Archives for category: Economics
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Who can resist those cute, kitty eyes?

 

Lately, when I feed my cat in the morning, he’s been displaying ‘hyperbolic discounting’.

Hyperbolic-what?

Hyperbolic discounting is what economists call the concept of valuing the present much more than the future.

It explains why people choose to light up a cigarette even if they know that it increases their chance of getting lung cancer or why some people choose to have that extra helping of butter pudding even though it could lead to all the costly downsides of obesity.

My Cat and his Food

So, when we feed our cat his breakfast which consists of one can of tinned food (usually chicken), we usually top up his timed feeder with dry food as well. Funny thing about him is that prefers his dry food to his tinned food. In my mind, it’s like preferring bread to meat.

It’s weird but hey, that’s our cat for you.

Anyway, lately, he’s begun to pause when I start to top up his feeder and to get him to eat, I add some dry food to his dish of tinned chicken.

What he should know is that the sprinkling of dry food that I add to his dish comes from the dry food that goes into the feeder. In order words, my cat is consuming some of his future food in the present.

But it all makes sense

Actually, if you were my cat, discounting the future heavily should make sense. After all, his timed feeder goes off a few hours after breakfast. In cat terms, that is probably an eternity.

More importantly, there’s no compounded interest from leaving the food for later. Five pieces of dry food now are still going to be five pieces of dry food later. So why bother waiting till later?

Of course, he also does it because unlike my wife, he knows he can bully me to do it.

 

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Light selection this week because I was reading the very good Atomic Habits by James Clear as well as a few articles on value traps in stock selection (more on these in the weeks to come).

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November Macro Update: New Employment Among Highest Since 2000 (The Fat Pitch)

A collection of statistics on the U.S. economic situation. Key points being that the U.S. economy is still going strong and therefore we can look forward to more rate hikes in the not-so-near future. The Fed didn’t raise rates in November but they are still expected to raise rates once more in December and three times next year.

Anyway, the money shot from this link is (emphasis mine):

Equity prices typically fall ahead of the next recession, but the macro indictors highlighted above weaken even earlier and help distinguish a 10% correction from an oncoming bear market. On balance, these indicators are not hinting at an imminent recession; new home sales is the only potential warning flag (its most recent peak was 11 months ago) but it has the longest lead time to the next recession of all the indicators (a recent post on this is here).

As Chuck Prince, former CEO of Citigroup famously said, ““When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

I guess the party’s still going strong in the U.S.

 

The New Three-Legged Retirement Stool: You, You, And You (Financial Samurai)

U.S. context but still very applicable to Singaporeans.

There used to be a lot more levers you could count on for retirement in Singapore. All civil servants used to have pensions (an auntie who’s in her late 60s was in the last batch that qualified for pensions).

Right now, I would say that Singaporeans have to rely a lot more on themselves. CPF is a decent system IF you have any money left in there after paying for your home.

If you have a big mortgage that is being paid off over the next 25-30 years, then you must hope for either (a) an increase in your pay and/or (b) an increase in home prices. That way, the burden of housing will decrease and there will be an option to cash in your home equity in your retirement years.

There is one more lever for some Singaporeans: hope that you inherit enough from your parents. For people in my students’ generation, this will be an increasingly attractive proposition as the demographics will be in their favour. Of course, this is provided there’s anything left after their parents spend on healthcare.

 

So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried… (Early Retirement Now)

A good take on sequence risk and it’s always good to point out that most people end up retiring at the top of the cycle. Subsequent drops in the market can cause a (temporary) drop in wealth and this may affect your standard of living in retirement.

What to do about it? Go on to the link to find out.

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So check this out.

CNBC reported that Southern California suffers its worst housing slump in over a decade with home sales and prices much lower than the year before and historical norms. I’m not too surprised that prices are much lower than recent history because you have to remember that the housing boom of the first decade of 2000 caused prices to be inflated.

From the article, what’s more worrisome is this (emphasis mine):

LePage noted that while the median sale price was up 3.6 percent year over year in September, the principal and interest mortgage payment on the median-priced home was up 14.2 percent because mortgage rates increased about 0.8 percentage point over that period.

It appears that interest rate hikes are beginning to have an impact on the housing market in the U.S.

