Road to Success
Is The Next Economy Crisis Coming? (Must Read)
RicheHo
Publish date: Tue, 25 Aug 2015, 10:40 PM
United State (“US”) is the largest economy country in the world. Subsequently USD is the major international currency which used around the world widely. Since commodities around the world are priced in the USD, a strong currency in the United States is great for all commodity consumers around the world. A strong dollar makes commodities less expensive to import and hence lead to decrease in gold and also commodity raw material price such as steel, copper, zinc and aluminum. Commodity price is always inversely proportional to USD. It is same as crude oil price. One year ago, the crude oil price was still at the level of USD100/barrel but now it had dropped to USD38/barrel. Palm oil is also at the same category as crude oil; its price had also hit a new low. Being the only crude oil exporter in Southeast Asia, a big portion of Malaysia revenue is depending on crude oil. When the crude oil price dropped, subsequently Malaysia income will be hit heavily! In other words, Malaysia is selling the same volume of crude oil out to other countries but it received much lesser money compared to last year. That’s the reason why Malaysia budget 2015 had been revised beginning of this year.
Malaysia main source of income is depending on export. Our country export is larger than import. So, after the export value minus import value, the remaining is what we called as surplus. Imagine you are doing export business in Malaysia, once you received USD from customers, what will you do? MYR is our principal currency and our daily expense including salary is also mainly in MYR. So, normally people will exchange with Bank Negara Malaysia (“BNM”) to convert back to MYR. The USD will be used as a fund by BNM and this is what we called as foreign currency reserve. When tourists visit to Malaysia, the USD currency they exchange will also contribute to the foreign currency reserve, same goes to foreign investment.
Back to the story, when the surplus is getting lower, automatically BNM reserve will be reduce. Money that doesn't have to be reserved at a bank is money that can be used to make new loans. Money that can be loaned out is money that can filter through the economy. So, when BNM reduce, MYR money supply will also reduce subsequently. It will affect bank borrowing since bank has left little money for lending. There are two signals that shown that bank money supply had decreased.
1) Did you receive any SMS from any banks that promote their fixed deposit rate? Normally, this only happens after BNM hikes the interest rate. However, in current situation, the bank is willing to increase its own interest rate to attract people to put their money in their bank.
2) There are some friends or relatives mentioned that their car loan / mortgage loan had been rejected. The bank had tightened their loan policy.
From these two points, we know that the bank no longer has enough money supply. Let’s think further, when most of the loans had been rejected, the sold out rate of property project will be highly reduce. It will affect the company corporate earnings. When the company doesn’t have enough funds on hand, their new project will be on hold or delay. The construction and industrial products such as cement, sand etc will be affected as well. This is a chain reaction that linked the whole economy!
The main income of bank depends on collecting interests from loan. When they no longer had enough money supply to lend out, their revenue earnings will drop. AMBANK is a very good example which hit by the economy.When our economy becomes less attractive and money supply drops, investors no longer interest to our country. In addition with the negative issues in politics, they had loss their confidence. Hence, foreign currency is pulling out very fast from Malaysia and lead to depreciation of MYR! FYI, our BNM International reserves was still at USD130+ billion on Jan 2014, but now it only left USD96.7 billion. Government no longer able to support our currency and hence they allow MYR to free falling. That’s the reason why USDMYR only took 2 weeks time to drop from 3.80 to 4.25. The worse case is Malaysia government and finance minister don’t have any method or idea to stop this. They don't even know what to do!
People tend to argue that weakening of MYR will attract foreign investors come to Malaysia again. Imagine if you are a foreign investor, will you still invest in Malaysia at this moment? In fact, they will wait for our currency to depreciate to a stable level before coming in. Our currency now is like a falling dagger, it drops without stop. Today, foreign fund had pulled out another MYR338m out from Malaysia stock market. It is a good example.
