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Briefs: Powell aims for 'growth recession'; Silkroad Nickel to privatise

The Edge Singapore
The Edge Singapore9/2/2022 10:24 AM GMT+08  • 8 min read
Briefs: Powell aims for 'growth recession'; Silkroad Nickel to privatise
Forget about a soft landing. Federal Reserve chair Jerome Powell is now aiming for something much more painful for the economy. Photo: Bloomberg
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Powell aims for ‘growth recession’

Forget about a soft landing. Federal Reserve chair Jerome Powell is now aiming for something much more painful for the economy to put an end to elevated inflation. The trouble is, even that may not be enough.

It is known to economists by the paradoxical name of a “growth recession”. Unlike a soft landing, it is a protracted period of meagre growth and rising unemployment. But it stops short of an outright contraction of the economy.

Powell “buried the concept of a soft landing” with his Aug 26 speech in Jackson Hole, Wyoming, said Diane Swonk, a chief economist at KPMG. Now, “the Fed’s goal is to grind inflation down by slowing growth below its potential”, which officials peg at 1.8%.

“It’s a bit like dripping water torture,” added Swonk, who attended the Fed’s annual Jackson Hole symposium last week. “It is a torturous process but less torturous and less painful than an abrupt recession.”

See also: IMF may cut its China growth forecast, chief says

The shift in Powell’s message got the attention of Wall Street. Stock prices have swooned since the Fed chair vowed to do what it takes to rid the economy of too-high inflation.

Politicians in Washington took note too. Massachusetts Senator and former Democratic Party presidential hopeful Elizabeth Warren voiced concern that the Fed could tip the economy into a recession. At the same time, Senate Republican Party leader Mitch McConnell said a downturn was likely as the central bank raises rates to combat inflation.

In the archetypal soft landing in 1994–1995, the Fed slowed the economy briefly and contained inflation through a doubling of interest rates. But unemployment never really rose. It just stopped falling for a while.

See also: Global growth to be as weak next year as 2009, IIF forecasts

The late New York University economist Solomon Fabricant coined the term “growth recession” in research published in 1972. While such a scenario may not be as costly as an actual contraction, it poses dangers for the economy nonetheless, he suggested at the time.

A tiger contained “is not the same as a tiger loose in the streets, but neither is it a paper tiger”, he wrote.

Powell has seemingly concluded that it will take a tiger — and not just a soft landing — to attack America’s pernicious inflation. In his Jackson Hole speech, he said the labour market was “clearly out of balance”, with the demand for workers substantially exceeding the supply. That has led to rapid wage rises incompatible with the Fed’s 2% inflation target.

“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell said. “Moreover, there will very likely be some softening of labour market conditions” — widely seen as a euphemism for higher unemployment. Joblessness in the US probably held steady in August at a five-decade low of 3.5% as payroll growth slowed to 300,000 from 528,000 in July, according to the median forecast of economists surveyed by Bloomberg.

Powell said the pain businesses and households will have to endure was preferable to the Fed failing to restore price stability now and having to inflict even more damage on the economy later.

He left the door open to another jumbo 75 basis-point interest rate increase in September, telling fellow central bankers in Jackson Hole that a recent ebbing of US inflation “falls far short” of what policymakers want to see.

Slowing the economy down enough to push up joblessness without tipping the economy into recession will take some luck, however. A weak economy that is barely growing is much more likely to be knocked off course by an unexpected shock, like a renewed run-up in oil prices.

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“We are on the edge and very fragile,” said Moody’s Analytics chief economist Mark Zandi. “If anything at all goes off the rails, we’re going into recession”, although he added that is not his base case. — Bloomberg

Silkroad Nickel to privatise

Catalist-listed Silkroad Nickel has received a privatisation bid that will value the company at $109.7 million. The offer is also made with a view to delist and privatise the company.

According to an Aug 29 filing, Horowitz Capital, an investment holding company, plans to make a voluntary conditional general offer of 42 cents per share for all the issued ordinary shares in Silkroad Nickel it does not already own. Shareholders of Silkroad Nickel may accept the consideration in cash or one new ordinary share in the capital of the offeror in lieu of the cash consideration.

