Bangkok Bank Exec Fears New Economic Crises

[Heng]

For 'Heng", re post 17:

You say: "Yes, plenty of projects that didn't quite make it."

And: "Many places, what was once the middle of nowhere, in just a little time will be in the middle of the city. "

That is true.

At the end of a property boom, there will always be a few well-planned projects that were 'caught when the music stopped'.

But what I see, and what 'soap' is, I think, referring to, in what is now post #15, is rows of shophouses out in the middle of nowhere.

Somebody went to the bank with a request to borrow money to build those, on the basis that s/he would attract occupants who would pay rents, from which the loan would be paid back.

That person was either an idiot, or a con merchant.

And the bank official who approved the loan without examining the business proposal and having it checked by the bank's property appraiser (who would have taken one look at the empty field surrounded by other empty fields and burst out laughing at the idiocy/try-on) was derelect in her/his duty.

Each 'middle of nowhere' project has its own story, and they aren't all (or even a majority IMO/IME) of the idiot/con merchant variety as you put it. The idiot/poor/long term business decision projects are often completed, and in good faith, some lose momentum in the end and are still unsold... some are completely sold out -some projects are sold out to the partners of the project (this is the case where only some are sold to buyers and the rest go into the pockets of the developers: not an ideal situation, but for long term real estate portfolio families, it's just part of the business and usually agreed upon by the partners before the first batch of concrete is poured)- and just mothballed. These are the projects where buildings/houses are completely finished/mostly finished and the bank is no longer related to the project; the properties are typically no longer bank owned, but rather project builder or buyer owned.

The con merchant variety of project in the middle of nowhere is more likely (not always of course) to be the type of abandoned projects that are in stages that are 'nowhere near completion.' Projects where just the gates to the neighborhood, just a few homes, just the shell of a building(s) are finished. These folks likely took the initial 3-4 bursts of bank payments (it's the same nowadays and even back in the 80's and 90's: it's a myth to think the banks just give project builders a big check for the whole project like small home loans; each check comes with a certain stage of project completion: whether real or faked) and then folded.

[soap]

i would like to comment on what mr heng says,

"its a myth to think the banks just give project builders a big cheque

for the whole project like small loans, each cheque comes with a certain

stage of the project completion "

all the builders wanted was a name of a person who said they wanted to buy the house,

once the bank had a name they would issue the cheque to the builder.

the laws of thailand at the time were such that the banks hands were tied when the

debtor defaulterd on the loan, it is only in the past 3years since the goverment changed the law

to allow the banks to repossess properties from debtors that progress as been made.

i know of cases were people signed up with the builder to buy the house,

never spent one night in the house in 12 years just leaving the house to go into decay

and never paid a penny morgage once again hoping the tiger economy boom would never stop.

i know of 2 cases were they even collected rent on the house without paying a baht back in morgage for over 10 years and rest assured some are still doing it

[Heng]

i would like to comment on what mr heng says,

"its a myth to think the banks just give project builders a big cheque

for the whole project like small loans, each cheque comes with a certain

stage of the project completion "

all the builders wanted was a name of a person who said they wanted to buy the house,

once the bank had a name they would issue the cheque to the builder.

the laws of thailand at the time were such that the banks hands were tied when the

debtor defaulterd on the loan, it is only in the past 3years since the goverment changed the law

to allow the banks to repossess properties from debtors that progress as been made.

i know of cases were people signed up with the builder to buy the house,

never spent one night in the house in 12 years just leaving the house to go into decay

and never paid a penny morgage once again hoping the tiger economy boom would never stop.

i know of 2 cases were they even collected rent on the house without paying a baht back in morgage for over 10 years and rest assured some are still doing it

I'm talking about release of funds for projects. And I'm not talking about single homes, rather multi-home/multi-building or multi-story tower developments. Yes, there may have been release of funds with commitments to buy/reserve.... but again, not release of funds for the entire project. In a 500 million Baht project, a list of reserved homes + proof of cash flow of deposits + and reserve contracts (whether faked or not) might have gotten you a releast of maybe 2% of the funds at best. They old days were indeed wild, but they weren't flat out crazy.

If anything the crash showed us that regional and branch bank managers can't handle empowerment and indeed need to be overseen by core family members and stakeholders. Nowadays a loan officer has to okay it with the home office in Bangkok if anything over 2-5 million is to be approved (depending on the bank). It's archaic, but they certainly run tighter ships now than before.

