Times are a Changing

Recently, i was asked a very interesting question - if US finances are in such a bad shape, why does USD appreciate in times of risk aversion. This to me was a very interesting question and its a question i have to deal with daily in my role as a local markets trader.

My reply to this friend and to some others are attached but the message is the same - Times are a changing.
____

Your question on why USD up was the RIGHT question. No one in KL got that.

Basically, the speculative money now borrows in USD and invests in risky assets - equity, bonds in other currencies. So when there is risk aversions, these guys sell their risky assets and buy back USD to pay their USD borrowing.

Also, there are two types of risk aversion - Perception and Real (my own terms...haha).

Perception Risk Aversion (PRA) - market panics and risky assets get sold off and USD strengthens but then things move back or bounce back because of some positive moves. This is what happened from 2006 to 2008.

Real Risk Aversion (RRA) - is market panics, risky assets get sold off and USD strengthens but then an event happens (2008 was Lehman failure), and the risk aversion actually led to a funding crisis where banks did not want to lend to one another. When the banks stopped lending, importers and exporters could not get Bank lines or Letter of Credits to facilitate trade, and trade crashed. In RRA, everything breaks, Equity does a big selloff, property sells off and USD flies as capital is pulled back.

Risk Positive (RP) - From 2009, market moved back to a risk positive mode and here people borrowed USD all over again, and started selling USD to buy risky assets in other countries. Also, perception of USD changed where players now felt that USD had only one way to go - DOWN!!!. This carried thru to 2010.


Where are we now?

My view is if we try to put whats happening now into context of that 2006 - 2010 period, we are now in mid to late 2008 where we saw a lot of volatility but news of things getting worse and worse was coming out with occasional bouts of positivity until the EVENT happens. What that EVENT will be, i am not sure or it could just be a multiple of Events - France downgrade, Greece default, massive riots in China..who knows. But the strains are there.

What will happen?

In the near term (say next 3-6mths), markets will be generally negative with bouts of positivity ie you will see volatility but negative moves should be bigger than positive moves. USD should see more strength in the near term. If the Event(s) occur, you will see a big Negative move like we saw in 2008 and govts will try to prop things up as much as possible. My view is that they wont be as successful as they were before. There will be a sharp slowdown in business activity across all boards (worst hit will be financials) and then things will pick up but at slower pace to what we saw in the 2009 - 2010 recovery.

Will Malaysia be different?

My main issue with Malaysia is they lack a credible business plan or business focus. They cant compete as a low cost manufacturer as they dont have a large labour pool. They dont have a strong enough educated pool for high skill manufacturing and their services/tourist sector is growing but too slow to make a difference in the next 5 years. Malaysia's main wealth and growth is now commodities. So if i am right and we go through a sharp drop in buisness activity and then a very slow recovery - commodity prices will stabilise and maybe trend lower. In that situation, Malaysia will not benefit. But if commodity prices recover faster than expected, Malaysia will do well. So thats the call - how will oil and commodities do? That will determine how well Malaysia does. I cant say for sure what will happen on commodities but my bet is on a drop in prices by at least 30%-40% and then a stabilisation of prices.

What you should do?

Focus on growing your customer base and business growth. Coz if you get thru this next 2 years, you will be stronger than ever. This is what happend with business that started in 2007. They nearly went under in 2008 but then did extremely well 2009 - 2010 and now have adequate buffers to get thru the next down move.

Keep liquidity near. try to bring your payment terms close or get long term bank lines and borrowing in place once you reach a size to do that. Keep cash ready and invest only in your business.

Near term, USD will see higher prices but post that Event(s), USD is going to weaken considerably so if you receiving income in USD, try to push for a currency closer to your cost ie MYR or IDR. OR, whenever you receive USD only keep a small proportion in USD, keep the rest in your base currency. I would suggest not keeping more tan 20 - 30% of your cash in USD.

Of course, i could be wrong as like trading, everything is based on what you think will happen and the more info you have, the better your chances to be right. Currently i am 70% sure that the outcome will be as i say - so pretty committed to that view. Will let you know if that changes.

For now, getting liquidity and managing your cash to get thru the next two years will be key as you continue to invest in the business. Its a fine line you will have to face - spend money on the business which reduces your liquidity NOW but adds revenue later. Here, only you can make that call but my bet - go ALL IN......survive the next two years, your business is going to be growing from strength to strength.

Good luck
____

what i am convinced about is that if you see the growth in the last two years, its basically been a growth about financial assets - property, equity, bonds etc. Its been very little about real growth - save maybe for Apple but thats not enough - we need new growth areas, new businesses outside of services. I think the slowdown will be good in the long run but capital has to move away from financial assets and into real business - energy efficiency, increasing productivity, alternate energy.

Its interesting times and thats what i said about 2006 - 2010 but maybe the slump in 2008 was just delayed till now and now we are actually heading to real downturn and real changes. Creation from destruction and when people look back - maybe they will look at 2006 - 2014 as one period.

I am not being pessimistic. In fact i am optimistic about the long term but in the near term, be cautious of finances, focus on your business and build multiple streams of income (if you are in business) and if you are a salaried worker, keep expenses down as i think incomes will actually go down or stabilise at these levels and not move up. My whole goal from here is to build a proper business (ie sustainable income) for this bank and am achieveing that BUT i take nothing for granted and am now keeping at least 1yr of cash as a buffer to cover expenses and maybe even 2yrs.


Upon us all a little rain must fall - Led Zeppelin

_________

be prepared, be productive, be relevant