Thursday, September 17, 2009

Double Dip Economy

Recently many economists have warned that the global economy may suffer a double dip economy in the near future. There are reasons for their worry. Firstly, governments around the world have been pumping billions of dollars into their economies for fear that their economies will undergo a prolonged recession like the 1929 "Great Depression". The aggressive fiscal stimulus policies have been doing the wonders of a speedy V-shaped recovery for most of the economies in the world, especially the Asian countires.

Secondly, the "Fear and Greed" factor in human's emotion has started to build bubbles in the stock markets and property markets around the world. Since the subprime crisis, Singapore STI up 77%, Hong Kong HSI up 65%, Indonesia JKSE up 100%, Bursa Malaysia up 50%. And property market in Singapore also see sales volume reaching its pre-crisis level. Its 2Q 2009 almost doubled 1Q 2009’s level to reach an eight-quarter high of 4,714 units. A year ago, "fear" has caused many investors to dumped their shares at cheap sale, now "greed" has taken over control and everyone is in for a quick profit.

Third is the threat of the commodity prices. With speedy recovery in the Asian economies, the demand for commodities is rising. Most likely we are going to see another round of cost push inflation, like the one in 2007.

And finally, the interest rates. With rising oil prices and overheated economy, very soon we will see rates hikes which will drag down the stock markets and the property markets. And when all these happen, we'll see a "W" formation for our GDP which is also known as the "double dip" economy.

As an investor, we do not need to feel fearful about this situation. We should treat it as part of the economic cycle, there are bounds to be ups and downs. The important lesson here is cash management: (1) Do not invest with borrowed money and (2) Do not invest all your funds at one time. Space out your investment, if its a down market, you're practicing lower cost averaging; if its an uptrend, you're averaging up. And remember to take profits when you're happy with your gains.

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