Archives for category: Economics

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.

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A Definitive Guide to CAP Rates, Net Property Income Yield in Property Investing (Investment Moats)

If you can get past Kyith’s longform posts and his sometimes awkward phrasing, he provides very well-researched and in-depth articles. In this case, he has produced a piece that’s likely to be of interest to many Singaporeans.

Are financial literacy programs a waste of time? (Quartz)

Financial Literacy is one area of knowledge that many people could benefit from and as an educator, it’s begun to trickle into schools. This semester, I’m forced to make my students go through a financial literacy module but I’m not sure that the people who designed the module ever questioned how effective it might be.

Thankfully, I’ve found the wonderful Allison Schrager who is an economist by training and her area of research happens to be the economics of retirement. I’m also halfway through her book, “An Economist Walks into a Brothel” which is an interesting read. Not the best or most definitive on financial economics but Schrager tries pretty hard to show how basic financial economic concepts are applied through some interesting stories.

Podcast Ep#26: Lies Behind Property Ads In Social Media (Property Soul)

Another property-related piece and this one is interesting to me because we’ve been getting flooded with advertisements from property agents inquiring about our desire to sell our property given that it is reaching the minimum occupation period stipulated by the government agency that sold us our public housing flat.

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This week at work, I had to sit in a meeting attended by senior management and while I cannot reveal any specifics, I got the message that my school (a business school) was trying to align what we teach students to be closer to the “real” world.

How did they plan to do so? Mainly by thinking of ways to encourage entrepreneurship among students, especially in the digital realm that seem to get all the news nowadays.

Unfortunately, this plan comes at the expense of fundamentals. And as I reflected on the bizarre scenes of the meeting, I realised that perhaps the way that businesses operate.

Raise cash, Spend it. Rinse and repeat

It almost seems to me that even though we’re in 2019, the way to start and run a business hasn’t changed all that much.

Have an idea, raise some cash, focus on selling, and hope for the best.

After all, some of the best-known names being bandied around as examples to follow are hardly profitable or take ages to reach profitability. However, these are being held up as paragons of business excellence.

Take Grab, the Southeast Asian version of Uber that’s trying to be the WeChat of Southeast Asia. It’s raised billions of dollars but hasn’t turned a profit yet.

Or Carousell, another name that the local media loves to cite. The online marketplace app has raised hundreds of millions but is still making losses that are many times its revenue.

The Madness

Anyone with a fundamental sense of business knows that you cannot continually make losses as investors and debts have to be repaid. The only reason why companies can continue to raise and burn cash is because much of these funds are being raised from investors awash with cash in a low-interest rate environment.

The recent spate of tech IPOs in the U.S. show that the credit cycle may be coming to an end for these tech companies. Investors are increasingly seeking a way to cash out on their investments and going public is that endgame. However, if Lyft’s IPO is anything to go by, the markets may not be willing to cooperate for much longer.

The funny thing is, it wasn’t long ago that we’ve seen this madness. Once in the dot-com era where companies that had no proper business plan or semblance of profitability were bid up to levels previously unheard of; And once more when profitability was dangerously elevated through the use of debt in the real-estate and financial sectors.

Is this the endgame?

Unlike the dot-com boom of the late 90s, the recent madness in tech has been fueled by venture capital funds (think Softbank). This is why we haven’t seen the madness spread far and wide as only a handful of investors and executives/owners involved in these so-called “unicorns” have been getting rich on paper.

In the dot-com boom, lots of these “I have a business plan but no profits” companies were going public and the wider public was participating in the madness. That breadth of madness was also seen during the real estate/stock market boom of ’05-’08.

But with the recent spate of “unicorns” going public, it seems that the investors in the VC funds are trying to cash their chips. Unfortunately, with the performance of Lyft’s IPO, perhaps the market isn’t biting the bait. We’ll have to see if Uber IPOs and how that performs to confirm the state of the markets.

However, now that even public institutions like my school are sold on the idea that businesses in this day and age are all about “innovation”, going digital, selling ideas without much regard for fundamentals, is this a sign of the end?

Perhaps, it is.

Happy Easter Weekend!

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Your home may be an investment but don’t expect it to fund your financial goals (Abnormal Returns)

A paper (highlighted in the post) has come up which finds that owning a house provides returns on par with equities but at a lower risk. I think many people in Singapore would agree with this but I’m not exactly convinced.

I’m still in the camp that the data on returns to property are hard to calculate because the data may not account for transaction costs, lack of liquidity and bad sampling due to infrequent transactions.

Getting rid of debt may actually make your brain work better (MarketWatch)

A study by researchers at NUS (nice one!) confirms what other researchers have found (you can read more about this in Mullainathan’s book, ‘Scarcity‘). This is precisely why those in poverty need more help than people assume.

Are Plastic Bag Bans Garbage? (NPR)

As much as I love the environment, I think we need to respect the data. After all, if bans on plastic cause more harm to the environment than good, then perhaps we need to hold our horses and reevaluate.

I’m not saying that we should stick to plastic bags but I’m saying that if a ban causes more harm than good, then perhaps we need to find another solution.

Alan Krueger, a master-economist for our age (Tim Harford)

Another obituary on Alan Krueger and it’s amazing to realise the breadth of the topics that Krueger applied his talents to. Every economics student should be inspired.

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.