 

Mortgages in Singapore will get more expensive

In Singapore, things are still pretty ok. I haven’t heard much about homeowners complaining about the interest on their mortgage.* Most homeowners in Singapore are on some form of 25 to 30-year loan with floating rates so interest rate hikes in the U.S. will definitely hit home at some point.

The reason why it hasn’t hit home is probably due to some combination of the fact that we’ve allowed the U.S. dollar to appreciate against the Singapore Dollar (the USD has gone from about 1.31 since the beginning of the year to about 1.38) and the fact that regional currencies (like the IDR) are doing worse than us**.

If the SGD moves in line with the USD, we’ll kill our trade with Indonesia but if we don’t allow a full adjustment of the exchange rates, we’ll have to run our stash of USD in our reserves down. I suspect this is the middle of the road scenario that MAS prefers unless interest rate hikes in the U.S. start to pick up even more. When that happens, we’ll have less choice but to have rates in Singapore follow the path of U.S. interest rates a little more closely. If you want to understand the mechanism, I have a post on that here.

Back to interest rates, our 10-year Singapore Govt Bond yields have been moving up which is great news for the many mom-and-pop investors that love the Singapore Savings Bonds (SSB) but from the yields, you can also see that short-term yields are heading north (see the chart in the post).

 

Back-of-the-envelope Calculations

I’ve said it before. Singaporeans are obsessed with property.

Recently, two close friends of mine bought new properties for their own stay. A reasonable guess is that one of them took a loan of $1m and the other, a loan of $1.5m. This means that a reasonable estimate of their mortgage payments (assuming it’s a 30-year, 2% p.a. loan) comes up to $3,696 and $5,544 per month respectively.

Just picture that. The median household income in Singapore is $9,026 so obviously, my friends are doing much better than most people.

Both their spouses work (albeit one less than the other) but even so, to service the loans from their CPF contributions alone mean that their household monthly incomes must be $16,069.57 and $24,104.34 respectively. That’s certainly possible for two adults working white-collar jobs close to the peak of their careers. However, if their incomes are any less than those numbers, then they will be servicing a decent amount of the loan using cash.

My worry for them is that it doesn’t leave any room for bad luck or errors.

For the next 30 years, they will essentially have to hope that the family doesn’t experience any shortfall in income due to loss of jobs. It will also mean that they have to find a job that either pays as well or better in the event their current work environment is no longer as fulfilling as it once was.

Looking further down the road, if they use their CPF-OA to service the mortgage, then I hope they are putting some of their cash aside for life after work. If they are using cash out of pocket to service some of the loans, then life after retirement becomes a lot harder.

In any case, what my friends have done is ensure that for the next 30 years, they have to play a very strong offensive game. They have to continue to work as hard as they have or even more to find other sources of income.

Oh yes, and they have to hope that interest rates don’t go up much.

 

It all comes down to rate hikes in the U.S.

Which way the markets are going to move will depend heavily on future rate hikes. I’m pretty sure we haven’t seen the end of rate hikes because the U.S. economy has been reporting strong numbers on the employment front. That’s also what the markets seem to expect and the Fed could even throw everyone off by hiking more than expected.

The point is, I’m quite sure I’m not alone when I say that no one is expecting interest rates to get lower in the near future. If anything, we need to expect that interest rates will go up. And if you’re not comfortable seeing the interest rates on your mortgage go up at least a percentage point, then I guess you’re in trouble, my friend.

 

Notes:

*This would apply more to investors that own private property in Singapore. HDB flat owners have the choice of taking the loan from HDB directly which pegs the interest on the loan to the CPF rate + 0.1%. I don’t think CPF rates will move up and cause more pain to flat owners with a mortgage.

**Against the USD, the IDR has depreciated more than it has against the SGD.

Very long weekend if you took leave on Monday.

Happy Deepavali to those celebrating it.

books on bookshelves

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Junk Bond Bubble in Six Images (Mish Talk)

You know what they say: always follow the money.

If you want to look for where the seeds of the next crash are, you don’t have to look any further than where debt has been building up and therefore, is more likely to implode.

With interest rates going up at a quicker pace as compared to past years, debt serviceability will become an issue for more risky borrowers. If the proceeds from borrowing went into (a) saving a sinking ship, or (b) unproductive assets, that will also be a problem for those who borrowed thinking that rates are low.

