Travel and Inflation
It's been two months since I wrote something here. I must admit, writing is sometimes hard. Not that I don't have anything to write about, but more like I thought of something to write while walking/driving/showering but I forget to write it down immediately and when I'm ready to write, I forgot what I was going to write about.
Anyway, I wasn't able to write anything last month because I was on vacation for three weeks. I went to the Philippines and Hong Kong as we usually do. I'm telling you this because it has something to do with what I am writing about today.
As I usually do whenever I go somewhere, I like to observe everything. I not only try to enjoy the sights and the place, but I always try to look at the town or country from an economics point of view. I know, I'm weird that way.
For my clients who are from the Philippines, here is what I observed.
Philippines
Compared to when I was in the Philippines back around 2009, when Gloria Arroyo was still President. The Philippines today seems calmer with Noynoy Aquino as President. Calmer in a sense that there isn't much tension in the area of politics like it was back in 2009. Back then, you almost hear that there's going to be a coup d'etat just around the corner.
While most people will tell you that Noynoy is a know nothing President, in my opinion, a know nothing is better since people can go about their business without interference from the government.
It also seems to me like President Aquino's promise to curb corruption is somewhat working. I did not hear one siren or "wang wang" in my three weeks there and the authorities did not seem as abusive as they were back when Arroyo was President. Interesting enough, the customs officials at the airport did not even ask for money for coffee or "pang kape" in Filipino parlance. This was in sharp contrast to when Arroyo was President where everyone was asking for "money for coffee", even the person getting your baggage claim stub.
Noynoy Aquino may not be a smart President, but at least he did create a climate where the government employees would not be so blatantly abusive or corrupt. This is my observation in the short time I was there so it may not be entirely accurate. But it was notable for me.
An interesting thing to note is that the Philippine stock market is actually one of the best performing market since the financial crisis in 2008. It was up compared to every other markets around the world. It's holding steady now, but it was impressive how good the Philippine market has performed in the last 3 years.
Would it continue doing well going forward? Hard to say. The Philippine stock market is always influenced by "hot money" or money from foreign investors. The reason the Philippine market went up is because foreign investors had nowhere else to go. So they found the Philippines to be the least exposed to the worldwide financial crisis so they all went in there. Good for the Philippine market, but also prone to sudden drops when all these hot money flow out. Which may happen in the near future if these foreign investors keep losing their money in Europe and the US. They will sell everything to keep afloat, even their holdings in the Philippines if they need to.
The biggest problem facing the Philippines right now I believe is inflation and overcrowding. Food and energy prices is really high now. The Philippines has the highest electricity rates in Asia. This is going to dampen the competitiveness of the manufacturing sector.
Overcrowding is another big problem. I'm talking specifically about overcrowding in Downtown Manila or the Binondo area where Chinatown is located. I cannot believe how many malls they have built in that area. These malls are not your regular malls like Richmond Centre or SM. They are of course what we call "Tiangge" or bazaars. It used to be that there was only Tutuban and Ilaya and Divisoria Mall. In addition to that, they now have 168, 268, 368, 568 (they don't like 4) and so on.
Of course, they sold of an old public school called Jose Abad Santos High School and built in its place mixed commercial and residential building called Cityplace.
I cannot believe how bad traffic is now in Binondo. It'll take you 30 minutes just to drive one block! And that one block will actually take you 5 minutes if you walk.
Another thing I learned is that they are building the Anchor Sky Suites in the middle of Chinatown. Once built, the 57 storey luxury condominium will the tallest building not only in Binondo, but in any Chinatown around the world outside China.
While that may sound impressive, if you're from Binondo, you know this is going to be a major headache. It is going to be built along Ongpin Street near T. Alonzo. Everybody knows Ongpin is a one lane street. Can you imagine the traffic? Also, this condominium will have 346 residential units. This is a disaster.
Why do I say it's a disaster? Let's look at some facts. The average affluent Filipino-Chinese family will have 3 to 4 family members, then add to that one or two maids. So you are looking at an average of 4 to 6 people per unit. Let's be conservative and say there's 4 per unit. Multiply that by 346 you get 1,384 people. Can you imagine the amount of waste, energy and traffic that's going to be created by that one building alone? If you think the rats in Chinatown are big, they're about to get bigger. By the way, they're as big as a cat now.