[KhunPadThai]

The risk to the Thai economy is not a replay of 1997. That crisis was caused by inflows of hot money in the 1985 to 1995 period chasing the high SET growth, rapid credit expansion, excess capacity expansion, notably in building, incurrence of dollar-denominated debt, and failure to float exchange rates before running out of foreign reserves. I believe that the Thais have adequately protected themselves against that scenario by maintaining currency controls and with a buildup of foreign currency reserves amounting to USD 59 billion as of April, 2006 as explained in this BOT report:

http://tinyurl.com/qpoug

However, economic crises are seldom reruns. The current risk to the Thai economy is the general risk to a newly globalized economy: a recession in the US reduces the main source of global demand which is from US consumers. There are numerous threats to the current high-level of US consumer demand: high oil prices, lack of real wage growth over the past five years, bursting of the housing bubble and subsequent loss of mortgage equity withdrawal as a source of fund, negative savings rate which prevents use of savings as a means of defending standard of living, higher interest rates which particularly affect consumer debt, but also ARMs and new mortgage origination, weakening of the dollar, and the prospect of increased taxation to meet the unfunded government liabilities. Thailand was the trigger in 1997, but in the next crisis it will be just a normal participant swept along by the global current between the US and China. Some economists, such as David Rosenburg at Merrill Lynch, put the risk of a US recession next year as high as 40%. Most economists expect a reduction of growth in the US economy from the 5.6% of 1Q06 to 2% in late 06. If an exhausted US consumer does put the US into recession it will spread quickly to all of Asia, including Thailand.

I think it is particularly naive to believe that graft and corruption in Thailand or anywhere else will be the cause of an economic crisis. People who make that argument seem to believe that economies are moral engines punishing the wicked. Not so. Economies don't punish greed; they depend on it as a constant in human affairs. Bad timing is a much more grievous vice than greed. The US economy, after all, carries a high burden of corruption such as in: excessive executive pay, accounting distortions that exaggerated profit growth not only in Enron, Global Crossing, etc. but extensively throughout the S&P 500, corporate reneging on pension and health care liabilities, excessive and non-competititve costs of maintaining the largest war machine in history, etc. Nevertheless, the US economy can support these costs, loathsome though they may be. Graft and corruption are more observable on the ground in Thailand than in the US, but that doesn't mean that the economic burden is either greater or unbearable. What might make a difference is a dramatic increase in the rate and effects of graft and corruption. Transplanted first-worlders are seldom in a position to make a judgment as to changes in the rate of graft and corruption.

Khun Pad Thai

[Steely Dan]

The risk to the Thai economy is not a replay of 1997. That crisis was caused by inflows of hot money in the 1985 to 1995 period chasing the high SET growth, rapid credit expansion, excess capacity expansion, notably in building, incurrence of dollar-denominated debt, and failure to float exchange rates before running out of foreign reserves. I believe that the Thais have adequately protected themselves against that scenario by maintaining currency controls and with a buildup of foreign currency reserves amounting to USD 59 billion as of April, 2006 as explained in this BOT report:

http://tinyurl.com/qpoug

However, economic crises are seldom reruns. The current risk to the Thai economy is the general risk to a newly globalized economy: a recession in the US reduces the main source of global demand which is from US consumers. There are numerous threats to the current high-level of US consumer demand: high oil prices, lack of real wage growth over the past five years, bursting of the housing bubble and subsequent loss of mortgage equity withdrawal as a source of fund, negative savings rate which prevents use of savings as a means of defending standard of living, higher interest rates which particularly affect consumer debt, but also ARMs and new mortgage origination, weakening of the dollar, and the prospect of increased taxation to meet the unfunded government liabilities. Thailand was the trigger in 1997, but in the next crisis it will be just a normal participant swept along by the global current between the US and China. Some economists, such as David Rosenburg at Merrill Lynch, put the risk of a US recession next year as high as 40%. Most economists expect a reduction of growth in the US economy from the 5.6% of 1Q06 to 2% in late 06. If an exhausted US consumer does put the US into recession it will spread quickly to all of Asia, including Thailand.

