Archives for category: Economics

July’s almost over! Here are some reads to make your week better.

 

Canada’s Secret to Escaping the ‘Liberal Doom Loop’ (The Atlantic)

Ah, Canada. We visited the Niagara Falls area, Toronto, Montreal and Quebec on our honeymoon and I have very good memories of the country.

The article provides a commentary on Canada’s much greater propensity to accept migrants. A nice overview of Canadian history as well as their approach towards multi-culturalism.

Singapore is also supposed to be a melting pot of cultures but I’m too sure about whether we’ve become more or less accepting of immigrants over time. I suspect we’ve become less welcoming towards migrants over time.

Maybe we need to take a leaf from Canada’s playbook on this.

 

Understanding The Yield Curve: A Prescient Economic Predictor (Financial Samurai)

The Flattening (The Irrelevant Investor)

These ones are for the economics/investing crowd.

Of late, the yield curve has been brought up a lot. This was one of those things that I struggled to understand in university but now that you know it, it’s so trivial.

Read Financial Samurai’s piece for a primer on what an inverted yield curve shows us and read Michael Batnick’s piece for some analysis done on yield curves. What’s particularly instructive is the chart from oddstats about how the S&P500 was up anywhere from 20-70% in the 500 days following where the yield curve is now.

Unfortunately, 500 days is a long time and I suspect that many people will not be able to live with the drawdown that comes with a recession. As always, you can’t react to things when a recession or a bear market comes, you already need a plan before these things happen.

 

The topsy turvy logic of Trump’s trade tirades (Tim Harford)

One more for the econ crowd. Tim Harford always makes current economic affairs so simple to understand. If I read his books while I was in junior college, I might not have been so bad at economics.

Anyway, go read his piece to realise how stupid Trump is with his war on trade.

The same is true for Mr Trump’s new steel and aluminium tariffs. Ostensibly an attack on perfidious foreigners, the tariffs hurt any American who directly or indirectly uses steel or aluminium, all 327m of them. And by obstructing US imports they obstruct US exports, too.

And also some American’s obsession with the trade deficit:

There is the US trade deficit. This is the result of the world’s insatiable desire to invest in US assets, coupled with the American consumer’s preference to spend rather than save. It has little to do with tariffs on milk powder or anything else.

 

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In part 1, I detailed the most important takeaways from ‘The Intelligent Investor‘ (although in my haste, I left out the idea of Margin of Safety). In this part, I want to show you the parallels between the act of buying the book and investing.

This is essentially the second reason why I asked my younger brother to buy the book. I wanted to see what his thought and action process was like.

Reason 2: Buying stocks from a value perspective is pretty much like buying anything else

intelligent-investor-benjamin-graham

#1: Hardcover or Softcover?

Now, there are various ways to think about the difference but let’s take a look at the first factor that comes to mind — price.

Hardcover books are more expensive than softcover books although the first print comes out earlier than the softcover. In the past, I used to automatically buy the softcover version of the book since I figured that I was getting the same content for a cheaper price.

As the years have passed, I’ve come to realise that hardcover version of the book lasts much longer than the softcopy version of the book. Sadly, my own copy of ‘The Intelligent Investor’ is an example of this.

For things that you genuinely treasure, it never makes sense to consider only the price of the stock. In investing, the parallel to this would be buying stocks just by looking at price. Some people who buy stocks actually think that a stock that costs $10 is a more expensive stock that cost $1.*

The other parallel is to remember that sometimes, cheap stuff is cheap for a reason. Just like the book, a stock that sells for pennies (aptly called “penny stocks”) could reflect the actual fundamentals of the company.

#2: Borrowing before buying

Although I recommended that my brother buy the book, one other thing he could have done is go to the library to borrow the book first. You may say that he trusted me, as his brother and someone who knows a thing or two about the markets and therefore didn’t have to check the book out first.

However, borrowing the book is a smart thing to do if you want to know whether it’s worth spending your money on. In investing, this is akin to fundamental analysis where a would-be investor investigates the earnings, assets and cashflows of the firm in order to know what price to pay for the stock.

This could also be a good step before you decide whether it’s worth buying the hardcopy or just the softcopy, or whether the book is even worth buying at all.

Conclusion

In short, most people know exactly what to do when they buy a product. They check out the reviews, they compare the specifications between one product and another and they also compare where they can buy the good for the best price as well as other factors like delivery and any warranties from the manufacturer.

It’s strange that many people don’t do this when it comes to investing. They don’t compare the returns from one investment to another, whether those investments are guaranteed or the guarantee is merely a probability. They buy high for fear of missing out and sell low for fear of losing everything. Swayed by fluctuations in price, they hold investments for ever shorter periods of time.

It’s just weird.

Investment should be like buying anything else. Thinking of it as such will make you a better investor.