Hong Kong
I went to Hong Kong for only 3 days, so I can't really say I know about Hong Kong that much. But here's what I've observed. Hong Kong is getting really expensive now compared to when I was there two years ago. This is due to the increase in tourist from China who are driving up prices in Hong Kong.
In the newspapers, they are talking about the high inflation Hong Kong is experiencing which is hurting a lot of lower income people because of higher food cost. Another thing I read in the newspaper is the importation of gold in Hong Kong increased six-fold compared to last year. The big jump in gold imports is due to buying by the Mainland Chinese who goes to Hong Kong and buy their jewelry and gold there.
What's interesting to note is that while there was a 6-fold increase in gold imports in Hong Kong, the month of September was one of the worst month for gold when gold went from $1,900 a ounce down to $1,600 an ounce. This shows the disconnect of the futures market with the actual physical market in gold.
Another thing that caught my eye was the jewellery store Chow Tai Fook. For those of you who don't know, Chow Tai Fook is a major jewelry store chain in Hong Kong. When I went to Hong Kong 2 years ago, I only saw maybe one store in a 5 block area, maybe less. Now, Chow Tai Fook is everywhere, it's like Starbucks where you can see a store every two blocks (I may be exaggerating here). But I cannot believe how many of these stores I saw in my last trip there. I believe the explosive growth of this company is due to the demand of Mainland Chinese for quality jewelry. In fact, Chow Tai Fook is actually going public. Chow Tai Fook is looking to raise $2.8 billion in it's IPO and legendary investor George Soros is investing $50 million worth of shares in the IPO.
Hong Kong is still a very dynamic city. There are still a lot of construction going on like it was two years ago. There does seem to be a lot of people from China shopping there compared to two years, ago so this is good for the retailers.
Conclusion
So what does these stories have to do with investing or your portfolio? A lot actually. I've learned that investing is not something done in a vacuum. What happens in one country affects another country or an asset in another country.
For example, the increase in food prices in the Hong Kong will translate to an increase in food prices everywhere. As demand grows, prices go up. Supply will go to where it can get the highest price and if there's a short supply in another country, the prices there will have to go up or get nothing.
The increase in energy prices and overcrowding in the Philippines will affect the country and Asia politically, demographically and socially.
What's interesting to see is that inflation is growing rampant not just in Canada but in Asia as well. If you think groceries are expensive now, wait till you see your grocery bill next year.
The worldwide inflation is driven by massive printing of currencies by every country. When inflation goes up, the biggest hit will be in commodity prices.
Here are a couple of charts which show what I mean.
As you can see from the charts above, sugar, beef and coffee prices have been going up in the last 5 years. You may see some downward movement in the price from time to time, but in general, the trend has been up.
Take a look at these charts.
These are the charts for gold, silver and oil. Same thing, the trend is up. The trend is up due to demand and inflation. Oil went down during 2008 because of the financial crisis. People expected global demand for oil to decrease. But you can see that it's now back around $100/barrel again.
What does this all mean? In my opinion, we're going to see a lot of inflation going forward. There is no way that the massive amount of bailouts and money printing by the major central banks won't affect the prices we pay. You will hear a lot of opinion about inflation, but the lesson I take here is what happened in Zimbabwe where the government printed massive amounts of money which ended up costing you Z$100 billion to buy 3 eggs.
Think this isn't going to happen? For our sake, I hope not.
The problem in Europe is cause to worry. The European bond market is very volatile because you don't know which country is going to report a problem next. Add to that the massive bailout six central banks did yesterday to ease the sovereign debt-crisis in Europe, this means even more money printing. Although they call it a loan, I call it a bailout.
Where should you invest right now? GIC looks safe, but in reality, you're getting a negative real rate of return on GICs. The highest rate you can get right now in the GIC is 2.65% if you lock in for 5 years. The inflation rate in October 2011 is 2.8961%. So that means, that even if you lock in your money for 5 years, you're still losing out earning -0.2461% on your investments.
Before I go further, real rate of return to put simply means the rate of return of an investment minus inflation.
So if you invest in a 2 year GIC earning 2.00% and inflation is 2.8961%, you get 2.00 - 2.8961 = -0.8961%. If you're losing money by saving it, you might as well spend your money right away instead of saving it.
