Monday, May 31, 2010

1st World Country, 3rd World Wage Structure?

"For years, companies have creamed off a larger share of economic gains - larger than those in other developed countries or industrialising economies in Asia. As a result, workers get a slice of Singapore's gross domestic product (GDP) that is considered unusually small compared with their counterparts' share in those countries." - Business Times, 18 May 2010


I wrote about this in 2007 (let me try to find the post...) when profits as a share of GDP rose to the highest level in history. In March 2010, Slyvia Lim spoke about it in parliament[Link] when she argued that GDP growth must benefit Singaporeans. What is the selling point of a system for ordinary citizens when most GDP growth generated goes to profits of companies and ordinary citizens have to bear the brunt of cost increases resulting from the growth?

How did all this happen? In the past few decades, the govt had a policy of trying to keep wages way below productivity so that the per unit labor cost goes down. For a long time the Singapore workforce was ranked number 1[Link] and has been the key pillar of Singapore's competitiveness and success. However, the govt never got away from economy dependent on lower wages for growth and in the past few years seek to perpetuate this by importing cheaper labor from overseas. At the same time, they cut corporate taxes while raising regressive taxes such as GST. Our income inequality (measured by GINI) is now the highest in the developed world. The inequality is further compounded by govt policies that shift as much healthcare and retirement burden to ordinary citizens as possible. The Singapore govt share of healthcare cost is the lowest among all developed countries.

We are supposed to be a developed country but the quality of life of ordinary Singaporeans is nowhere near that of the citizens in other 1st world countries even as our per capita income make it look like most of us should be going to Europe for the school holidays. The GDP number has become quite meaningless to ordinary Singaporeans because their lives are not getting better. Most of it goes to profits of corporations, owned by a handful of shareholders. Increasingly, it is no longer sufficient for ordinary Singaporeans to try to work hard to overcome their economic situation...and for small unfortunate number that forms the ultra-underclass in Singapore, they are caught in a poverty trap that they can never get out of.

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World country, but not First World wages? [Link]
By Sue-Ann Chia, Senior Political Correspondent
THE recession is over but bosses may not be heaving a sigh of relief. A new challenge is looming: rising wage bills.

From June, bosses will no longer enjoy any wage subsidy from the Jobs Credit scheme.
From July, they will have to fork out a higher levy for foreign workers, or pay more to hire local workers as the inflow of foreigners starts to slow.

From September, they will have to put in a higher contribution to their workers' Central Provident Fund (CPF) accounts.

And if that does not pack enough of a whammy, they also have to heed the national call to boost productivity and pay packages.

Poor employers, some would say, as they seem to be under attack on several fronts to raise wages.

But think of it the other way: Could it be payback time?

For years, companies have creamed off a larger share of economic gains - larger than those in other developed countries or industrialising economies in Asia.

As a result, workers get a slice of Singapore's gross domestic product (GDP) that is considered unusually small compared with their counterparts' share in those countries.

Workers' wages account for less than half of Singapore's GDP. In contrast, wages take up more than half of GDP in developed countries.

This means that Singapore may have achieved one of the highest per capita GDPs - at $51,656 last year - but the superlative showing may not reflect the wealth of workers or benefit them as much.

It has led some analysts to wonder if Singapore is a First World economy with what is closer to a Third World wage structure.

'Factually, our wage levels are much higher than Third World (economies'). Otherwise, so many foreign workers would not be flooding into Singapore,' notes economist Manu Bhaskaran from Centennial Asia Advisors.

'The problem is not our wage levels, which are reasonably high, but whether they are commensurate with our per capita GDP level.'

So are wage levels keeping pace with economic growth? Or is Singapore's low wage share of GDP an indication that workers have been losing out?

Saturday, May 29, 2010

Vincent Cheng not allowed to speak....

I read that Vincent Cheng who was scheduled to talk at the NUS History Seminar held on the 28 May 2010 has been barred[Link] from speaking. It is important for Singaporeans that he speaks so that we can understand what happened 33 years ago.

I was a teenager when I woke up one day to find that the Singapore govt had arrested a large number of people and detained them without trial. They were accused of being communists and part of a plot to overthrow the govt using 'subversion'.


They were accused of 'infiltrating' Catholic Church, the Worker's Party and various student societies. The mastermind behind all this was Tan Wah Piow, a 'student radical', who planned to set up a Marxist state in Singapore in 15 years time after Lee Kuan Yew was no longer in power.

Yes, I think it is important to hear from Vincent Cheng. Very important to have him tell us about his plot to overthrow the govt by defeating the SAF without any weapons - none were ever found. How was it supposed to be done? Perhaps Mr. Vincent Cheng's plan was to infiltrate and convince masses of people that PAP is not good govt and have it overthrown at the ballot box. Quite difficult in those days without the Internet and the mass media controlled by the govt. Also, communism was collapsing[Link] at that time so it was a bit difficult to sell those ideas they were accused of propagating. As for the evil mastermind, student radical Tan Wah Piow, he is now a prominent human rights lawyer who spends his time helping downtrodden refugees and minority groups in England[Link]. The biggest act of violence Tan Wah Piow committed as a 'student radical' was taking part in an event were several chairs were broken - he was accused of rioting and sentenced to 1 year in jail. Tan Wah Piow was the NUSSU president at that time.

It is important to look that what happened 33 years ago because nothing has changed to prevent such arrests from happening again to today's activists who are not in agreement with the govt. For 33 years since that event, there has been fear among Singaporeans because they still don't understand what these people have done wrong..... all they did was aim for better human rights, great equality in society and sociopolitical change no different from today's political activists so how can we be sure that the draconian measures of the past won't be used again to preserve the interests of the ruling elites. If the ISA is needed today to tackle violent gangs and terrorits, we should look at removing it and replacing with anti-gang and anti-terrorist acts otherwise it can be used against anyone and that leads to widespread fear among Singaporeans in taking part in anything political in nature.

Monday, May 24, 2010

MM Lee's Eulogy...

"When he held a contrary view, he would challenge my decisions and make me re-examine the premises on which they were made. As a result, we reached better decisions for Singapore."
- MM Lee's Eulogy [Link]

I read all the eulogies for Dr. Goh but found this sentence by MM Lee most interesting. He talks about the importance of being challenged and questioned by Dr. Goh to force him to 're-examine the premises'. The result of Dr. Goh's contrarian view is the govt reaching 'better decisions for Singapore'.

