Scenario Forecasting - Singapore 201X

I'm not a regular reader of Senang Diri, but his latest post seriously irked me.

As much as I get the idea behind him exploring the security implications of a political transition to a non-PAP government, the post was heavy on the scaremongering and extrapolation ad infinitum, and thin on substance.

And the final flourish? "This is Year 0 and Singaporeans have gotten the government they deserve." Subtext: You would be a fool to risk the PAP falling from power. Better the devil you know, than the devil you don't. Stay safe: vote for the men in white.


You know what that sounds like to me? Too big to fail. Like banksters holding everyone hostage while they pile up their bonuses and construct their grand plans for everyone else. Having the PAP continue to have their way is no reason to feel secure. Quite the opposite in fact.


While flaneurose may not have as many page views as Senang Diri, I think I too will channel my inner Peter Schwartz, and try my hand at scenario forecasting.

I'll take creative licence to scaremonger and extrapolate endlessly too, but let me paint for you a different, and dare I say, more plausible scenario for Singapore in 201X.

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With the massive debt overhang from decades of trade and fiscal deficits, largely brought on by the abandonment of the gold standard and the Bretton Woods system, as well as having in possession the exorbitant privilege of issuing the world’s reserve currency, the US government’s debt situation finally comes to a head in 201X.

The proverbial straw that breaks the camel’s back are the massive debts from the Great Recession of 2008 that were never written off, but were instead transferred onto sovereign balance sheets. The Federal Reserve and the US government, captured by financial and special interests, continues their destructive policy of quantitative easing in an effort to inflate away debts and avoid writedowns of US debt. They are confident that the US dollar will continue to maintain its reserve currency status as “there is no credible alternative”.

Meanwhile, the European Union (and the UK) first implodes under a mountain of debt, then breaks up in spectacular fashion. Belatedly, the European Central Bank also revs up its own printing presses to arrest the crisis, but the damage has already been done.

China, being a mercantilist economy more dependent on its trade partners than it cares to admit, prints as well, keeping the value of the Yuan low to maintain export competitiveness and export-driven growth. But global markets will have none of it. Demand has dried up everywhere. Meanwhile, the massive amounts of bad debt in China’s state banking system start to take their toll. The shadow banking system in China also starts to exert profoundly negative effects on the economy. Stir in a real estate collapse into the mix, and you have politically destabilizing developments in China as once reasonably prosperous Chinese citizens revolt against a situation where growth turns negative for the first time in a generation.

Debt-ridden countries make the conscious decision to default on their debts, either through outright repudiation of debt, or through stealth default via inflation. Inflation everywhere runs at a rate of at least 7% per annum for the foreseeable future. Interest rates respond by rising concomitantly, leading to more rounds of default. The astronomical notional value of derivatives in the global financial system acts as an accelerant to the crisis, nay, apocalypse.

Global trade and commerce dries up everywhere as developed countries that formerly ran trade deficits erect trade, capital, currency and immigration controls to ringfence their own economies from global economic turmoil, and to husband their most valuable resource: domestic aggregate demand. These measures are largely implemented by politicians swept into power on a wave of nationalistic sentiment and a revolt against the status quo. A new era of trade protectionism dawns.

Small countries highly dependent on external trade and capital flows, and who have deliberately structured their economies that way, are the biggest losers.

In Singapore, the economy suddenly grinds to a halt from a reversal in the hitherto-thought unstoppable trend of increasing international trade and globalization. At the same time, with globally high inflation and interest rates (and bond yields), the real value of Singapore’s sovereign wealth funds, tied up in various “investments”, plummets. All of a sudden, the emperor wears no clothes, and is poverty-stricken to boot. Needless to say, the Sing dollar isn't looking pretty. Singapore politicians start to panic, torn between digging into the kitty to fight the crisis or leaving untouched what has sudden been cut in half, or worse.

The large foreign professional workforce starts leaving, either for better prospects elsewhere, or at least home, where the living is cheaper or where social safety nets exist, albeit greatly diminished in real terms. This provides cold comfort to the average Singaporean professional, as the number of jobs is vanishing faster than the competition for them.

