US is a ‘monopoly’

 

While the United States plays the role of the banker similar to the game of Monopoly, the rest of us will be happy for now to remain in the game and not go bankrupt. — Bloomberg

WHETHER you are young or old, it is likely that at one time or another, you would have played a board game called Monopoly.

The rules of the game are simple, with the objective of winning the game by beating your opponents and making them bankrupt.

The whole idea is to build up your “assets” in the board game to make it pricey for other players to continuously pay rent whenever they land on your properties. At the same time, in the game of Monopoly, there is also the banker, who never goes broke.

However, if the bank runs out of money, the banker can issue “I Owe You” notes or IOUs to other players and for whatever amounts that are required by writing the amount on a piece of paper.

These IOUs can be exchanged for cash whenever cash is available, or otherwise, counted as an asset of the player holding them. In essence, the banker can print money and the holders have a claim against the banker. Sounds familiar?

Out of control

Welcome to the world of finance. In real life, some central banks, in particular, the US Federal Reserve (Fed) and the US government, are simply printing money.

They may not be playing a game like Monopoly but their actions certainly reflect that.

Today, the United States has a total debt amounting to US$34.6 trillion and with the debt ceiling out of the window, the US debt level will just continue to grow, as the past two trillion dollar increase occurred in a space of just 100 days each.

The pace of increase of every US$1 trillion is expected to accelerate very quickly as there are no plans to curtail the growth or any effort to reduce the government’s twin deficits – trade and budget deficits.

Another interesting point of measurement is the growth of the US debt level since February 2019, which has increased by US$12.5 trillion whilst the US gross domestic product (GDP) itself only expanded by US$7.2 trillion.

In essence, in the last five years or so, for every dollar growth of the US economy, the government created 1.7 units of debt.

Forever deficit

Last year, the US budget deficit hit US$1.7 trillion or 6.2% of GDP and this is expected to be sustained at a relatively high level over the next decade and beyond. The Congressional Budget Office in its March 2024 projection is looking at a budget deficit to GDP to hit 5.6% this year before rising to 6.1%, 7.3% and 8.5% in 2034, 2044 and 2054 respectively.

Astronomical by any standards, and by continuously running budget deficits, it suggests that the US debt level will accelerate further over the next 30 years.

In the words, as commented by the International Monetary Fund (IMF) recently, the United States debt level is simply mind-boggling. With higher debt levels, naturally, cost of servicing the debt too will increase. For the month of March alone, the US government spent US$89bil on interest, which on an annualised basis, suggests a figure of more than a trillion dollars or US$120mil every hour.

With the United States sustaining a higher Fed fund rate for a longer period, how does the country pay for this?

You guessed it, and yes, print more money just like the banker in the Monopoly board game writing IOUs.

In fact, the United States government, which raises approximately US$5 trillion a year uses it mostly for social security, healthcare, and debt servicing.

Expenditures related to defence, space programmes, state departments, or even law enforcement agencies are funded via debt. Even aid that it provides to nations or even wore-torn countries is funded via debt. Fewer dollars

With the rise of China and of course the emergence of the euro as a potential reserve currency, the US dollar has seen its share of global reserves held by the central bank shrinking year after year.

Based on the data from the IMF, the US dollar’s share of global reserves has dropped from 72% in the year 2000 to just 57% currently.

Although not elected yet, former US President, Donald Trump, is said to be considering ways to stop other nations from shifting away from using the US dollar by punishing them in one way or the other.

According to a Bloomberg report, these measures include export controls, currency manipulation charges, and tariffs.

Will this ever work and what would this mean to international trade and relationships if Trump is re-elected as President for the second time?

The ”S” word

With inflation at elevated levels, the Fed is in no hurry to cut rates just yet as the core Personal Consumption Expenditure (PCE) print looks to be sticking out like a sore thumb for longer.

In fact, the concern is that the core PCE, which grew by 2.8% in the latest March 2024 data, is not falling fast enough, while the super-core inflation, which is defined as PCE services inflation minus energy and housing, rose by 3.5% year-on-year (y-o-y).

The first quarter of this year’s 2024 GDP growth, which came in well below expectations at just 1.6% annualised rate against the market estimate of a 3.5% y-o-y growth has re-ignited the fear that the United States economy is headed towards stagflation – defined as a period of slow growth, high inflation and of course, rising unemployment, although the Fed chair is quick to dismiss it.

The latest monthly payroll numbers, which came in below expectations and lifted the unemployment rate to 3.9% have added a bit more pressure to the stagflation narrative.

While the Fed would not ring the alarm bell, the market is still saying that the United States economy is headed towards either a soft landing but could quickly become a hard one if rates are not cut soon enough.

