Singapore is not Turkey is a mischievous attention grabbing title with the Turkish Lira moving everywhere with no destination in the horizon. Imprinted against little red dot Singapore lies a good measure of wisdom, foresight and measures ( yes indeed ) we can take to lessen potential future pain suffered by those with interest in Turkey or Turkish Lira.Like many Singaporean man in the street, personal balance sheet used to be denominated ONLY in Singapore Dollar (SGD) assets and liabilities until recent past where I ventured to park some currency UNHEDGED instruments after much thought. Had a tensed social debate with a secondary school classmate on this topic at his home a few New Year Eve ago. Our spouse thought it was getting out of hand but over the years we have very much learnt to agree to disagree having worked together to produce our school magazine at 16 year old. Why is there a need to diversify my SGD exposure if the intention is to retire here as it would be a natural hedge; SGD-SGD; so goes the conventional wisdom. After USD was delinked from Gold Standard, all currency essentially became Fiat currency. Absolute measure vaporized as most currency became relative to each other. Sovereigns issuing currency controlled their supply by literally printing money. Simplistically balance between demand and supply was chief in determining its price. To inculcate budgeting, the common rhetoric that they are not printing money ought to be yes but government all over cannot escape the enticement of running fiscal deficits. The small number of countries with net positive fiscal budget in the last 11 years of economic rally is proof of this.
Without belittling our ASEAN 2 billion emergency currency swap agreement, I doubt the utility of such firstly because the amount is perhaps good against very temporal market alimonies but not sustained structural or systemic issues. Hong Kong just burned HKD $2.195 equivalent in reserves today 15th August 2018 buying their currency to support the peg. This is not her first neither will it be her last if the USD/HKD 7.8 peg were to stay. As we speak, India and Indonesia are also dealing with their own currency issues as the Turkish crisis is turning systemic and spreading to other Emerging Market currencies.
Secondly, economies are more global and connected now and local issues can turn systemic regionally or globally faster. If fires were to break out systemically across ASEAN, each man for himself would most probably rule the day. Although ASEAN members have sustained ties and common interest, the firewall separating each sovereign member might prove more polarizing.
Fiat is no Faith. Anyone who claims irrefutably to robust understanding of Forex is most probably a liar or living in their own world. Global forex is huge and complex and I doubt anyone have such mastery as he would be the richest man on earth if so. Boundless talent from economics (not exactly a science to some), mathematics, physics, biology to computer have been working on it with very limited success. How to have faith in something with little understanding though my fellow Christians would argue otherwise. To them, faith is believing in the unseen.
Currency is essentially the cornerstone and keystone architecturally speaking of our everyday living being the starting point and without which the structure will fall. Being a necessary devil having an ostrich mentality isn't helping unless living in an Amish community is your cup of tea. Undeniably, as human progress, our ability to live in isolation decreases and with it the need for money as a medium of exchange. Some archaeologist believe that a healed femur is the green shoots for signs of a civilization and along the same lines, money might be proof of civilization reaching puberty but not her zenith. Healed femur was proposed because it might be proof of mutual care between humans. Money isn't the perfect medium of exchange; in fact it rates poorly in some quarters like equability but it is the best that we have. Even the communist saw a need for it.
Risk where more can be less. Markowitz, the father of modern portfolio theory opined and justly rewarded with a Nobel prize that that non-systemic risk in portfolio can be reduced through diversification. Recent critiques highlighted many limitations with this theory chiefly because the theory was more applicable as a reduction of standard deviation rather than risk. Others relate to short selling and questionable effectiveness for market makers as oppose to takers. The important theme being that diversification does reduce risk in general everything else being equal.
Singapore Government Bonds are denominated in SGD and this can be a double edged sword. Post Mexican debt crisis, central banks and governments began to realize the hazards of issuing their bonds in foreign currencies but many are still cornered to do so. The market for bonds denominated in their local currency might not exists or the interest rate could be too sky rocket high to compensate investors for taking such risks. Singapore government remains a rare majority within emerging market economies that still issues bonds in their own currency. However, if you are holding on to such bonds, there is a very remote but should never be overlooked risk of the government monetizing such bonds by printing money in very desperate times.
Pragmatically, I would do better to have part of my personal balance sheet denominated in other currencies although the plan is to retire here. In the last 3 decades, even major currencies like USD, EUR, GBP, JPY, CNY have all fluctuated by more than 20% in terms of their relative value to each other. Other currencies have seen near total collapse or major devaluation especially in smaller economies and less developed countries like Mexico, Indonesia, Venezuela etc.
lkypeter@gmail.com Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye (c) Peter Lye 2019