As a conclusion, as long as Malaysia internal problem couldn’t be solve, the bad cycle of economic will still continue going on. FYI, Malaysia stocks market had gone through 6 bull markets and 5 bear markets, either big or small one, since 1998. There were four times which caused by SARS, US Technology Bubble, US Subprime Crisis and Euro Sovereign Debt Crisis. In this 4 times, Malaysia economy was not hit but our stock market was indirectly affected. The biggest direct hit on Malaysia economy is during Asian Financial Crisis on 1998 and that was the most serious crisis in Malaysia stock market history! Please stop believing on those analysts or newspaper that mentioned Malaysia stock market will go up to the level of 1,800/1,900 by end of this year. Either we are heading towards World economic collapse or not, the stocks market no longer optimistic. So my dear friends, the journey will be tough and unpredictable. This will hit on all of us, regardless you are rich or poor. Of course, a crisis might be an opportunity too. All the very best to all of you!
Just for sharing!
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Discussions
11 people like this. Showing 28 of 28 comments
i am not interest when it start..... i interested in when it ends only.... ha.ha..
2015-08-25 23:09
All the elements are interconnected but its not simply proportional or disproportional. all will make money if its that simple. Many elements macro and micro play a role. Example, even if dollar rises and the demand for oil is high with low inventory could cause the oil price up. Supply and demand principal. Finally, does the global economy is upbeat or not which drive all other sub -elements up.
2015-08-26 00:03
Paperplane3
Oops, I am sorry as the diagram arrow has some mistake. I will amend it later. Refer to the words. Haha.
2015-08-26 08:12
there is no theory to prove that oil and gold has to go down when USD is up. And the theory itself isnt conclusive either
2015-08-26 08:48
Have a look
http://marketrealist.com/2015/01/strengthening-us-dollar-impacting-crude-oil-prices/
2015-08-26 08:51
Oil price movement is affected supply and demand and some speculative elements. If China GDP growth cannot sustain at 7%, the demand for commodities including oil will weaken and couple with impending supply from Iran early next year. The possibility of oil price moving up in the near term looks dim.
In addition, China ability to switch from export led GDP growth to domestic consumption is hampered by the recent meltdown in the stock market. China has to do more monetary easing and increase infrastructure spending.
European countries growth are hamstring by austerity drive and their debt to GDP are growing over the years since 2008. It is not a good sign.
In addition, US GDP growth sustainability is still a question mark. Japan may also heading for more problems.
If the prices of commodities such as oil continue falling, countries that loaded with US denominated debts and face with trade and fiscal deficits will definitely heading for sovereign debt defaults. That will create a domino effect on the banking industry world wide, more so in the developed countries where exposure to riskier products are more prominent.
If you wish to bottom fish fundamentally sound companies at bargain price, better wait till the first sign when banks reported stable quarterly earning.
2015-08-26 09:49
Wow... Hence can start buy popcorn and watch properties bubbles burst n banks brought down to its kneels.
2015-08-26 10:35
This article is true if only based on conventional thinking.
Don't forget that this was what the world of short sellers got tricked when Ben Bernanke started QE1. THEN QE 2 AND QE3.
THE POWER OF KEYNESIAN THEORY HAS BEEN UNLEASED.
SO THERE WILL BE QE4. THEN QE5 TO QE INFINITY.
WHAT WILL BE THE END OF THE END GAME?
THE ANSWER WILL DETERMINE YOUR SUCCESS OR FAILURE IN YOUR INVESTMENT
2015-08-26 13:31
Rich, kudos to you, this is the most sensible article I have read so far. Looking forward for more of your articles.
2015-08-26 13:50
As a conclusion, as long as Malaysia internal problem couldn’t be solve, the bad cycle of economic will still continue going on.
Why should 29 million Malaysians suffer because of one man who has no clue how to run the country?
2015-08-26 14:36
29mil m'sian think debt is money, the other one just taking advantage by ramping up the national debt. this end game is global and unprecedented. why we are not told? simple, if all understand how debt based monetary system works, bersih 4.0 will have a different objective.
