Archives for category: Economics
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Cheap Money vs. Investor Psychology (A Wealth of Common Sense)

I’ve been saying this for a while (here and here) and I think WeWork is just another example of the times we live in. It’s funny how WeWork came up with their own metric to justify their valuations (or at least make their valuations seem less bad) but if you’ve read about what happened in the dot-com era, remember that at one point, analysts valued non-profitable tech companies on “eyeballs” (thank god the internet never forgets).

bItCoiN iS a SaFe hAvEn (The Reformed Broker)

‘Nuff said. Go read it for the takedown.

When Money Dies (Of Dollars and Data)

Great piece. Particularly on how The Market’s real returns in various countries is a better hedge against inflation than commodities like Gold. The article provides a logical and sensible take on what matters in the economy.

Krugman’s take on how Trump still doesn’t understand economics. Actually, at this point, I think everyone knows that Trump doesn’t understand much of anything except self-promotion.

But I particularly like Krugman’s take on how the U.S. has more to lose than China from the ongoing trade war.

Is your financial adviser really looking out for your best interest?

Of course, that’s a loaded question. The short answer is no.

Are their incentives aligned?

After all, the incentives for a financial adviser^ is quite different from the clients they serve. This is an example of the principal-agent problem that happens elsewhere where the agent that you hire (i.e. the adviser) is not acting in the best interests of the principal (i.e. you).

The main problem in Singapore is that the bulk of the remuneration that a financial adviser receives is commission-based. This creates two problems – one, your financial adviser has an incentive to sell you more product which you may not necessarily need. Two, your financial adviser has an incentive to sell you products that generate more commissions for them.

In Singapore, I find that the above translates into financial advisers having a tendency to sell products that have some form of savings or investment component rather than a products that merely provide protection.

It’s not surprising once you ask financial advisers which one pays greater commissions and I suppose this happens because the company generates a greater profit from savings/investment products rather than protection.

They may quibble that protection and savings/investment are two entirely different areas of needs but my retort then, is why only focus on products from insurance companies when it comes to savings/investments? If you were truly providing fair and unbiased financial advice, then it should not be limited to the products that you sell.

Many financial advisers tend to proclaim that they love helping their clients overcome some financial issues that arise due to misfortune, I often see insurance companies in Singapore rewarding their advisers based on how much sales they make. Ever heard of “Million-dollar Round Tables”?

In short, the way the industry currently operates, I doubt your financial adviser has your best interests at heart.

Information Asymmetry

The other problem is that for the common person, financial advisers would/should know more about financial advice than they do. This means that what they say may confuse you but the mark of a good salesperson is that you’ll be comfortable enough with the confusion to part your money.

The good news is that the asymmetry can cut both ways. With a little finance training, you may know more than your financial adviser.

I’m not sure if it’s because some advisers are more salespeople than research people but I’m certain that financial advisers don’t come up with the products they sell.

It’s pretty much like how car salespeople don’t know much about what makes the car good from an engineering standpoint and rely on what management or product development tells them about the product.

In some ways, it’s pointless for salespeople to question the product because they aren’t the ones coming up with it. Moreover, they need to put food on the table and therefore, whatever goods they are given to sell, they sell.

Case Study: Company X’s savings/investment product

Recently, my financial adviser from Company X* proposed a product/plan that requires that I put away $5,000 a year for 15 years and thereafter, I have the choice of withdrawing the money either at 60, 65, 70, or 75 years old. The amount of money I would receive is $137,966, $172,471, $214,073, and $260,073 respectively.

In his presentation, my adviser framed each choice as how much I would gain in dollar amounts upon maturity of the plan. My observation is that in every product schedule, dollar amounts are exactly how insurance companies present the returns of every savings/investment product.

What’s wrong with it?

I must admit that it didn’t occur to me right away even though I’m a CFA Charterholder. But that’s what happens when you don’t use your training much in your daily work. =(

Any decent finance student will tell you that the problem with such a presentation is that it obscures the actual yearly return and therefore makes it difficult to compare between alternatives.

After all, if I were to invest/save an amount of money and receive a return over a certain number of years, I must consider all the possible alternatives and pick the best one. The idea of opportunity cost is one of the most fundamental ideas in economics and is important for decision making.

