Archives for category: Economics

Postings have been light because I’ve been away on holiday.

The upside of it all is that I managed to get through two really great books and I highly recommend both of them if you’re looking to get smarter about the world.

Book 1 – The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

In the book, Harvard economist Dani Rodrik provides a compelling argument of how the conventional mantra of freer trade, financial liberalisation, and lower trade barriers may not be the best solution for all economies.

In my opinion, this book is a great counter-balance to the theories that every economics student learns at university. It’s also a great insight into how the economics profession seems to go through fads and that this latest fad hasn’t worked out all that well (cue the global financial crisis as well as crises in Argentina in the 1990s).

Anyone interested in world trade issues, the World Bank, IMF, globalisation, free trade, and politics should read this.

Book 2 – Billion Dollar Whale by Tom Wright and Bradley Hope

This amazing account of the 1MDB scandal focuses on Jho Low’s role in the whole affair. It’s a tale of how the immense greed fueled the actions of a few individuals. They siphoned billions of dollars from a state fund to their personal accounts and went on a spending spree that few individuals would ever experience in several lifetimes.

It’s also a tale of how Hollywood, the global banking system, and corrupt political systems endorse or enable such shenanigans to take place. After reading the book, I would be really, really disappointed in myself if I were Leonardo DiCaprio.

Despite Bill Gates recommending the book, Billion Dollar Whale has its flaws. For one, it focuses too much on Jho Low’s role in the affair which kind of diminishes the role played by other actors in the story. Second, it leaves out more technical details on how rules were circumvented or how Low managed to hoodwink supposedly smart people into carrying out the transactions. I would have loved to know more about how Low, or others, managed to concoct and execute the schemes that they did but I suppose that the authors did so to keep the main narrative going without having readers bogged down by more technical aspects of the various deals.

I’m currently making my way through ‘The Sarawak Report‘ which is the other exposé on 1MDB that focuses more on rot in the Malaysian political system. That should also be interesting.

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Neo-Nazis Bet Big on Bitcoin (And Lost) (Foreign Policy)

What do Neo-Nazis and Bitcoin fans have in common? A common sense of anarchy and distrust in the institutions that run the world today. Great read.

STAT FIGHT! want to have money when you’re old? Don’t have kids! (The Basis Point)

Chart says it all. But notice that Couples with children have more money socked away up until the point where they turn 65? Probably the drop in savings after 65 is because these couples help their children fund their marriage, starter home, or education.

Paul Krugman’s latest opinion piece is a must-read for those who think that robots are coming for your jobs. He was absolutely right about the Asian Miracle in the late 90s and I sense he’s right about this one too. In short, it’s not the robots killing the lower income class. It’s politics.

Diversification Isn’t Sexy (The Belle Curve)

A back to basics article on the definition of diversification as it applies to investing.

Sorry, there wasn’t a post last week because I was busy over the weekend. Regular programming resumes and my heart goes out to the victims of the terror attack on the mosque in Christchurch, New Zealand.

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Total compliance in financial reporting, but was it misleading? (The Edge Singapore)

Seriously good article on the Hyflux saga. Not one of those that pretends that it could have seen the future but more of a reflection on how accounting principles could have caused blindspots in the analysis of many analysts. Focusing on earnings would have painted a much more rosy picture than how economic reality eventually played out. By focusing on cashflows, one could see that betting on Hyflux was basically a bet that its plans go off without a hitch.

Buy, Hold… Profit? (The Big Picture)

The money shot is the animation that shows how longer timeframes provide positive returns even after accounting for inflation. The problem is: how many people are wired to wait that long? I’m willing to bet ‘not many’.

On Japan Sea coast, small firm shows scars of China’s economic woes (Channel NewsAsia)

A story about how trade woes are affecting a small firm in Japan that makes precision parts for auto-makers. Is it really due to trade wars or is it due to ‘peak car‘? Hmm…warrants more investigation.

Why inflation is good for us (The Undercover Economist)

Many people that worry about the national debt don’t really understand economics. Many people that worry about runaway inflation don’t understand economics either. Do yourself a favour and read this article.