As it is, the risk of recession indicator, as seen in the inverted yield curve, has been flashing “recession” for the past two years, but the United States economy continues to chug along, mainly driven by monopoly money.

At the same time, the yield spread between the US treasuries vis-a-vis other major currencies has caused significant gain on the US dollar itself.

Forget about how much the ringgit has lost ground but look at some of the other major currencies too, especially the yen, which has dropped more than 50% from the low of 102.36 to the US dollar in March 2020.

The drop in the yen is not merely due to the yield spread alone but also the massive debts that the Japanese government is presently carrying to the tune of 1,286 trillion yen or US$8.6 trillion, which is just over 217% of its GDP of about 591.4 trillion yen or US$4.2 trillion.

Will history repeat itself on the US dollar when the time comes just like how the yen is being devalued?

Can the US dollar be dethroned?

Short answer – unlikely!

However, if any country, especially those in emerging markets, were to behave like the United States today – twin deficits, unsustainable debt level, and money printing a.k.a. Monopoly money, that country would be doomed.

The local currency would need to be re-based via a devaluation if the market has not already priced that scenario just yet.

However, this would not happen to the US dollar simply because the greenback, for all intent and purpose, remains the reserve currency of the world and the world has not found an alternative yet and may never even find it.

Every other option, be it the euro, yen, yuan, gold, or cryptocurrencies, has its respective shortcomings.

As long as the US dollar is used as a medium of exchange for commodities, trade, and finance, and as the majority reserves of central banks globally, the US dollar remains relevant.

Hence, while the United States plays the role of the banker similar to the game of Monopoly, the rest of us will be happy for now to remain in the game and not go bankrupt.

But how long can the United States keep writing the IOUs? That’s the real question.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

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Demystifying the property market overhang

AN account­ant, who is tasked with pre­par­ing the books of a cor­por­ate, will always be guided by account­ing prin­ciples when it comes to how the fin­an­cial state­ments of the com­pany are presen­ted on an annual basis to ensure they are accur­ate and reflect­ive of the com­pany’s busi­ness affairs.

An aud­itor, look­ing at the same pre­pared accounts, will run through the num­bers and audit the key mater­ial items to ensure they are reas­on­able, reflect­ive of the com­pany’s fin­ances, and free from mater­ial mis­state­ments, includ­ing due to fraud or error, or applic­a­tion of wrong account­ing treat­ment.

In fin­an­cial state­ments, two of the most crit­ical items are receiv­ables and invent­or­ies.

In order to have proper account­ing treat­ment, account­ants and aud­it­ors used account­ing the­or­ies to describe what is deemed to be cur­rent, and those that have a longer-dated age­ing pro­file are either impaired or writ­ten off.

The reason for this is to ensure that the fin­an­cial state­ments reflect the status of a cor­por­a­tion’s cur­rent assets and are in no way doubt­ful.

There is also an applic­a­tion of gen­eral pro­vi­sion or spe­cific pro­vi­sion when it comes to how these bal­ances ought to be treated in the fin­an­cial state­ments.

Often, we see cases of over-inflated bal­ances and when it came to the crunch of the mat­ter, the man­age­ment would have no choice but to write them off.

The ‘real’ over­hang

At the recently con­cluded 15th Malay­sian Prop­erty Sum­mit 2023, the Dir­ector of the National Prop­erty Inform­a­tion Centre (Napic) presen­ted a paper on the status of the Malay­sian prop­erty mar­ket up to the third quarter of last year (3Q22), with some data points related to the per­form­ance of the mar­ket up to Novem­ber 2022.

The full mar­ket report is only expec­ted to be released in the middle of next month, where Napic will not only provide the usual annual update of the mar­ket’s per­form­ance but also provide more insight into some of the key data points that have been much dis­cussed among all stake­hold­ers, of which, one of them is the status of over­hang in the mar­ket.

As we are aware, the res­id­en­tial over­hang at the end of 3Q22 stood at 29,535 units worth some Rm19.95bil.

Napic’s web­site also provided the details of where these over­hang prop­er­ties are loc­ated and the three key states – Johor, Selangor, and Pen­ang – are the main hot­spots, account­ing for some 14,956 units or just over half of the coun­try’s total over­hang.

In terms of the type of prop­er­ties, the 3Q22 data showed that high-rises com­prise 18,962 units or 64.2% of the total over­hang.

In terms of price points, 23.8% of the total over­hang was priced at RM300,000 and below, 29.5% was priced between RM300,001 and RM500,000, 31.6% was priced between RM500,001 and Rm1mil and the bal­ance was priced above Rm1mil.

In terms of the total value, the res­id­en­tial over­hang is skewed towards the high-end seg­ment with prop­er­ties worth more than Rm1mil account­ing for 43.4% of the total over­hang value, while those priced between RM500,001 and Rm1mil accoun­ted for 31.9% of the total over­hang.