Dr. Goh left the govt more than 20 years ago. So who was around to provide 'contrary views' and challenge MM Lee's and subsequent prime ministers' premises? You notice how long it takes for the govt to fix its birth control policies and adjust its foreign workers policies. It is done long after everyone knows something is wrong.

I was at the National Museum open house yesterday and there was an old clip of Dr. Goh and the Jurong Industrial Park. The park cost the govt $50M and there was tremendous fear among the decision makers (Dr. Goh and Hon Sui Sen) that the investment can go wrong and they would have to live with the consequence i.e. Jurong Industry Park would have been known as "Goh Folly" to the next generation ,,,,,,if it had failed he was ready to take responsibility and that would have been the end of his political career. $50M in those days was huge sum given that our entire reserves was only $400M. Today, the Singapore govt can lose a few billion here, tens of billions there and you don't hear of anyone taking responsibility for the loss. Perhaps "contrary views" and "challenges" to those big risky investment decisions would have resulted in better outcomes for Singapore.

Are teachers overworked?

Lionel Lee posted this comment in my previous posting:

There is a big issue in the yahoo post. There is a big issue of 3000 commentaries on the follwing: http://sg.yfittopostblog.com/2010/05/16/are-singapore-teachers-overworked/comment-page-57/#comments. Please do a write up on this issue as it is a hot topic among the netizens since the last 2 weeks but I have yet to see your perspective on it.

Keep up the good work.
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I went through the original letter by Ms Aishah Quek and the Yahoo article:

1. Primary school teachers sometimes work from 7am to 8pm due to guard duties in the morning and remedial lessons after school hours.

2. While the actual school sessions are short, they have to put in extra hours for marking assignments, remedial lessons and a whole host of administrative tasks.

As a result of the long hours, many feel drained and strained.

For the friends I have who entered teaching in Primary & Secondary school most don't last too long. I have 3 friends teaching in the poly and they feedback that "life is not bad"...quite good in terms of workload and balance. Many see it as a transition job because the progress is limited and a few complain of stress. A few years ago, I thought the MoE wanted to hire TA (teacher assistants)[Link] to relieve the teacher's burden. So I think the problem is specific to primary, secondary and may be JC teachers. Overworking teachers may be a bigger problem than overworking an IT guy or a finance guy. The IT feller can just move on to another company doing a similar job if he doesn't like it so can the finance feller. But teachers are under the employment of MoE so they either stick to teaching or leave teaching. The 2nd problem is teaching has limited progress - that is why you lose people when you overwork them. The financial incentives dangled for other jobs and potential career advancements make people accept some level of overwork. My lawyer friend has slept in his office for the past 1-2 weeks because of a big case but if he makes to partner in a few years he will be set for life so he doesn't mind - it was understood that he will be overpaid and overworked when he took up the job.

I always thought that teaching should be a stable, interesting job for people who love it..and are not driven primarily by financial incentives. If it is true that they are overworked, something has to be done. It is a real loss if we train teachers only to overwork them and lose them to other sectors. Teachers should concentrate on teaching and a large part of it is interacting with students for the 6 hours or so. The guard duties, remedial lessons and administrative loads can be eased by hiring of assistants - 1 for every 2-3 teachers? - and that will ultimately lead to better quality of primary and secondary school education.

The issue has set off heated debates on the Internet with some people finding it hard to believe teachers are overworked because of the school sessions and holidays. I think it is good that the issue has surfaced so that these perceptions can be corrected. One figure to look at is the turnover rate of teachers compared with those who are hired into the civil service. The turnover rate shouldn't be higher because there are many similarities between the two - they are suppose to be stable careers with a focus on important duties rather than monetary rewards...the govt went as far as giving teachers full medical benefits and pension schemes in the past so they can focus on teaching..now all that is gone and the workload has increased.

Saturday, May 22, 2010

Weekend Thoughts...

I haven't updated the blog because I've spent the last week pouring through economic and market data generated by the current financial crisis. There was enormous upheavals in the financial markets that threatened to spillover into the real economy and take us to a double dip recession at fast and furious speed. These events show that we are living in an unstable world no thanks to the high level of debt that has built up in the system. Life in Europe changed within weeks as govts put together austerity measures and tighten belts. If you're poor and Greek, nobody will blame you for taking to streets and demanding justice. The ruling elites in Greece embarked on a irresponsible spending spree at the expense of ordinary folks. It was found that the Greek govt awarded construction contracts to their cronies during the 2002 Olympics that cost 5 times that of what the same type of buildings cost in the China Olympics. Late last year, sensing trouble, rich Greeks shifted most of their money to Switzerland and London to avoid the financial mess and increased taxes. The Greek tragedy holds many lessons one of which is there is no substitute for transparency and citizens actively scrutinising what govt does. The small handouts to buy their votes and social programs account for only a small part of the $300B Euros. Most of it is due to corruption, tax evasion and govt waste. They have voted in a socialist govt to fix the entire system but to-date no body in the previous govt has faced any criminal charges and that is one of the main reason for unhappiness among ordinary Greeks.

The passing of Dr. Goh Keng Swee was greeted with much sadness among Singaporeans. I saw a news clip yesterday of people attending the state funeral. Any few of them had actually received help directly from Dr. Goh when he was their MP something like 40 years ago and they did not forget. The newspapers had plenty of coverage of Dr. Goh's achievements when he was in govt. He contributions were quite wide ranging - from defense to education to economic development. He is credited for being Singapore's economic architect and was a visionary when he worked out a development strategy tapping FDI (Foreign Direct Investments). Building Jurong Industial Estate was a big bet he made to attract foreign investments and it was highly successful. Today his vision is a known formula used in developing countries i.e. Vietnam, China and India and they compete with us using cheap labor. We really need a new economic vision going forward.....we need a Dr. Goh of our generation.

