Viewpoint: If panic comes, keep buying

by Chan Wai Chee
Phillip Securities Research


Many commentators are now telling you about the impact of stagflation, depression, hyperinflation and so on. And they would use many theories to explain their concerns.

For example, Royal Bank of Scotland has advised its clients to brace themselves for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses major central banks.

Last week, the media were reporting comments from Morgan Stanley, Goldman Sachs, Northern Trust, BCA Research and others.

They are not trying to mislead you, but I am sure some of you must now be very worried by now.

You need not worry just because the problems may be real. You need not worry because they will not go away.

You should not worry because if you don't --- you can use the situation to buy stocks at panic prices.


Why?

When economies are strong, central banks (either within or without their control) create money. If there are real goods and services produced in the economy and the money created is just enough to facilitate these transactions, there will not be any problems.

The root of the problem starts when credit gets too easy and excess speculation takes place. Bubbles are formed and perpetuated when unproductive activities are allowed to take place with easy money.

Bubbles can go on for a long time. But when measures taken to cool things down are belated, we get the onset of financial disasters.


Inflation

Inflation is a very simple concept. If real GDP grows at 10% but money supply (M1) grows at 20%, you should get 10% of inflation. 20% - 10% = 10%.

Take China, for example. China's GDP is just over 10%.

Its M1 has been growing for an astonishing 13 months in a row at between 19.8% and 22.8% from January 2007 to January 08.

The latest May figure fell under this range, weighing in at 19.3%. Its CPI which is a measure of consumption just hit 11%. You figure out the math.

Singapore's M1 has grown in excess of 20%. We have 7% real GDP. Should we also have high inflation? You figure.


Asian Crisis

If you think the last Asian Financial Crisis was caused by the lack of foreign reserves --- think again. In 1997, China's M1 money supply grew more than 20% for months on end. Will we see a repeat?

I believe it depends on how the contraction is being handled. If the squeeze is too drastic, crashes are likely. China's M1 for the last 4 months to May 2008 read as follows: 18.9%, 18.0%, 18.8%, and 17.7%.

The months following July 1997, the country's M1 fell to 18.7%, 17%, 15.3%, 13.6%, 13.4%, and 13.1% --- which was more drastic than what we have now.

Whatever the next few months bring, the Chinese and Vietnamese stock markets have already fallen by about 50%. We should not expect any more 10% GDP from China. As M1 comes down further, it will impact their GDP later. More realistically, expect 6%-7%.

Similarly, the Indian stock market has lost a third of its value. 50% to come?

We need not look for a definition for another Asian Financial Crisis. A 50% loss in any market is tantamount to a crisis, except that China has lots of foreign reserves.


Don't Worry

The US has been growing their money supply at less than 5% since May 2005. That’s almost three years of slow money growth. The sub-prime crisis is the bust of the bubble created in the 1990s.

The US will lead the world out of this mess, just as in 1998.

If we get a disaster, buy stocks at panic prices.

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