Cash is king now

We all heard of the saying “cash is king”. It is especially true at this point of time.

To cope with rising inflation, the Monetary Authority of Singapore has gone ahead with three rounds of monetary tightening. Each round resulted in further reduction of money supply. Suddenly, cash becomes precious. Everywhere people are looking for cash now.

The old trick of money printing

Covid-19 caught the world off guard. Things were quickly getting out of control. On the infamous Black Thursday (March 12, 2020), the US stock markets suffered the biggest single-day fall since the 1987 stock market crash. Three days later, Federal Reserve began a quantitative easing of $700 billion and cut rates to zero. After all, quantitative easing has been an old trick to tackle financial problems since the last global financial crisis.

To avoid their countries falling into recession, governments all over the world followed suit to release relief packages and inject money into the markets. The loads of cash ended up in the asset markets including stock and real estate. It had successfully preserved the wealth of the rich. With lots of cheap money to borrow, the value of assets quickly soared to new heights.

“Governments notice asset bubbles are growing. But at least they benefit certain industries and people who own these assets. On the other hand, with an expected prolonged pandemic, they know that there is a limit to their relief measures. Their options are printing more money, keeping interest rates low and raising taxes. Money printing accelerates inflation. Low interest rates shoot up asset prices. Higher taxes help to replenish depleting reserves by taxing those who buy and own assets that have ballooned in value.”

– “Property cooling measures, here we go again!”, PropertySoul.com

The vanishing of Covid-19 special offers

When the banks were flooded with money, they couldn’t wait to open the floodgate to big creditors. Deal makers were the busiest during the pandemic. Venture capital funds were plentiful. Start-ups, unicorns and SPACs rushed to list on the stock exchanges. Founders became instant billionaires. Brokers made fat commissions. Stock prices skyrocketed. Everybody was happy.

We were benefited too. When start-ups focused only on growth, they threw profit out of the window. Every day we were bombarded with discounts, vouchers and special offers. Suppliers were literally paying consumers to enjoy their products and services. Grab and Gojek were subsidizing the limited pool of customers to go for rides. We were spoiled for choices of food delivery and e-commerce platforms.

Unfortunately, the media talks of post-Covid-19 recovery were short-lived. When interest rates climbed and funds dried up, the IPO market bubble burst. There is no more cheap money for borrowers nor value-for-money stuff for consumers. In fact, everything has a new price now.

Since Singapore’s border reopened on April 1, hotel prices have been doubled. There is no more room upgrade or dining vouchers. The 5-star hotels used to offer $250 to $300 per night are now priced over $500. The hotel I booked to celebrate my last birthday has jumped from $350 to above $700 per night. I won’t be going back again this year.

Prices of private-hire rides and petrol keep climbing. Costs of food, groceries and electricity are soaring. It is a difficult time for low-income families when food is the biggest expense in their monthly budget. Ordinary people need to cope with both higher expenses due to inflation, as well as higher monthly payments for their home loans.

The banks want us to pay more

The central banks are now turning their tables to increase interest rates. Borrowers have two choices: Pay higher monthly mortgages or repay their debts. The banks want us to pay more. They also want us to pay back now. The message is loud and clear.

1. The United States

Uncontrolled money printing, coupled with China-US Trade War, Covid-19 logistic problem and the Ukraine War, drove US inflation to four-decade high. Fed has no choice but to go for quantitative tightening and rate hikes to tame the inflation beast.

As of today, the US average 30-year fixed mortgage is 5.76 percent. It has risen 92 percent from 3 percent early this year. Fed is likely to raise its benchmark rate again by another 75 basis points during the July 26-27 meeting.

2. Canada

Over in Canada, Toronto home prices have fallen for four straight months under rising borrowing costs. Sales volume has plunged 41 percent. End of last month, the government further tightened borrowing for home purchase. Effective end of the fiscal year in 2023, it will be illegal for loan-to-value to be above 65 percent. Currently, around 11 percent of existing mortgages fall into this category. From now till the effective date of the new rules, these borrowers “will have a period where part of their principal payments go to gradually reducing the mortgage amount to below this level.”