Mish’s charts also show what all this could mean for the equity markets.

 

What Today’s Trend Following Sell Signal Implies For The Months Ahead (The Fat Pitch)

I’ve heard of Meb Faber’s signal before but it totally fell off the radar for some reason. I think it’s because I looked at how the signal would have applied to the STI and realised that the whipsaw from buying and selling wasn’t my cup of tea. The findings from the paper are impressive though.

Anyway, if this is triggered on the S&P…

As the post says, there’s a fair chance (about 50-50) that we’re about to see more pain in the markets.

 

The Road To Burnout Helped Me Find My Purpose (The Physician Philosopher)

I read this via Minimalist in the City and the post resonated with me because for those of us who have been working for a while, it’s no surprise that there are shitty aspects to our jobs. Some people may love what they do but even then, they cannot deny that some parts of the job suck. For example, I may love to teach because I get to share and discuss stories and ideas but I hate to deal with all the administrative tasks that come with the job.

I don’t think I have, or even will, hit the burnout stage in my current job but there’s no doubt that I wouldn’t want to be there all the way till I retire/die like some of the older colleagues.

Fortunately for me, and unlike the doctor in the post, I didn’t have to wait until I started working to figure out that I had to build some sort of money machine in addition to the income that I’m getting from my job. It’s still a work-in-progress but I can definitely see it coming together.

If you love your job but haven’t thought about not relying on it for income, I suggest you start today.

Creative Destruction (Humble Dollar)

With the recent emphasis in Singapore on lifelong learning, I thought that this post is quite timely. It goes to show that being adaptable is a necessary skill in life because it seems that a core feature of life is the constant change.

With all the advancements in A.I and robotics, I suspect that both white and blue-collar jobs that are fairly routine will be the first to go. The good news is that the change will happen quicker in countries where the infrastructure was never laid and therefore more open to new forms of organisation. For example, think about how China was so much quicker to adopt mobile payments than more developed countries like Singapore or Japan. In fact, a lot of transactions in Japan still rely on cash. At least in Singapore, we have that dastardly system called “NETS”.

 

Public Pensions for Sale (part 1 of 3) (The Intercept)

Amazing account of how the people running some of the public pension funds sold out to Wall Street. Very long read but this is what journalism is about. Classic examples of information asymmetry and agency problems at work.

airport bank board business

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As of yesterday, I think we can finally say that sentiment in ALL major markets have turned. For those of us outside the U.S., I think we’ve been feeling this way pretty much since the 2nd quarter of the year.

Well, for those in the U.S. markets, welcome.

As of yesterday, the S&P 500 is a whisker away from correction territory while the Dow is also almost there. Asian markets have had it much worse; The Shanghai Stock Exchange (SSE) composite is officially in a bear. And so is the Hang Seng. The Straits Times Index (STI) is also a whisker away from bear market territory.

 

What the Market Giveth, the Market Taketh Away

Not too long ago, the markets proclaimed Jeff Bezos the richest man in the world thanks to the rising valuation of Amazon stock. As of yesterday, Amazon’s value fell below Microsoft’s, taking $11 billion off Bezos’ wealth.*

This isn’t to say that Amazon is a bad company or that they are in trouble. It just shows how stretched valuations were. Even with yesterday’s drop, Amazon has a P/E of 130. Just imagine how much Amazon has to grow each year for decades in order to justify that sort of valuation. The danger for stretched valuations is that any hint of danger to the growth justification story and Amazon’s value will get hammered, just as it did on Friday.

The other point is that those newly minted millionaires and billionaires have to be careful when they first ascend the lists. It’s usually during times of great optimism and growth that these people suddenly find themselves among the richest in the world. The problem is whether their riches will still be there when the tide goes out.

In retirement planning, this is known as sequence risk. It’s pretty often the case that many people retire at the top of the market cycle because that’s when their wealth is the most. The problem is whether their wealth remains at that level after the market cycle turns. This is important because if their wealth gets decimated due to the downturn in the cycle, then these new retirees may find it difficult to remain retired as their wealth would no longer be able to generate the kind of income they need to live the rest of their days without income from a job.

 

The Economic Story

Of course, what’s going on in the markets is a reflection of where economic reality on the ground and where people think the economy is headed. The sudden change in sentiment in the market while government bodies are reporting great economic growth numbers is probably a reflection that interest rate hikes have come home to roost.