The sudden loss of such a large proportion of the population creates an accelerating downward spiral in the economy, extremely difficult to reverse even if the will to apply massive fiscal stimulus did exist. Politicians who are penny pinching in good times are unlikely to loosen the purse strings in tough times. The austerity hair shirt beckons. And of course, the local real estate market, fueled by debt and capital flows from since the previous decade, starts to implode. Debt, again, shows itself to be a problem even in the formerly prosperous city state.

Meanwhile, the poor unskilled foreign workforce remains in Singapore, abandoned by irresponsible employers, unable to return home, or unwilling to do so since they borrowed heavily to pay for passage here. Crime of all stripes, petty, violent or venal, starts to skyrocket. The authorities respond by forcibly deporting undesirable foreign elements. Expect riots and violence to ensue.

Too bad the authorities can’t deport the bottom 30% of the local born Singapore population as well. Struggling right through the good times, their collective living situation deteriorates even further into the teeth of the crisis, unrelieved by substantive social safety nets, real or imagined, permanent or stop gap. *They* start to contribute to societal disintegration as well.

The top 20% of the Singapore resident population, fatly fed from the boom years, treated with kid gloves (see Woffles Wu) and feted by the government, start to reconsider their choice of home. After all, they aren’t Singapore citizens, not really, since they’re actually “global citizens”. Turns out the Boston / London / Switzerland / *insert city of reference here* of the East is a lot grubbier than once thought. Hey, if the formerly top property developer here had the tagline of “Own the Original”, why not “Move to the Original” too?

So the elite of Singapore leave, taking their wealth with them. I would not be surprised to see more than one cabinet minister's family among them. The people who were formerly the toast of the town now toast their goodbyes and take off, tossing the last flute of champagne aside at Jet Quay in Changi Airport and breezily swanning through the departure gate. Of course, they don't forget to collect their goodies stashed at FreePort on the way out. 

If you’re smart and lucky, well, you might just be able to slip away right on their heels. Do turn off the lights when you leave.

For everyone else, enjoy the darkness.

When will housing prices return to 'normal'?

I think few ordinary Singaporeans would think that housing in Singapore is affordable or reasonably priced.

Yet, while I share this view, I have been hesitant to label the Singapore housing situation a bubble, unlike many other bloggers or news sites. This is because there are several fundamental drivers for property prices in Singapore. Also, indicators for property valuations are mixed. For example, price-income ratios appear to be on high side, but price-rent ratios are more moderate. 

Note, however, that this post does NOT constitute an exhortation to "buy now before it becomes even more expensive" or that property represents an excellent investment proposition in Singapore.

This post is on thinking about why housing prices have risen, what could cause prices to reverse, and how likely it is that prices will return to a more moderate, 'normal' level.

I have identified 5 drivers for the recent rise in property prices in the past 7 years or so:

1. Strong GDP growth and a relatively stable employment. Wage growth, however, is a separate issue. But clearly, at least some people, notably higher income groups (both local and expatriate) benefit from GDP growth.

2. High rates of immigration.

3. Liberalization in property-related policies. For example:

• reduction in downpayment from 20% to 10% for HDB flats bought with bank loans, enacted in 2005.
• permitting singles to buy any type of HDB flat, when previously they were restricted to 3-room flats.
• permitting entire HDB flats to be rented out.
• reducing the number of years flatowners must stay in their flats before they can be sold on the resale market.

Notably, HDB has backpedalled on some policies since property prices started sky-rocketing. I do not have an exhaustive list of all the policy changes that the government has enacted in the last 7 years or so (and there are many). Frankly, the housing policy system in Singapore, just like the CPF policies, are byzantine. But the overwhelming impression I get is that policies today are far more liberal than they were 7 years ago. Enlightened readers can correct me here if I am wrong.

4. Inelastic supply of property, in particular HDB flats. HDB's BTO scheme is largely responsible for the latter situation.

5. Ample liquidity, and low interest rates. This is a function of governments around the world flooding the markets with liquidity, particularly Bernanke's quantitative easing policy. There is a direct inverse relationship between property prices and interest rates.