Last week a group of Singaporeans protested against the changing of weightage for mother tongue for PSLE. I was not very good with languages but managed to survive the system by putting in the extra effort. Language skills like mathematics is an inborn talent...probably not genetically inherited. My siblings didn't have problems with 2 languages and went on to pick up a 3rd language. I think Dr. Eng was thinking along the lines that a person only needs one language to survive economically so the 2nd one is not really need...just good to have. However, there is an emotive aspect to this whole issue because our 1st language is one we adopted from our colonial masters, the British and our connection to our cultural roots is through learning our 2nd language. Coming from an English speaking school, I have seen many Eurasian kids and people who have less talent in languages struggle with the mother tongue. This affected them throughout their education. Their weakness in Chinese will affect their entry to good secondary schools. The richer kids even have exit plans to go for higher studies in Australia or USA because of 2nd language issues. We have created this unique problem because of our bilingual policies which places great emphasis on a 2nd language. MM Lee recently admitted that he realised the underlying assumption that anyone can just master a 2nd language with reasonable effort is wrong. However, to fix this policy now is difficult because many will view it as a move away from our cultural roots in a society that is seen by many as already too westernised. The approach to solve this is perhaps a more inclusive criteria that will emphasise one's strength and strengthen one's weaknesses. Allow those who are weak in 2nd language to enter based on a separate criteria that excludes the 2nd language but require them to take up additional lessons throughout their secondary school education to improve their 2nd language. This is similar to the NUS Chinese camps conducted for those who entered NUS without passing their Chinese.

This weekend a protest will be organised against the exorbitant fees charged for World Cup 2010 by our telcos. It goes that show that when people are faced with a situation that they feel is unjust, they are will to make the effort to fight against it. If they do nothing, they will face the same situation 4 years from now in the 2014 World Cup. The organisers hope to attract 100,000 people[Link]. This protests says something about Singaporeans - when they are passionate enough about something, say World Cup soccer matches, they will protest if they are affected by it. Why can't anyone get 100,000 people protest for greater democracy? Why can't you get 100,000 to protest against CPF Life? What about mandatory death penalty for drug offenses? When its somebody else's problem and they are not affected by it, life goes on ...its hard for Singaporeans to get angry over somebody else's problem.

Saturday, May 15, 2010

Euro : Govt Intervention in the works?

FINAL UPDATE: [Link]
NEW YORK (Dow Jones)--The euro rebounded strongly from four-year lows Wednesday on market speculation that European authorities are preparing a response to the common currency's rapid decline.
Conjecture in the market that the European Central Bank could take steps to try to arrest the euro's decline--which could be becoming too rapid--has helped boost the currency more than 1% against the dollar on the day by noontime trading.
The Federal Reserve declined to comment on speculation the ECB and other major central banks are preparing to intervene in the foreign-exchange markets to prop up the flagging euro. The ECB also declined ........


The Euro has stabilised somewhat on the believe that central banks will intervene. However, there is great uncertainty and instability due to unwinding of the 'risk trade'. The large currency movements have shakened investments from commodities to emerging market equities. Looking ahead it is pretty uncertain where things are headed.


FURTHER UPDATE: Trichet : Economy in Deepest Crisis since WW2. The only thing good about what Trichet talked about in his interview is the realisation of the severity of the mess they are in. Trying to fix it with austerity now can stall the economy and doing nothing risks sovereign insolvency. There is little they can do except delay the day of reckoning - ultimately living standards will have to fall in the EU. Even buying time is not so simple with speculators eager to bring forward the dire consequences of their past profligacy by sinking the Euro. Graceful degradation is best...but speculators want chaos. The day when you wake up and see the euro plunging 10cents in one day may not be too far away....and that will shock the fragile system reversing the gains of past 12 months. That is why it make sense to intervene to shore up the euro- buy time and some hope the global growth can overcome global problems. The US had debt several times its GDP just after WW2...but rapid growth made the debt manageable. There is little chance of that kind of rapid growth for Europe in today's economy but some growth can make debt servicing less painful... . Now more on the possibility of currency intervention I was talking about. The falling euro hurts confidence in Europe and the rising Yen is threatening Japan's exit from deflation( Read : Tokyo Alarmed by Yen Rise) so there is plenty of incentives to intervene and calm markets ...this is a very worthwhile time to do it. The Japanese used to intervene every other week to keep the Yen down in the 80s so that its exports sector remained strong. These days intervention is a G7 effort done to ensure that all members benefit from from it. We are now at a psychological tipoff point when markets are about to declare the $1T package inadequate and watching the euro plummet makes that idea sink in threatening to plunge the markets into next crisis of confidence. I don't know for sure whether they will intervene but I certainly think it would be one of the most appropriate times to do so.

UPDATE: The Wikipedia page on the 2010 European sovereign debt crisis is up. I remember reading the Wikipedia page on the subprime crisis when that crisis was in the infancy and there was a write up on the "worst case scenario". Most of what was described in that scenario actually happened. The contagion scenario for the current unfolding crisis is described here.


This posting is more for my own reference as I'm watching the current market turmoil closely. Do feel free to post any comments/opinions.

The $1T European bailout package calmed markets in the early part of the week. The package in fact appeared to be working because the ECB was able to narrow interest rate spreads of Italian and Spanish bonds[Link] and the Italian govt was able to conduct bond auctions[Link] receiving good demand. This means the tailend risk has subsided and that was probably the basic idea behind the bailout to buy time, implement austerity to cut deficits over the long term and stem the panic. The ECB was about to get all this done spending only about 20B euros. However, late Thursday, currency speculators started shorting the Euro again bringing it down to the lowest levels since the Lehman collapse. The sharp movements in the currency markets caused equities, commodities and oil to be sold off. The carry trade is again disrupted by the large currency movements. Looking at the turmultous markets one may be led to think that things are falling apart because there is a lack of confidence in the Eurozone countries. But think hard about this is the Euro falling because there is lack of confidence in Eurozone countries or is the fall in the Euro itself undermining confidence? The sharp falls in the Euro is creating a negative feedback loop that will lead self-fufiling prophesy that speculators want and profit from. So what can govts do under such situation? During the Asian Crisis govt were not able to do anything and that led to foreign funds fleeing Asian countries and a catastrophic collapse of Asian economies. Letting the Euro go into a freefall will lead to dire consequences for the global economy for sure given we are still in a nascent recovery. Something has to be done soon....