The only solution to this is to find a higher yielding investment doing better than inflation. What is the right investment? There is no single answer for this and we will have to sit down with you one-on-one because everybody has a different investment objective and the answer will have to be tailor made for your individual objective.
Anyway, I wasn't able to write anything last month because I was on vacation for three weeks. I went to the Philippines and Hong Kong as we usually do. I'm telling you this because it has something to do with what I am writing about today.
As I usually do whenever I go somewhere, I like to observe everything. I not only try to enjoy the sights and the place, but I always try to look at the town or country from an economics point of view. I know, I'm weird that way.
For my clients who are from the Philippines, here is what I observed.
Philippines
Compared to when I was in the Philippines back around 2009, when Gloria Arroyo was still President. The Philippines today seems calmer with Noynoy Aquino as President. Calmer in a sense that there isn't much tension in the area of politics like it was back in 2009. Back then, you almost hear that there's going to be a coup d'etat just around the corner.
While most people will tell you that Noynoy is a know nothing President, in my opinion, a know nothing is better since people can go about their business without interference from the government.
It also seems to me like President Aquino's promise to curb corruption is somewhat working. I did not hear one siren or "wang wang" in my three weeks there and the authorities did not seem as abusive as they were back when Arroyo was President. Interesting enough, the customs officials at the airport did not even ask for money for coffee or "pang kape" in Filipino parlance. This was in sharp contrast to when Arroyo was President where everyone was asking for "money for coffee", even the person getting your baggage claim stub.
Noynoy Aquino may not be a smart President, but at least he did create a climate where the government employees would not be so blatantly abusive or corrupt. This is my observation in the short time I was there so it may not be entirely accurate. But it was notable for me.
An interesting thing to note is that the Philippine stock market is actually one of the best performing market since the financial crisis in 2008. It was up compared to every other markets around the world. It's holding steady now, but it was impressive how good the Philippine market has performed in the last 3 years.
Would it continue doing well going forward? Hard to say. The Philippine stock market is always influenced by "hot money" or money from foreign investors. The reason the Philippine market went up is because foreign investors had nowhere else to go. So they found the Philippines to be the least exposed to the worldwide financial crisis so they all went in there. Good for the Philippine market, but also prone to sudden drops when all these hot money flow out. Which may happen in the near future if these foreign investors keep losing their money in Europe and the US. They will sell everything to keep afloat, even their holdings in the Philippines if they need to.
The biggest problem facing the Philippines right now I believe is inflation and overcrowding. Food and energy prices is really high now. The Philippines has the highest electricity rates in Asia. This is going to dampen the competitiveness of the manufacturing sector.
Overcrowding is another big problem. I'm talking specifically about overcrowding in Downtown Manila or the Binondo area where Chinatown is located. I cannot believe how many malls they have built in that area. These malls are not your regular malls like Richmond Centre or SM. They are of course what we call "Tiangge" or bazaars. It used to be that there was only Tutuban and Ilaya and Divisoria Mall. In addition to that, they now have 168, 268, 368, 568 (they don't like 4) and so on.
Of course, they sold of an old public school called Jose Abad Santos High School and built in its place mixed commercial and residential building called Cityplace.
I cannot believe how bad traffic is now in Binondo. It'll take you 30 minutes just to drive one block! And that one block will actually take you 5 minutes if you walk.
Another thing I learned is that they are building the Anchor Sky Suites in the middle of Chinatown. Once built, the 57 storey luxury condominium will the tallest building not only in Binondo, but in any Chinatown around the world outside China.
While that may sound impressive, if you're from Binondo, you know this is going to be a major headache. It is going to be built along Ongpin Street near T. Alonzo. Everybody knows Ongpin is a one lane street. Can you imagine the traffic? Also, this condominium will have 346 residential units. This is a disaster.
Why do I say it's a disaster? Let's look at some facts. The average affluent Filipino-Chinese family will have 3 to 4 family members, then add to that one or two maids. So you are looking at an average of 4 to 6 people per unit. Let's be conservative and say there's 4 per unit. Multiply that by 346 you get 1,384 people. Can you imagine the amount of waste, energy and traffic that's going to be created by that one building alone? If you think the rats in Chinatown are big, they're about to get bigger. By the way, they're as big as a cat now.
Hong Kong
I went to Hong Kong for only 3 days, so I can't really say I know about Hong Kong that much. But here's what I've observed. Hong Kong is getting really expensive now compared to when I was there two years ago. This is due to the increase in tourist from China who are driving up prices in Hong Kong.