Given these positive fundamental drivers, high property prices in Singapore may stay high for a very long time. 'Normal' could be a long time coming, which might be a good thing or a bad thing depending on your personal financial situation. Again, I have to reiterate here that I am NOT recommending investing or buying property now. I'm not in the market for Singapore property, or any property for that matter, now and in the foreseeable future, so I'm not talking my book.

How might the fundamental drivers listed above be affected such that property prices start to fall and moderate?

Clearly, government policy has a lot to do with policy liberalization, immigration and housing supply. Given how wedded our government is to immigration and just-in-time construction policy, I'm not holding my breath for change here. The government has shown a willingness to tweak housing policy, but it is evident that their effects are not as potent as increasing supply or restricting immigration. Barring a massive loss by the PAP at the next general election, which needless to say is a black swan event, we can safely conclude that policies conducive to high property prices will continue to persist.

As for economic growth, liquidity and low interest rates, these will largely depend on external factors. In particular, if the wheels come off the global economy due to fiscal stimulus wearing off, or if the China overcapacity, commodity-buying and property bubbles burst, or if the US dollar suffers a crisis of confidence, or if the sovereign bond market revolts and stages a massive puke-up...well, a lot of very bad things could happen in a very short time.

Singapore's economy would clearly suffer in such a situation, with knock-on effects on foreign direct investment, capital flows and property prices (and perhaps even immigration).

On balance, it's difficult to say when property prices in Singapore will revert to 'normal'. If you believe that high growth will continue, you might hold the view that housing prices have reached a permanent new plateau, never to descend again.

If on the other hand, you see unsustainable policies, interest rates, levels of debt both sovereign and household, and money-printing everywhere you look, you might have far less sanguine views. 

Myself? Let me reiterate for the third time that this post does not constitute a recommendation or a forecast. Whatever I write could well be very wrong.

I think that property prices will continue to grind higher (keyword: grind, meaning protracted and choppy but with a directional bias) for the short to medium term, meaning 6-18 months or so. Perhaps longer. If an economic reversal occurs however, then property prices will probably plunge sharply and quickly. In other words, my view is that property price movements will be assymmetric in direction and magnitude. Less potential upside relative to potential downside.

A rising tide lifts all boats?

The PM recently rubbished income inequality as being of little importance.

There is an excellent book for those who wonder why people like myself are deeply concerned with income inequality and why it matters to modern society - Falling Behind: How Income Inequality Harms the Middle Class, by Robert H. Frank.

Very briefly, Frank argues that there are two kinds of goods, positional, and non-positional, and rising inequality forces people to devote more resources to purchasing positional goods, neglecting the non-positional, and leading to a loss of social welfare across the whole of society.

What are positional goods? They are goods for which the relative rank of what the consumer consumes has importance.

There are lots of good examples in Singapore. Education for instance. A university degree is practically a requirement now for a person to make a decent living. 30 years ago, it wasn't. The reference point for education has shifted upwards so that most people view a university degree as a necessity. Hence the deep unhappiness whenever tutition costs are raised. Housing is another. Oh, we're not talking about luxurious condos or bungalows. But consider this, it is common wisdom in Singapore that because of the 1 km proximity rule, housing that is nearby to "good" schools is considerably more expensive than comparable housing located elsewhere. Clearly, not all HDB flats are built equal. And getting, or rather, not getting, the "best" HDB flats could literally seal the fate of your kids.

And for a more pan-national perspective, we can consider defense spending as the ultimate positional good. To illustrate this, let's rework what the mainstream media article wrote:  "Worried about low defense spending? What's important is not the absolute gap between Singapore and Malaysia/Indonesia, but whether Singapore's defense spending is moving up."

Does that statement sound absurd? Of course it does. What matters is how much more we are spending than our neighbors, not how much we are spending in aggregate.

Positional goods are real; concern with the positional nature of goods should not be dismissed or belittled or deemed irrational. Context matters. And it isn't simply just a matter of keeping up with the Joneses or about the politics of envy. It's just that rising inequality raises community standards of what is deemed normative in the community.

So how does rising inequality hurt Singaporeans? 

Singaporeans today are spending more on a whole range of positional goods, to their own detriment. It is akin to a positional goods arms race: We are spending more on housing (got to be close to those good schools!), on raising children (think tuition, enrichment classes, childcare), on education (both for our kids and ourselves - retraining, reskilling, postgraduate degrees), and even, basely, on consumer goods.