Prop­er­ties priced between RM301,000 and RM500,000 have a total over­hang value of just Rm3.5bil, while prop­er­ties priced below RM300,000 are worth some Rm1.39bil. These two rep­res­ent some 24.8% of the total over­hang value.

For the ser­vice apart­ments, the total over­hang in units stood at 23,688 worth some Rm20.21bil as at end of 3Q22, with Johor alone account­ing for 62.4% of the total.

Most of these over­hangs in the seg­ment are prop­er­ties priced between RM500,001 and Rm1mil, which accoun­ted for two-thirds of the total unit num­bers and 58.9% in value of the total over­hang.

For the longest time, Napic had not shared with the stake­hold­ers the key under­ly­ing age­ing pro­file of this over­hang, and that has led to a mis­lead­ing status of the mar­ket’s over­hang status. It was indeed an eye-opener to see what the real over­hang has been.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

For example, as seen in Table 1, the key over­hang is prop­er­ties (both res­id­en­tial and ser­vice apart­ments across the four key states) that have been part of the stat­ist­ics for the last five years and they account for between 51% and 93% of the total over­hang units.

In total, these prop­er­ties accoun­ted for a whop­ping 75.7% of the mar­ket’s over­hang status while prop­er­ties that have been in the mar­ket for the last three years are just over 5% from the key states.

Spe­cific men­tion must also be made on ser­vice apart­ments loc­ated in Johor, and those that are in the five to 10 years bucket, as they account for 26% of the total mar­ket over­hang.

In terms of prices, most of the over­hang is seen in the same five to 10 years bucket across the board and they alone account for 71% of the total over­hang prop­er­ties in the mar­ket.

As seen in Table 2, prop­er­ties below three years account for less than 5% of the total mar­ket over­hang. Spe­cific men­tion must also be made on ser­vice apart­ments that are in the RM500,001 to Rm1mil bracket and are in the five to 10 years bucket as they account for 25% of the total mar­ket over­hang.

In the cor­por­ate world, when one is up against data that is dis­tort­ing the real pic­ture, the proper thing to do is to see whether the data is still rel­ev­ant or oth­er­wise.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Clearly, look­ing at the age­ing pro­file of the prop­erty over­hang, those above five years will likely remain unsold for a fore­see­able future, mainly due to either being wrongly loc­ated and without the proper or good infra­struc­ture to sup­port com­munity liv­ing, or untouched by prop­erty buy­ers for simply being too expens­ive, espe­cially those bey­ond the RM500,000 price threshold.

Hav­ing iden­ti­fied the issues, reg­u­lat­ors and prop­erty developers would need to come out with strategies to address them and to attract buy­ers to these prop­er­ties via a rehab­il­it­a­tion exer­cise and with a sig­ni­fic­ant price reduc­tion.

The bot­tom line is to remove them from the over­hang data.

Let’s call a spade a spade

So what is Malay­sia’s real over­hang? Based on the data presen­ted by Napic, one can take com­fort that over­hang is not as ser­i­ous as it is made out to be mainly due to a lack of data and proper ana­lysis in terms of what is real over­hang pre­vi­ously.

While those more than three years but less than five years are part of stat­ist­ics, we should redefine them as core over­hang while those bey­ond five years can be redefined as hard­core over­hang.

As we have been able to slice and dice these num­bers, the real over­hang is only per­haps less than 5% of the mar­ket in terms of the num­ber of units and value.

Napic could also help stake­hold­ers to under­stand bet­ter the prop­erty mar­ket data bet­ter by break­ing down the data points as an over­hang that is mainly due to gov­ern­ment hous­ing schemes and those that are privately built.

In this way, we could also see whether the gov­ern­ment’s inter­ven­tion is needed to boost demand for these obscurely loc­ated prop­er­ties.

For the private developers, most of these invent­or­ies would have been impaired as the like­li­hood of the assets being real­ised in full value or even at 50% to 60% of the mar­ket value is seen as low.

Private developers too ought to think out­side of the box on how to over­come the prop­erty invent­or­ies sit­ting in their books as being part of the stat­ist­ics only res­ults in paint­ing the wrong pic­ture for the prop­erty mar­ket as a whole.

By Pankaj C. kumar is a long-time invest­ment ana­lyst. the views expressed here are the writer’s own. 

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Budget 2021 – Great expectations

 

LAST Friday, the Finance Minister tabled what is now known as Malaysia’s largest-ever budget.

The excellently-crafted and well-written budget was presented in a couple of hours and after it was presented, the social media, mainstream media, economists, consulting firms and investment banking strategists gave their views on the measures, especially those related to taxes, incentives or grants.

Now that Budget 2021 has been tabled, lawmakers will debate on the merits and vote on it. Having covered budgets for more than two decades, the devil is in the details and this year is not an exception.