 

Notes:

In case you’re wondering, paying $1 or $10 for a stock doesn’t matter. What matters is how much you pay relative to the earnings per share.

grayscale photography of man praying on sidewalk with food in front

Photo by sergio omassi on Pexels.com

 

It’s been some time since I wrote about inequality and how the poor in Singapore have fewer options. Since then, there’s been a slew of commentary and in-depth articles on this topic (for example, see here for a piece from the ST).

I’m not sure why there’s been so attention on this topic lately but I’m glad that this topic is in the limelight. In fact, the Straits Times (ST) article that I shared above mentions three cases and how in each of those cases, the poor have terrible options that could either (a) hinder social mobility or (b) mean that they’re always living life on the edge and one unfortunate incident could push them over.

What Many Singaporeans (Still) Think About The Poor

For me, the gem is in the comments and discussions on the reddit page discussing the article and there are some people who still don’t get it that the poor face terrible odds when it comes to making it out of poverty.

The commentators who say that being poor is a result of terrible choices and that the poor should know better are typical of the government’s thinking that welfare is a dirty word and will lead to a crutch mentality*.

To be fair, the government has softened its stance in recent years (probably as a result of GE 2011) but structurally, welfare tends to be on a case-by-case basis as the government has this thing about appearing prudent.**

You can tell that the government still thinks welfare across the board is a dirty word because they like to mention that certain ministers came from humble backgrounds and despite that, they’ve succeeded. In recent years, the same goes for students who have done relatively well, or passed, national exams despite odds like less-than-average family backgrounds or illnesses.

Using Isolated Stories As Shing Examples of Self-Reliance Doesn’t Help

The problem with using isolated examples is that it gives a distorted view of how big a handicap being poor is. I’m not a privy to such data but I sure hope someone that’s doing the research is looking into it. We need the data and if the data shows that majority of poor people lead less healthy and/or have less chance at social mobility for them or their children, then we can call the bluff on the government’s use of isolated examples. Otherwise, the government can call the bluff on the activists, academics and critics calling for more help for the disadvantaged.

For me, I was quite convinced because I heard the economic argument by Nick Hanauer (see here for a later version of his talk). Think of it. How much stuff can rich people buy? Rich people may have wealth and incomes that are thousands of times that of poor people but they certainly don’t buy thousands of stuff more than a poor person. You don’t see a rich person with a thousand times more T-shirts than a poor person, do you? And Mr Hanauer was talking about the middle class. So what more the poor?

Like I said, I don’t have all the answers and I think most people in Singapore don’t either. What I’m aware of is the issues are not as simple as “self-reliance” or “to try harder” and I think many people need a paradigm shift from that idea. I’m glad that the mainstream media and the academics finally have time in the sun on this topic.

 

Let me know what you think in the comments below.

Notes:

* The irony is that these same people are probably the sort that expects the government to do something for every single situation. MRT breakdown? LTA’s not doing their job. Floods? PUB’s not doing their job. Kid failing in school? Teacher’s not doing their job. And as for the crutch mentality, guess what? We’re already heavily dependent on the government to provide housing.

** The irony of this is that our Ministry of Defence gets the lion’s share of the budget each year and no one questions the prudence of military spending because there’s always the boogeyman that someone is out to get us if we appear weak. I guess MINDEF can thank Mahathir for making a comeback. This argument holds more water now that there’s a different government up north.

Markets in this region have been tanking and the STI has fallen below the 200-day EMA to the point that it’s about to pull the 50-day EMA below the 200-day. While this isn’t a perfectly reliable indicator in itself, this could present a good buying opportunity if this trend continues for another 6-9 months.

Anyway, if you’ve had a tough week, here are some reads to make it better.

 

‘Stingy’ millionaire donates S$3.35 million from S$20 million fortune to charity after his death (TODAY)

I’ve written about people like Agnes Plumb and Ronald Read. Finally, there’s an example from our local shores. Mr. Low Kum Moh was a sub-accountant who was born into a family of fishmongers. The secret to his wealth? Frugality and investing in the stock market over a long time-frame. This is pretty much the same story as the other ones I’ve featured here. The point of it all is that great fortunes can be made by people that most would consider very normal. The trick is to find a strategy that works and keep plugging away at it.

Which brings us to the second read.

 

In Praise of Incrementalism (Rebroadcast) (Freakonomics)

Freakonomics was the book that convinced me that economics could be interesting and that probably saved my university life.

In this episode of their podcast, they make the point that lots of progress in this world are based on incremental progress. The problem with most of us is that we tend to view great events or inventions as if they happened miraculously.

