Is The Singapore Dollar Becoming A Bubble?

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 |  Includes: EWS
by: Simit Patel

Since QE2, we've seen the rise of one bubble after another: Silver, Swiss franc, gold, and Internet IPOs. So long as US monetary policy remains stimulus-oriented, I believe the rise of bubbles will continue, with gold being the primary and most stable beneficiary of the stimulus capital being created.

Stimulus is having the effect of injecting more capital into the economy, as evidenced by recurring new highs in US money supply as measured by MZM and M2. This capital, aware that the sovereign debt crisis is alive and well and that a secular bull market in equities cannot emerge until the global debt insolvency issue is resolved, is flooding into safe haven assets, thus creating a bubble in those asset classes. Gold, silver, the Swiss franc, and US Treasury bonds are historical candidates, though gold, silver, and the franc have recently shown a resistance to further appreciation at a rapid rate -- an outcome created through margin hikes on futures exchanges in precious metals and interventionist policies by the Swiss National Bank. So where is the stimulus capital that has been created and that which is being created by monetary policy going to go?

The Singapore dollar is my favorite candidate at the moment. The "safe haven = liquid currency" formula is alive and well, so I think existing nation-state currencies are likely candidates. These currencies, as they are issued by acknowledged central banks and support an entirely underlying economy, have the market capitalization needed to absorb a rush of speculative capital, and thus will be able to tolerate such inflows for a longer period of time, which in turn creates more accessible opportunities for speculators of all kinds. Singapore's money supply is currently at about 423 billion SGD, which equates to about $352 billion. That's an amount I think is more than sufficient to sustain a bubble. Assuming there are 1 billion ounces of silver in the world, that would put silver's market capitalization at around $42 billion. So I think Singapore dollar could get bubble-ized like silver, but as it has a higher market capitalization, any bubble will get blown at a much slower rate.

In addition to having fared better than most since the financial crisis began its acceleration in 2008, the Monetary Authority of Singapore (MAS, Singapore's central bank) has noted in its most recent bi-annual statement it is tolerant of further appreciation. This is more than can be said for most other central banks, which are pursuing a policy of currency weakness in order to preserve the value of their US dollar reserves. A less resistant central bank also invites speculators, at least until the central bank changes its mind.

Last but certainly not least, price action on the USDSGD remains formidable. The chart below, a monthly chart going back to 2002, illustrates.

For ETF investors, EWS is perhaps the easiest instrument to use to play this opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.