Compared with Canada, Singapore is far more relaxed when banks offer mortgages with loan-to-value up to 75 percent.

3. Australia and New Zealand

Last week the Reserve Bank of Australia just raised interest rates for 50 basis points for the third month in a row. Market analysts said they foresee a property price drop of between 15 and 20 percent in Sydney and Melbourne.

Similarly, New Zealand has raised rates three times since last October. Another 50-point raise is likely to come this week. Under aggressive rate hike, housing prices in New Zealand dropped 2.3 percent in 2nd quarter. It is the biggest decline in 13 years since early 2009.

4. Malaysia

Last Wednesday (July 6), Malaysia central bank raised interest rate the second time this year to 2.25 percent. Rate hike is inevitable to stimulate economic growth and prevent ringgit from further depreciation.

However, higher interest rate and stronger currency is a blow to the country’s real estate industry. This is especially true for the high-end residential market which is already suffering from oversupply and struggling to recover.

5. Singapore

In Singapore, homebuyers were still protected by a three-year fixed rate of 1.15 percent end of last year. However, there are now no more fixed rate packages from foreign banks.

On June 28, DBS raised its fixed rate packages to 2.75 percent. The next day UOB wasted no time to hike its two and three-year fixed rate to 2.98 percent and 3.08 percent respectively. OCBC finally caught up the following day with only one fixed rate package of 2.98 percent for 2 years. After this month’s Fed meeting, the three banks are likely to take turns to raise mortgage rates again.

The higher mortgage rates of the banks help to increase interest margins and incomes from mortgage loans. This comes in handy to make up for any shortfall in the banks’ other credit businesses due to weaker consumer spendings during inflation.

The Urban Redevelopment Authority’s Q2 flash estimate showed private home prices up 3.2 percent last quarter. However, there is no information on total transactions, sales volume by month, or breakdown by new resales and resale. No one knows whether sales transactions are going up or down. It is also unclear whether the 3.2 percent increase in prices is the result of the two big new launches last quarter.

As usual, the media reassured us that the Singapore’s property market is “resilient”. For one thing, developers still have many unsold units and over 40 new projects waiting for a suitable time to launch. Hopefully, more homebuyers can pay their new homes in cash and free from the threat of interest rate hikes. Above all, Singaporeans are cash rich. Although recession implies sharp drop in asset prices, we should be “resilient” even if home prices drop 20 percent like Australia, or even 45 percent as in the Asian Financial Crisis.

Fleeing for cash and liquid assets

Since the start of the year, every now and then the financial market would give us some surprises or heart attacks: First was the China developer bond market catching fire. Next, the tech stocks tanked. Huge wealth evaporated from the US equity market. Then came the collapse of the cryptocurrency prices. Under high inflation and recession fear, many foreign currencies weakened significantly. The most recent attacks were on the commodity markets, with prices of copper, oil and precious metals losing ground.

Prices of once high-flying assets can plunge like nobody’s business. Worse still, they show us that they are always capable of dropping to a new low.

Whenever the market is shaky, investors flee for safe havens. To cut loss, they quickly sell off high-risk, high-return investments.

There is heavy outflow of capital from risky countries and markets. In June alone, there is $4 billion drained from emerging markets. Massive sell-offs are mainly from tech-heavy Taiwan and South Korea equity markets and Indonesian bonds. Last quarter global funds have offloaded $40 billion worth of equities across seven regional markets. The amount is even higher than the three months in 2007 with the onset of subprime crisis.

Everyone rushes to increase liquidity, cash reserves and liquid assets in their portfolio. These days investors don’t mind whether there is low or no return. They just hope to keep their damage to the lowest possible level during market downturns in the foreseeable future.

A bear investment market, together with higher prices, interest rates and taxes, have negative impact on consumer sentiments. If everyone holds back purchases and spendings, the economy cannot help falling into a full-blown recession.