I did some research on what govts did in the past when the Euro fell sharply. The last time that occurred was in Sept 2000 when the Euro fell 30% from the the level it was launched in Jan 1999. During that period, the Euro's fall also threaten to derail the global economy. The then US Treasury Secretary Lawrence Summers led the coordinated effort to shore up the Euro. 48 hours later, the speculators came back to attack the currency but the central banks kept them at bay for the next 6 weeks...2 years later the Euro was 50% higher. Already there is plenty of reports of behind the scenes coordination of by leaders - Barak Obama was said to be working behind the scenes to persuade the EU get last weekend's package through[Link]. Given how interconnected market are these days, no major economy is immune from EU's problems. There were also reports that Obama himself persuaded Portugal & Spain to accept new austerity measures to shore up confidence[Link].

The US, Japanese and others govts have taken many big steps to get the global economy back to the point where it is starting to grow. It is unlikely they will stand by and watch speculators pick it apart by shorting the Euro and disrupting market. There is also precedence for successful coorperation. I believe the govts will act soon before the damage to confidence becomes permanent....maybe as early as Monday next week. There is really no benefit to wait any longer.

Friday, May 14, 2010

Current SEC investigation into investment banks....

"In June 2006, a year before the subprime mortgage market collapsed, Morgan Stanley created a cluster of investments doomed to fail even if default rates stayed low -- then bet against its concoction" - Bloomberg [Link]
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The US govt is current conducting an investigation into the sale of certain mortgage linked products by US investment banks and whether these banks bet against these products themselves as they sold them to unknowing customers. The investigation also hope to uncover if the banks knew that these products have a high chance of failing when they sold it. If that is the case, the banks have engaged in fraud - outright cheating.
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The structured products such as Lehman Minibonds and Pinnacle Notes were sold to Singaporeans in around mid-2007. The SEC is looking at products sold as early as mid-2006. If investment banks knew that these products were bad and sold them to Asian investors, they have engaged in fraud. The Pinnacle Notes sold to Singaporeans was a product by Morgan Stanley currently under investigation by the SEC.
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Unlike the US which has the SEC and very tight regulation, the MAS and Singapore govt takes a handoff approach on such matters always holding up the "buyer beware" principle. If US investments have engaged in fraud, to allow them to go unpunished is not just a grave injustice but sends the signals to the cheats and crooks of this world to come to Singapore and take Singaporeans for a ride.

Understanding European Weekend Package...

Very often during crisis we get weekend solutions. That is the time when markets are closde and there is enough time to figure out some kind of deal. The US$1T package came a few hours before the Asian markets opened and was initially treated with some skepticism before euphoria overran the markets on Monday. That was followed by doubts on Tuesday. More euphoria on Wednesday and more doubts on Thursday. In other words, there was some confusion over whether the package is big enough, how they will get the money and whether it will work and so on.

The trillion dollar package sets up a fund for the ECB to purchase govt debt in particular debt of PIIG countries. This money comes from contributions from IMF and EU govts. So how does it work? Whether it works or not depends on what problems you're looking at. The EU problems are divided into the short term and long term. Remember the long term debt problems have been there for years long before this crisis. The short term problems were triggered by accounting fraud in Greece discovered at the end of last year. Quickly it became very clear that Greece's debts are too big and the country is probably insolvent. Financial markets had been pretty calm and optimistic prior to that. All these factors made it very profitable for hedge funds and speculators to attempt to launch attacks on the Euro, govt debt, etc. The result was a 2-3 week panic culminating in tremendous intense fear and uncertainty of last week. The problem was these speculative attacks were driving up interest rates on govt debt of Portugal and Spain to something like 8% making it hard for these countries to raise cash to service their debt and because of fear that these govt will default the banking system in Europe was freezing up because banks were afraid of lending to each other and that could end the global economic recovery.

The package is already working for the short term problem by bringing down the interest on govt debt and the cost of protecting them. So while we still see some volatility, the panic has largely ended (I hope). There is a lot of confusing commentary that the package is not enough and so on....the package was never intended to solve the long term multi-trillion debt problem of Europe - those were around 5 years ago and will be around 5 years from now. There are not too many ways to solve it - monetise the debt and risk inflation, cut the budget deficits to slow the growth of debt. Both involve undermining the living standards in many parts Europe so the ordinary people will not be too happy. In the absence of financial panic, these problems can be amortised over longer periods..... entitlement cuts, welfare reduction, i.e. falling living standards.

I think the question on investor's minds is what will happen in the markets? While there is some silver lining from this - Federal Reserve will have to postpone rate hikes until next year and China too will probably lessen its tightening, the stock markets may a little harder to fathom in the coming days. Earlier I had forecasted a peak in May 2010 (best estimate 12 May) but the peak came several weeks earlier when the European problems erupted. I came out with the May date looking at the average time it takes for carry trades to build up and get disrupted/unwound. The carry trade is the use of a low interest currency to buy risky assets in another currency. The use of the carry trade is associated with benign currency movements i.e. stable or slowly weakening of US$ and the Yen...and is characterised by the overwhelming number of up-days (vs down days) on the stock markets. Because the carry trade feeds on itself - carry trade begets more carry trade, it tends to build euphoria in the markets. In the past, once every few months the carry trade get disrupted by speculators attacking the US$/Yen rate leading to sharp stock market corrections lasting 2-3 weeks....many investors panic and get shaken out of the markets by these sharp selloffs. Because they tend to occur when markets are in a semi-euphoric state, many small time stock investors get burnt. The events of the past 3 weeks cause the massive unwinding of carry trades - the very sharp one associated with the 1000pts drop in the DOW. 15 minutes before that huge drop, the Yen fell by 2%....such a huge drop probably triggered high speed trading 'robots' to sell equities ahead of carry trades unwind for profits.

How do we know that some kind of an intermediate bottom is formed in the markets? We will know when most of the most leverage carry trades are unwound and stock market movement decorrelated with currency movements or when currencies stabilise. As long as we have extremely low interest rates and thesis that the global economy is recovering is still believed, the carry trade will come back. Yesterday night the DOW fell by 100+ points in the last hour of trading and if you look at the US$ chart, the US$ moved up sharply by 0.5% against the Euro during that period so there is this clear correlation between currencies and stocks. The devaluation of the Euro perhaps another piece of the puzzle in getting Europe out of its rut - remember when Greece imploded, they said one of the problems is Greece does not have its own currency which it can devalue competitively when in trouble. The Euro has fallen by 15% in the past few months - the Italian marble you're thinking of using for your home is 15% cheaper, if not for the COE + crazy taxes in Singapore, Mercs and BMWs will be 15% cheaper. Many people are thinking of going to Europe for their next holiday. For Germany which is a major exporter, it benefits from the devalued Euro and sharp investors already know that - despite being part of the trouble EU and caught in this turmoil, the German stock index is only 1-2% from its 52 week high which is quite amazing given the turmoil we have seen.

