Happy National Day to Singapore! It’s a public holiday here today (Wed) and I didn’t do much at all. Cooked breakfast and lunch at home with my wife before heading over to my parents-in-law’s place for dinner. Nice and quiet mid-week break from work. Anyway, I have a full day of training tomorrow so I won’t be going into the office until Fri. It will be the weekend before you know it and I will have a wedding dinner to attend on Sat night!
I have been watching quite a bit of TV (Netflix and the National Day celebrations) today (Wed) so I thought I should do something more productive now. If you are wondering what triggered this post, it’s really just an observation more than anything. As I monitor the financial news & events less frequently in an effort to disassociate myself, there are still some key economic indicators that I focus on. Nothing complex and those that are simple & easy to understand.
Ministry of Manpower (MOM) Overall Unemployment Rate
I know people can be distrusting of this statistic. The most common criticism being it is often an understatement of the actual unemployment levels in Singapore. Another being it doesn’t reflect underemployment. However, this doesn’t change the fact that it is an important indicator of the labour market.
Have a look at the annual average overall unemployment rate (%) from the MOM website for the past several years:
You see that slight uptick in 2009, which coincided with the aftermath of the 2007/2008 Global Financial Crisis. I was surprised that it only went up to 3%. In Singapore, you could argue that almost everything is propped up by the employment market. Stocks, property, etc. This link is stronger than you think when you consider how our Central Provident Fund (CPF) Ordinary Account balances can be used to invest in stocks and property.
Singapore has one of the highest mandatory employer and employee retirement contributions and most flexible use of retirement funds in the world. It’s no wonder the health of the job market remains a primary concern for the Singapore Government. Once the unemployment rate starts to creep up, the repercussions for such a small country like us with no natural resources and a high dependency on human capital can be severe. In short, we can get screwed a lot worse than other countries.
Local Banks Profits
The performance of the 3 local banks in Singapore is a strong indicator of how well our economy in general is doing. Although certain industries and sectors can be underperforming, it is possible for other areas to more than make up for it. A significant portion of these local banks’ businesses is coming from Singapore firms. SMEs, MNCs, Funds, Asset Managers, etc.
As long as the local banks’ profits are holding up, it would suggest that the Singapore economy is still sufficiently healthy since their core business is as financial intermediaries. Which again ties to the unemployment rate and circles back to the stock market, property market, etc. It doesn’t matter what the media is writing about in relation to all of these topics. The statistics should drive your analysis.
What does it say about our holding power?
Let’s have a look at the combination of factors for Singapore in the past several years:
- Property prices have gone up significantly
- Birth rates have gone down to below replacement levels
- Unemployment rates have stayed at relatively low levels
- Personal taxes continue to remain low
- Wealth taxes have gone up slightly
These are prime wealth-building conditions and that’s exactly what has happened. The older generation may be suffering from a higher unemployment rate but they are able to monetise the increase in their property prices. By downsizing or moving in with their children. The younger generation may be suffering from higher property prices but they have been able to save up aggressively from staying with their parents before moving out. Besides, the children will more often than not be the beneficiaries of their parents’ wealth. In fact, when this transfer of wealth happens, it gets focused on to a smaller number of people because of the declining birth rate.
Have a look around. There are so many people all cashed up and waiting.
- Graduate couples below 25 years old that are staying with their parents while waiting for their subsidised flats to be ready. But saving for their wedding, downpayment, etc.
- Single/Dual-income couples between 25 and 35 years old living in their first subsidised flats that are waiting to have children or just started their families. Most of them can foot the entire monthly mortgage with their CPF OA balances without touching their cash.
- Single/Dual-income couples between 35 and 45 years old that have children and are waiting to move out to a bigger apartment. Most of them have benefited from the run-up in the property prices (because of their first property) and hold sufficient equity & cash to make their next purchase.
- Singles in any of these 3 age groups either still staying with their parents and saving aggressively or they have sufficient earning power to move out by themselves. For those above 35 years old, the availability of specific smaller subsidised flats helps to ensure some of those that move out do not financially overstretch themselves.
My wife and I know of extended family, friends, colleagues and acquaintances in every one of the above groups of people. Their purchasing and holding power is very real. If you reckon it’s because of our social and professional circles, I can assure you that’s not the case. When everyone you know has the ability to hold such a high level of cash savings and wait for the stock and property markets to crash before they invest, that’s how you know it’s not happening for a while. Not in such an obvious way when everyone’s waiting to capitalise.
One other thing to remember. The reason why banks have been competing to offer attractive high interest savings accounts is because there’s so much cash and liquidity sloshing around that can be utilised. If cash savings weren’t high, there would be no point in trying to capture any market share of such high interest savings accounts.