In the above example, a simple calculation in MS Excel or with a financial calculator will reveal that the Internal Rate of Return (IRR) of such a plan ranges from 3.38% p.a. (for the earliest payout) to 3.79% p.a. (for the latest payout).

This plan seems like a raw deal because you could do better by putting your money in your CPF Special Account (SA) which currently pays 4% p.a.** and you could do that with greater confidence that CPF is less likely to default on paying you back. Of course, the CPF may lower their interest rates at some point in the future but if that happens, it might also cause increased pressure on Company X to deliver the promised returns.

Plus, the fact that the IRR calculated above is a nominal rate, the real rate of return (after accounting for inflation) by taking on Company X’s plan is likely to be something pathetic. My financial adviser may argue that it’s just $45,000 spread over 15 years but money is money; A bad deal is a bad deal and this smells like a very bad deal to me.


I think financial advisers hate me.

^Financial advisers in Singapore are more like insurance company representatives that sell insurance, endowments, investment-linked products and the like. They don’t typically advise on equities, bonds, ETFs and such.
*Not naming the company for obvious reasons.
**I know it’s slightly higher for the first $60,000 or something like that but for this argument, it’s not necessary.

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Gen Y Speaks: At 20, I ran a business with six-figure revenue. Here’s what I learned. (TODAY online)

I love how they’ve run a story on a local entrepreneur who’s candid enough to share her experiences. It’s also a nice story because the writer no longer runs her own business which is a nice contrast to the perspective that entrepreneurs must be married to their businesses forever and ever.

It’s like what I tell my students in economics class – opportunity cost tells us that if you want to start your own business, do it while you’re young because the opportunity cost of doing so is low.

That aside, one day I must rant about how we’re trying to promote and teach entrepreneurship in school. It’s my view that while the skills to be an entrepreneur can be taught, what ultimately makes entrepreneurs is their social and familial environment.

You can’t go out and run a business if putting food on the table is a concern.

3 property statements that don’t hold water (Property Soul)

To be honest, at some point in time, I believed in some of these statement myself.

I kind of learned that statement 1 and 2 didn’t always hold water when I saw my parents’ investment property become a liability instead of an asset.

Statement 3 is the most interesting one for me because I never really thought that hard about the backgrounds of the Asian families whose riches are so closely linked to property.

The other thing I like to point out about those who believe in Statement 3 is that property developers make their money building and SELLING property and not buying it as the common man does.

In short, it’s a different ball game.

Extreme Concentration of Global Wealth (The Big Picture)

Nice infographic.

And a sobering thought that the average Singapore should easily be in the top 10% in terms of wealth if you have a fully-paid up HDB flat and/or meet the retirement sum in your CPF.

Unfortunately for the pro-government types, people can’t eat bricks and their CPF statements.

The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors (OSAM)

Heard about this from this episode of the “Animal Spirits” podcast. I haven’t gotten through it but looks like a worthwhile read.

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Family Inc: Viewing Your Career as Investments (Investment Moats)

I think Kyith at Investment Moats is going through some sort of career transition and chanced upon this book. There is a nice bit at the front part of his post on the importance of human capital.

I written about it before (here and here) but it’s interesting to see how prevalent it is that people don’t consider their human capital as part of their net worth.

This is especially true when it comes to asset allocation. I know far too many people whose incomes don’t vary much and where the threat of redundancy is low with respect to economic cycles (think civil servants, doctors, etc.) and most of their wealth comprises spare cash in the bank or they lock up themselves up in some sort of low-yielding endowments.

On the other hand, it’s the very people whose incomes and jobs vary with economic cycles (think property agents, bankers, traders, business people etc.) that load up on risk assets with leverage to boot.

If there was anything that I learned some the CFA level 3 syllabus, if was this – that if your human capital is bond-like, you can weigh your financial portfolio more towards equities and vice-versa if your human capital tends to be more equity-like.

The Thing That’s Probably Blowing a Hole in Your Budget (A Wealth of Common Sense)

Ben Carlson has a great post on how a car is probably the worst of the three big forms of debt for the average American since a car is a depreciating asset while a mortgage and a study loan, arguably, helps you purchase an asset that increases your net worth.