Think of it this way, at a job interview, who gets hired? The best candidate of course. But all candidates being equal, would you rather hire the guy dressed in the sharp Zegna suit or the typical guy in shirt and slacks? Never mind that the Zegna guy is a trust fund baby and can well afford his threads. The next job interview, everyone shows up in a Zegna suit. Problem is, every other candidate put the suit on their credit card, resulting in four-figure debt.

That's how income inequality hurts the middle class. Rising income inequality stretches the boundaries of what are considered normative, because the rich invariably purchase the things that give them a leg up in whatever they're doing. This isn't about envy, it's about how people try to keep up in order to achieve things that are really important. Jobs, schools, kids' futures, a better quality of life for the family.

In Falling Behind, which speaks specifically to an American audience, Frank lists the ways middle class folks use to "afford" to keep up. The list isn't pretty. They are: working longer hours (to which I would add increasing prevalence of dual income households), reduced savings (that certainly sounds familiar: CPF accounts emptied by housing anyone?), increased indebtedness (ditto), longer commutes (yes, yes, yes), growing sleep deprivation (maybe, maybe not) and public service cutbacks (not so much here).

I would add another way that is more uniquely Singaporean. Fewer kids. Rising income inequality means fewer kids, as Singaporeans marshall their resources to pin their hopes on just one or two offspring.  The last I checked, encouraging Singaporeans to have more kids was a government priority. Income inequality isn't important...really?

"The Quiet Coup"

Great economics article here by Simon Johnson from the IMF.

And so it begins...

The race for competitive devaluation is just beginning. Not that the US dollar is such a paragon of virtue. Despite its "strength", the US dollar is better described as the least bad of all currencies, excepting perhaps a certain shiny yellow metal (which does NOT construe a recommendation on my part in any way). 

Competitive devaluation could be a precursor for what every government around the world is exhorting everyone else not to do: protectionism.

Really? If paying down debt is also called savings, then I contend that explicit policies designed to encourage exports is also known as ... protectionism.

And the next thing to happen after protectionism is a global slowdown in trade, not that that isn't happening already.

For countries dependent on world trade, it's time to wake up and smell the coffee.

Stay tuned.

Recession Fatigue

If you're experiencing "recession fatigue", as in you're sick of all the bad news in the economy, stock market, job market, real estate market, you had better sit tight. Things aren't going to return to 'normal' anytime soon.

This is rapidly shaping up to the worst recession in a generation and will probably influence the zeitgeist for the coming decade ahead.

The financial crisis is feeding off the economic crisis and is in turn fueling the economic crisis through one giant positive feedback loop. And embedded in this giant feedback loop are hundreds of other little vortices that are like tiny positive feedback loops acting in concert.

And we thought the big bank bailouts were the end of it. Heck, no. For the Singaporeans who care about such things, you can safely assume that our sovereign wealth fund investments in Citigroup are essentially worth zero already; Citigroup the global entity is effectively insolvent. That's in spite of the spin that we're paring losses. Further dilution of common equity through "preprivatization" or at the very least, more capital injections by the US government, is almost certain for sure.

And Singapore's exports driven growth model works just as well on the downside as it does on the upside. The problem is, we were so successful at it that every other Asian country jumped onto the exporting bandwagon, independently or not. It's now a really crowded ride. 

How are the economic numbers going to turn out in the near future of the next one or two years? If you live in the USA, you want to read this.

For Singapore, I'll take a wild stab at guessing the numbers. And the operative word here is guessing.

5% contraction in GDP and unemployment in the high single digits (~9%).

"Shortage of Critical Commodities Seen Already"

I almost never reproduce investment or economic commentary even though I consume a lot of it in my own reading. This is mainly because I do not want anything on this blog to be misconstrued as investment advice. But this story is interesting and is far easier to relate to than the typical wonkish economics or finance story. But as I've said, I will not offer any advice or commentary of my own. Read into this story what you will.

The links to Wikipedia are a convenience I provide to readers. Enjoy.

