Economic Insights for November 2022

The following are some economic insights for the month of November.  As of now, global economic activity is experiencing sharp growth slowdowns.  Inflation is higher than we have seen in several decades.  We have to consider that the ongoing conflict in Ukraine, supply chain disruptions, and the lingering effects of the COVID19 pandemic all point to a negative outlook.  As such, most economists have lowered their forecasts for GDP growth in 2022 and 2023 and have raised their forecasts for inflation. 

The Federal Reserve and most central banks in advanced economies are expected to maintain a restrictive policy stance. As expected, the Federal Reserve hiked up interest rates by another 75 bps to reach 3.75%.  There is an apparent commitment to raise the rate to about 4.50% to 4.75% by the end of Q1 2023.  This range is well above the neutral rate.  The prolonged hawkish stance of central banks has triggered increasing fear of recession, which is overblown.  This, of course, benefits the US dollar, which is viewed as a haven asset. 

On the other hand, the People’s Bank of China is far from hiking rates amid the weak economic momentum.  The Chinese Communist Party is not going to risk an economic slowdown and would rather ride out the inflation.  However, the increasing rate differential versus the US has forced the central bank to pause monetary easing and keep the key rates unchanged.  China’s economy has rebounded in Q3, but any strong recovery in the long term will be challenged by its property crisis, strict zero-COVID controls and lockdowns, the threat of corporate bond default, and global recession risks. 

When determining the range of portfolio outcomes amid volatile markets, the asset allocation decision remains one of the largest drivers.  We are now in an environment of fast-paced central bank rate hikes, rising risk of recession, and potential rising unemployment across large developed markets.  Growth is unlikely to bounce back quickly in the absence of central bank easing.  In such a case, it is recommended to stay underweight equities, cautious on bonds with a preference for lower durations, and set aside an increasing allocation to cash.  This liquidity is prudent since it allows for making opportunistic purchases when valuations inevitably drop to attractive levels. 

It is recommended to continue staying underweight for equities to mitigate downside risk.  Weaker macro conditions and a higher risk premium mean expected equity returns remain low.  The driver to lowering markets is valuation derating.  It is also recommended to maintain a neutral view towards Asia, excluding Japanese equities.  The overall outlook remains uncertain due to local central banks turning hawkish amid multiple external headwinds.  China is an exception. 

It is prudent to remain cautious on credit, especially high-yield credit, as it is expected that yields will further widen amid economic slowdown and worsening corporate results.  The preference is short-maturity credit, as they are less sensitive to interest rate changes.  The rise in interest rates increases the borrowing costs.  This affects revenue, which in turn impacts corporate profits. 

The aggressive Federal Reserve policy tightening in the face of stubbornly high inflation has caused bond yields to increase sharply.  As such, short rates have been moving upward more quickly than the long end, causing the yield curve to flatten materially.  We should expect higher rates, volatility and weaker price performance to continue over the medium horizon.

Economic Insights for October 2022: A Record Checking against What Actually Happened

The following were the economic insights for October 2022.

The global economic outlook continued to deteriorate.  Inventory rebuilding lost momentum, and end demand weakened under high inflation, tight fiscal policy, and worsening financial conditions.  Consumer demand shifted from goods to services, adding further pressure.  The peak of the technology cycle was expected to hit Asian exporters, excluding Japan, through the second half of 2022 and most of 2023.

The Federal Reserve’s Trajectory, and the Dollar's Response

Risk-off sentiment returned after a higher-than-expected CPI report.  The Federal Reserve’s 75 basis point hike, taking rates to 3 per cent, magnified that reaction, alongside a stated commitment to reach 4.25 to 4.50 per cent by year-end.  The inflation hawks were making up ground on earlier reluctance to raise rates, and the prolonged hawkish stance across central banks fed a growing fear of recession.  The US dollar rose against most major currencies, treated as the haven asset it usually becomes in this environment.

China’s Divergent Path

The People’s Bank of China kept its rate unchanged, holding an easing bias against mild inflation and an uncertain outlook.  China could not risk a slowdown severe enough to loosen the Communist Party’s grip on power, and this divergence from US policy fed directly into uncertainty over the domestic property market.  Economists downgraded growth forecasts below the government's own target, and the unclear direction of the zero-Covid policy added further risk to the outlook.

The Portfolio Positioning at the Time

Asset allocation remained the dominant driver of portfolio outcomes.  Accelerated rate hikes, rising recession risk, and the threat of rising unemployment across developed markets kept most funds underweight equities and cautious on bonds, favouring lower duration.  Growth was not expected to rebound without central bank easing, pushing many managers toward larger cash allocations, now generating a meaningful risk-adjusted return in its own right.