I think it is particularly naive to believe that graft and corruption in Thailand or anywhere else will be the cause of an economic crisis. People who make that argument seem to believe that economies are moral engines punishing the wicked. Not so. Economies don't punish greed; they depend on it as a constant in human affairs. Bad timing is a much more grievous vice than greed. The US economy, after all, carries a high burden of corruption such as in: excessive executive pay, accounting distortions that exaggerated profit growth not only in Enron, Global Crossing, etc. but extensively throughout the S&P 500, corporate reneging on pension and health care liabilities, excessive and non-competititve costs of maintaining the largest war machine in history, etc. Nevertheless, the US economy can support these costs, loathsome though they may be. Graft and corruption are more observable on the ground in Thailand than in the US, but that doesn't mean that the economic burden is either greater or unbearable. What might make a difference is a dramatic increase in the rate and effects of graft and corruption. Transplanted first-worlders are seldom in a position to make a judgment as to changes in the rate of graft and corruption.

Khun Pad Thai

Excellent post. From my knowledge of the stock market there tends to be a phenomenon whereby the nature of each major recession is different from the previous one. Everybody is running scared with regard to inflation, however I think this is a mirage caused by huge amounts of liquidity bidding up all asset classes. The forces of globalisation are actually deflationary with regard to wages and the cost of manufacture, once liquidity starts to dry up every speculative bubble will be burst and the legacy of it will be a horrific amount of debt. I hope I'm wrong but I see a deflationary depression every bit as severe as 1929. The first signs of turbulence are there to be seen. Some emerging market bourses are down as much as 50% from their peak, Australian and U.S housing are showing signs of topping, the Icelandic Krona was devalued by 30%.

I have been putting my mind to how to best protect my girlfriend and her family. She is taking a fatalistic view stating it is not easy for a Thai to exchange money into other currencies and gambling is not allowed here so how can you hedge against a tumbling Baht? Well 78 was about the best exchange rate I got for my £ but the rate is now 70, what would it be if global trade and tourism dried up? I think 100 would be by no means impossible. I could spread bet the THB/£ or THB/$ exchange rates, however in a deflationary crash the populations with the highest saving rates would imho fare best so a hedge against the Yen, Swiss franc or Singapore dollar would be better.

Is everyone just debating the economic situation or is anybody actually doing anything about it yet?

[KhunPadThai]

Excellent post. From my knowledge of the stock market there tends to be a phenomenon whereby the nature of each major recession is different from the previous one. Everybody is running scared with regard to inflation, however I think this is a mirage caused by huge amounts of liquidity bidding up all asset classes. The forces of globalisation are actually deflationary with regard to wages and the cost of manufacture, once liquidity starts to dry up every speculative bubble will be burst and the legacy of it will be a horrific amount of debt. I hope I'm wrong but I see a deflationary depression every bit as severe as 1929. The first signs of turbulence are there to be seen. Some emerging market bourses are down as much as 50% from their peak, Australian and U.S housing are showing signs of topping, the Icelandic Krona was devalued by 30%.

I have been putting my mind to how to best protect my girlfriend and her family. She is taking a fatalistic view stating it is not easy for a Thai to exchange money into other currencies and gambling is not allowed here so how can you hedge against a tumbling Baht? Well 78 was about the best exchange rate I got for my £ but the rate is now 70, what would it be if global trade and tourism dried up? I think 100 would be by no means impossible. I could spread bet the THB/£ or THB/$ exchange rates, however in a deflationary crash the populations with the highest saving rates would imho fare best so a hedge against the Yen, Swiss franc or Singapore dollar would be better.

Is everyone just debating the economic situation or is anybody actually doing anything about it yet?

Inflation is indeed a conundrum. I agree with you that the global liquidity bubble is behind much of the rise over the last ten years in stocks, then housing, and now commodities and bonds. And the East Asian economies have been exporting disinflation as you point out, in wages and manufactured goods. On the other hand, do you think the central banks have foresworn providing liquidity to avoid recessions? What do you think the Bank of Japan will do if when they drop ZIRP over the objections of the politicians, their economy tanks? If the US has a recession next year do you think Bernanke will keep rates high to whip inflation a la Volcker or will he buckle and cut rates to help the Republicans in time for the next presidential election in 2008? It could be that we will continue to have a series of asset bubbles fueled with bouts of cheap money from one central bank or another. The other major source of inflation could be governments' printing money to meet their overwhelming financial obligations.