The ‘Hidden Mechanisms’ That Help Those Born Rich to Excel in Elite Jobs (The Atlantic)

Really interesting read for those interested in the issue of inequality and class privilege. No surprises that these things happen but nice to see some academic work that explains how and why these things happen.

Let me start by saying that I have no insight or expertise on this. What I’m about to share are thoughts from more learned people and I suspect these guys are on the right track as opposed to the noise we hear from politicians and lobbyists.

And oh, the title is a nod to Hanauer’s article to his fellow billionaires.

The jury’s probably still out on who’s right or wrong but the following reads should provide some context and understanding to the matter.

Paul Krugman

Nobel Laureate, Paul Krugman wrote about Alexandria Ocasio-Cortez’s (AOC) proposed top tax rates of 70-80% in early January. I can’t believe I missed this until now but he seems to be a strong proponent of her argument. Also, AOC’s proposal isn’t based on fluff but studies by Emmanuel Saez and Peter Diamond who are two giants in the field of Economics.

Krugman’s take is both in terms of theory and historical precedence. The theory is that since humans exhibit diminishing marginal returns to utility, an additional dollar (or $1,000, in Krugman’s argument) provides more utility to a low-income person as compared to a high-income person.

By way of thought experiment, it means that an extra $1,000 to a low-income person would result in extra food, shelter and overall feeling of security (high additional utility) while a high-income person will probably just spend it on something frivolous, like an extra bottle of champagne (low additional utility).

Furthermore, Krugman points out that the high marginal income tax rate has historical precedence. The top rate through the 60s and 70s was in the range that AOC is proposing and GDP growth during that period was solid.

It may be a correlation but at least it shows that Republicans shouldn’t be dismissing the idea outright.

Tim Harford

While Harford may be no academic, he is an economist by training who clearly knows the literature well and while he doesn’t advocate for anything, he does point out what variables/assumptions must be necessary if you do advocate for a top marginal tax rate. He also points out where the details in the studies differ from what politicians are advocating for so I think he raises good points to note when advocating for/against what politicians are proposing.

His is a short post but nonetheless, instructive.

And finally, The Financial Times

I’m not really sure about the background of the author but he makes a good point that is summed up in the first sentence of the article:

Is Ben Bernanke the father of Alexandria Ocasio-Cortez?

The basic gist of the author’s argument is that the era of quantitative easing under Ben Bernake saved the economy and the banks, and bailed out the boomers (who happen to hold more assets) at the expense of the millennials (who happen to be wage-earners). This created an asset boom which then dashed all hopes of millennials ever owning homes of their own or attaining security over their finances.

What we’re seeing now is just the result of increasing wealth and income inequality play out in the political realm.

I’m not sure what’s right or how things will turn out but I believe that we need to keep all these things in mind as things play out.

Selectively Cheap (A Wealth of Common Sense)

A great read on how to budget for lazy people and also, in my opinion, how one should think about spending money. I’m still in the camp that believes that money is important and useful but only up to a certain extent. After all, ask someone who lacks money for the basic stuff like food, shelter, medicine, water, electricity and they’ll let you know how important money is. On the other hand, beyond a certain level of comfort, money doesn’t bring much more utility. If you need a good example of diminishing marginal utility, money is it.

Looking back at our 2018 finances (Minimalist in the City)

Always nice to look at how much other people spend on different areas of life. I’m rooting for this family to hit their FI goals.

Return of the Ever-Wrongs (The Big Picture)

It’s amazing how some people can be so wrong and yet so blind to being wrong. I know all about the Dunning-Kruger effect but still, for some people to be so blatantly wrong and yet not realise it, boggles me.

I mopped the floor, made a pretty decent instant noodle dish, cleared tons of stuff with wife, dropped a load of books off at the library for them to find new owners, and of course, I had to clean my cat’s litter box.

It’s so domestic, so routine and yet, there’s something blissfully peaceful about it.

Oddly satisfied with how this turned out

Juxtaposed against the story told in the Fyre Festival documentary on Netflix and it’s crazy to me how some people keep chasing the novel and the new, unaware that the promise of excitement could be the peak of the experience. When the actual experience arrives, it may just let you down, and more.

The documentary is a fantastic insight into how people buy into all sorts of hype and how some people can spin something from nothing. It’s also an instructive lesson on fraud as well as a cautionary tale on investing in pipe dreams.