From www.safehaven.com
Published: February 11, 2009
by Marygwen Dungan 

Maybe you thought that less trade with China would mean fewer choices of lawn gnomes at Walmart this summer. And since you've recently sworn off, who cares anyway. Turns out China is also a leading provider of the raw materials used to make critical pharmaceutical drugs. We'll have fewer of those too and, in some cases, none at all.

What inspired me to write about this subject was the predicament of a friend in pain management. Last week a Wegmans pharmacy ran out of OxyContin® and several other prescription medicines. Customers were told that Wegmans' supplier did not have the ingredients to make several medicines and did not know when they would have them. Wegmans isn't a mom-and-pop corner store with no buying power. It's a 71-store chain on the east coast, is one of the largest private companies in the US and had sales of $4.8 billion in 2008. The active ingredient of OxyContin® is thebaine, an alkaloid compound distilled from opium. By law, it cannot be stored so each year's crop size is determined by expected sales. However, it's only February so the shortage in the US is not due to Asian exporters' supplies having run out.

The shortage of leucovorin, a generic used in the treatment of colon cancer, is so acute that many cancer patients are receiving lower-than-prescribed dosages or none at all. According to suppliers, the shortage is due to "manufacturing" delays. In an interview with Forbes, Michael Katz, chair of a committee of patients that advises the Eastern Cooperative Oncology Group (ECOG), said, "I've never heard of anything like it," nor had any of the doctors in the group. There is a fear that shortages will occur more frequently with generic drugs because the margins are so thin. Leucovorin is also called folinic acid, which is derived from vitamin B and, like most vitamins, vitamin B comes from China.

There is also a worldwide shortage of acetonitrile, a critical chemical ingredient used in the purification of pharmaceutical compounds. Acetonitrile is a by-product of the automotive industry and is in short supply due to the worldwide slowdown in that industry, which, in turn, has caused chemical production facilities around the world to close.

Going forward, a number of factors will influence the availability of life-saving medicines and other critical commodities.

Supply disruptions: The majority of growers and producers of the raw materials for drugs are in Asia. You remember the cliff dive of the Baltic Dry Index last year. It was a reflection of severe disruptions in international trade, which, in large part, was caused by the unwillingness of banks to accept letters of credit. This could be the reason for the shortages of opium distillates, vitamins and other raw materials, which are showing up in US pharmacies now.

Profitability and production stoppages: Indian pharmaceutical companies have stopped manufacturing some unprofitable drugs and they threaten to cut back on more. Their profits have been eroded by the fall in value of the rupee, which has raised their procurement costs for both packaging materials and bulk purchases of raw materials from China.

Distribution: Trucking companies across the country are both cutting back on routes and closing due to less business and higher costs. This reached crisis proportions during the gas price spike last spring and summer and is continuing due to reduced demand for hauling. Bankruptcies were up more than 118% by the second half of 2008. In a Reuter's interview, industry consultant Fred Crawford said he expects the acceleration of bankruptcies seen in the second half of 2008 to continue this year.

If demand for medicine decreases in a depression, it's not because people aren't sick. In fact, more people are sick, but they can't afford medical care. If you've come across the crisis-preparedness list of 100 Things that Disappear First, you know that drugs are at the top of the list. Well, we are in a crisis, we are ill-prepared and, sure enough, medicines are disappearing.

"IBM to laid-off: Want a job in India?"

From CNN.com

By Karina Frayter, CNN
Last Updated: February 5, 2009

NEW YORK (CNN) -- IBM employees being laid off in North America now have an alternative to joining the growing ranks of the unemployed - work for the company abroad.

Big Blue is offering its outgoing workers in the United States and Canada a chance to take an IBM job in India, Nigeria, Russia or other countries.

Through a program dubbed Project Match, IBM will help interested workers whose jobs are on the chopping block to "identify potential opportunities in growth markets and facilitate consideration by hiring managers in those markets," according to an internal company document obtained by CNN.

The company also will help with moving costs and provide visa assistance, it says.

Other countries with IBM opportunities include Argentina, Brazil, China, Czech Republic, Hungary, Mexico, Poland, Romania, Slovakia, Slovenia, South Africa, Turkey, and United Arab Emirates, according to the document.

