Last week I received a touching letter from one of my readers thanking me for writing informative articles. The reader also expressed concern about the future economically and wondered how to adjust to the increasingly risky situation. Therefore, I feel it should be my duty to suggest investment options, lifestyle adjustments and career choices for the upcoming economic winter.
But before I start I would like to digress to briefly express my concern about the Bank of Thailand's exchange rate management policy. In my view, the "right" exchange rates are the rates that support exports and other economic activities. Central banks should be able to determine the "right" exchange rates for their respective economies and manage the "market-determined" exchange rates to move closer to the "right" rates.
I will give an example. For the past three years, Thailand has consistently registered trade deficits with Japan -- averaging US$2.5 billion per quarter -- and yet the Thai baht has appreciated by 25% against the yen. How on earth does the Bank of Thailand expect Thai exporters to Japan to improve their production efficiency by 25% to keep up with the appreciating currency?
Based on chronic trade deficits with Japan, I guesstimate the "right" exchange rate for the baht-yen should be about 0.4 baht per yen, not 0.28 baht per yen as determined by today's market. The job of the Bank of Thailand is to close the gap between 0.4 and 0.28 so as to support Thai exports to Japan. By letting the market drag exchange rates beyond economic reality, the Bank of Thailand unknowingly destroys the export sector which accounts for almost 70% of GDP.
Back to our subject of surviving the economic winter. Economists have been talking about the global economic slowdown for several years, before today's US-China trade war. From 200 years of economic data, it is clear that the world economy has expanded twice as fast as it should have for the past 50 years. Overheating not only makes the world economy prone to crises, but also calls for big adjustments. The economic spring was over in 2015 and we are entering a long economic winter. As usual, the adjustment period is the most dangerous. A financial crisis can pop up any minute.
By the way, I really like the term "synchronised slowdown" by the new IMF chief, Kristalina Georgieva. You really get the picture.
My suggestions on surviving the economic winter will be divided into three areas -- investments, lifestyle changes, and career prospects. First, one has to arrange investments into three groups -- Risk Lover investment, Risk Neutral investment, and Risk Averse investment.
Risk Averse means an investment that can withstand the slowdown and bears no or low risk of capital loss. Risk Neutral means an investment that could have a capital loss of up to 20% during a tough time. Risk Lover means an investment that might experience 50% or more capital loss. Readers/investors can adjust their portfolios according to individual risk appetite and financial limits.
I am not a licensed investment adviser so I cannot legally advise readers on how to arrange their portfolios. But I can generally say that government bonds fall into the zero-capital loss category and bank shares are in the Risk Lover category. Property investment is also not a good investment choice as pricing of properties is based on the income potential. A slowing economy means less income for properties.
On the other hand, precious metals could be anti-economic cycle investment. Ask your investment adviser how gold performed during each economic crisis, namely, the great depression, the oil crisis, the Kobe crisis, the Tom Yum Kung crisis, and the Lehman Brothers crisis, then you decide.
Currency investment is always tricky, although it is my area of expertise. The golden rule is large economies withstand adjustments far better than smaller economies. But I advise people to avoid China, even though it is the world's second-largest economy, though I would need a separate article to explain why. Another key problem with investment in currencies is the technological change from paper currencies to digital ones. I have to discuss with knowledgeable people how digital currencies might affect the valuation of paper currencies.
Anyway, if anyone wishes to invest in digital currency, please make sure it is a US-backed digital currency. A Chinese/Japanese-based digital currency like bitcoin should be avoided. The US dominates the world economy with American dollars, and they intend to do it again with their own version of a digital currency. Should one hold cash? Cash is always king. The real question is in which currency. As I said before, big economies will fare much better than small economies during hard economic times. Therefore, capital will flow out from smaller economies to big economies. Thailand will certainly be no exception. It is estimated there is more than 1 trillion baht of foreign capital in Thai money and capital markets. If a large part of that flows out, the effect on the Thai currency will not be small.
Recommendations for life-style change? Three magic words: Save, Save, and Save. This is equivalent to saying keep yourself warm in winter. Furthermore, I also advise people to repay their debts as fast as they can. The outflow of capital from a small economy like Thailand will tighten domestic liquidity and inevitably raise interest rates. If one cannot afford to quickly pay back loans, it would be wise to replace floating rate loans with fixed-rate loans, and replace foreign loans with baht-denominated ones.
Despite the slowing world economy, there are bright spots for certain careers, particularly artificial intelligence based careers. Big data management will be in high demand. Businesses are collecting incredible amounts of customer data but few, actually none, know how to utilise it properly. I use Grab Food frequently. If I used their service yesterday, today I would get e-mails and text messages offering discounts on things I do not need. Why can they not analyse my food preference, budgetary usage, and ordering time to offer me things that I need? This is an example of inefficient use of big data.
It is not possible to summarise upcoming meteor-size economic challenges in one half-page column. I will continue to write as long as readers continue to read me. Of course, readers do not need to agree with my opinions. I am just happy that anybody bothers to read them.