The Fyre Festival

I’m a little slow on these things so when all the bad press surrounding the Frye Festival hit the news in May 2017, I didn’t really pay much attention to it except that it was some hyped-up party that never happened.

The Frye Festival was supposed to be some luxury music festival that many celebrities and (cringe word alert) influencers were supposed to attend. Of course, the celebrity and hype around that made it THE party to go to and people were actually shelling out hundreds to thousands of dollars for tickets and tens of thousands for a “VIP package”.

What eventually happened was that due to the inexperience of the main people in charge, the festival never really happened and was cancelled on the first night itself, having disappointed guests with subpar food, inadequate housing arrangements and barely any music.

Investing in pipe dreams

In the Fyre story, what’s really interesting to me is how the CEO, Billy McFarland managed to convince people to invest millions of dollars into his ideas which, from the footage, seemed to be just that – ideas.

At the end of the documentary, it also turns out that he had defrauded investors by inflating revenue numbers to convince investors to invest more and more money. And it was also this lack of cash that forced the company to cancel the festival.

The funny this is, Frye was supposed to be an app. It had nothing to do with organising music festivals until the founders thought it would be good publicity for the app since the app was supposed to be about allowing users to book artistes directly without having to go through any middlemen.

In the end, I guess the founders got too caught up trying to live the high life and be popular rather than concentrate on actually building an actual business that earns money.

And the investors? I guess it was a sign of the times. 2017 was the year that the markets were doing well. This was especially so in the U.S. Investors were probably flushed with cash that they could invest in what was essentially a hyped-up party with little projection of realistic returns.

Young People Just Want it Fast

Which brings me to the sad conclusion that the world today just wants things fast. Very few people below the age of 30 play the long game.

Maybe it’s seeing how people around them can raise money to fund pipe dreams. Maybe it’s seeing how some of their peers seem to afford the good things so easily. Maybe, just like the Frye Festival, social media has helped put blinders on kids that they think if so many people are able to live the good life, then they must be able to do so too. Otherwise, it’s a sign of weakness or being inept.

I’m saying this because I’ve seen too many students, former and current, behave this way. I see some of it in my younger brother too. Heck, I even see some of it in my friends, and we’re in our 30s.

Maybe I was lucky in that I got my way too often when I was younger. Now that I’m older, I’ve gone past the stage of reacting like Pavlov’s dogs when something new and novel comes about. I also find it silly when people talk about how good something is without regards to cost.

Am I one of the rare few? Is the continuous chase of the new and novel a human condition or it is more a manifestation of how the world works nowadays?

The Biggest Valuation Spread in 40 Years? (Meb Faber)

A spark of hope for those invested outside the U.S.

Shifting Risks in the Bond Market (A Wealth of Common Sense)

Yield curve flattening. ‘Nuff said.

The Rise of Netflix Competitors Has Pushed Consumers Back Toward Piracy (Vice)

Consumer behaviour is strange, isn’t it? Not really if you’ve studied econ 101. Basically, having to subscribe to other services means more cost for the consumer. Naturally, the consumer will turn to a cheaper (free!) option which is piracy. Content providers and creators can bitch all they want about piracy and the intellectual property rights but it’s their competitive behaviour that’s pushing consumers to the free option.

BBRG: Labor Market Is Doing Fine With Higher Minimum Wages (The Big Picture)

Another one for the Econ folk. Time to shut down the people who have only studied econ 101 and keep saying that a minimum wage will definitely cause an increase in unemployment.

It’s not so simple.

Given the rally in the markets from the start of the new year, a friend and I were discussing the likely direction of the markets. Now, we aren’t chartists nor are we professional economists or analysts* but my friend has a good sense for business and I…, well, I read a lot.

He was wondering about the potential implications of a slowdown in the Chinese economy and its impact on the world economy, and by extension, the world’s stock markets.

Based on what I’ve read, I think some serious shit could happen and I’ll lay out the conditions for it.

The Chinese Economy

It’s no secret that China’s economy is slowing down. It’s also no secret that the Chinese government has been trying to transition the Chinese economy from an investment-driven one to a consumer-driven one.