In particular, I love this example that their guest, economist David Laibson points out:

LAIBSON: One has the impression that it’s impossible to save enough for retirement — and to a certain extent, it is impossible if you start at age 50. But if you start early in life, and every year, you contribute let’s say 10 percent of your income, and maybe there’s an employer match, so now we’re up to maybe 15 percent, and you invest that savings in a diversified mutual fund, stocks and bonds, and you have low fees, and you keep going at that year in and year out, and you don’t decumulate prematurely — it’s amazing how that process produces millions of dollars of retirement savings. So it’s kind of hard to imagine how you go from what seems like a little bit of money each year to being a millionaire but that’s exactly the way it works when you work out the math.

Instead, most people often aim for that lottery ticket like buying bitcoin. Most people who do this put very little at the beginning (like a lottery ticket) and when it starts to pay out in a substantial way, they then proceed to bet the farm thinking that what has happened will go on indefinitely.

Unfortunately, this is almost always precisely the time when things start to go bad. Think of someone who bought bitcoin at $500 or $1,000. After seeing the price of bitcoin go to $10,000, they feel like a genius and proceed to place even bigger bets. Well, the bet may have paid off temporarily but look at how it’s turned out.

Which brings us to…

 

Bitcoin Bloodbath Nears Dot-Com Levels as Many Tokens Go to Zero (Bloomberg)

I’ve been writing about the problems with Cryptos since late last year (see here, here and here). To be honest, I’m not as pessimistic about crypto now as I was last year. Of course, there’s nothing fundamental to base my thoughts on but buyers are surely not as euphoric about cryptos as they were late last year.

I suppose the article compares the crash in cryptos to the crash in the tech sector during the dot-com era as prices in both situations have nothing fundamental to support them but I would argue that bitcoin is in a worse situation because, in case of the dot-com stocks, you could at least see if things were getting better based on a turn-around in cashflows and profits.

For bitcoin and cryptos, you have to track whatever these cryptos are meant to replace and see if those things are getting replaced at all.

Anyway, here’s the million-dollar picture from the article above.

bitcoinCrashJun18

 

Have a great week ahead!

mvimg_20180612_152236.jpg

The chance to read a good book like this, with a cup of cheap coffee. That’s not something everyone gets to do

 

I finally got my hands on Teo You Yenn’s book “This is What Inequality Looks Like” and so far, it’s been a very enlightening read. In fact, the picture above shows what inequality really IS like in Singapore.

Here I am, a Chinese male Singaporean, able to read this book without having to buy it. On top of that, I am able to read this book at my leisure without having to worry about losing some wage while I’m reading the book.

Now, the only reason why I could borrow the book for free and read at my leisure is that my job allows me to. It’s a white-collar profession that depends more on my smarts than the amount of physical labour that I have to put in. And this would not have been possible if not for the fact that I am a university graduate.

Now, I’m not particularly intelligent. In fact, if not for a stroke of luck that the National University of Singapore’s Faculty of Social Science accepted me in the second year that I applied, I wouldn’t have made it there. This is also despite the not-so-trivial sums of money that my parents spent hiring tuition teachers for me when my brother and I weren’t doing so well in school.

I’m also on track to obtain a net worth or wealth that’s easily more than the average Singaporean will obtain in their lifetime. This is a testament to my strategy but it’s also a testament to the fact that I was born into a relatively privileged family. I never had to worry about there being no food on the table. Family holidays, albeit to destinations that weren’t so far off, were a norm.

This good fortune isn’t just confined to my immediate family. By virtue of my education, I managed to get a job in a government organisation that paid pretty well. It was there where I met my wife who comes from an equally privileged background. Of course, it helps that she was brought up well and while we may not be one-percenters, we are certainly not poor by any means.

In short, we were lucky to be born into the right families, we (at least my wife really did) made the best of it, and while we still need to work hard, we’ve largely benefitted from the system.

Why some get left behind by the system

Unfortunately, not everyone benefits from the system.

Teo’s book highlights how the poorest can fall through the cracks and remain there. It’s a mix of bureaucracy and policy that never really attempts to understand the people that the policy is supposed to serve.

Teo gives a good example in the book where she writes about how the Singapore government has made childcare more affordable but when you’re poor, it’s not just about having affordable childcare that matters. The low-income work in very different kinds of jobs from the average person. Those jobs may not allow them to pick up their children from childcare, or to buy the things for their children to participate in the usual activities that childcare centres organise.

And unfortunately, I see this at work too.

Occasionally, we counsel students who wish to withdraw from school, aren’t doing well in their studies, or who just have issues with attendance. Often, the story is that these students have family issues. Sometimes it’s the family finances that cause lots of tension in the family; Sometimes, the student’s mixing with the wrong crowd; Sometimes, they have issues with self-image.

Of course, not all of them struggling with their studies come from low-income families but I suspect if we were to actually do a proper survey, we will find that a disproportionately high share of them come from families with financial problems.

And I get it, what’s the point of doing well in school when there are more pressing concerns? After all, the payoff from doing well in school only come much later. Even if they don’t have pressing circumstances, these students that came through the non-traditional academic track then to already have disadvantages in English-language and mathematical ability.