Only "satisfactory performers" who are "willing to work on local terms and conditions" should pursue the jobs, the document says. IBM would not immediately confirm if it means that the workers would be paid local wages and would be subject to local labor laws.

A spokesman for Alliance@IBM, a workers' group that is affiliated with the Communications Workers of America but does not have official union status at IBM, slammed the initiative.

"IBM not only is offshoring its work to low-cost countries, now IBM wants employees to offshore themselves," spokesman Lee Conrad told CNN. "At a time of rising unemployment IBM should be looking to keep both the work and the workers in the United States."

The Armonk, N.Y.-based company has confirmed recent layoffs but has not provided any specifics on the number of people affected.

Conrad said IBM (IBM, Fortune 500) has laid off more than 4,000 workers in the United States since the beginning of the year, but called that "a conservative number."

"This is unacceptable to the Alliance and we are pursuing this by asking our members and all IBM employees to contact their political representatives to demand an accounting and transparency in job cuts and offshoring from IBM," Conrad said.

LoUC and Organ Trading

There was a recent news report speculating that a local tycoon who had been charged with attempting to buy a kidney had received an organ from an executed convict. See the article here.

Bearing in mind that the donation was a directed one (in which the donor specifies explicitly who is to receive his organs), and considering the rapidity with which Tang Wee Sung received the organ, his age, and his admittedly poor health that renders him a less than ideal organ transplant patient, it's tempting to speculate if any ex gratia payment was made by him to those Tan Chor Jin is survived by. 

Now far be it for me to impugn the character of anyone in this matter, or to speak ill of the dead. I am doing neither. I am merely using this to illustrate a possible effect of the Law of Unintended Consequences (LoUC) should organ trading be legalized. I am neither for or against organ trading. I simply am not wise enough to know which is the better option, hence I choose to reserve my opinions.

Many people have spoken of in favor or against organ trading. One prominent local blogger, for instance, has written on it.

One argument against legalizing organ trading is that it permits the poor and destitute to be exploited by those rich enough to pay for their organs.

I have a different take on this, and that is that legalizing organ trading could reduce the supply of organs for patients too poor to pay for them. Do bear in mind that this in no way necessarily means that I am against legalizing organ trading. I am merely exploring consequences here.

The strength of the legalization argument rests on the premise that it would immediately raise the number of organ transplants (lubricated by money), hence increasing the number of lives saved.

Economics tells us that by having a clear and transparent market for organs, the own price elasticity of organ supply should increase (when it is now exceedingly inelastic, being illegal), leading to a rise in the number of transactions (i.e. lives saved) and a fall in the market price for organs (the fall in price is relative to the presumable black market price for an organ, or any analogous illegal product, like a narcotic drug). The implicit assumption is that the demand for organs remains unchanged, which is a reasonable assumption to make, given that a person either needs or doesn't need an organ, and organs can't be stored. 

So far, it's all good. More lives saved, cheaper organs. But the key thing to note here is that the "cheaper" applies only to people who are willing and able to pay for organs anyway, even to the extent of going to the black market, like tycoon Tang did. What about patients who are too poor to pay the market price for organs? What then, since the demand for organs is almost always much higher than the available supply? What happens when something that was formerly a gift of a new lease of life is now commoditized and subject to the discipline of the market? Will poor organ transplant patients be priced out of the market?

And will it stop there? What if the donors who had formerly donated their organs now choose to hold back, seeking payments for themselves and their families? What will that do to the market clearing price for an organ? Will middle-class patients find themselves gazumped at the last minute, outbid by someone who is willing to pay more? In Singapore, where our society is already one of the most inequitable on Earth, will organ trading also lead to organ transplants being one more thing that will be reserved only to the rich?

Certainly, the story I highlighted above about Tang Wee Sung doesn't exactly lend confidence to the view that these things will not happen.

 

The spread between private and public housing

“Spread” is finance jargon. It means difference in price or level. For example, the bid/ask spread in a stock is the difference between the highest price potential buyers are willing to pay and the lowest price potential sellers are willing to accept.

The spread between private and public housing I am referring to in the title of my post is, of course, the difference in price between a HDB flat and a comparable (in location and square footage, among other things) private apartment.

