Tuesday, January 21, 2014

L.A.M. on Whether Singapore is heading for an Iceland style meltdown

Introduced by Nassim Nicholas Taleb in 2007, the black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

Let me try to give an example. Let's say that back in 2000, a FAA personnel had the foresight to improve airport security by increasing and enforcing checks on airport travelers. Forcing every traveler to remove his shoes, belt and jacket at the screening area, throwing every LAG into the dustbin, setting protocols preventing pilots from leaving the cabin. Because of the efforts of this FAA personnel, we would still have the World Trade Centre towers today. Osama Bin Laden will still be alive and would have never planned to strike America on 9/11 in such a way because he knew that his terrorists will never get through security. 

Will this FAA personnel be lauded as a hero? The answer is a huge resounding no. Travelers everywhere will curse him. Hundreds of complaints will be filed by people because he has made air travel and inefficient mode of transport. Pilots will complain that they can no longer flirt with that pretty air stewardess during the flight. This FAA personnel will be branded a villain and the world will never know that they evaded a catastrophe because of his efforts.

The other day, I read an article about Singapore heading for an Iceland style meltdown. The reaction to this article was quick and fast. The MAS replied within a day, the article was shared 50,000 times and that probably justified Jesse Columbo's pay cheque. 

Well, there are some very fundamental differences between Singapore, Iceland and the US credit crisis but if I were to pick one very big difference, it is the presence of a black swan event. In the US, Alan Greenspan has constantly refused to acknowledge that near zero rates were creating a credit bubble. Iceland ignored signs that it's debt has grown to Godzilla proportions. When the meltdown came, it was huge, it was tragic, it was unexpected.

Now Singapore is in a slightly different position. We have the benefit of hindsight and MAS has been preparing to cool off a credit bubble. Similarly in China, the PBOC has taken draconian measures to wipe out runaway credit in the world of shadow banking, even allowing it's benchmark rates to increase by 200%. Further South, Bank Indonesia has raised benchmark rates multiple times in 2013. Are the Central Banks aware of a credit bubble? The answer is yes. Are the consumers aware of a credit bubble? A quarter of them, yes. 

With increased awareness and action, will a black swan event occur? The answer is no. Singapore has a strong balance sheet. Singapore banks are poised to withstand huge shocks to the market. Will we have an Iceland style meltdown? Unlikely. But whether we have a property market collapse is up to the consumer.

If enough consumers buy into the theory that property prices have only one direction and that is up, eventually the bubble will burst and property markets will collapse. If enough people are swayed by recent news, make prudent credit decisions, then we will see a dip in the property market and a U shaped recovery. Whatever the majority believes in, the opposite will occur. How's that for a Paradox.

In conclusion, whatever analysis is made, what matters is not whether people believe it's true but whether enough people believe otherwise.


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