As to practical steps to protect ourselves, my own steps have so far been to go from real estate and stocks to cash, which unfortunately means USD. I have considered diversifying, perhaps into German or Japanese bonds, but the Euro has its own problems and the Japanese goverment debt of 160% of GDP is the highest ever in the developed world. So, where else to go? Gold is part of the bubble now. CHF? Possibly, but daunting for those of us who lack experience in currency hedging. Buffet lost $900 million at it last year and he is a pretty smart man.

In my mind the short term risk is a recession against which holding cash and avoiding debt seem to be an adequate protection. Against the currency risks beyond that, it is hard to know. Perhaps just spreading it around would be enough since currencies cannot all go down against each other.

[Martin]

I have come away from cash and into gold, because I fear such turmoil amongst currencies that faith in fiat money takes a real knocking.

Mentally, I am reducing my expectations of the purchasing power of my UK pensions, whether the rate is 30 to the baht or 200 to the baht, or all sorts of figures in between.

In expectation of job losses in urban Thailand and some 'return to the villages' (as in 1997), I have planned how our fields that are under sugar at the moment can be turned back to rice and support three more families of landless peasants, whilst still giving us a satisfactory return.

[Steely Dan]

Inflation is indeed a conundrum. I agree with you that the global liquidity bubble is behind much of the rise over the last ten years in stocks, then housing, and now commodities and bonds. And the East Asian economies have been exporting disinflation as you point out, in wages and manufactured goods. On the other hand, do you think the central banks have foresworn providing liquidity to avoid recessions? What do you think the Bank of Japan will do if when they drop ZIRP over the objections of the politicians, their economy tanks? If the US has a recession next year do you think Bernanke will keep rates high to whip inflation a la Volcker or will he buckle and cut rates to help the Republicans in time for the next presidential election in 2008? It could be that we will continue to have a series of asset bubbles fueled with bouts of cheap money from one central bank or another. The other major source of inflation could be governments' printing money to meet their overwhelming financial obligations.

As to practical steps to protect ourselves, my own steps have so far been to go from real estate and stocks to cash, which unfortunately means USD. I have considered diversifying, perhaps into German or Japanese bonds, but the Euro has its own problems and the Japanese goverment debt of 160% of GDP is the highest ever in the developed world. So, where else to go? Gold is part of the bubble now. CHF? Possibly, but daunting for those of us who lack experience in currency hedging. Buffet lost $900 million at it last year and he is a pretty smart man.

In my mind the short term risk is a recession against which holding cash and avoiding debt seem to be an adequate protection. Against the currency risks beyond that, it is hard to know. Perhaps just spreading it around would be enough since currencies cannot all go down against each other.

I agree currency hedging is not straight forward, in any case as you point out will Bernanke do as Greenspan did or do a Volker instead? Well the U.S dollar used to trade at parity with the Euro but is now some 30% devalued. I don't think the dollar will be allowed to wilt indefinately as the Chinese, Japanese and Saudis are buying U.S government debt in vast chunks.If they even got a sniff that Bernanke intended to print money to ease the debt burden they would liquidate their U.S assets as quickly as possible. The dollar is also the reserve currency of choice throughout much of the world, a devalued dollar may result in commodities being priced in euros, which would be very damaging to U.S interests in itself. Bernanke is as you hinted on the horns of a dialemma, I suspect that controlling liquidity is not within his gift though; ever heard of Kondratieff? Kondratieff concluded there is a liquidity cycle lasting 60-70 years which has four phases: Beneficial inflation (Spring), Stagflation (Summer), Beneficial deflation (Autumn) and deflationary depression (Winter).

The last cycle winter was the Wall street crash of 1929. If Kondratieff is correct then the machine code of capitalism is programmed for liquidity to turn down - indeed how could it rise or stay level if the world is struggling under a mountain of debt?

Returning to Thailand the Baht has traded in a range of 37.5-42.5 to the $. Don't take this as investment advice but I'm currently long on the dollar as I suspect it's due a bounce, there is of course an outside chance that speculators will attack a S/E Asian currency which could prove lucrative: I was working in Belgium on 'black Wednesday' when as if by magic I got a 20% pay rise relative to sterling my currency of principle expenditure which illustrates my point. Will I be eating Pizza and drinking Heineken, or will it be noodles and Chang?

[Martin]

You two brave men make me feel that I am a right coward for 'legging it to my house high on the hill'.