A wise colleague told me the other day that he read on the papers that owning a car in Singapore is one of the major differences between comfortable retirement and a barely-there retirement for the average Singaporean.

Cars are darn expensive in Singapore and the COE only lasts 10 years. Also, public transportation is relatively affordable. So, yeah, I agree.

Double feature since there are on the same issue. NYT link via The Big Picture and the other sent by a friend.

It’s crazy to see how long and how low interest rates can go. But as I replied to my friend, it’s also this sort of environment that leads to asset bubbles as easy credit means that money has to find a place to be invested no matter how ridiculous the premise.

Initially, I thought that we were at the end of the cycle with all the new tech IPOs but it looks like the powers that be hope that this will continue for some time yet.

The other positive thing that this environment has going for it is that valuations, in general, are not at extremes, the masses aren’t making the easy money, and we don’t have the inflation necessary to force the hand of the central banks.

So perhaps, this party could go on for some time.

We’re halfway through the year! Time really flies, doesn’t it?

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The Fecundity of Endowments (Northwood Family Office)

A paper on safe withdrawal rates for long-horizon portfolios. The paper proposes a safe, simple, and dynamic approach to the safe withdrawal rate. Totally makes sense and I can’t imagine why no one thought of this before. (h/tip to Investment Moats for this)

Go read the entire paper. It’s only 8 pages long and not very technical.

Georgetown study: ‘To succeed in America, it’s better to be born rich than smart’ (CNBC)

I can’t say that I’m surprised at this finding.

I wonder if we’ll find similar results in Singapore or will we find that our much-vaunted education system is really a social leveller?

Some Good News For Retirement Savers For Once (A Wealth of Common Sense)

Ben Carlson breaks down the findings from a Vanguard paper and notes how stark the difference is between voluntary enrolment and automatic enrolment in 401(K) plans.

Ladies and Gentlemen, this is why CPF is forced upon you.

Unfortunately, along the way, the usefulness of CPF gets diminished by letting people use it for (overpriced) housing. Those who need CPF for retirement will have spent it on housing and those don’t…well, CPF is a drag on compounding wealth.

Lots on the economic and investment front this week.

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Tesla’s Travails: Curfew for a Corporate Teenager? (Musings on Markets)

From Prof. Damodaran comes this wonderful piece on Tesla’s valuation. I don’t read it so much for the accuracy of what Tesla’s worth but more for the thought process and analysis on what Tesla’s value should be.

How Many Hours Of Work Does It Take To Buy The S&P 500? (Global Macro Monitor)

Interesting way to value the S&P 500. Essentially, the higher the ratio of the S&P 500 to the average hourly wage from work, the more richly valued the S&P 500 is as it takes more and more hours of work to buy the S&P 500.

However, the average investor probably does not earn the average weekly wage.

Institutionalized nonsense (The Grumpy Economist)

The economic perspective on why the US labelling other countries as “currency manipulators” is wrong on so many levels.

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Elbow-to-Elbow in Jalan Kukoh: The Reality of Overcrowding in Singapore’s Rental Housing (RICE)

A good look at some of the poorest households in Singapore through the lens of a writer who has observed two families living in the estate. Singapore isn’t all about the stuff that you see in Crazy Rich Asians. Most of us live very different lives from what was portrayed in that movie.

However, the lives of those living in rental housing are even further removed from the experiences that the average Singaporean go through in a lifetime.

Not Efficient, But Effective (Of Dollars and Data)

Guilty as charged.

Too often, I think about efficiency rather than the likelihood of the job getting done. And ultimately, I think we want to get the job done rather than not get there at all.

For example, being fully invested in equities may get you to retirement in the shortest possible time due to the higher expected returns.

However, most people may not stick to the plan when they see huge drawdowns on their portfolio when the market crashes. This causes them to give up on investing and they end up worrying about money even after they have to stop work.

In short, maybe we need a rethink towards getting to our destination with the highest probability instead of getting to the destination in the quickest possible time.

Think effectiveness, not efficiency.

Now, before I get called up for questioning by the police, I need to say that the title of the post is a reference to a book of the same name. I’m not saying that MHA is lying. I’m just saying that in case they haven’t realised, their statistics needs more explanation and clarification.

There is a very good classic on statistics called “How to Lie With Statistics” by Darrell Huff that was written in the 1950s that every student of logic should read.