Rate hikes have been a feature of the environment since late 2015 but it’s only with Powell’s recent moves that the hikes have started to hit a little bit harder. This is obviously the beginning and further rate hikes, which the markets have been pricing in, is going to hit harder.

In Singapore, we’re definitely going to get good GDP numbers for this year (that’s pretty much a given). The question is, what will the numbers for next year look like? Currently, MAS still expect next year’s growth to be quite decent (above 2.5%) but that could easily change if a global recession hits us.

 

What to do? What to do? What to do?

If anything, I would say that here in Asia, a buying opportunity is on the horizon. Valuations in our markets are undemanding. The STI’s P/E and PE10 are less than 15x. In fact, another drop of 300 or so points in the STI will see us at valuations on par with the depths of the Global Financial Crisis (GFC) and 2016.**

Of course, what you CAN do is constrained by your budget. If you were happily buying into the market in 2017 as prices rose and have been holding onto assets from then up till now, your hands are pretty much tied. If you have regular savings socked away, then you probably have enough bullets waiting for you to pull the trigger.

The other thing to remember is that even when you think things are cheap, prices could still go down further. Buffett is famous for being early. I remember seeing CNBC plaster his quotes about how he’s a net buyer of U.S. stocks throughout 2008. Of course, his game is a little different from yours and mine because he has this ridiculous cashflow from Berkshire’s operating businesses and insurance operations. You and I? We probably have savings from our salary as well as dividends or other passive income that could be cut in the depths of a downturn.

Anyway, long story short. It may be a good time to buy but you may have to live with being early.

 

Notes:

*This is Forbes’ way of calculating how much someone is worth but let’s be realistic – Jeff Bezos himself knows that there’s no way he’s worth that much because if there was even news that he was trying to cash out his equity stake in Amazon to realise whatever Forbes says he’s worth, the stock would crash and he would automatically be worth much less. Billionaires know this and only the really insecure ones care about which position they are on the Forbes’ rankings.

** Not many people realise this but 2016 was one of the best times in recent years, valuation-wise, to buy into the markets. Markets in early 2016 were actually down about 30% from the highs made in 2015. We hit bear market territory but not many people realised it and the bear market was over pretty quick. Unfortunately, I know of many people who waited on the sidelines thinking that the markets would go down further even though its PE10 was already lower than that during the GFC.

This won’t be a complete run-down of the investment characteristics of the bond. If you want a detailed take on the attractiveness of the bond, you can check out either Financial Horse’s (link here) or Investment Moat’s (link here) post.

Instead, I want to comment on a few things regarding the media’s profiling of the bond and a hidden factor that not many people seem to be focusing on.

Media’s Profile of the Bond

On Wednesday, when the offer for the bond was first announced, many of the local media outlets ran the story with a focus on how the bonds return a “fixed 2.7%” per year. For example, Channel NewsAsia (link here) ran this:

The five-year notes, which will mature on Oct 25, 2023, offer a guaranteed fixed interest rate of 2.7 per cent, the Singapore state investment firm said on Tuesday (Oct 16). The interest will be paid at the end of every six months.

Now, my problem with this is that if the media has to highlight to the public that bonds return a fixed amount, then maybe what the public needs aren’t bonds but more investor education.

Plain vanilla bonds are pretty easy instruments to understand and if your target audience doesn’t understand bonds to the extent that they need to know that it returns a “fixed 2.7%” per year, maybe they shouldn’t be buying bonds in the first place.

I’m not sure if any of the media outlets bothered to explain why the bonds return a “fixed 2.7%” per year because, in the secondary market, they could possibly return more or less than 2.7%. Understanding this is crucial to understanding bonds.

The Main Risks of this Issue

While the media correctly emphasised Temasek’s credit quality in order to assure retail investors that they would most probably (I’d put it at 99.9%) get their money back upon maturity, the media didn’t point out that with high-quality bonds such as this, the core risk is not so much with default but with inflation.

If you subscribe to these bonds, the main risk, in my opinion, is getting back less than what you put in, in terms of purchasing power. If you have been tracking the core inflation rate, you’ll see that 2.7% isn’t even a percentage point higher than the recent core inflation rates of 1.9%.