To a certain extent, China has been pretty successful in helping Chinese companies grow and gain the technological capabilities necessary for them to be world-class competitors.

If we just look around us today, many Chinese brands like Alibaba, Huawei, and Xiaomi have sizable shares of their respective industries. Within Asia, countries like Tencent (which owns the all-in-one app, Wechat) has also become so entwined with people’s lives that it’s going to be hard for their Western counterparts to gain a foothold. So, the bottom line is that it’s no secret that China’s investment-driven strategy has produced some results.

However, what many people outside of China probably don’t realise is how the Chinese government directed investment spending in China. It turns out that the Chinese government was leaving it up to the banks and its related entities.

And while the rest of the world recovered, this worked fine. Unfortunately, the returns started to slow down once the low-hanging fruit was picked and obviously, lots of money has been either lost through corruption or just bad investments.

The best examples of this are how much money was flowing into overseas property markets like Canada’s and Australia’s or how Chinese companies with non-existent business models (think bike-sharing firms like Ofo) expanded in so many markets so quickly.

In short, to paraphrase the Washington Post article in the link above, China’s debt-fuelled stimulus is getting less and less effective. Which brings us to the better question: What’s next?

China’s Gameplan

I’m not an expert on China but if I had to guess, China realised that returns on investment were slowing down due to diminishing returns and/or corruption were those who had access to the money were just misappropriating it and moving the money overseas into property and other forms of wanton spending.

Therefore, their solution to “pay off” the debt that was circulating in the economy was to have their domestic economy take over. If their households started to consume more and take on more borrowing in order to do so, the previously issued debts of the firms could be “rolled over” into newly created debts that would be borne by the consumers.

The second thrust would be for Chinese firms to expand overseas as much as possible to earn foreign currency. This would directly help pay off the debts created as it would be a return on the investment.

The third thrust is to have the RMB become more widely accepted as a reserve currency which is pretty much a variant of the first strategy as the world takes on more debt which “offsets” the amount of debt owed by Chinese firms.

What Could Go Wrong?

As 2018 showed, the Chinese consumer is not exactly picking up the slack from the firms. Although in part due to Trump’s trade war and the Huawei situation, Chinese consumer spending is projected to slow and evidence of it is showing up in the projected fall in iPhone sales as well as the drop in car sales.

As for the second thrust, Trump’s trade war, as well as a projected slowdown in most major economies, is making this strategy a no-go. Ofo looks like it’s preparing to go bankrupt which shows you how tight credit is in the startup space.

The third thrust is also unlikely to work even with China’s “One Belt, One Road” idea because that idea pretty much depends on China lending money to developing countries to build all sorts of infrastructure like ports and railroads. This means taking on more credit risk for the Chinese financial system which is the opposite of what China needs.**

Conclusion

Don’t get me wrong. It’s not like I don’t want China to succeed. China’s economy slowing will mean a lot of pain for the rest of the world. After all, it is the world’s second-largest economy. Much of Asia also depends on China to buy raw materials or supply us with goods.

What I’m saying is that China needs a lot to go right for it to restructure its economy and given the state of affairs in the world today, it really needs Trump to stop his ridiculous trade war and the fed to loosen credit so that Chinese firms can breathe easy.

Notes:
*Well, not likely those guys are likely to be any more accurate.
**Lending money to third world countries for infrastructure projects in which neither borrower nor lender has much experience executing is a disaster. China may have another agenda through this but that’s another story altogether. See Sri Lanka’s experience with their Hambantota port.

Markets have had a horrible December so far. For those outside the U.S., the whole year has been terrible. The problem with all of this is it only seems like it’ll get worse.

Here’s an opinion piece by former banker, and author, Satyajit Das, that was on Bloomberg and republished in The Business Times:

THE “everything bubble” is deflating. The fact that it’s happening relatively slowly shouldn’t blind us to the real threat: The world is dangerously underestimating how hard it’ll be to deal with the fallout once it pops. 
 

Frothy markets can’t disguise the warning signs. The shift to tighter monetary policies in the West is putting pressure on global equity and real-estate values. Even more critically, it’s weakening credit markets. Over-indebted emerging markets face headwinds from rising borrowing costs and dollar shortages. 