That book highlights some of the various ways that statistics, intentionally or unintentionally, can be used to muddy the waters and unfortunately, I think that’s what Minister for Home Affairs, K. Shanmugam did when he warned Singaporeans of how there are “very strong, coordinated efforts internationally as well as within Singapore“. Efforts to do what? Well, according to the mainstream media, to change Singaporeans’ perception of cannabis use.

Now, the minister may possibly be right about how the sinister forces of the western world and capitalism are trying to change Singaporeans’ perceptions of cannabis use in an attempt to expand their markets and ultimately, profits.

The MHA may also be right about the harmful effects of cannabis use. After all, this piece by Malcolm Gladwell in The New Yorker cites some of the studies done on cannabis use and it’s not all good. However, even The New Yorker story is cautious about being too definitive on the data.

The Misuse of Data

In the section on ‘Social Costs’, the article reporting on the issue cited “that the US state of Colorado, which legalised cannabis for recreational use in 2012, had reported an 8.3 per cent increase in property crimes and an 18.6 per cent increase in violent crimes from 2013 to 2016. “

I have no doubt that the statistics are true. Unfortunately, statistics can be misinterpreted and in this case, I think they have.

Why? Because I went digging around about other people’s thoughts on the issue and there are some out there that are in agreement with our minister and MHA and some of those those that oppose them.

Then, I found this report by the Colorado Department of Public Safety. The report is titled “Marijuana Legalization in Colorado: Early Findings” and was written in March 2016.

Now I haven’t read the whole thing (it’s 147 pages long over six sections) but in the executive summary, it clearly says:

It should be noted that the most fundamental challenge to interpreting data related to marijuana over time stems from unmeasured changes in human behavior concerning marijuana. Legalization may result in reports of increased use, when it may actually be a function of the decreased stigma and legal consequences regarding use rather than actual changes in use patterns.  Likewise, those reporting to poison control, emergency departments, or hospitals may feel more comfortable discussing their recent use or abuse of marijuana for purposes of treatment. The impact from reduced stigma and legal consequences makes certain trends difficult to assess and will require additional time to measure post‐ legalization. Additionally, for example, the increase in law enforcement officers who are trained in recognizing drug use, from 32 in 2006 to 288 in 2015, can increase drug detection rates apart from any changes in driver behavior.  For these reasons, these early, baseline findings should be carefully considered in light of the need to continue to collect and analyze relevant data. 

The point is that even if, as per the MHA factsheet, crime rates did go up, can the cause be attributed solely to the fact that cannabis was legalised? In fact, two points raised in the executive summary of the report are:

  • Colorado’s property crime rate decreased 3%, from 2,580 (per 100,000 population) in 2009 to 2,503 in 2014.
  • Colorado’s violent crime rate decreased 6%, from 327 (per 100,000 population) in 2009 to 306 in 2014.

So in fact, property and violent crime rates were higher prior to the legalisation of cannabis. So what gives? What’s the true story?

And the answer to that should be: “We don’t know yet.”

In the case of the statistics quoted by MHA:
– Did the increase in property and violent crimes rate coincide with it being a tougher economy? After all, we know that people who are more desperate turn to crime.
– Is the increase due to a low base or outlier? If 2013 happened to be an abnormally low year for crime in Colorado, any reversion to mean would cause an increase in the rates reported.
– Were the statistics statistically significant?

In short, the point I’m making is that any statistically sound person shouldn’t be drawing conclusions based on a few reported statistics without knowing the context of the numbers or knowing the veracity of the data.

The downside of certainty

From the MHA and the Law and Home Affairs minister’s point of view, the upside of being so certain about the data is easy to guess. For one, they don’t have to amend any laws. Or look bad for being so tough on drugs only to have academic studies say that they were wrong all along.

However, as with all things, upsides come with downsides.

So what’s the downside of being so certain as the MHA and Minister Shanmugam are?

The downside is that the justice system will be forced to come down hard on those who still consume and traffic cannabis. And it could potentially result in cases like this* where people in difficult circumstances become unwilling drug mules and if not for the appeals court, an execution would have taken place.