Furthermore, if you have a huge chuck of change stuck in these bonds when the market crashes, there is an opportunity cost of deploying funds in the market. The bonds can be sold in the secondary market but at what cost? Will the bonds still be priced at par when the markets turn south?

In my opinion, that’s pretty unlikely because investors don’t fly to the safety of corporates in the event of a market crash. This means that the bonds would probably be priced below par in the event of a market crash.

Conclusion

Any investor considering the Temasek Bond will realise that the rate of return is better than a savings account and slightly better than a fixed deposit or the CPF-OA. But in return, you will be giving up the chance to effectively deploy cash in the markets over the next 5 years if there is a crash (which seems more and more likely by the day) as well as the fact that the return on the bonds may barely cover inflation.

Warning: Long read and it’s really for econs wonks.

 

gold link pocket watch

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Last Sunday, I wrote about how interest rates in Singapore have to go up because of rising interest rates in the U.S. I suspect many people don’t know the mechanism behind this so I thought I’d explain how it works for Singapore.

But first, we need to know what interest rates are.

Interest Rates

It’s the rate that banks charge you when you take a loan. Similarly, they are also the rates that the banks pays you in order to deposit money at the bank and keep it there.

Of course, the rates that the bank pays a depositor and the rates that banks charge borrowers cannot be the same but they are related. This describes the most fundamental way a bank makes money — by borrowing money from depositors and lending out most of the deposited sums at a rate higher than the rate that the bank pays a depositor.

How Banking Works

However, the fundamental issue with making loans with depositors’ monies is that if a sufficient number of depositors all want their money back at the same time, the bank will be in trouble because the money has been lent out and the loans may not be due for some time. This is known as borrowing short and lending long.

Usually, there aren’t problems because most depositors don’t close their accounts all at once and as long as you have enough depositors that are convinced that the bank is going to be able to return their monies when they want it, the bank will be fine.

The bank will also be fine as long as the monies that they’ve lent out gets repaid with interest included. This is where the basic job of a banker is to ensure that the borrower is credit-worthy and/or has collateral that the bank can seize in the event that the loan goes sour. Of course, sound bankers will make sure that they aren’t overexposed to any one industry so that the bank can’t be brought down by any downturn in any one industry.

However, what’s described in the preceding two paragraphs doesn’t erase the fact that banks still face the problem of “borrowing short and lending long”. This is where the banks can borrow in the credit markets to overcome any short-term liquidity needs. The rates that banks have to pay to borrow in these markets are the Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR). (see here for an explanation of the difference between the two.) More importantly, you have to understand that SIBOR and SOR represent the cheapest rates that a bank can borrow money for and if these rates are the cheapest, then if these rates go up, then all other rates (the rate paid to depositors and the rate charged to borrowers) will tend to increase as well. In Singapore, the rate quoted on housing loans are typically pegged to SIBOR or SOR and therefore, the SIBOR or SOR will directly affect the interest rates paid on housing loans.

Why Interest Rates in Singapore tend to follow the U.S.

Lately, the U.S. federal reserve has been making headlines for raising rates and how they’ll probably raise interest rates a few more times in 2019. The Federal Reserve is the Central Bank of the USA and effectively acts as the lender of last resort. This effectively means that any bank under the Fed’s jurisdiction can borrow (or be forced to borrow) from the Fed to cover their short-term liquidity needs. The interest rates charged by the Fed are essentially what SIBOR or SOR is to banks in Singapore.

At this point, some people (and this happens for many of my students) wonder why can’t the Monetary Authority of Singapore (MAS), Singapore’s central bank just hold interest rates in Singapore steady or independently of what the Fed in the U.S. is doing.

The answer to this lies in what we call ‘The Trilemma” or “The Impossible Trinity”.

 

red triangle

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The Impossible Trinity

In economics, the impossible trinity says that any economy has to choose between:

  • Controlling the exchange rate
  • Free flow of capital
  • Independent Monetary Policy (i.e. controlling interest rates)

In Singapore, we’ve chosen to allow free flow of capital and to have some control over our exchange rates which is why interest rates in Singapore are greatly influenced by interest rates outside of Singapore.

Before we look at why this happens, let’s look at why we in Singapore would want free flow of capital and to control the exchange rate.