We call them “less academically-inclined” but it very well could be that they are bad at their studies because they’ve been starting further behind the starting line in the same race all those years ago.

And so, what are we to do?

It’s not very much help to tell someone to run faster if they’re starting 20m behind the starting line in a 100m race. It also doesn’t help to tell someone to train harder for the same race if they have fewer resources (time, effort, money) to do so.

I have no answers

While my heart goes out to these lower-income people, I have no answers for them. It’s very hard to give people a solution when the system isn’t designed for them. The civil service has always prided itself on hiring some of the best and the brightest. And it does.

Unfortunately, if the best and the brightest comprise mostly of people who have gotten relatively ahead in life because they were born into the right circumstances, then it’s hard to imagine that these same people would be capable of designing a system that caters to the marginalised. Instead, the system is probably designed for the people just like themselves.

Now, don’t get me wrong. Teo’s book sheds some light on the marginalised in Singapore and the difficulties they face in getting help. From her narrative, it appears that this group of people have very low chances of escaping the poverty trap.

On the other hand, we have our government constantly highlighting how some of their own have come from underprivileged backgrounds, crawled up despite their circumstances and, in the eyes of modern society, made it.

Nowadays, the local newspapers also always highlight those who have overcome adversity to do relatively well at the national exams. No more highlighting of the best and brightest who had an easy life. Instead, they highlight those who have overcome the odds.

And that’s where I think we need to focus on for a start.

What’s the real story? Are most of the underprivileged more like those highlighted in Teo’s book? Or do most of them fit into the narrative described by our government and the media?

I hope Teo’s book is the match that lights a conversation on this.

close up of coins

Photo by Pixabay on Pexels.com

 

Today, a friend brought to my attention my calls on bitcoin.

To be fair, I didn’t call anything. It’s not like I had a price target on bitcoin or a specified timeframe for the collapse in prices but I did say that it was a mania and the whole damn thing was overhyped as an asset class.

When I began writing about bitcoin (see here and here) in November of last year, bitcoin was approximately US$7000. As of today, bitcoin is roughly US$6,400. In the span of just a few months, Bitcoin has reached a high of US$20,000 and fallen back to slightly less than when I started writing about it.

I don’t know if bitcoin and other cryptos will continue to fall but I’m pretty sure the naive, retail investors aren’t really in the thing any longer. The good news is that unlike the US housing market, I don’t think the institutions are levered up to their eyeballs with derivatives related to crypto. It’s too soon for another financial crisis and crypto seems unlikely to be the kind of asset class that would lead us to one.

I wrote a whole bunch of stuff on crypto which you can read as well.

If the value of a thing can vary so widely in just a few months, can you really use it as money? Can it hold value? Was the fervour speculative?

I think the answer to those questions is pretty obvious.

I’m pretty sure all the students and common folk in South Korea who put their life savings in crypto are regretting it now. They regret their folly which was fueled by greed.

It’s sad that people who obviously don’t know what they’re getting into, lose money on things like this. It’s not much different from those ‘investors’ who bought into structured products during the GFC.

Unfortunately, these things are as old as the hills. We would be wise to know the difference between investing and speculation.

Although #deletefacebook is becoming a thing, Facebook is pretty much the only place that I get my news from nowadays. I mean, no sense reading through an entire newspaper when many people are more likely to only share the news that is breaking or news that resonates with them. And if enough people share it, then it’s probably worth taking a look.

Anyway, the point of my post today is to bemoan the lack of common sense thinking that comes quite naturally to anyone who has studied some economics. This thought came to mind when I saw an acquaintance on Facebook share the following headline with his own caption that lamented how prices in Malaysia were getting too high for locals.

 

msia_kopi.PNG

Apparently, most coffeeshops have raised the price of iced milo to almost RM3 and iced kopi is hovering near RM2.

Now, any person who has done a course in economics at high-school should be able to point out all the problems with that line of thinking.

#1 Price increase in a competitive market are subject to the forces of demand and supply

 

If the market is competitive, any price increases must be due to either an increase in demand or a decrease in supply. Since the demand for coffeeshop drinks are relatively stable from year to year (after all, people don’t suddenly go from drinking two cups of iced milo a day to drinking three cups a day).

The culprit probably lies on the supply side with costs of rental, labour or the ingredients themselves being the main reason to sellers having to raise prices.

Artificially keeping the price low will cause some sellers to be unable to generate a normal profit sufficient to keep them in the market. This will mean that some sellers will close shop and there will be even less goods available in the market, making it harder for buyers to obtain the goods at the artificially low price.

Unless you can find proof that sellers are acting in concert to raise prices unnaturally, it’s probably better to leave markets alone to do their thing. Thinking otherwise is just bad logic.