In the newspapers, they are talking about the high inflation Hong Kong is experiencing which is hurting a lot of lower income people because of higher food cost. Another thing I read in the newspaper is the importation of gold in Hong Kong increased six-fold compared to last year. The big jump in gold imports is due to buying by the Mainland Chinese who goes to Hong Kong and buy their jewelry and gold there.
What's interesting to note is that while there was a 6-fold increase in gold imports in Hong Kong, the month of September was one of the worst month for gold when gold went from $1,900 a ounce down to $1,600 an ounce. This shows the disconnect of the futures market with the actual physical market in gold.
Another thing that caught my eye was the jewellery store Chow Tai Fook. For those of you who don't know, Chow Tai Fook is a major jewelry store chain in Hong Kong. When I went to Hong Kong 2 years ago, I only saw maybe one store in a 5 block area, maybe less. Now, Chow Tai Fook is everywhere, it's like Starbucks where you can see a store every two blocks (I may be exaggerating here). But I cannot believe how many of these stores I saw in my last trip there. I believe the explosive growth of this company is due to the demand of Mainland Chinese for quality jewelry. In fact, Chow Tai Fook is actually going public. Chow Tai Fook is looking to raise $2.8 billion in it's IPO and legendary investor George Soros is investing $50 million worth of shares in the IPO.
Hong Kong is still a very dynamic city. There are still a lot of construction going on like it was two years ago. There does seem to be a lot of people from China shopping there compared to two years, ago so this is good for the retailers.
Conclusion
So what does these stories have to do with investing or your portfolio? A lot actually. I've learned that investing is not something done in a vacuum. What happens in one country affects another country or an asset in another country.
For example, the increase in food prices in the Hong Kong will translate to an increase in food prices everywhere. As demand grows, prices go up. Supply will go to where it can get the highest price and if there's a short supply in another country, the prices there will have to go up or get nothing.
The increase in energy prices and overcrowding in the Philippines will affect the country and Asia politically, demographically and socially.
What's interesting to see is that inflation is growing rampant not just in Canada but in Asia as well. If you think groceries are expensive now, wait till you see your grocery bill next year.
The worldwide inflation is driven by massive printing of currencies by every country. When inflation goes up, the biggest hit will be in commodity prices.
Here are a couple of charts which show what I mean.
As you can see from the charts above, sugar, beef and coffee prices have been going up in the last 5 years. You may see some downward movement in the price from time to time, but in general, the trend has been up.
Take a look at these charts.
These are the charts for gold, silver and oil. Same thing, the trend is up. The trend is up due to demand and inflation. Oil went down during 2008 because of the financial crisis. People expected global demand for oil to decrease. But you can see that it's now back around $100/barrel again.
What does this all mean? In my opinion, we're going to see a lot of inflation going forward. There is no way that the massive amount of bailouts and money printing by the major central banks won't affect the prices we pay. You will hear a lot of opinion about inflation, but the lesson I take here is what happened in Zimbabwe where the government printed massive amounts of money which ended up costing you Z$100 billion to buy 3 eggs.
Think this isn't going to happen? For our sake, I hope not.
The problem in Europe is cause to worry. The European bond market is very volatile because you don't know which country is going to report a problem next. Add to that the massive bailout six central banks did yesterday to ease the sovereign debt-crisis in Europe, this means even more money printing. Although they call it a loan, I call it a bailout.
Where should you invest right now? GIC looks safe, but in reality, you're getting a negative real rate of return on GICs. The highest rate you can get right now in the GIC is 2.65% if you lock in for 5 years. The inflation rate in October 2011 is 2.8961%. So that means, that even if you lock in your money for 5 years, you're still losing out earning -0.2461% on your investments.
Before I go further, real rate of return to put simply means the rate of return of an investment minus inflation.
So if you invest in a 2 year GIC earning 2.00% and inflation is 2.8961%, you get 2.00 - 2.8961 = -0.8961%. If you're losing money by saving it, you might as well spend your money right away instead of saving it.
The only solution to this is to find a higher yielding investment doing better than inflation. What is the right investment? There is no single answer for this and we will have to sit down with you one-on-one because everybody has a different investment objective and the answer will have to be tailor made for your individual objective.
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