The offer price represents a premium of approximately 2.4% over the last transacted share price of 41 cents on Aug 22, the last full day on which the shares were traded on the Singapore Exchange (SGX).

The offer price also represents a premium of approximately 4.7%, 5.0%, and 1.9% over the volume weighted average price (VWAP) per share for the one-month, three-month and 24-month periods before and including the last trading day of Aug 22, respectively.

According to Horowitz Capital, the cash consideration represents a “clean cash exit opportunity” for shareholders who may find it difficult to exit their investment due to the low trading volume. The consideration is also a good time for shareholders to realise their investment without incurring brokerage and other trading costs.

The delisting and privatisation will also provide Horowitz Capital with “greater control and management flexibility” in utilising and deploying the available resources of the company.

In addition, the company will be continuing its business activities following the takeover. There are currently no plans to introduce any major changes to its business.

Horowitz Capital, incorporated in February, has three directors on its board. They are Silkroad Nickel’s CEO and executive director Hong Kah Ing, executive director Syed Abdel Nasser Bin Syed Hassan Aljunied, and Rockstead Capital Group’s CEO Lester Tay Lee Chye.

As at Aug 29, Horowitz Capital has an issued and paid-up share capital of $2 comprising two offeror shares, all of which are held by Aljunied.

Hong and Aljunied are each deemed to be interested in the 162.3 million shares, or a 62.1% stake, in Silkroad Nickel that is held by Silkroad Nickel’s major shareholder, Far East Mining. — Felicia Tan

MAS to launch public consultation on proposals to minimise crypto consumer harm

The Monetary Authority of Singapore (MAS) is inviting views on possible measures to minimise harm to crypto consumers, seeking to publicly consult on the proposals by October this year.

MAS managing director Ravi Menon says the regulatory body has been reiterating the risks of trading in cryptocurrencies since 2017.

“Prices of cryptocurrencies are highly volatile, driven largely by speculation rather than any underlying economic fundamentals. It is very risky for the public to put their monies in such cryptocurrencies, as the perceived valuation of these cryptocurrencies could plummet rapidly when sentiments shift.

“We have seen this happen repeatedly,” says Menon during his opening address at the Green Shoots Seminar titled “Yes to Digital Asset Innovation, No to Cryptocurrency Speculation”.

Menon notes that the MAS has issued numerous advisories warning consumers of potentially losing all the monies they put into cryptocurrencies, citing Luna’s sister token stablecoin collapse as an example.

Despite the warnings and measures, consumers are increasingly trading in cryptocurrencies, enticed by the prospect of sharp price increases. “They seem to be irrationally oblivious about the risks of cryptocurrency trading,” he says.

As customer-related risks have gained the attention of regulators around the world, MAS is considering further measures to reduce consumer harm. It is contemplating adding frictions on retail access to cryptocurrencies which may include customer suitability tests as well as restricting the use of leverage and credit facilities for crypto trading.

Customers must also take responsibility and exercise judgement and caution. “No amount of MAS regulation, global cooperation or industry safeguards will protect consumers from losses if their cryptocurrency holdings lose value,” says Menon.

Meanwhile, MAS sees good potential in stablecoins, provided they are securely backed by high-quality reserves and well regulated. However, many stablecoins lack the ability to uphold the promise of stability in their value.

“There are currently no international standards on the quality of reserve assets backing stablecoins. Globally, regulators are looking to impose requirements such as secure reserve backing and timely redemption at par,” says Menon.

Menon says MAS will propose for consultation on a regulatory approach for stablecoins — also by October.

As the digital asset ecosystem grows, it will be natural for linkages between the traditional banking system and digital assets to grow, says Menon. Therefore, there is risk of contagion to financial markets through exposures of financial institutions to digital assets.

Hence, MAS is working closely with other regulators to design a prudential framework for banks’ exposures to digital assets. It will provide banks with clarity on how to measure the risks of their digital asset exposures as well as maintain adequate capital to address the risks. This will reduce risks of spillovers into the traditional banking system.

“Singapore wants to be a hub for innovative and responsible digital asset activities that enhance efficiency and create economic value. The development strategy and regulatory approach for digital assets that I have described go hand-in-hand towards achieving this. Innovation and regulation are not incapable of co-existing,” says Menon. — Khairani Afif

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