Equities were recommended underweight, given the rising risk of a hard landing and earnings expectations still judged too optimistic.  A neutral stance on Asia, excluding Japan, was recommended for those already invested, given local central banks turning hawkish despite improving activity.  Investment-grade credit spreads looked unattractive after their recent rally, with default rates expected to rise and a genuine risk of cascading sovereign bond defaults.  US credit was recommended underweight as spreads widened, with short-maturity credit treated as the closest cash-like proxy.  The Federal Reserve’s aggressive tightening had already exacerbated liquidity constraints for highly leveraged entities, flattening the yield curve as short rates rose faster than long rates.

The Federal Reserve did not stop at 4.25 to 4.50 per cent.  It kept raising rates into 2023, reaching 5.25 to 5.50 per cent by July 2023, its highest level in 22 years.  China abandoned zero-Covid abruptly in December 2022, following nationwide protests the previous month, ending the policy uncertainty this report flagged, though the property crisis it also warned about deepened through 2023 and 2024 regardless.

The warning about liquidity constraints for highly leveraged entities proved prescient in a way this report could not have specified.  Silicon Valley Bank and Signature Bank collapsed in March 2023, followed within days by Credit Suisse’s forced takeover by UBS, the first banking crisis directly traceable to the pace of this same rate-hiking cycle.  The S&P 500 finished 2022 down roughly 19 to 20 per cent, its worst year since 2008, before recovering sharply through 2023 once the rate-hiking cycle showed signs of ending.  The underweight equity call held for the remainder of 2022.  It cost upside for anyone who held that position too far into 2023, once the market began pricing in the eventual pause this report could not yet see coming.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code

The Palindrome & Emordnilap

In rhetoric, a palindrome is a word, number, phrase, or other sequence of characters which reads the same backwards as forwards.  

The word palindrome was introduced by Henry Peacham, the English poet and writer, in 1638.  It is derived from the Greek roots “πάλιν”, meaning “again” and “δρóμος” meaning “way”, or “direction”.  However, there is a different word is used in Greek, “καρκινικός” “carcinic”, which literally means “crab-like”, to refer to letter-by-letter reversible writing. 

English has a surfeit of palindrome words, such as eye, redivider, deified, civic, radar, level, rotor, kayak, reviver, racecar, madam, and refer.  Palindromic sentences, on the other hand, are rare.  A John Taylor coined one in 1614: : “Lewd did I live, & evil I did dwel.”  In 1848, a certain “J.T.R.”, who is still unknown, coined, “Able was I ere I saw Elba”.  This became famous after it was implausibly attributed to Napoleon Bonaparte, alluding to his exile on Elba.  Another famous palindrome, for its time, was from 1948: “A man, a plan, a canal – Panama.”  The authorship is uncertain.  Other examples include, “Dogma I am God”, “Mr. Owl ate my metal worm”, “Do geese see God?”, and “Was it a car or a cat I saw?”.  In many cases, punctuation, capitalisation, and spaces are ignored.  Some, such as “Rats live on no evil star”, “Live on time, emit no evil”, and “Step on no pets”, include the spaces in the palindrome. 

Another form of palindrome are word-unit palindromes.  Word-unit palindromes are where the unit of reversal is the word.  For example, “Is it crazy how saying sentences backwards creates backwards sentences saying how crazy it is?”.  James Albert Lindon, the English puzzle enthusiast and poet, made word-unit palindromes popular in the recreational linguistics community in the 1960s. 

The longest palindromic word in the Oxford English Dictionary is the onomatopoeic “tattarrattat”.  This was coined by James Augustine Aloysius Joyce, the Irish novelist, in “Ulysses”, in 1922.  It referred to a knock on the door.  The Guinness Book of Records gives the title to “detartrated”, the preterite and past participle of detartrate, a chemical term meaning to remove tartrates.  “Redivider” is used by some writers, but appears to be an invented or derived term since only “redivide” and “redivision” appeared in the Oxford Dictionary.  The word, “Malayalam”, referring to a South Indian language, is of equal length.

English palindromes of notable length include mathematician, Dr. Peter John Hilton’s, “Doc, note: I dissent.  A fast never prevents a fatness. I diet on cod”. and Scottish poet, Alastair Reid’s “T. Eliot, top bard, notes putrid tang emanating, is sad; I'd assign it a name: gnat dirt upset on drab pot toilet.” 

In contrast, we have the anadrome, or emordnilap.  “Emordnilap” is simply “palindrome” backwards.  They refer to words whose spelling is derived by reversing the spelling of another word.  This makes it a specific type of anagram.  “Anadrome” is derived from Ancient Greek “ανα”, meaning “backwards”, and “δρóμος” meaning “way”, or “direction”.  Anadromes are also called levidromes, or reverse pairs.  Examples of anadromes include the following: 

Abut and tuba

Avid and diva

Bard and drab

Bats and stab

Brag and garb

Decal and laced

Deeps and speed

Doom and mood

Edit and tide

Flow and wolf

Gnat and tang

Maws and swam

Redraw and warder

Remit and timer

Sloops and spools

Snaps and spans

Sports and strops

Way and yaw

The Money Multiplier Effect

Contrary to what most people think, banks do not simply take in deposits on the promise of interest, and loan these deposits out for higher interest.  That is a simplistic understanding of retail banking.  Once we factor in non-performing loans, currency exposure and other forms of risk and costs, the revenue is not much. 