2015-08-26 15:03
Not everything is true...Msia is not the only crude oil exporter in SEA. In fact Brunei, Indonesia, Thailand and host other countries albeit smaller amount. Now the big question is why the RM is badly hit if it is due to oil export. I believe Brunei shud be worse as its export is almost entirely oil. Looking at global scenario Saudi Arabia should also be in worse situation. But why are their currencies not affected as bad as Msia? In money markets billions move with the click of a button. So it is not as simple as what you suggest...
2015-08-26 17:43
Yes, i believe that the main concern is not about the oil price, if it is the oil price, why some of the major exporters currency doesn't get affected? and why Malaysia?
2015-08-26 18:44
@Xxxvalue Brunei dollar is bilateral interchangable with S$, since singapore kick out from federation, they signed and agree for brunei to do so. Riyal is peg to usd, same like hk$, which is why you see rmb devalue doesnt affect HKD. Crude price is the war between OPEC to get rid off US shale, al-Naimi the saudi minister of oil has a much bigger impact on oil price than what usd value, punish russia, US supply threat etc. Watch out for next OPEC meeting as it affect price much more than any other factors.
2015-08-26 18:55
Very good article and good questions. Why Malaysia? Ask the Government. I am sure we all know all the ugly scandals recently and investors have good reasons to exit from the stock markets and these people also hope to see market to collapse so that they have excellent bargains. Large fund managers will just continue to pump our tax and hard earned money to support them!
2015-08-26 19:00
What come up need to go back, ever since FED stimulate their economy, they exported a lot of inflation oversea. Asset price inflation is prominent globally, look at property price in australia, malaysia, taiwan, canada, singapore, philipimes, vietnam UK etc over the past year, all share a lot of similarity. Europe bcoz of crisis, their bubble ady pop eg ireland, spain etc. So next year is the interesting year to watch, as US on their path to normalise, systemic financial risk on those developing nations may increase and no matter how strong malaysia financial position is ( malaysia strong? Puiiii.), once one nation bubble burst, it will be contagious to others countries, and keep in mind, unlike 1997 only asia region, this time is global crisis, somewhere some place on the earth sure got problems. Good things is that US has their own impending bubble too, their shale bubble, so really see who burst first, and next year will be very volatile. Even China cant do much, already manufacturing PMI drop consecutiively, they are trying to resolve their economy transformation issues as that might affect them whether they will be trapped in middle income trap. So next year, beware.
2015-08-26 19:09
Ahbeng Beng,.... So next year, beware.
I agree with you Mr Beng. This time, the effect would be painful and long.
Don't hope for any end of 2015 turn around.
I wonder anybody would like to predict how low will KLCI fall?
Will it be a repeat of the financial crisis of the 1997?
And how long did that last? Anybody remember?
I wonder if PM would be brave enough to declare no income tax next year and also temporary halt the GST?
Any taker?
2015-08-27 09:19
tq all for the intelligent response to my comments. We have to admit no one knows everything. Todays market whether it is equity, money market or hard commodities are all subject to manipulations. The manipulators are on the look out for preys and certainly with host of problems Msia become an easy target! It is not new as it happen to many other countries before. With a weak Prime Minister who is presently besieged by life & death issue, worrying about the economy will be last thing on his mind! And this seem too aggravate things!
2015-08-27 13:29
Thanks for all the comment! :) The economy now is still very unstable. Foreign fund still pulling out from Malaysia market in the past two days even though the KLCI index rose. There is no any positive catalyst in our market now. I believe the uptrend in this two days are just temporary as local institutions came out to support again. But, how long they can support?
2015-08-27 16:10
the global is poised with a big correction - whether it is a crisis no one know.
In the midst of the process - there will be stimulus along the way, it is very hard to predict right now.
The china market is very volatile swing 2-8 per cent daily, until this get stable else smart investor will not pour money in such market
2015-08-31 09:57
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Probability
USD had weakened against EUR...
what do u say about that?
2015-08-25 22:50