Friday 3 June 2022

Nominal and Real Negative Interest Rates for Market Timing

 

For years now, those of us who have funds parked in plain vanilla bank savings accounts have been getting negative real interest rates - CPI higher than what the bank is giving us.


You think why there's so much interest in REITs, cryptos staking, and for the more risk averse ones - voluntary contributions to CPF?


However, it all fell apart this year 2022.


I mean making more than CPI is why we embarked on the Earn More path; having your funds suffering a -50% unrealised loss, or completely wiped out is not part of the plan to beat inflation!


Voluntarily contributing to CPF looks a bit awkward now that our Singapore's CPI is more than the CPF OA 2.5% interest rates... 


In case you didn't know, the Singapore Savings Bond now pays more than CPF OA!


Or course we can still transfer funds from our CPF OA to CPF SA, we just have to treat big daddy's 2022 annual CPI projection of between 4.5-5.5% as "transitory".... 


Repeat after me, "CPF cannot give negative real interest rates...CPF cannot give negative real interest rates...CPF cannot give negative real interest rates..."



Hang on a minute!


Suffering a guaranteed loss in purchasing power of 1-2% is way much better than -50% loss or losing everything!


You're 100% right!


Bet you thought this is a Save More dissing post! Au contraire!


That's why many Western Europe institutions and high net worth individuals have been parking funds at negative nominal yielding interest rates for some years now. Especially in Germany.


This is NOT supposed to happen; if we remember what we've learnt in economics.


Now you know why they have been doing so in 2022.


They are market timers.


Those who are suffering unrealised losses of -50% and more, don't you wish you had done nothing at all and shoved all your money under your mattress all these years?


Just like there's a difference between dividend investors and yield hogs, there are Tarzans (泰山) out there who may appear to be "Save More" with their risk adverse actions, they are in fact closet market timing "Earn More" speculators!


They are the true contrarians.


In bull markets, they slowly sell into the rally to raise cash. 


Then they WAIT to wash, rinse, and repeat.


As I've alluded to in my previous post Early Adopters and Laggards, it pays to monitor the other market participants out there. Wink.


Know yourself; know your opponents. (Our 5,000 years of Chinese wisdom power or what!?)









6 comments:

  1. Inflationary impact is less scary than investment losses as we can exercise some options to cut down some expenses. Investment losses how? Cut losses and beat our head or chop fingers?

    ReplyDelete
    Replies
    1. CW,

      Food and transport have gone up a lot in Singapore, but we have no protests or riots like other third world countries.

      That's because food and transport make up a small part of our monthly expenses. Like you say, we have alternatives to cut expenses.

      Plus the fact inflation can be "good" if we own assets like properties. This must give credit to big daddy - how many countries/cities have more than 80% home ownership?

      If we own our own homes, we are "insulated" from rising rents.

      This is dangerous times for those who only know Save More vehicles and nothing else. Especially old fogey but bei kambing when it comes to Earn More...

      If they have no conviction, snake oils will come and tempt them to the path of Earn More at the worst possible time, "Look! Your money in CPF is rotting away... Better "invest" them out through CPFIS.

      No worries lah! See this 100 year chart of the S&P? Stocks always go up one!"

      The difference is that unlike veterans who had their inoculations through zero baggers, salted fishes, and bruises all over, these newly minted bei kambings have no natural immunity to sales spin from wolves in sheep skins!

      Want to bet end of this year we'll see more CPF "savers" and voluntary contributors tapping their CPFIS for the very first time?

      Savers can "capitulate" too....

      Delete
  2. Smol,

    No worries about inflation. The cure for high inflation is higher inflation.

    Then recession, slowdowns & deflation will help to release the pressure valve. ;)

    Basically what happened in 1973, 1974, 1980, 1981, 1990, 2008, 2011.


    Of course the caveat is having robust currency & financial policies, else we'll see hyperinflation like Zimbabwe & Venezuela, or death by a thousand cuts like our neighbours the ringgit, the rupiah, the peso.

    PS: Robust policies is good for the country, but may not be good for specific individuals in terms of job security or "easy living".

    ReplyDelete
    Replies
    1. Spur,

      Yup, the cure for high prices is high prices.

      If crude goes to USD200, then the world economy will keel over.
      Demand destruction will ensure lower crude prices.

      But along the way, some will relish; some will perish.

      If you own energy stocks (and remember to sell at the peak), you'll do well.

      Everyone else, suck thumb....

      Job security will become more popular than FIRE. Everything got cycles one.

      When I see laggards jumping onto the FIRE train, its quite evident the gravy train will end soon...

      Changing seasons, phases of the moon, rise and fall of the tides....

      Different words to mean the same thing - cycles.

      Nothing stays up forever; nothing stays down forever.



      Delete
  3. Hi Jared,

    Things do go in cycles dont they? But wait, we dont become young again leh.

    With our "one way ticket to the moon", our response to each cycle will be and should be different, I think. Coming down the mountain, we may no longer have the same desire and appetite for risks.

    In this round, freehold landed home owners hit the jackpot with many landed home owning colleagues & friends walking around with a big spring in their steps. I am consoled that our two modest condos also gave us a paper gain of slightly above $1M. No spring in my steps but can hold up my head.

    My "expeditionary force" of $82.5K into new territories of US stocks and Cryptos have taken a good beating leaving only a spent force of $58K struggling to survive.

    CPF? I am very close to my target of $2M before 63 (2 more years). So I will continue to direct money into the CPF till I hit that goal, regardless of inflationary risks. As a couple, we still have 4 four years to hit our goal of 4M65 in our CPF.

    But I am a cashflow person. Cashflow oils our lifestyle.

    This May, while our "expeditionary forces" and STI stocks took a beating, our passive income was healthy - hitting $32K comprising $21K of dividends, $3.1K of rental and $8K interest* from dear CPF.

    The monthly interests from CPF is a projected amount based on our total CPF savings we had in Jan 2022.

    As you so wisely pointed out, nothing stays up forever, nothing stays down forever. While this cycle goes about its business, we need cashflow to live our lives.

    ReplyDelete
    Replies
    1. mysecretinvestment,

      Thanks for making this watering hole of old fogeys a little more interesting to readers who pay more attention to what people DO, over what people SAY ;)

      I hope youths who only do CPF voluntary contributions and nothing else would understand the risks (loss in future purchasing power) they are taking on...

      Its not so black and white - "safe" can be disastrous; "risk" can be most rewarding!

      Your portfolio is classic diversification and rebalancing of risks.

      CPF is really earning nothing in REAL terms, but it beats losing money in stocks and cryptos!

      Unrealised losses in stocks is balanced out by unrealised gains in properties.

      And if one day properties go south (I believe you'll sell before it does since you're not property bei kambing), you'll sleep soundly knowing you have CPF as the ballast to keep your portfolio ship upright ;)


      Just as long our CPF is a minority share of our networth, we've done not so bad financially. Wink.

      Delete

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