Free Flow of Capital

First of all, Singapore is a financial hub for South-East Asia. This means that money has to be able to flow in and out of Singapore with very little to no restrictions. This is important for a few purposes but mainly it’s important for investor confidence and trade.

If you want foreign investors to put their money to work in your country, you have to reassure them that their money won’t be at risk of sudden confiscation, suspension or devaluation. This is why free flow of capital is necessary to attract foreign investors.

The second reason is trade. For the buying and selling of goods to take place, money needs to exchange hands. Since Singapore is a global trans-shipment hub, we need to ensure that money can exchange hands here to facilitate the buying and selling of goods. Once again, if we don’t have free flow of capital, that can’t happen.

Controlling the Exchange Rate

The issue of trade also leads us to the point on exchange rates. Buying and selling of goods typically happen in local currencies. In order to a company in China to sell something to Singapore, the company in China needs to receive Chinese Yuan (RMB). That means that whoever is buying the good in Singapore needs to exchange their Singapore Dollars (SGD) for RMB before the trade can take place. Similarly, if we’re exporting things to the USA or elsewhere, an exchange of foreign currency needs to happen.

If the value of the SGD fluctuates greatly, no one would be willing to accept SGDs in exchange for goods. Therefore, a highly unstable currency leads to a breakdown in trade or the use of alternative currency (e.g. the highly inflationary environment in Venezuela right now has lead to Venezuelans using alternative currencies like the US dollar).

Trade, being such a huge component of Singapore’s GDP, requires that the SGD remains relatively stable. Furthermore, as we import quite a lot of goods and resources to our daily living, having control over our currency means that we can retain some control over inflation as well. Controlling interest rates won’t be much of a lever on inflation since most of our inflation will be ‘imported’ i.e. our inflation rate depends greatly on the price of the goods and resources that we’re importing.

Why We Have to Give Up Control Over Interest Rates

Since we choose to have free flow of capital and control over the exchange rates, the impossible trinity says that we have to give up control over our interest rates. Let’s look at what happens when monetary policy between Singapore and another country, for example, the USA, diverges. In fact, this is exactly what’s happening in the world today.

As the Fed raises interest rates in the U.S., it becomes more attractive for investors/depositors to deposit money in the U.S. Investors in Singapore (assuming rates haven’t moved relative to the U.S.) will tend move their capital from Singapore to the U.S. Remember, in Singapore, we have free flow of capital so this can happen.

However, in order for this movement of capital to happen, investors need to exchange their SGD for USD. Selling the SGD to buy USD causes a depreciation (appreciation) in the SGD (USD).

Singapore, or rather, the MAS, in wanting to retain control over the exchange rate will then have to buy these SGD being sold in order to prevent the SGD from depreciating too far. And what does MAS buy SGD with? Why with foreign currencies of course. The question is where does MAS get their foreign currency from?

The answer is that foreign currency first enters the country’s financial system either for the purposes of trade or foreign investment. MAS facilitates the conversion of these foreign currencies to SGD. The excess foreign currency held by MAS is placed in our foreign exchange reserves where they are used to control the exchange rate as described in the preceding paragraph.

The problem is that if such a scenario continues, MAS will eventually run out of foreign currency and will have to let the SGD depreciate greatly. This is exactly what happened to the pound (which Soros is famously known for betting on) in the early 90s and other Asian currencies during the Asian Financial Crisis.

Therefore, MAS cannot allow there to a difference in interest rates for too long. Specifically, if rates outside of Singapore are much higher than the rates here, MAS has to either allow the SGD to depreciate or interest rates in Singapore have to rise in tandem with rates in the U.S.

Conclusion

In sum, it’s been a long, long post but if you’ve read this far, I hope you’ve gotten a better understanding of why rates in Singapore have to follow rates outside of Singapore (particularly the U.S. as financial markets there are huge). If you understand this, I’d say that you already have a better working knowledge of SGD and interest rate movements than even some people working in the banks.

The first week of October is over!

Weather has been crazy hot and Howard Marks’ new book is out. Funny enough, on the Kindle, it’s about a buck cheaper than the pre-order price. No perks for pre-ordering.

books on bookshelves

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Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father (New York Times)

Someone’s finally broke news about Trump’s finances and the origins of his wealth. It’s amazing that someone who’s been lying about how he obtained his wealth has managed to hoodwink people for so long.