I don’t have any particular insight into the financial sector or the rumblings in the corporate debt markets but from what I’ve been reading, it seems that tighter credit markets have finally hit home.

What we’ve yet to see a a major default by a corporation that is Too Big To Fail. Once we have that, it’ll be the catalyst for a further drop in the markets that will take markets down to bargain bin territory.

A Market of Our Making

The funny thing is how this whole mess is a market of policy missteps. Barry Ritholtz made a good case for how Trump basically did everything wrong – he did a terrible job replacing a Fed Chief that’s more partial to a gradual tightening with one that’s more hawkish. He also screwed up on trade with his trade policy, and now it seems that he’s bent on taking the U.S. close to a shutdown.

Over in the U.K., things aren’t looking so hot either and you can argue that it all started with David Cameron’s promise of a referendum on Brexit. Now it seems that lawmakers can’t agree on Brexit and the deadline is looming.

Closer to home, one Dr. M across the Causeway isn’t making things easy for us. What and how big the fallout will be from the increase in tensions between Singapore and Malaysia remains to be seen but I’m pretty sure that any major hit to our economy and markets isn’t going to come from Malaysia.

Take cover but be ready

In short, I think things could get worse before it gets better. This is particularly true for U.S. markets because valuations there haven’t come down as much (major indexes there have only just reached correction territory).

For the local markets, things are cheap but we’re not quite at basement bargain levels. We’ll need at least another 7-10% drop in the index to take us there. And at that point, people invested in more leveraged counters like REITs will be feeling a lot of pain.

It’s been a terrible week for me. I was pretty much in bed for the first two days of the week and I couldn’t eat much until Thursday. Thankfully, I’m feeling close to a 100% now.

Hope your week ahead won’t be anywhere near as bad as mine was this week.

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The Big Read: Cryptocurrency crash offers industry the reality check it needs (TODAY Online)

Great read on the aftermath (yes, you’ve read it first. I’m calling it an aftermath) of investing in Cryptos with accounts from those who had substantial (relative to probably their own net worth) skin in the game.

Good lessons abound and I wish I had kept better records or accounts of what was happening in ’07, ’08 and ’09. I was only in university then and beginning to start learning about the markets but I remember how some guys were trading warrants and making/losing 5-figure sums in the room that us Honours year students were given to use.

That was in ’07 and of course, we know what came after. I would have liked to remember a little better how I felt about the markets in ’08 and ’09 because the sentiment now in 2018 certainly fits those times better.

Of course, in recent times, we haven’t seen the participation of the masses in any widespread, crazy speculation (apart from a tiny group in crypto) so my question now is: What is the next shoe to fall?

As Singapore’s population ages, I suspect we’ll see this sort of thing start to pop up as well. I mean, we hear of elderly folks being conned of their CPF savings through various means (appealing to their vices, taking advantage of their less-than-once-stellar mental faculties etc.) but I’m waiting to see if it happens at the financial institutions level.

I suspect it’ll come from the financial institutions offering a product that isn’t actually designed to give returns much better than the risk-free rate but with all the “protection” of a bond. That sounds like Structured Products which kind of gave banks a bad rep but if you know of anything new, do let me know. It’s fascinating stuff really.

Russell Napier: Equity Markets and Structural Change (Enterprising Investor)

A plausible sounding narrative for where U.S. markets are headed in the longer term. Not optimistic but if it does happen, it would provide a good buying opportunity.

Could we Model Our Retirement Spending like Endowment Funds? (Investment Moats)

Sharing this not because it’s a new idea to me but I think it could be a paradigm shift for many people.

Most people aim to accumulate a certain sum before they retire and upon retirement, spend down the sum and upon their deathbed, leave the rest for their beneficiaries.

It’s not that I think that’s wrong but I think the pros of acting as if your money should last forever outweigh the idea behind spending it down.

For starters, aiming to have the accumulated sum grow/last forever means greater prudence in spending. It also means greater prudence in investing as it requires a proper plan for investing the money instead of sticking to investments that guarantee the principal at the expense of purchasing power.

The biggest downside is what the growing sum of money is meant to do. If the beneficiaries are too few, you end up with a generation of spoiled heirs who will eventually squander it all.