Archives for posts with tag: economics
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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.

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

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

 

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

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

Which brings us to the second read.

 

In Praise of Incrementalism (Rebroadcast) (Freakonomics)

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

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

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

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

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

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

Which brings us to…

 

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

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

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

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

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

bitcoinCrashJun18

 

Have a great week ahead!

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

 

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

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

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

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

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

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

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

Why some get left behind by the system

Unfortunately, not everyone benefits from the system.

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

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

And unfortunately, I see this at work too.

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

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

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

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

And so, what are we to do?

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

I have no answers

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

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

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

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

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

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

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

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

The Trump-Kim summit is in town! Before you get caught up with all the bread and circuses, read these:

 

No, Your iPhone Does Not Make You Wealthy (The Big Picture)

Barry Ritholtz makes a very good case for how having things today that people centuries ago didn’t have is not going to make a very convincing argument for people who don’t feel wealthy. Unfortunately, I don’t have a Wall Street Journal subscription so I can’t read the article that Ritholtz mentions in his post but I buy this line in Ritholtz’s post:

We have deflation in the things we want, but inflation in the things we need.

So next time if someone tells you that life is better now because you now have iPads and stuff, please tell them otherwise.

 

Income Growth: 1980 to 2016 (The Big Picture)

Another one from Barry Ritholtz. This one cites a study that shows how inequality has progressed through wage growth for different income groups. No surprises here. These points have been well-known and established for some time now.

 

Commentary: Can education fix inequality in Singapore? If not, what can? (Channel NewsAsia)

On the home front, politicians have been putting inequality at the fore in their recent speeches. I suspect this is a result of BN losing the elections in Malaysia and therefore our government leaders are all kind of worried that the populist fever will infect our shores. This gem from Channel NewsAsia highlights the main issues with inequality in Singapore and what to do about it. You may disagree with what they say but do take a look.

 

The Art Of The Good Life #7: The Ovarian Lottery (My 15HWW)

Last but not least, Mr. 15HWW makes a good point that those of us fortunate enough to have won the ovarian lottery need to recognise our good fortune. In the vein of a survey done on social mobility in the USA, he raises the following thought experiment:

How much of your income would you give up to be born to parents who stay in a freehold landed house?

The answer for most people is that they probably would trade quite a fair bit of their income in order to trade for the wealth that comes with parents who can afford a landed property in Singapore.

I would caution that if you wish to do the trade, you should be aware of the following:

  • Not all landed property is equal. Location matters. A lot.
  • It depends on how many siblings you have. More siblings equal more competition.
  • It also depends when you inherit the place. The longer you have to wait, the worse the trade.

Obviously, I’m joking (ok, half-joking) about the points I’ve made but the crucial thing is that being born to parents who own and stay* in a freehold landed house has a higher probability of conferring significant advantages to their children. I’ll do a post on this in time to come.

Notes:

*Own and stay is important. We have a joke within our family about how my dad was ‘conned’ because he assumed that my maternal grandfather owned the house that my mother’s family stayed in when they were dating. It was only later that he realised that it was my mother’s aunt who owned the house and that my mother’s family were merely fortuitous recipients of her aunt’s charity.

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

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

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

First, what is bitcoin?

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

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

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

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

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

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

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

The economics of bitcoin

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

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

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

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

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

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

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

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

Stay tuned for part 2.

Update: Part 2 is up.

snarky notes:

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

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

 

The fallacy of composition is perhaps the most common one made by many investors. I have a post on this over on my economics blog detailing how Warren Buffett avoided that by shutting down Berkshire Hathaway’s textile operations as well as how this plays out during bubbles in asset classes.

Not many people know this but besides having studied and dabbled in finance and investing, I also majored in economics and I’m actually an economics lecturer by profession.

Here’s the first of my 3-parter on traffic jams (written for students and layman) on my sister site.

Part two is up.

So is part three.

For some reason, an article titled “How much do you need to earn to be above Singapore’s “average”?” was making its rounds on my Facebook feed. Although I know that these kind of headings are link baits but what can I say? I’m a sucker for these kind of articles.

It’s painful to read stuff like this from a website in Singapore that is supposed to be promoting financial literacy. After all, this is supposed to be the reason why their site exists.

Enter DollarsAndSense.sg, a local website that aims to be the destination for timely, relevant, and useful information on personal finance matters presented for the ordinary Singaporean in a bite-sized, interesting, and enjoyable manner. Being run by a group of young Singaporeans in their mid 20s, DollarsAndSense.sg has no hidden agendas, no sales pitches to make and best of all, no credit cards to charge.

Anyway, the beef I have with the article on that site is that they obviously have no clue what they’re talking about.

The article starts with using GDP as a measure for income. While in theory, there should be no difference in calculating GDP using the income or the expenditure approach*, the problem here is should we even be using GDP as a proxy for one’s income?

Common sense would tell you not to since the salaries to workers are just part of the remuneration for the value created that GDP measures. At the end of the article, the writer even tells us the more important statistic that the median income in Singapore is SGD 3,770 per month which is all you really need to know if you want to figure out whether you earn more than the bottom half. By the way, even that is not completely true to the title since the average and the median in Singapore is far from being the same. Those that don’t know why should go learn some statistics.

So, given the title, most of the article is completely useless because it just tells us what the GDP per capita is (so is the useless calculation of adjusting the per capita figure for just the labour force) and the main point is actually in one sentence somewhere near the bottom.

By the way, the average Singaporean probably doesn’t know this but you can easily get average and median income data from MOM’s website (here and here) that shows you median income over time and even categorised by industry occupation so any one who’s really interested  in comparing doesn’t really need to read a half-assed article to know.

So what’s the value of THIS post?

1) Don’t believe everything you read out there. Most of it is bullshit written by people who don’t know any better.

2) GDP is not a good proxy for worker’s income. However, GDP and wages are correlated which is why, all else equal, most citizens in a country with higher GDP is able to have a higher income than most citizens in countries with lower GDP.

3) People trying to improve financial literacy should just leave economics out of it. There are economic theories that could help people become more financially literate but I’ve found that what helps more is a dose of common sense.

Anyway, the people running that site should be happy that some people who read this are probably going over to check them out but in my book, at their current level, I think that they are the ones who need help.

Notes:

*GDP measures the market value of all final goods and services produced in a country in a calendar year. Since there is a buyer and seller for each good, the value of the good produced is also the income earned by the seller of the good. This is where the writer of the article tripped up since the full value of the good sold doesn’t go to the worker. Not all of us are workers, some are bosses.

– By the way, it looks like they have the guts to acknowledge some of the mistakes in their article by posting some of their readers’ comments in an edit and I wrote this post after seeing those updated comments but my opinion hasn’t really changed much.