The carry trade has always been involved in worsening market volatility when trouble occurs. Be it the subprime crisis or the Greek contagion, the carry trade become part of the transmission mechanism that disrupts markets. A number have come to warn that the carry trade will lead to next crisis (article : Currency carry trade could be next global crisis) whatever the underlying triggers (subprime debt, sovereign debt) are. The thing about the carry trade is it has to build up, bring euphoria and happiness to investors before it tumbles down like a house of cards. Speculators and hedge funds time their currency attacks to maximise the disruption in the markets with an element of surprise to create the shock and fear effects. Once you're passed the point of maximum fear as we saw last week, they will slowly back off to plot the next round of attacks. They were so ferocious and deceptive, the EU leaders called them 'wolfpacks'.

While the Greek contagion disrupted the carry trade a little earlier than I thought would happen. I also predicted that there will be a double top in a previous post. Why did I conclude that there will be another peak coming and why did I think that would be the final one? The next time the market goes up and come down, it may not be so easy to recover because we might be in an rising interest rate environment and inflation may so rear its ugly head forcing govts to tighten quickly...when that happens risky assets will decline no matter how sustainable the economy looks. For now, I still believe we will have another peak (I hope) and my advice is think seriously about getting out.

Wednesday, May 12, 2010

The Singapore Bubble?




Financial and property bubbles are obvious on hindsight. When things are going up most people will think the rise is sustainable and many will even invent reasons to explain why it is sustainable. A few years, I went to Vegas for a short tour. I was completely overwhelmed by the extravagance of the place - the concentration of magnificient buildings, entertainment etc. From Vegas, I booked a day tour that took me Hoover Dam and the Grand Canyon. The tour guide told us how Vegas had become the fastest growing city in the US and the real estate in the area can only go up because the number of people in the city expanded every year due to the building of 'mega-casinos' which created jobs. Jobs bring people to the city...mega-casinos were highly profitable because the number of visitors to Vegas was expanding at rate that would filled the mega-casinos faster than they can build them. The guide was right because 3 years later the real estate in Vegas were up something like 80% - thanks to Greenspan's zero interest rate policies. At the height of the real estate boom in 2007, all the economic fundamentals looked like they can't go wrong. However, within 3 months, the boom turned to bust[Link].

I'm not too sure if counting the number of cranes seen from the Singapore Flyer is a good indication that we are in a bubble, but the video is a good reminder that we all the factors holding up prices such as liberal immigration policies, low interest rates and global economic growth can change abruptly.

Sunday, May 09, 2010

Are Singaporeans better off than they were 4 years ago?

The cost of watching the FIFA World Cup in Singapore has just been announced. The two operators are offering subscribers early-bird World Cup football package priced at S$66 on or before 31 May, after which it will cost S$88. Do you remember how much the subscription cost 4 years ago for the 2006 FIFA World Cup? It was offered to Singaporeans at $15 subscription fee for those who signed up during their early-bird promotion and $25 subsequently[Link]. Singaporeans are going to pay more than 4 times what they did in 2006. Many soccer fans are hopping mad at this and have started a Facebook campaign to call for a boycott[Link].

Soccer is important to many Singaporeans but many have found alternatives such as getting good antennas to receive the Indonesian broadcast or watching it over the Internet for free. Also, while the companies involved in the bid are GLCs, you can't really pin it on the govt because part of the blame has to go to FIFA for having an inflexible policy that links their World Cup fees to what a country pays for EPL. Clearly, Singapore soccer fans are much worse off than they were 4 years ago and they will begin to question what has gone wrong to result in them having to pay one of the highest if not the highest subscription fee in the world. Starhub and Singtel can easily come up with a metric like Minister Mah to show you that the subscription fees are highly affordable to Singaporeans ....they can even argue that you receive a subsidy because advertisers pay for part of the cost and so on. But you know something is not right and you know for sure you're worse off than you were 4 years ago...

The 3 things that affect Singaporeans the most are housing, healthcare and transport. Are we better off than we were 4 years ago? Housing affordability has declined as the price increase of flats purchased from the HDB has increased faster than income. Healthcare costs have risen and the govt has implemented means testing to cut subsidies[Link] to keep its own expenditure low and shift the burden to Singaporeans. Transport? The trains have become so crowded during the morning rush hour, I couldn't take the ride anymore because it gets me to work tired - feeder to super packed MRT to another super-packed feeder - so I switched to to taking long haul buses because I have a higher chance of getting a seat trading off half an hour for a more comfortable ride. Imagine my dismay when the announcement about getting rid of long haul buses came out - hub and spoke? I was about to write a suggestion about having very frequent express buses from population centers to areas where people work will relieve the pressure on the MRT system. It seems that the transport minister, Lim Hwee Hua, thinks otherwise. The hub and spoke will result in greater efficiency and shorter travelling times but will add more load to the MRT system. I'll accept the hub and spoke if results in greater comfort. Transport is not just about efficiency - getting people from point A to point B in the shortest time - there is another dimension which is comfort. Has the transport improved over the last 4 years? Not for me....I was pushed from taking taxis by the exorbitant increases in fares to taking bus+MRT then by pushed the overcrowding on MRT to taking long haul buses. For me, transport has become more expensive, less comfortable and less efficient over the past 4 years.

4 years ago, Singaporeans voted for a govt that claimed to be world class during their GE campaign - one that is highly competent, honest and pragmatic. Shortly after the elections, they hiked their own salaries which were already the highest in the world. Singaporeans really have to ask themselves if their lives are better today than what it was 4 years ago for the things that the govt has responsibility and control over i.e. housing, transport and healthcare. If you vote the same way in the coming elections, the outcome will the same 4 years from now.

The 1000 points DOW plunge on Thursday...