What’s even more amazing is that this person has managed to become POTUS and there’s nothing that the citizens of the USA can do about having someone this dishonest represent their country.

By the way, Singapore has its fair share of ‘financial gurus’ that purport to teach you how to become wealthy like them. I’m willing to bet that 9 out of 10 of them are rubbish. If they can reproduce their investing returns over a 20-year period, you can believe them.

 

All the nightmares for stock investors start in the bond market (The Business Times)

 I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

– James Carville, advisor to former U.S. President Bill Clinton

The BT ran a piece (cross-syndicated from Bloomberg) that tries to find a cause for the drop in markets last week and namely, it’s about how yields in the 10-year treasury spiked last week.

The article also cites a number of money managers who are concerned about the high debt levels and the damage that higher yields will cause. What’s interesting to me is this quote from the article:

“Leverage is near all-time highs, and companies used tax reform proceeds for buybacks instead of paying down debt,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors, which manages US$40 billion. “More than triple the debt that came due in 2018 will be due each year from ’19-’21. If yields go up, there’s real concern about companies’ ability to reissue and keep their leverage.”

If triple the debt IS coming due in the next 3 years, then there’s going be a fair portion of it refinanced at higher rates. The higher debt repayments can only be sustained if growth is sustained. That is something we won’t know until 2019-2021 comes around but what we can say for sure is that it increases the odds that things don’t turn out well.

In my own circles, I just heard from a friend about how his friends are feeling a bit more stretched now that mortgage rates are moving up*. The funny thing is he said that his friends are feeling stretched on their mortgage payments because the bank’s raised their rates by 50 basis points.

My first reaction was, “50?! Wait till they experience a 150 basis points increase.”

By the way, even a friend of mine who works in a bank doesn’t expect rates to increase to anywhere near 5%. But this is because we’ve seen interest rates remain so low for so long. Unfortunately, many people in Singapore who’ve overstretched themselves on housing are on 25 to 30-year loans. This increases the probability that they may see a day where interest rates are 3-5% instead of the 1-2% we’ve experienced over the last decade or so.

This, my friends, is why you shouldn’t pay too much for housing.

 

Why big companies squander brilliant ideas (The Undercover Economist)

A brilliant article for those who want to understand why organisations fail to change for the better. The article looks at companies and the military but you could extend the same logic for any large, incumbent organisation.

There’s a theory I read somewhere on why large organisations fail to use innovation to improve productivity and that’s because large organisations already have a structure in place that provides cashflow or profitability and the innovation while useful in the long-run is painful in the short-run. Most times, having the innovation means having to retool or start from ground zero. This explains why mobile payments caught on so fast in places like China (with a less developed existing payments system) while it hasn’t caught on so much in Japan or Singapore (with already established payments systems).

That’s basically also the gist of the article.

Now, applied to the local context, you can see why it’s so hard to expect political systems and other branches of government to change. For example, in education, there’s been a huge push towards skills and other forms of assessments other than exams for entry requirements. It’s been the same where I teach.

Unfortunately, while the admissions system was forced down our throats, they haven’t forced us to make changes at the assessments level. This means that we’re taking in students who are less academically-inclined and forcing them to go through a course that hasn’t moved away from exams and tests. Us teachers are still questioned about the results of the modules we teach so of course, that’s what our focus is going to be.

In short, no matter what you see about big changes in government policy, remember this article because you can’t change one part of the policy and expect it to be equally well received by other parts of the structure. And if the rest of the structure/organisation doesn’t accomodate, then the policy probably won’t be very effective.

 

 

Notes:

*The interest rates on mortgages in Singapore are typically floating rates tied to SIBOR or SOR. These rates are heavily influenced by interest rates around the world (particularly, U.S. interest rates) and since rates have been moving up, our mortgage rates have been moving up as well.

What a difference a week makes! Markets have rallied strongly to end September on a positive note. To think that just one week ago, we were hovering somewhere near lows for the year.

This shows us how fickle markets can be.

books on bookshelves

Photo by Mikes Photos on Pexels.com

 

Undervalued Financial Advice (A Wealth of Common Sense)

The advice in the post above may not seem like financial advice but it is. Coming off the back of the whole “monk vs. warrior” thing that had been the focus on the Singapore financial blogging community last week, the advice in the post above seems particularly relevant.