#2 Prices are a nominal concept

Price increases on their own aren’t a problem. What matters more is the amount of goods one can buy despite the price increases. If wages have been increasing faster than the price increase, buyers are actually better off in real terms. In other words, if wages rose faster than price increases, buyers are able to increase their standard of living as they can afford more goods than before.

This is something that many common folks don’t get. They look at the increase in prices in isolation from their increase in income or wealth. Of course, there will be a segment of the population who hasn’t seen wages or wealth increase and are unlikely to do so for the foreseeable future but we can’t deny that there is also a substantial part of society that experiences wage adjustments and/or increases in wealth.

Another cause may be behavioural. One finding of prospect theory is that losses hit people twice as hard as gains. An increase in the price of something you purchase could be viewed as a loss which means that gains in income or wealth twice as much in order for people to feel just as well-off as before.

Whatever the case, thinking is nominal terms is just bad logic.

Conclusion

Now, don’t get me wrong. If everyday necessities are getting expensive to the point where most people cannot afford them then we have a crisis. Authorities could compound the problem by printing money or interfering with the function of the market by restricting either price or output like they have in Venezuela but to worry about the prices of things going up without consideration of many other aspects of the situation is just plain stupid.

 

I was going to do a piece of bitcoin as an asset class but this morphed into a very long piece so I’m splitting this up into two parts. This part covers how to value bitcoin and a guess on what the future holds for bitcoin speculators. Catch up on part 1 here.

Putting a value on bitcoin

If bitcoin is unlikely to be the next form of a widely accepted currency, then why has the price gone up so much? Well, the short answer to that is that the price has gone up because the demand for it has done up relative to the supply.

In economics, the theory goes that there are three reasons why people demand any sort of money:

  1. Transactional purposes
  2. Precautionary purposes
  3. Speculative purposes

The above is for money in general but it’s useful to think along those lines for the demand of any particular form of money. And since almost all societies already have an accepted form of payment (the local currency or a foreign one), the demand for bitcoin is mostly confined to the last purpose- the opportunity cost of holding money is low, therefore, let’s hold in the form of a moonshot such as cryptocurrencies.

The next question, then, is whether buyers of bitcoins are buying it cheap, fair or at ridiculous prices? The only way to answer this question is to figure out what is the intrinsic value of a bitcoin and what is the price today relative to the value.

With asset classes as such bonds, equities or real estate, the typical way to value these assets is to ask ourselves: what are the payoffs (coupons, dividends, rental) over the remaining life of the asset, the associated probabilities of those payoffs and arrive at a value of the asset as it is today. Comparing that with the price one would pay for the asset, we can then determine if the asset is priced fairly or not.

In contrast, valuing an asset class such as commodities or foreign exchange is inherently more tricky. After all, before bitcoin, there was another commodity that was a darling for some “investors”. Unfortunately, this is what Warren Buffett has to say about it:

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion…you could have all the farmland in the United States, you could have about seven Exxon Mobils (NYSE:XOM) and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.” – Warren Buffett on CNBC, March 2, 2011 (source)

If you think about the amount of utility by investing in an asset that doesn’t provide any income, then you better be darn right about the capital gains. Unfortunately, none of us are time travellers (if you are, please get in touch!) or have a crystal ball so betting the farm on an outcome that is speculative in nature is a fool’s errand.

Don’t misunderstand, I think gold has some utility. It has served as a hedge against inflation, is used in jewellery and as insurance in the event you need to escape your country but the price of gold beyond the costs associated with those options is pure speculation. bitcoin, I believe, has even less utility apart from being a conversation at a cocktail.

Prof. Aswath Damodaran has a fantastic post on bitcoin and cryptocurrencies and how to think about the definitions of various asset classes (read the full thing here) but I present his brilliant summary of my point:

 You cannot value Bitcoin, you can only price it: This follows from the acceptance that Bitcoin is a currency, not an asset or a commodity. Any one who claims to value Bitcoin either has a very different definition of value than I do or is just making up stuff as he or she goes along.

In short, what a bitcoin is worth is only as much as the next person willing to pay for it.

Will it end well?

This is where things get interesting. What I’ve covered so far shows that bitcoin has value only insofar as people’s willingness to pay for it and the willingness to pay for it, right now, seems to be pretty much only because people think that it’ll continue to go up further. Why would it go up further? Simply because it may gain widespread acceptance and be the currency (amongst many others, crypto or otherwise) of choice.

The last line hints at a plausibility of reality or what Howard Marks calls a “grain of truth”. Unfortunately, Marks was referring to how bubbles form and in his checklist, he listed nine bullet points that lead to a boom/bubble:

  1. A benign environment
  2. A grain of truth
  3. Early success
  4. More money than ideas
  5. Willing suspension of belief
  6. Rejection of valuation norms
  7. The pursuit of the new
  8. The virtuous cycle
  9. Fear of missing out

Of course, Marks was referring to the investment climate in general but when applied to just Cryptocurrencies, I think 2, 6 and 7 have either already been covered or are pretty obvious. What some people don’t realise is that 1, 3, 4, 8 and 9 have played out in some fashion.