This is why I reckon bear markets and market crashes are difficult to predict and take advantage of. They happen when everyone is too afraid to step in to invest despite having sufficient cash holdings, which suggests a quick recovery cycle that’s difficult to time. Or they happen when everyone can’t step in to invest because they don’t have have sufficient cash holdings, which suggests a longer recovery cycle that’s difficult to stay invested in.
Don’t agree about banks competing for cash at high interest rates…
Rather, interest rates has been decreasing across the board.. Its the worst I have ever seen in the history of my life span so far because there is so much cash they don’t actually need to ‘borrow ‘ from savers to loan out to businesses or spenders
Case in point, there are so many cc promos , because banks has so much liquidity to loan out to earn the spread or merchant fees ….
SG’s interest rates tend to be tied to US interest rates. That’s probably why they have been quite low for such a long time. However, the trend of high interest (relative to the low interest rate environment we have been in for a while) bank accounts only started a few years ago. Which I interpret to mean banks are still interested in competing for cash funds. Otherwise, there would have been no need to offer such bank accounts at all.
However, I reckon we are both trying to make the same point that the banks have a lot of liquidity to loan out. I agree with the credit card promos to encourage spending and for banks to earn the spread or merchant fees.
It s not the banks that are cash rich. Most baby- boomers are. These baby-boomers are cash rich for the following reasons:
1. Most are 55 and above.
2. They experienced 3rd world to 1st world growth rate economically.
3. Following point 2, their homes both public and private, were bought at very cheap and today, they could easily liquidate them and become cash rich or they already are.
4. Most of them, because of then punitive family planning, restricted families to two children( with many adopting only one). Today, many of these single-child are grown up, married and have their own families. Many of these couples today, have rich elderly parents who are about to or already retired, with homes fully paid for or being enbloc, and soon, will hand their homes to the next generation.
Demographically awesome, yeh?
Yes, I totally agree that baby boomers have benefited significantly from the growth of the Singapore economy in the past several decades. Most of them should be asset rich at least and some of them even cash rich.
Haha, imagine what happens when the older generation gifts their homes to the younger generation. It’s already happening between our grandparents and parents. As a young country, Singapore has yet to experience generational wealth-building and its effects.
I have to agree with SGDividends here, the “high” interest accounts banks are promoting are hardly attractive. They are only called that because everyone knows how low interest rates actually are, and so everyone is chasing yield.
Plus the better interest rates are being offered by foreign banks that don’t yet have much of a foothold here, like the Bank of China and the State Bank of India.
Haha, at least banks offered high interest accounts (relative to the low interest rate environment we are in) for us to chase yield. They could have not offered anything and still retain our cash funds because we have no where else to invest them in given the high property and stock prices. But I take SGDividends and your point that it is perhaps not the best indicator of how much cash liquidity the banks have.
Hi,
You can consider looking at loan to deposit ratio of local banks which are hovering around 80%. 80% = 0.8 loan to 1 deposit which means local banks are still flooded with cash.
That’s a good point on considering the loan to deposit ratio of local banks. Does show they are well capitalised with sufficient liquidity.
The annual unemployment stats is quite low-res and doesn’t capture situations where there is quick turnaround. E.g. 2009 when the world was “saved” by massive QE.
If you look at monthly MOM stats instead, you’ll see 5+%, almost 6% for certain months in 2009.
Over past 20 years, 5+% to 6% monthly unemployment rates have usually been the bottom. When you start seeing 4+% unemployment rates, that’s when the economy & property markets are starting to really hurt.
Property markets, especially, won’t crash as long as unemployment rate stays below 5%.
Another stat is dividend yield of STI — again the bottoms are usually in when you get yield of 5+%.
Agree that risk for crash is low when so many people & money are on the sidelines. The classic symptom is when you see mass media stories of people quitting (or thinking of) their day jobs to go into a particular trading or investing. A market in bubble not uncommon to have overall 50+% or 100% up moves within 6-9 months.
I’m still mostly (75%) riding the markets for all they’re worth. 25% rotting in 3+% short duration bonds.
You are right. I should probably watch out for the monthly unemployment rates when they start hitting 4+%. The annual unemployment rate is too lagging as an indicator. Again, good point on the STI dividend yield of 5+%, something else to watch out for when I’m doing Value-Cost Averaging (VCA) to time the markets a little. You have made a good move in riding the markets. I might have pulled out too early and starting to come back in at such high prices. Not ideal but better than staying on the sidelines for too long.
That’s a pretty interesting article! I have never thought of looking at it from that angle.
Thanks and I hope you enjoyed reading it!
US banks loan to deposit ratio is around 70%. SG banks are around 90%. Imagine the difference in market size and 20% difference. SG cash sitting position is purely a prudent measure from my point of view. US cash sitting position is unprecedented.
Wow, didn’t realise the US banks loan to deposit ratio is so much lower. Better to go with the prudent measure at this stage I reckon!