This is the last posting on the recent financial market turmoil. I've been pouring through the news reports and various data over the weekend to get a feel of what is going on. There is a emergency rescue package put up by the EU to be announced later on Sunday. This thing will either work and calm the markets or it will intensify the turmoil if deemed insufficient....if it gets bad, it can get really bad very fast and the effects will be long lasting.

One of the interest things that happened during the market turmoil last week was this 1000pts plunge in the DOW followed by a recovery on Thursday. I was looking through various explanations including software bug, fat fingers pressing the wrong key, fast computer trading etc. There is an SEC investigation that will get to the bottom of it. But what started it?...The market was relatively stable for a few hours of trading after the open.

One of things I found out happened before the big plunge was a CNBC interview of highly respected PIMCO CEO El Erian[Wiki page]. PIMCO is the biggest bond fund in the world and Bill Gross,the co-founder and El Erian are considered to be the best in the business. PIMCO has successfully has navigated every crisis very well for its investors - many attribute this to its strong team making very accurate assessment of the macro economic picture. Here is the El Erian interview:

















El Erian gave a very thorough and clear explanation of whole European situation. Linking the risk to the banks, explaining how credit can freeze up like in the subprime crisis and one really gets and appreciation of how severe the situation is. You notice at the start of the interview the DOW was down a mere 78pts. By the time he finished talking, the DOW was down triple digits -115pts. Shortly after that the DOW declined in an accelerated fashion followed by the 1000pts plunged.



I'm not saying El Erian caused the plunge. The actual drop probably has something to do with computers overruning the system with sell orders when there are insufficient buy orders. Maybe it is just coincidence he spoke just before the market rolled over. What is important is his message. The global financial system with its high level of debt is very fragile and this economic recovery faces many headwinds. While this 1000 points drop was likely caused by computers and high speed trading, the next time it happens the causes may be economic and the problems here to stay.

While things look sunny with the govt finally willing to up the CPF contribution by employers a few weeks ago, in today's fragile global economy the outlook can change in a matter of days. Why? In the alchemy of finance, they have created the illusion of wealth from debt ...you're living in a HDB flat worth $600K only because someone else is willing to borrow that amount from the bank to buy it from you. ..your wealth is determined by somebody else's willingness to go into debt. It is completely unwise to have our ability to retire linked to HDB flats which the govt now tells us are 'investments'. By tying our funds meant for retirement in HDB flats, when something goes wrong, we not only see our wealth diminish but our ability to retirement disappear at the same time. While we may not have the political means today to bring about changes that will secure our future, we have to be wary of the system we live in and think hard about our future. Minister Mah comes out to say that flats are affordable by whatever metric he uses to measure it...at the end of the day it requires a person to service a debt over 2-3 decades and it is this long exposure to a high level of debt that poses the risk. We have seen 2 crisis in 3 years and 3 recession in the last 10 years. In the previous decades when people had 'lifetime employment' it required only 7-10 years to pay for their homes. The feeling of insecurity among Singaporeans is not something imagined. .

Saturday, May 08, 2010

Web of Debt in Europe....

The above picture is from NYTimes[Link]. This picture along with Paul Krugman's article on Europe[Link] appeared in the Straits Times today.

Default of any country is not an option because of the inter-linkages. They either stand or fail together. A sovereign debt default will mean govts will have to bailout the banks holding the debt unless they are willing to see the banking system collapse. So they are better off monetizing the debt. Another approach is for the ECB to guarantee the debt if the countries are willing to accept certain fiscal conditions laid out ....meaning they will monetise it only when countries can't service it...that will buy plenty of time.
Given the size of the debt, there aren't many ways to solve this.

Friday, May 07, 2010

Debt and Delusion Part 2

UPDATE: It appears that the EU members have woken up to the gravity of the situation and are treating the situation as an emergency. Here is a report from The Irish Times possible measures to monetize the debt[Link]. The risk is very high and if they "underwhelm" the market doing too little, they will be force to do a lot more but the damage may be so severe by then, it will not help. Monetizing debt is a bad solution but probably the only solution that will bring about confidence. They have to overcome their aversion to this, get it done to buy some time then put in regulation, rules and processes to ensure better fiscal discipline among its members. That was what the Americans did - if there is a fire, save lives first then talk about fire safety regulations later....

Debt and delusion part 1 here[Link].

In March 2010 I wrote about an interesting book by Peter Warburton about how the high debt levels in the economic system which will lead to something no less than a slow collapse and complete change of the existing financial system.

In 2004, Greece was hailed as an economic miracle when it was picked to host the Olympic Games. It was the comeback kid, the epitome of higher living standards brought about by membership to the EU. Today Greece threatens to fall apart under the austerity measures imposed on it by the IMF and other EU members. But it not just Greece that is problematic but a number of countries in the Eurozone known as PIIGS (Portugal, Italy, Ireland, Greece, Spain) that threaten the global economy with a new contagion.

In recent days we are seeing market turmoil similar to those that occurred during the subprime crisis. Fears of troubles in Europe spreading has caused a massive flight from risk as investors flee from equities and commodities to the 'safety' of the US dollar and US treasuries. This type of fear has a way of dissipating quickly resulting in large market rebounds and recovery. However, you have to fear that exceptions can occur such as during the Asian crisis when the financial crisis turned into riots and collapse of govts - some of which was brought about by speculators who created a self-fulfilling prophecy brought by spreading fear and panic throughout the crisis. We are in an extremely dangerous situation because the recovery is fragile and if it is derailed, we will be in for a long haul if we get into a double dip recession. The debt problem in Europe is extremely serious because the sovereign debt that has been downgraded is held by banks throughout Europe. Credit is freezing up and there is little time left. The policy options are very limited for Europe. If you read Peter Warburton's book, there is only one way out. I'll talk about this later. The capital markets have been completely destabilised in the past week. If Europe acts too late, the consequence will be dire. Perhaps before last month, there was some hope that the global economic recovery can lift Europe out of its sovereign debt mess. However, speculators have destroyed this hope in the past week. The falling Euro and globals stocks, brought about in part by speculators can bring a recession by undermining investor confidence. Either the Europeans can't get it done right and the EU falls apart or the make the only right move. If they get it wrong, it will perhaps be a blunder that exceeds the decision to let Lehman collapse.