After all, how many things that were once considered to be bad are now not? In Singapore, Men sporting long hair in the 60s was once considered taboo; Fat was once demonised; and of course, homosexuality in Singapore is still a controversial topic.**

The downside of certainty is that over time, what you were once certain about can change.

I can accept that individuals or members of a political organisation or religion have their views based on anecdotal evidence but our government and government bodies need to be held to a higher standard simply because they represent all of us. They should base their decisions on facts and certainty rather than ideology.

*I know the case in question is about an illicit drug and not cannabis but as long as cannabis remains illegal, same thing could happen right?
**Homosexual sex is illegal but our society has become increasingly tolerant of homosexual relationships.

I’m really sorry that I neglected my blog. No “Best Reads” last week because I was busy with something.

But back to regular programming this week.

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From making waves to drowning in red ink: Hyflux, Tuaspring and how a business giant came undone (CNA)

A brief story of how Hyflux came undone. Maybe they’ll rise from the grave. Who knows? But the basic lesson is that regular folks who plonked a whole lot of cash into their bonds and subsequently lost it all kind of deserve to.

After all, we’ve seen this story before with the GFC, the dot-com boom and bust, the Asian Financial Crisis. To be more specific, Singaporeans should have learned something from the minibonds saga, NOL’s fall from grace, Chartered Semiconductors, and even further back, the Pan Electric Crisis.

Clemens on minimum wage (The Grumpy Economist)

Doesn’t matter which side of the minimum-wage argument you stand on. You will want to read this post to gain some clarity on the issue.

Fortune Analysis: The Tech Superstars Never Went Through Cash Like Today’s Big Burners (Fortune)

Great piece of research. Not the most academic but it does raise a lot of doubts on whether Tesla, Uber, Lyft, and Snap (basically representing the new-age tech) can be the next Google, Apple, Amazon, and Microsoft.

The short answer is no.

By the way, we have our own nonsense versions of the new-age techs here in Singapore in the form of Carousell, Grab, Honestbee (which seems to have one foot in the grave) as well as a host of others which have a much smaller user base (think: eatigo, Chope etc.)

Stop the Financial Pornography! (Of Dollars and Data)

Great, great piece!

Also, in Singapore, we have a proliferation of “how to get rich by buying properties with little or no cash down” kind of schemes being advertised (horror of horrors, our local paper even featured the people behind this scheme in an article, thereby giving them some legitimacy).

Read the article above and be aware that people who claim to have achieved some form of return, especially those in a short period of time with little capital, are not telling you the entire picture.

How To “Lie” With Personal Finance (Early Retirement Now)

Basic financial literacy stuff. Don’t skip it this unless you have had some sort of training in finance.

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How to Teach Basic Finance to Students (The Big Picture)

While the article is written in the context of the American Education System and Americans’ knowledge of financial literacy, the same can be said of Singapore and Singaporeans.

I like the points made on how financial literacy needs to be taught in order for it to stick . Namely, the lessons need to be hands-on, include repetition, and train critical thinking skills.

By the way, my school recently introduced financial literacy as a compulsory subject for students. However, I believe the execution leaves a lot to be desired.

Financial Superpowers (A Wealth of Common Sense)

Ben Carlson has come up with a great list of what it takes for someone to be financially well-off. It’s a great list but the last sentence of his post sums it up best.

Find me someone who is content with their life and I’ll show you a person who is truly wealthy.

What Makes a Great Investor? (Enterprising Investor)

From the official blog of the CFA Institute comes this gem which is really about how great investing is more of an art than a science. In recent years, the use of massive computing power to sieve through huge amounts of data has become very attractive.

With that, many people believe that the future of investing is largely hands-off and robotic. To be honest, I believe that this is best for those that do not do investing as full-time work. However, the necessary trade-off is that if you go with the mechanical approach, you’ll never be great.

The greatest investors need to be able to stay ahead of the curve and to zig when others zag. That’s probably not something a computer will be able to do just yet.

China bond defaults hit record in 2018. The 2019 pace is triple that (The Straits Times)

Uh oh. Look out below?

How gangs used Vancouver’s real estate market to launder $5bn (BBC)

Money laundering is fascinating me to no end. The article doesn’t really elaborate on how the perpetrators get away with it but it does highlight some of the reasons why the Vancouver real estate market has been a channel for these activities.