 

Uber drivers and other gig economy workers are earning half what they did five years ago (recode)

No surprises here.

What’s reported in the article is also happening on our sunny shores. The only reason why so many people signed up to be Grab and Uber drivers at the beginning was because of the money they could make.

Unfortunately, the money that drivers could make was not just coming from the fares that they earned but it was partially subsidised by the respective companies blowing through the money that they had raised from investors. At one point, I remember reading about how Uber burned through $330m in one quarter.

Now that funding’s getting tighter (remember when the Fed started accelerating their rate hikes?), guess all these so-called unicorns are going to find it harder to find cash to burn through.

So, little wonder those working for them are going to feel the brunt of it.

 

BBRG: Iceland Found Another Way to Clean Up a Financial Crisis (The Big Picture)

Full story on the Bloomberg page in the link above but go read it to understand how an economy works through a financial crisis. Alternatively, you can go check out Ray Dalio’s new book (Psst…It’s free!) which gives a good framework for understanding these crises and how to deal with them.

 

FOMO in China is a $7 billion industry (Marketplace)

Finally, we come to China.

This is insane. I never knew podcasting was an actual business in China. If you see what’s happening in the western world, podcasting is merely an avenue for someone with an online presence to make his/her presence felt even more greatly. There’s already so many people giving away what is essential advice for nothing.

I guess this is what happens when you have less competition. After all, many people in China don’t speak English well enough to listen to podcasts. Furthermore, cultural differences might be great enough to exploit as a niche market.

I’m pretty sure if enough people speak good enough Mandarin, Chinese people won’t be paying for podcasts.

pexels-photo-164527.jpeg

Photo by Pixabay on Pexels.com

 

Howards Marks of Oaktree Capital just dropped his latest memo (“The Seven Worst Words In the World“). It may be somewhat of a promotional material for his upcoming book but if you are a serious investor, please go and read it. If you are a beginning investor, please go and read it.

If you care about money at all, please go and read it. It’s probably the most important thing you’ll read this week.

He makes very pertinent points on market cycles and he backs up a lot of what thinks about the current state of affairs with evidence that he sees in the markets today. It’s interesting that he also points towards SoftBank’s $100 billion venture-cap fund as a sign of the times. Guess who else pointed that out some months ago?

The funny thing is that I was also going through Ray Dalio’s “A Template For Understanding Big Debt Crises” and Dalio pretty much makes the same point as Marks does in his latest memo.

The point is that we want to be careful when there is too much money chasing too few deals.

But, but..Isn’t that Market Timing?

For those that think that this is market timing, it isn’t.

Timing the market means that one believes that one can predict exactly when the market is going to turn up or down. This is something that most of us in the fundamental camp don’t presume we’ll be able to do.

In fact, Marks makes it very clear in his memo that he doesn’t know exactly when this will happen. It’s just that, to him, it’s very clear that we aren’t in the part of the cycle where pessimism rules the day and bargains are aplenty.

In this environment, it’s more likely than not that bad deals are going to be done because prices (and the assumptions that the price hinge on) are too optimistic. The details of the mechanics behind why these sort of deals are done can be found in Dalio’s book.

For those that worship Warren Buffett, you should also realise that Buffett is keenly aware of these cycles. He famously shut down his partnership in the late 60s when there weren’t bargains to be found. Warren Buffett also tends to let cash accumulate when deals can’t be made at good prices.

His partner at Berkshire, Charlie Munger, also once said that the way they ran their insurance business was very counter-cyclical to other people. When too much competition drove prices down, they chose NOT to underwrite policies at discounted prices because they knew that these prices would eventually come back to haunt their competitors in a downturn and that’s when they would want to be writing policies.

Do Yourself A Favour

Having said all of the above, please DO NOT take what I’ve said as a signal to go to cash or gold or whatever other asset class. You have to remember that being completely out of the markets has a cost — You give up the returns that you could have got by holding risky assets.

A good example is a colleague of mine who has been (mostly) out of the markets since 2015. He’s missed out on what is probably a 5% per annum return on his capital as well as the 20% growth in the markets last year. For a person with his amount of capital to compound, that opportunity cost might easily be six-figures large.

To conclude, do your future self a favour and go read Mark’s latest memo and Dalio’s latest book.