What do the Europeans need to do? .....Here is a good article on where they are now and what the options are:[Link]

This is taken from a transcript from of a press conference in March 2009 given by ECB's Trichet[Link]:


"Question: Mr Trichet, two questions, please, one is: Could you again elaborate a bit more on your or the ECB’s problems with zero interest rate policy; the arguments which would prevent the ECB from lowering the main refinancing rate to zero.

And secondly, another question on the non-standard measures: If you cannot tell us what measures the Council would prefer at the moment, could you at least give us a sort of time frame for when a decision on this might take place. Or do you think you have unlimited time to decide when to pursue those non-standard measures, because time is a bit short at the moment, is it not?


Trichet: On your first question, time is short and that is why we are taking important decisions. We have taken important decisions in the past few months and we have taken important decisions today with commitments that go beyond the end of the year. As regards your second question on non-standard measures, as I said we are in discussions. I am not ruling anything out. We are not pre-committed to anything. When the time comes, you will know what we have decided. And I shall give you regular updates at our press briefings, but I do not pre-commit to any particular time. In any case, we have proved that we have been able to take decisions at any time when necessary including in exceptional unforeseen circumstances. And, as I have repeatedly said today, uncertainty is the mark of the time. With regard to why we think that zero interest rates would be very inconvenient, I will not elaborate any further. It is clearly an assessment that we have made."

Remember in March 2009, things were quite hopeless all over. There were fears that US banks were insolvent, the global economy was in a severe recession. The focus was not on European sovereign debt although it was one of the major issues. At that point in time, the US and Britain decided to take a risky strategy of quatitative easing i.e. printing money and ECB was considering the same move[Link]. Within a month, the capital markets recovered and today we have some sort of economic recovery. Based on the transcript in March 2009, the ECB was considering some 'non-standard' policy moves. However, because the US & UK started easing and capital markets recovered. This recovery masked the European problems until the early part of this year.

Things have come to a crucial juncture when market instability is going to spill over into the real economy. The ECB now has to reconsider these 'non-standard' policy moves e.g. print money to buy govt debt. They have to act this weekend or face further damage to confidence and risk of derailing this fragile economy. Also, because markets are heavily oversold, measures if announced this weekend will have the intended impact. In the absence of inflation and deflationary pressures in many EU countries forced to cut budget deficits....quatitative easing makes sense. It is a bit silly to be forced by further market deterioration to make this move. The wealth wiped out from global markets must amount to several trillions while they only need to buy back hundreds of billions of govt debt from the banks.

Yesterday, the STOXX 50 Index that track stocks of major European companies fell 4.26% in one day. They have fallen 16% in less than a month. So there is no more time left as confidence will completely shattered if nothing is done...any more dithering and the EU will be forced off the edge and when that happens, nothing they do will work.
Quantitative easing is a strategy to forestall the inevitable and buy time. If they don't do it, they will be worse off with a bigger mess to that cannot be fixed for years. However, there is some lingering political stubborn-ness on the part of Germans who feel short-changed that they have to bailout weaker nations[Link]. But the simple fact is German banks are the biggest holders of European sovereign debt and they will be perhaps the most to lose if there is no resolution of the crisis. We have seen what happens next if decision makers delay actions in such situations. History is very clear on this - we saw it during Asian Crisis and the recent subprime crisis - that the markets will force govts to act even more drastically. Govts have to put aside worries of moral hazard and politics to get this done. Looking how the Europeans bickered, dithered and quarrelled just to cough out $110B to bailout the Greeks, optimism that they will do the right and logical thing make have to be put aside. The worst case scenario is they continue to bungle and drag the rest of the world down with them in the coming days.

Warburton's pessimistic view is at the end of day there is no way out but quatitative easing may lead to inflation and ultimate deterioration in living standards ...but right now there is no choice.

Tuesday, May 04, 2010

Penang and Selangor pursue FOI (Freedom of Information) Act

http://www.theedgemalaysia.com/political-news/165123-penang-to-pursue-foi-legislation-despite-legal-obstacles.html

The FOI empowers ordinary citizens by allowing them to obtain information from govt as long as national security is not compromised.

Most developed countries have the FOI to ensure that there is competency, transparency, and accountability in govt. Without FOI, govts can release selective and misleading information that lead ordinary citizens to wrong conclusions. Secrecy is often associated with dictatorships and totalitarian govts whose main interest is to control the populace for its own benefit rather than the benefit of ordinary citizens.

In Singapore, instead of FOI, we have the draconian OSA (Official Secrets Act)[Link] which limits the communication of information.

A transparent and open govt has nothing to hide and should be willing to adopt legislation that allows citizens to request for information.

Healthcare burden worsens inequality in Singapore....

Saw this para in the TOC article on the recent 1% CPF increase:

"Singaporeans withdrew a total of S$660 million from their Medisave accounts to pay for the direct medical expenses incurred in hospitals, clinics and other healthcare facilities last year.
This was an increase from the S$590 million withdrawn in 2008.
These figures do not include withdrawals for MediShield and ElderShield premium payments which were S$745 million in 2008 and S$875 million in 2009. 52 per cent of the withdrawals in 2009 were to pay for the members’ own direct medical expenses. The remaining withdrawals were to pay for family members: 17 per cent for spouses, 18 per cent for parents, 12 per cent for children, one per cent for grandparents and others”. (“
S’poreans withdrew total of S$660m from Medisave accounts in 2009“, CNA , Apr 26)



A years ago, I chatted with a taxi driver who was taking me to work during the rush hour. It was one of those days when I couldn't get up in time to take bus and had no choice but to take the taxi. The cab driver was very friendly and told me he worked close to 14 hours a day so that he could cover the morning and evening rush hour. It was tough but he had no choice as he was badly in need of money. According to him, his wife was bed ridden with diabetes. She lost both legs and her kidney had failed so she needed dialysis. Due to diabetes, his wife also lost her sight. His daughter was also suffering from diabetes. He also told me that his family situation was so pitiful, they once appeared on a documentary and were featured news paper article. He told me he had to borrow using credit cards and eventually sold his home to pay for the medical expenses. I didn't get all the details about his income (taxi drivers earn about $3-4K?) and what type of home he was staying in. However, the financial burden for medical treatment can be heavy (read this case about another family that had to sell their home[Link] ...another about a family whose savings are wiped out by medical expenses[Link]).