The general investment environment has been pretty positive since Trump’s election with equity markets all up substantially since the beginning of the year (point 1). The price of bitcoin going up 700% in one year has already given plenty of laypeople some success (think bitcoin jesus and Ms bitcoin Mai) and that the feeling that the only way for bitcoin is up (point 3 and 8). After all, when civil servants (that’s referring to me, by the way) in the education sector start about bitcoin, beware.

As for point 4, the whole concept of Initial Coin Offerings (ICOs) just underscores how there is too much money floating around that people are willing to part with money* for nothing more than a digital representation to an idea. The worst part about the idea is that the startup is practically joining a space that is already crowded with a thousand other similar ideas. And that’s just in the cryptocurrency space. Softbank has a 100 billion dollar venture capital fund which just shows how much money there is floating around to fund ideas that are probably more moonshots than sure things.

As for point 9, there are now traditional Wall Street firms getting in on the boom (admittedly, they are just dipping their toes there) and there are cryptocurrency hedge funds and even fund-of-funds. If you don’t know what those mean, no worries. Basically, it just means that more money is being channelled towards cryptocurrencies.

Closer to home, just a few months ago, a student of mine was looking into buying bitcoin and while my school may not be looking to buy the currency, the fact that suddenly interest in the subject has increased drastically shows that no one wants to miss out on knowing what this exciting, new thing is all about. News about Google searches for buying bitcoin getting more popular than buying gold just strengthens the point that there are many people who are trying to get on board a ship that (perhaps?) has sailed.

Well, that’s just Howard Marks’ checklist. I saw a chart (it’s a little dated) that compared the rise in the price of bitcoin to other bubbles that have come before it.

 

bitcoinVsBubbles

The thesis here is that most bubbles increase a 1000% over 10 years before popping.

Well, from the chart, bitcoin rose a 1000% in just three years. And with the benefit of hindsight, we now know that the bubble hasn’t burst but has expanded further to 3700% since 1 Jan 2015.

So, that’s it from me. I think I’ve pretty much convinced myself that while the technology underlying bitcoin has its use, I’m not so optimistic on the token itself given the competition from existing currencies as well as new cryptocurrencies. And it’s ironic that the price of bitcoin is still quoted in USD so that says a lot about what our anchor still is.

Furthermore, the psychology behind bitcoin has pretty much fueled a buying frenzy (as evidenced by the exponential increase in price) and has checked off a lot of boxes that have plagued other manias before it. I’m not sure if the bitcoin/crypto boom is over but I’m pretty sure it’s not going to end well.

 

 

snarky notes:

*remember, money can be used to consume goods today or invested for surer returns.

I was going to do a piece of bitcoin as an asset class but this morphed into a very long piece so I’m splitting this up into two parts. This part covers what bitcoin is and the economics of money as applied to bitcoin. Part 2 is up.

First of all, bitcoin (or any other cryptocurrency) isn’t blockchain.

My thoughts are on bitcoin* which refers to the unit of currency and not Bitcoin which refers to the blockchain technology that the currency rides on. There is a difference and I believe blockchain has its uses but what I’m more interested in is bitcoin (as a proxy for cryptocurrencies) because that’s where people are putting their money into which has caused the price of bitcoin to be up some 700% this year alone.

First, what is bitcoin?

bitcoin is a digital token created by an unknown person or person(s) with the alias Satoshi Nakamoto. bitcoin can be used for electronic transactions and is created when computers (mining rigs) solve complicated mathematical problems.

As such, no one controls the supply of bitcoin and the theoretical maximum number of bitcoins is 21,000,000 bitcoins. Facilitating the transfer of bitcoins is the decentralised network that bitcoins transact on. People with mining rigs power the network in the same way people distribute content via a torrent file. Their systems provide the computational power needed to update the records anytime someone transacts using bitcoin. For this, the quickest one that solves the computational problems needed to confirm the transaction get bitcoin. This is essentially the process of mining bitcoins.

Bitcoin is set up to reward users for verifying transactions. Miners who package transactions into “blocks” receive two kinds of rewards: The additional Bitcoin they produce by using their hardware to solve mathematical problems (an income stream that will eventually cease since 21 million bitcoins are the maximum that can be mined) and the transaction fees paid by users to get their payments into blocks. – Bloomberg

In short, bitcoins are a digital form of currency just like how you would spend cash (e.g. USD or SGD) to buy virtual currencies in a game (e.g. “gold” in the mobile game, Candy Crush) which you can then use to purchase things. The only difference here is that it’s possible to use bitcoin to pay merchants that accept them rather than being restricted to only using “gold” (the candy crush currency) to buy power-ups or items in Candy Crush.