What banks actually do is play with the balance sheet.  When a bank issues a loan, it credits that amount as an asset on the balance sheet.  This same amount can be transferred to another bank, or even a different part of the same banking group as a liability.  Although no new physical money is actually created, we have a new deposit, meaning new money is actually added to the banking system. 

Of course, there has to be a limit to how much money can be created out of nothing, and added to the system.  This is the reserve requirement that central banks impose on the banks.  The reserve requirement is the amount of funds a bank needs to hold in reserve to ensure it can meet liabilities in case of sudden withdrawals.  The level of reserve requirements is a tool of monetary policy.  It is a means used by the central bank to increase or decrease the money supply in the economy, and therefore influence interest rates. 

Within its reserve requirement, any bank can lend directly from any new deposit.  For example, if the reserve ratio is 10 percent, and the bank’s new deposit is US$1 million, the bank can now lend out US$909,000 which can be deposited with another bank.  This creates another new deposit, which can be used to lend out another $819,000 dollars.  This can be repeated ad infinitum, creating an effect we call the “money multiplier”.  In effect, the total money supply is unlimited.  None of this money exists physically.  There is a tenuous link to GDP and economic activity since borrowing depends on this.  Because there is no actual underlying commodity to back this money, the system goes through a cyclical correction we recognise as market crashes.

AIA Toastmasters Club’s Speech Evaluation & Table Topics Contest, 11th August 2022

AIA Toastmasters held its speech evaluation and table topics contest on the 11th of August 2022, drawing a healthy crowd of around fifty people.  Attendance within the club itself ran lower than usual, given the meeting fell during convention season with many members overseas, but a strong contingent from Tampines Changkat Toastmasters, the club’s de facto sister club, alongside considerable support from friends across District 80, filled the gap comfortably.

The Appointment Holders

Amos Yio served as Contest Chair.  Eric Tan served as Contest Toastmaster.  Tay Tiam Theang, DTM, served as Chief Judge.  Yuniati served as Test Speaker.  Delton Teo and Loh Hao Yi served as Tally Counters.  Clara Tan, DTM, and Li Shan Shan, DTM, served as Timers.  Chng Pia Kim and Chia Hong Loon served as Sergeants-at-Arms.  Ariel Wu served as Photographer.  Rominia Leonard served as Event Creative Director.

The Contestants

The contestants across both contests were Eric Tan, DTM, Kevin Lim, Linda Lee, Rominia Leonard, Shirley Chia, and I.

The Test Speech

Yuniatu, delivering her first speech outside her own club, spoke on our invisible bag, filled with the cares of the world, and the need to put that bag down.  She told the story of a classmate whose poverty and ill-health went unrecognised until his funeral forced the realisation, a speech carrying genuine pain, a shared experience of loss, and the epiphany that produced it.  Acquitting herself this well on unfamiliar ground, in front of an audience larger than her own club, is not a modest achievement.

I will be honest; I fell asleep during the test speech and did not hear it.  I got the gist of it from the other contestants, especially Eric Tan, DTM, and reconstructed this after the contest.

Veterans and Newer Members, Side by Side

Eric Tan, DTM, and Linda Lee are contest veterans, and both set a sterling example for newer members competing for the first or second time: Rominia Leonard in her first contest, Shirley Chia, and Kevin Lim in their second.  They have made the club proud.

Every club appointment holder was organising a contest for the first time.  Amos Yio put together a tight, well-run programme, with clear mentorship from Chng Pia Kim, who also serves as Club Secretary and Division Administration Manager.  One of the Sergeants-at-Arms, Chia Hong Loon, had joined the club only a few days before taking on the role, which says something more flattering about the club's onboarding than most organisations manage in their first month with a new hire.

The Results

Speech Evaluation Contest:

Winner, Eric Tan, DTM; First Runner-Up, Terence Nunis, DTM; Second Runner-Up, Linda Lee.

Table Topics Contest:

Winner, Eric Tan, DTM; First Runner-Up, Terence Nunis, DTM; Second Runner-Up, Kevin Lim.

The winners and runners-up will represent the club at the Area contest.  I should note I was an undeserving winner.  I fell asleep during the test speech because I was tired after a long night.  I went up on stage and winged my evaluation, talking about connecting to the audience or some nonsense because I had no idea what Yuniati said.  That worked.

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Terence Nunis, DTM | Division Advisor, District 80 Division M | Club Advisor, AIA Toastmasters | Past President & Founder, Awesome Toastmasters