The PAP govt insists that Singaporeans shoulder as much of the burden for medical care as possible and they carried this idea to the extreme, making Singaporeans shoulder the highest % of medical expenses among citizens of developed countries:

Taking care of yourself and your family may sound like a sensible idea except that Singapore has the highest income gap in developed world. The cost of good medical care is driven the richer segments of society who will naturally demand the best private care. Because of the income gap, medical cost has been rising much faster than average income and for some in the the lower income bracket it is now unaffordable. The govt has allowed Singaporeans to use Medisave for treatment in Johor[Link] while Singapore is promoted as a world class medical hub for rich foreigners[Link]. About 400,000 adults are uninsured[Link] and face the risk of high medical costs. Without universality of medical coverage, the high burden of medical is passed other family members to keep govt's expenses down. The entire system worsens the inequality in our society by making medical care a heavy burden for those in our society less able to shoulder it.

This is an area where sensible things need to be done such as providing universal coverage. For those who are too poor or unemployed, the govt has to step in to help with the insurance premiums. In some countries, the insurance premiums for govt schemes are based on income to further narrow the inequalities buildup in the society. While PAP ideology prevents them from adopting such schemes, it is not clear how long Singaporeans, some of whom now have to seek treatment in Malaysia, will continue to accept the system and support the PAP. One good thing about being a developed country is that the citizens can stop worrying about something as basic as getting medical care....that is unless you're in Singapore where the burden of healthcare actually becomes heavier for ordinary citizens as the nation becomes more affluent.

Saturday, May 01, 2010

Minister Balakrishnan scolds Al Jazeera and bloggers ...Part 2

TOC has replied to Minister Balakrishnan's accusations[ TOC Part 1 & Part 2] of "propagating these falsehood". Please go through TOC's findings and judge for yourself. The truth is sometimes like an onion - it comes in many layers. I went through the comments in my last posting and a few people say its the couple's fault they end up homeless. It is almost always true that when people reach the point that they need to seek govt help, you can examine their lives and find that they could have done much better for themselves. This, I feel, is irrelevant because if everyone manages their life and finances well, nobody will need to go to Minister Balakrishnan's MCYS for help and he can just shut it down. The only relevant questions are whether they really need govt aid and whether, as a society, we want to help them or not. If the govt does not want to render help, there is no point examing their lives to pin the blame on the individuals. At the center of the truth onion are very simple facts : an unmarried couple wants to get a rental flat which is all they can afford but are prevented from doing so by various rules which they cannot overcome so they ended up it a very difficult situation withut a home.

"The people we have who insist on staying in beaches and parks are not first timers and not people who have bought their first flat or first rental flat. These are people who have almost always sold their second flat or a third flat, have unfortunately dissipated the subsidies and cashed them and now have run into problems. .Members would have faced this problem which almost become emotional blackmail" - Vivian Balakrishnan[Link].

You have to read what Minister Balakrishnan said a few times to fully appreciate what he is getting at. So most of our homeless people actually emotional blackmailers? They are blackmailers because they had gotten into financial trouble and were forced to sell their homes to repay creditors? They are blackmailing PAP MPs with the sadness of their situation? That the minister see people losing their homes due to financial difficulties as a form of blackmail says a lot about govt attitude towards those in need.

Singapore is a city-state and like many cities housing is expensive. Because land is scarce in a city, the free market can never bring forth a solution that results in everyone being housed. That is why you find some form of govt/public housing in cities around the world. In Singapore, the majority of the people stay in public housing. Within this public housing system, we have rental flats which is suppose to be the ultimate housing safety net. The govt like to say the people staying in rental flats enjoy subsidies (read the minister's comments) i.e. market subsidies. However, these 'market subsidies' are needed because there is a wide income disparity - which results in a gap between what the poor people can afford and market rental. When the subsidy is large, it is not because the govt is generous but because we have big disparities in income. There are roughly 4500 people in the queue for rental flats. The total stock of rental flats is 42,000 but will increase to 50,000 in 2012 based on current HDB plans. The waiting time for rental flats is 18-30 months long. As the cost of living increase and income gap remains, the demand for rental flats will go up. Some time in the early 90s when we were heading for the Swiss standard of living, demand for rental flats fell and near 100% home ownership was believed to be attainable. But today, we after another 2 decades of GDP growth, we see poverty rising and demand for rental flats increasing because our income gap ballooned and that is what drives the demand for rental flats. You have 2 solutions to fix this problem - (a) reduce the income gap (b) build more rental flats to match the genuine need for these flats. HDB decided to build more rental flats but not enough to meet the demand. So they decided to implement various rules to kick people out of the queues[HDB rule change for rental flats].

" HDB will continue to permanently debar those who have enjoyed 2 housing subsidies. This is a current criteria, and we’ll maintain that. We will also retain the 30-month debarment for those who have just sold their flats. " [Link]

I'm all for rules that disqualify those who are rich and have immediate alternative solutions to rental housing. But barring people who sold their flats for 30 months and permanently barring those who purchased flats twice from HDB just doesn't make sense. How would you know when you bought your 2nd flat from HDB that your business will fail or you will sick and have to use all your money for treatment? It is one of these rules that hit the homeless couple at the beach. Even if you are eligible, you have to wait for 2 years before you're assigned a flat...so what do you do in the meantime? Maybe stay at the govt shelter but shouldn't the govt build enough rental flats so that these people have a proper home?

The govt has adopted an approach to economic development with includes a policy of importing cheap foreign labor that has led to great disparity in income - the highest in the developed world. It is this income gap that drives the need for rental housing and housing subsidies. Instead of meeting the genuine demand for rental housing, the HDB under-supplies leaving those with very real needs to find other solutions - those who are lucky have other family members who stand in for the govt to give help ....others end up at beaches, void decks and govt shelters. Why is there a 2 year queue for public housing for those with a real need when resources are allocated for foreign workers hostels so that foreigners have a place to stay?

This is not a problem the govt cannot fix. The govt has more than enough resources to do this but is limited by ideological belief that 'welfare is a dirty word' and 'subsidies are bad'.....but these subsidies are neccessitated by the huge income gap which is a function of economic policies adopted by the PAP.