. I am no economist and its not my goal to be perfectly accurate but to understand this difference in how it relates to me and to you.
Asset prices = the prices of the stocks (equity) we own, the property that we own, the cash that we have in FD (cash). For simplicity lets say Asset Prices (AP) = Equity (E) + Property (P) +
Cash (C). In short , we could relate asset prices to our Wealth. If the E we own appreciates, we are wealthier and that applies to P as well. And if we are accumulating C at a faster rate than we spend, we are also getting wealthier. So lets say AP = Wealth and is the right hand column in a table and needs a left hand column to balance it.
I view the left column as Real Prices = the prices (earnings) we charge for our goods and services net of the prices (cost) we pay for goods and services. IN simple terms Real Prices (RP) = Salary (S) - Cost (C).
So the conditions we have is 1) RP growing and AP growing, 2) RP growing and AP shrinking, 3) RP shrinking and AP growing and 4) RP shrinking and AP shrinking. The key is to understand where we are in this four conditions.
Personally, the condition i would like to be in is 2. When i know that my RP is growing and AP is shrinking, this to me is the perfect time to invest and maybe finally buy our place in Singapore. For now though, i am certain AP is growing but am uncertain about my RP. In short, i have no confidence that my S will grow faster than my C. Cost of food is rising as well as energy prices which will increase my C but will my salary (S) grow as fast. This is i am not certain.
Please forgive the maths as i do see myself as a math geek but the point i am making is that asset prices cannot grow without real prices growing. This to me is my main reason i am still negative and continue to maintain a huge 2 year buffer in cash as i feel that in general markets and individuals are in stage 3, where RP is shrinking but AP is growing. This to me is not sustainable.
So how do you know which stage you are in coz it is wrong to assume that everyone is in the same stage. So here are the questions you should be asking?
1) if you in shipping, have you seen shipping rates rise
2) if you are a lawyer, have you seen your billings rise
3) if you are in business, are you seeing your business grow
4) if you renting, is your rent increasing
5) is your grocery bills rising
Basically, look to your personal lives and make an assessment whether 1) your salary/earning are increasing and if so 2) is it rising faster than your cost of living and 3) are you seeing your business improve.
If the 3 assessments above give you the impression than your RP is rising, then you are a lucky person indeed. AND if AP is low or falling, you have the perfect opportunity to invest. IF AP is rising and you are invested or own a property, you get to ride it with no worries. You should sell only when you feel your RP is turning down.
If you are like me and the assessment makes you feel that RP is falling or you are uncertain, then caution is probably advised. I am not advocating you sell your investments especially property BUT i do advocate having caution and having buffers in place to protect you from unnecessary losses and grief. My family now has 2yrs buffer in place. Some view this as overly cautious but i have seen what its like to fear losing your job and doubting your ability to maintain your quality of life. To me 2yrs buffer lets me sleep comfortably knowing that we can withstand most knocks.
The above is not negative. I apologise if it comes off as such. I am actually very hopeful and i now have a clear plan of action to manage come what may. The buffers protect me from risk to the downside. Prices rising now (especially as i would like to buy a place in singapore) when i feel RP is uncertain or falling, makes me cautious and uncertain to buy. BUT, i am waiting and am truly hopeful that we will see RP rise and when it does i will be BUYING.
d.