When making payment using bitcoin, the Bitcoin (deliberately using capital “B” here) network facilitates the transaction and every computer on the network gets updated with the same record of which account the bitcoin now belongs to.

Supporters of bitcoin champion bitcoin as a new currency for the following reasons:

  1. No one entity controls bitcoin and hence, can’t cause a debasement of the currency through undisciplined expansion of the money supply.
  2. It’s relatively anonymous because bitcoin addresses aren’t tied to a real-world address or name, although the public ledger will show how many bitcoins are held by a particular bitcoin address.
  3. A transaction is supposed to be fast and low-cost.

The economics of bitcoin

The problem with bitcoin is that being a digital currency, there is no shortage of other competing currencies. Existing competitors include all the other currencies in the world and there aren’t many technical barriers to entry for other digital currencies to enter the space. At last count, there were more than a 1000 cryptocurrencies in circulation.

bitcoin’s only advantage is the first-mover and top-of-mind recall when it comes to cryptocurrencies. In order to become a viable alternative, it will also need existing currencies to become shaky enough that they find alternatives. What comes to mind are countries that are experiencing bouts of inflation due to the government mismanaging the local currency. Even then, bitcoin has to contend with major currencies like the USD and Euro.

As a form of money, bitcoin may be portable (all you need is to connect to your digital wallet) and divisible (see here) but the first point requires internet access which could be stumbling blocks in countries where internet access is expensive.

Also, transaction costs for bitcoin do not seem to be as low as it’s touted to be. Due to the nature of how transactions get recorded, much computational power is required to solve the mathematical problems needed to record a transaction. Depending on the volume of transactions (which vary), this can cause bottlenecks and those with the computational power are starting to charge different prices in order to facilitate transactions. As I write this, the median transaction fee for a size of 226 bytes is 103,960 satoshis** or 8.30 USD. Try convincing merchants to accept or people to pay for a coffee, beer or sandwich using bitcoin if that’s the processing fee.

The biggest issue so far is whether bitcoin qualifies as a store of value. In economics, anything considered money should be a good store of value. Simply, this means that if I can buy 10 beers with 1 unit of this currency, I should be able to buy roughly the same amount of beers with the same unit of currency a week, month, or even, a year later.

And this is where bitcoin truly fails. In fact, the only reason most people have suddenly sat up and taken note of bitcoin is due to the fact that bitcoin has increased some 700% relative to the USD within this year alone. And within weeks of hitting 7000 USD, it fell to 6000 USD and then within a few weeks, shot up to 8000 USD.

While the increase in the price of bitcoin is good for holders of bitcoin, we have to remember that those who sold their bitcoin is kicking themselves in the foot. From a medium of exchange point of view, someone who used a bitcoin to buy a computer earlier in the year is kicking himself because he or she can now buy 7 while the merchant who accepted bitcoin (hopefully he/she didn’t use it to pay off a supplier) has now seven times more profit as compared to the start of the year by doing absolutely nothing! What kind of viable currency causes such changes in purchasing power?

While bitcoin, if accepted, will reap network economics (one phone is useless on its own but as more people have phones…), it seems unlikely to me, at this point in time, that bitcoin is going to be a viable alternative to a shitty currency.

Stay tuned for part 2.

Update: Part 2 is up.

snarky notes:

*Or any other cryptocurrency for that matter but bitcoin is probably the most prominent and manic example right now.

**Another reason why bitcoin is a terrible currency is due to the notion of divisibility. People hate decimals and having to come up with names like ‘satoshi’ for a fraction of a bitcoin just makes everything more confusing when thinking of the value of one thing relative to another. i.e. which looks like a better price for a pint of beer? 10 USD, 126,105 Satoshi or, 0.00126105 BTC?

 

For the life of me, I can’t remember where I read it but I’ve found sources that provide more of less the same arguments that were made.

Basically, what I read was that automation hasn’t really caused job losses (yet). After all, if automation and robots were the reason for job losses, then why is productivity so low? In economics, productivity is measured as the output per unit of input. Inputs can be either labour or capital which means that if more and more jobs were automated, productivity should start to increase.

That hasn’t been the case, even in Japan, where robots play a huge role in manufacturing. In Japan’s case, there are alternative explanations (for example, see here) such as Japan’s corporate culture but that doesn’t explain the similar observations made in other developed countries.

Singapore’s attempts at increasing productivity haven’t been all that great either. So, where is the evidence that automation and robots are taking our jobs? Well, I think economist David Autor (nice, long essay) has made a very compelling argument that automation and robots, at least at this point in time, have not caused job losses or the end of employment as some people say they will. (For a nice background on what happens as technology replaces labour, see here and here)

The historical relationship between technological improvements and labour

It’s an indisputable fact. As technology has progressed, jobs have been displaced but that often leads to job increases in other areas. As farms used more capital (think tractors), the amount of labour on farms has decreased. That led to increases in employment in other sectors such as manufacturing. And as manufacturing started getting more high-tech, that also led to increases in employment in services.