[marshbags]

You two brave men make me feel that I am a right coward for 'legging it to my house high on the hill'.

" Wise " is the word Martin and has nothing to do with feeling like a coward.

A very experienced accountant / financier of renown convinced me to invest in stocks when i wanted to invest in real estate quoting many of the points highlighted in this thread.

I gave him an amount i thought i could afford to loose while leaving the rest earning steady interest in my U.K. accounts

I felt the figures he gave me looked a little bit on the high side and difficult to achieve, otherwise surely i thought, he,d have been living off his own investments and personal gains from them.

Cut short.

The investment dived heavily and would have been sucked up in annual fees and outdoing the gains so i cut my losses.

I am happy i did and have no regrets on the outcome.

Now it is making a steady 4.5% along with the rest in the U.K.

You will all know what would have happened had i put it into real estate but that,s another story and again it,s no good living in an " if only " mode.

He even tried to convince me using statisics that i should sell my home and invest that as well.

My instincs told me different and like you Martin i consider myself wise and most certainly not a coward.

The money i,ve gained keeping my home more than made up for my losses while giving my instincs / gut feelings yet another boost.

marshbags

Edited July 9, 2006 by marshbags

[Soju]

I have come away from cash and into gold, because I fear such turmoil amongst currencies that faith in fiat money takes a real knocking.

A lot of people think the same as you, but therein lies the problem with investing in gold. Gold has had a significant runup recently, second only I believe to the runup in the late 80's. Inflation was running high at the time and there were many concerns about global stability gold is usually a good investment in times like those. People kept buying and buying gold despite it being so overpriced. Then the bottom fell out and a lot of people lost a lot of money.

If you think we're in for a period of high inflation and/or world instability, then gold is likely a good investment. But if you think we're in for bad economic times, then gold is probably the worst investment. Many people invest in gold right at it's peak because they forsee bad economic times. Absolutely the wrong decision. If we're in for bad economic times, the best thing you can do is have your money in cash or some very stable and liquid form, ready to pounce on excellent investment opportunities that present themselves once the economy goes south.

I think KhunPadThai said it best, "In my mind the short term risk is a recession against which holding cash and avoiding debt seem to be an adequate protection. Against the currency risks beyond that, it is hard to know. Perhaps just spreading it around would be enough since currencies cannot all go down against each other."

[Martin]

I hope 'soju' is right, and will happily accept that 'best' if it comes.

But I have (as far as I can) prepared for the 'worst', should that befall.

Things are never the same twice; though, on looking back, two events that are similar on the surface will be seen to have had some common features. But they will have had some different ones, too.

Gold price surges are a case in point.

"the runup in the late 80's" is mentioned by 'soju', in comparision to the surge a few weeks ago.

The similarity that I can see is that the price was rising because of demand, and (as 'soju' says) the speculators saw it going up and surged in. Some then found that they had bought near a peak.

The difference that I see is that the demand that started the upward rise, then, was the onset of war in Afghanistan and 'turn it into gold, as something liquid and stable' was coming into the mind of a lot of individual Asian people.

But this year, it was national treasuries doing the buying, particularly Russia, to raise their gold-holding from their traditional 10%, aiming for 20%.

When the speculators pushed the price up, the 'big boys' would have stopped buying (and may even have sold some, to take a profit) and the price soon came back into the 'sensible' range.

People are also looking back at the early 1970s, when demand for refined oil grew to be more than the refineries could put through and it woke OPEC up to its chance. Frankly, I haven't a clue about how to read the similarities and differences with that.

But it all boils down to hopes and fears, doesn't it? As always.

[backflip]

"A lot of people think the same as you, but therein lies the problem with investing in gold. Gold has had a significant runup recently, second only I believe to the runup in the late 80's...If you think we're in for a period of high inflation and/or world instability, then gold is likely a good investment. But if you think we're in for bad economic times, then gold is probably the worst investment. Many people invest in gold right at it's peak because they forsee bad economic times..."

I don't understand the false mysticism of gold. It's a "hedge", it's "protection", it's....

If you wanted to "make", as compared to "not lose", money, plain old copper has provided gains that are substantially better than gold.

"Warren Buffet lost $900 million". He also has made billions and, gloating on his false step will prevent you from learining a thing or two. A half-dozen years ago, most people thought that Berkshire Hathaway was overpriced at $30,000 a share. It has recently topped $90,000 a share...