Let’s look at the gross domestic product (GDP) estimate first. The government expects GDP growth for 2020 to contract by 4.5% and for next year, it is estimated to grow by between 6.5% and 7.5% in real terms. For the economy to close the year with the projected contraction, the second half of 2020 has a very small room to contract by only 0.7% as the economy shrank 8.3% in the first half.

This is a tall order as economic data remains largely weak as seen in several indicators, which include the industrial production index as well as the poor reading in the retail sub-segment.

With almost the entire nation under the conditional movement control order, economic growth, if any, will be challenging.

Meanwhile, in nominal terms, the government expects GDP growth to be -4.7% this year and to rise significantly by almost 9% in 2021, as inflation is expected to return with a reading of 2.5%, mainly due to the low base effect from 2020.

Perhaps when the Bank Negara releases the third quarter GDP data on Friday, we can then assess if the full year GDP assumption still holds water or otherwise.

For 2021, the government expects GDP growth to be driven by domestic demand, in particular growth from private consumption while the external sector may post some drag as imports are forecast to grow even faster than exports.

On the supply side, the government expects the services and manufacturing sectors, which account for 80% of the economy, to grow by 7% each while construction is expected to bounce back with a near 14% leap in 2021 after the forecast drop of 18.7% this year. From here, we can observe that one of the key drivers of the economy next year is public investment, as the government has bumped up development expenditure to the tune of RM69bil for 2021 from the adjusted figure of RM50bil this year (which was previously forecast to be at RM56bil).

The government’s total expenditure is now broken into three main buckets – other than operating expenditure and development expenditure, we now have a new line item called the Covid-19 Fund with an allocation of RM38bil this year and RM17bil next year.

In essence, since the pandemic outbreak, the government has introduced various economic stimulus packages under its Prihatin package series and the Penjana package, which in total amounted to RM305bil, while the actual direct fiscal injection totaled RM55bil.

However, under the Temporary Measures for Government Financing (Coronavirus Disease 2019) Act, the Parliament had only approved a ceiling of RM45bil for the fund and hence the Minister has proposed, taking into consideration the nation’s need up to 2022, an amendment that will be tabled to raise the fund to RM65bil, an increase of RM20bil.

This increase that was mentioned in the budget speech is meant for the RM10bil Kita Prihatin package, additional assistance for people’s well-being, as well as to secure the supply of the much-needed vaccine. The table above summarises the government’s revenue projection for this year and the next.

The expected revenue for the second half of the year and into 2021 will be challenging for the government, given the level it had achieved in the first half. As it is, the second half forecast is 23.3% higher than the first half.

In addition, for 2021, revenue and expenditure are expected to increase by 4.2% and 4.3% respectively, which will likely be tough given the tax breaks that the government is proposing, in particular, company income tax (CITA) and personal direct taxes.

Based on government’s estimate, taxes from the two sources are expected to fall by 6.8% and 7.2% this year but will bounce back strongly in 2021 with a growth of 8.8% and 18.2% respectively.Interestingly, the 2021 forecast for CITA and personal direct taxes at RM64.6bil and RM42.4bil is higher than 2019’s figure by 1.3% and 9.7% respectively.

As for expenditure, as total federal government debt stood at RM874.3bil mark or 60.7% of GDP as at end of September 2020, the government’s Debt Service Charges (DSC) too have deteriorated.

From an estimated level of 15.4% of GDP this year, DSC is expected to drop further to 16.5% in 2021, mainly driven by 11.6% increase in absolute DSC to RM39bil.

Although both the DSC ratio in 2020 and 2021 will be higher than the self-imposed fiscal limit ratio of 15%, it is hoped that by beyond 2021, this ratio will be brought under control when the economy is expected to expand further.

All in, Budget 2021 measures are holistic and inclusive for all levels of society and have been cleverly crafted to address the challenges faced by Malaysians, especially those severely impacted by Covid-19.The government has largely listened to the voices of hope in addressing the pandemic world.

Having said that, the expected government’s revenue and GDP projections are rather optimistic, resulting in a much lower budget deficit figure while the forecast government tax revenues too are on the high side. While the DSC has now surpassed the self-imposed ceiling, the government’s debt to GDP ratio is expected to remain elevated for at least this year and in 2021.It is important for the lawmakers to approve this budget as the government has taken steps in keeping the economy going.

While there are some shortcomings in the terms of budget allocations, it is hoped that this can be ironed out during the parliamentary debate stage and all lawmakers come to an consensus to approve the gigantic budget.

Pankaj C. Kumar is a long-time investment analyst. Views expressed here are his own. 

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The FM really got SHOCKED when LGE asked him whether the budget was approved by the cabinet. Watch the video.

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