Paradoxically, improvements in technology have also led to increased employment in the same jobs. The often-cited example in labour economics is the role of the bank teller. As ATMs were introduced, many people thought that that would spell the end of the bank teller. Interestingly, the number of bank teller jobs in the US actually increased after the introduction of ATMS. What gives? Well, it turns out that the ATM reduced the need for tellers per branch and that meant that the ATM made it cheaper to open up new branches. Since branches were cheaper, banks opened up more branches, increasing the need for tellers. Bank tellers were still necessary to perform certain banking functions as well as guide customers on how to use the machines.

What lies ahead?

If the above holds true, we should expect that the coming age of automation and robots will bring about some changes but it won’t necessarily spell the end of work as we know it.

(1) Augmentation of labour

First, automation and robots will definitely replace some jobs. Off the top of my head, in the more severe scenario, drivers (as an occupation) will no longer be necessary. Instead, they may be employed to sit in self-driving cars just to hit some emergency button or take over manual controls in the event the whole system goes down. In the less severe near-term scenario, drivers may still be needed to take over in certain driving conditions much like what goes on in modern passenger aircraft.

Any labourer lifting heavy loads (such as nurses or constructions workers) may use robots or exoskeleton suits that help them in their work. If it helps them to their work quicker, then obviously, there will be less of these labour needed given the same level of demand. However, it’s probable that nurses will see a greater demand given the level of ageing in developed societies while construction depends on different demand condition altogether.

(2) Growth in other/new industries

Let’s not forget that it’s not just blue-collar jobs that are at risk. In fact, due to the digitisation of information, software and AI can probably do repetitive, routine functions that people are used to doing. Administrative functions like filling forms, templates and other such bothersome activities can be automated.

As AI developed, even less routine jobs can be replaced. In the world of finance, trading, to some extent, has been replaced with AI and software. Robo-advisory, or being advised by software, is also increasingly being used by money management firms (see here).  The days of buying insurance directly from your insurer are here but dare we go one step further and leave the endowment and investing portions up to software as well? This would eliminate the so-called financial advisor whose only value-added service thus far is the relationship built between the advisor and client. It may be argued that many such ‘advisors’ exploit the relationship for a commission. While advisors may say that they bring clarity to the otherwise lengthy and complicated terms and conditions, it is difficult to take that stand when your income depends on it. Much better is the independent advisor who compares all the offerings available and provides balanced advice.

So, where are the likely pockets of growth? Leaving out the sectors that only the truly visionary can imagine (hyperloop anyone?), we can already see a greater switch to sectors that depends on creativity and novelty.

In Singapore, this has manifested itself in the form of various restaurants and cafes that offer products slightly different from each other. Some tout a special item on the menu while some brandish the fact that they were trained at famous schools, restaurants or bakeries or the fact that its the outpost of a celebrity chef. The ones that really get ahead though, are the ones that grind it out on the ratings (informally on platforms like Yelp or HungryGoWhere or formally in the Michelin guide). In retail, it’s even tougher. Competition based on price happens on platforms such as Qoo10.sg while a novel idea can help you out on Etsy, Kickstarter or Indiegogo.

In short, if you aren’t a big company reaping economies of scale (lower average cost of production as output increases) are opening outposts all across the world, it seems that for individuals, we’re back to the age of a craftsman where uniqueness and emphasis on dedication triumph mass production.

This isn’t unique to just physically creating products. We have robots that can now produce articles that transmit the facts of the matter. However, in the blogosphere or on YouTube (if you prefer), superstars are being made of those whose opinions provide clarity, prognostication or simply, a breath of fresh air. The software and AI haven’t gotten there yet.

Industries will change

If demand for goods and services change, obviously there will be winners and losers from it all. After all, what good is it to a manufacturer if costs are reduced by saving on labour but that also leads to a reduction in demand? In econ 101, we learnt that households provide labour and it is also households that form the demand for goods and services. So, companies and corporations have a vested interest to ensure that whatever labour is displaced gets employed once more. Hopefully, they get employed in a higher value-add job and therefore, draw higher wages than before. Realistically, that would take a lot of training and in meantime, the unit of displaced labour would depend on dissavings and/or handouts from the government.

The industries that will weather all these relatively well will be those that have income inelastic demand for their products. After all, even if one loses his/her job, one still needs to eat. Therefore, the basic triumvirate of food, shelter and clothing will do well. They will do even better if they are large enough to reap the cost savings of adopting new technology bearing in mind that labour gets cheaper relative to automation and robots as more and more labour gets displaced.

The likely scenario is that this pace of change will be more acceptable in developed, ageing countries where labour gets more scarce with each passing year. In developing countries, there might be possible problems as highlighted in this article. When you have a young, growing population without jobs, that’s just a recipe for disaster.