When no one wants our cash

In September 2019, governments were busy giving out money to avoid their country falling into recession: Thailand approved a $10 billion stimulus package to boost economy. Hong Kong announced $2.43 billion relief measures. More countries were joining the camp of printing money and cutting rates.

When banks are already flooded with too much money, they can only discourage people from putting more money with them by giving them low or zero interest.

Under the fear of missing the boat, I immediately placed a 10-month fixed deposit with 1.9 percent interest in a foreign bank. That was the last chance savers get a reasonable interest rate.

Then governments started another round of uncontrolled quantitative easing after the outbreak of Covid-19. I know it’s time I locked up my funds. Because no one knows how long this cheap money period would last. In between I might feel bored and get my “itchy” hands on some fast-appreciating assets. When the bubbles popped, I could be stuck for years. It is unwise for me to take unnecessary risk and lose it back to the house after all these years.

In July 2020, I caught the last train to place a 24-month fixed deposit with 1.5 percent interest. Then I signed up for a 2-year principal-protected guaranteed return growth plan to earn a bit higher interest. In order to get the maximum interest for my CPF account, I refunded all housing withdrawal and topped up the maximum sum in the Special Account.

Now everyone wants our cash

Two years later, the opposites happen. After three rounds of monetary tightening, there are many places that want our cash.

1. The banks

Last week I was placing new fixed deposits with the banks. CIMB gives 1.8 percent interest for 12 months. HL Finance is offering 1.98 percent interest for 13 months. The next day Standard Chartered has a promotion of 2 percent interest for 12-month fixed deposit.

A friend told me that a local bank offers 1.9 percent interest for 12 months. This is not even put up on their website. My fixed deposit account there has been closed after being inactive for years. When I went down to their branch, the bank officer said she could push the interest rate up to 2.1 percent for 12 months. I only need to put a small amount in my fixed deposit account for the next few years.

That reminded me of placing fixed deposits in a foreign bank in the mid-2010s. Every time when I showed up at their branch, the bank officer would automatically offer me a 0.5 percent higher interest rate. That was more practical than another foreign bank. Every fixed deposit with the latter would be entitled to tens of department store vouchers. After a while, I didn’t know what to buy. Anyway, I was surprised that, in the midst of a new wave of Covid-19 now, this local bank rewarded me for being there in person.

At the end, I declined the bank officer’s 2.1 percent offer. I am sure that fixed deposit rates will be above 2 percent in the next few months. Besides, time deposit rates of foreign currencies like US, Australia and New Zealand dollars have all gone up. I prefer to keep my cash and place new deposits whenever rates go up again. Who knows, maybe in one to two years’ time, there will be many good buys in other asset markets.

2. The government

Last month a friend asked me about Singapore Savings Bond (SSB). I did a small research and found that the average 10-year return was 2.79 percent for the July issue – the highest since November 2015. For the August issue, the average 10-year return is now 3 percent.

It is interesting that even the first year interest of SSB goes higher than the banks’ fixed deposit rates. Because the Singapore Deposit Insurance Corporation only insures bank deposits of up to $75,000.

Anyway, these two fixed-income products are flexible. Whenever we are not happy with the interest rates, we can cancel it and get back our deposits plus interests. For my banks, it is just a call away and I can get my money back on the same day They beat properties in terms of liquidity, especially during this time when cash is king.

3. The others

Thanks to sky-high inflation in the US. We have weekly reminder from the Fed to hike rates. Now the strong US dollar is rising by the day. Many foreign currencies are under pressure. Japanese yen fell to its 24-year low. Euro followed suit to deep dive into 20-year low. There are simply too many buying opportunities. Maybe I can plan a short trip to Japan and Europe in the near future.

Recently, many stocks in my to-buy-list have slipped into 52-week low. Now I am waiting for their 2-year low or even 5-year low to enter the market.

How I wish I had more cash!

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