Private apartments obviously cost more than HDB flats and are also more “desirable” or “better” for a number of reasons, which I will not elaborate on here. Ample information is available elsewhere, given how property is a national obsession.

Unless you’ve been living in a cave somewhere, you should know that we’re headed for a global recession. Singapore is already in a technical recession and private property prices here are starting to crash. Hard. 

We could go on and on about the imminent new supply of private apartments coming on stream and the delayed redevelopment and subsequent letting out of enbloc-purchased units by developers. These are all warning signs that private property prices are poised to go “cliff-diving” (ah, how that catchphrase just rolls off the tongue).

But we won’t. As mentioned before, my blog focuses only on fresh perspectives or perspectives with less exposure. And right now, I want to focus on credit.

Credit as in debt financing for property. Mortgages in other words.  

Today’s ongoing global financial and economic crisis was in many ways brought about by too-easily available credit. Enough ink has been spilt over why this is the case. Suffice it to say that banks are now yanking back easy credit, and even though Asia is not the epicentre of the crisis, even here in Singapore, we see that credit availability has been tightened, for both companies as well as individuals.

How does this affect residential property prices?

Well, property being such a big-ticket purchase, it is almost always purchased on credit (for normal people that is). 

The thing is, for families that buy HDB flats, credit is exceedingly cheap (by global standards) at 2.6% p.a. from the HDB. Contrast that with the expense associated with a bank loan to purchase private property in Singapore, even if interest rates have been driven to multi-year lows by central banks around the world.

And that’s if you can get a bank loan. Word is getting out that even if servicing debt has not become more onerous, getting credit in the first place is harder than before.

So the spread between private and public housing is set to narrow in Singapore. This is mostly due to private property prices crashing hard after attaining bubble-like characteristics. But what I am pointing out here also is that the spread is contracting because of the unavailability of easy credit. Unavailability of credit, by the way, is also one of the culprits behind shrinking trade, which is unequivocally bad news for trade-dependent Singapore.

Private property prices are falling because bank loans to purchase them are harder to come by. Asset deflation, as economic pundits would put it. Anything that needs credit to purchase (including cars) is going to see its price fall unless that credit is still available.

Further to this is the liquidity issue. Something that needs credit to purchase when that credit is not forthcoming is unlikely to be a highly liquid asset. And illiquid (relatively speaking) assets are subject to a liquidity discount.

To put it another way, HDB flats in the near and foreseeable future are likely to be priced at only a modest discount to private property. Not because they are almost as desirable as private apartments (which is debatable), but because they are far easier and cheaper to obtain financing for, and are easier to move in a property market that is in recession.

In some ways, these factors have always applied, but they are more pertinent today than before because the era of easy credit has come to an end.

So what does this mean for property buyers and sellers?

I am not in the habit of giving advice on this blog, much less advice that has import on actions of such magnitude as property transactions. So don’t misconstrue anything here as advice, you have been warned.

Now that the disclaimer has been done with, my take is this:

HDB prices are likely to reverse course after a short-term rise, and start to slide as Singapore endures a serious recession. But their slide will be cushioned by many reasons, including the ones I have cited above. 

As for private property prices taking a tumble, does this mean that they are a good, cheap, value-for-money buy? 

It depends on your view as to whether reflation will occur, whether easy credit will make a comeback, and whether the economy will swing back to the same dizzying heights it experienced in 2006 through mid-2007. 

This is entirely reasonable to expect as Asia in general and Singapore in particular suffered much less of the speculative excesses of the real estate markets in developed countries.

On the other hand, economists and “analysts”, never mind their dismal track record for forecasting, have been busy prognosticating that recovery will take place in the [insert number] quarter of 20[insert number], after credit and economic conditions “stabilize” and return to “normal”.

“Normal”, as I am fond of reminding people, is a matter of historical perspective and frame of reference.

Singaporean's net wealth higher, really?

The New Paper today (23 November 2008) ran a column by "Harvard-trained economist" Zhen Ming, who's self-styled moniker is Boston Brahmin. It's on page 16 if you have a copy of it handy.

The gist of the column had to do with the net wealth of the average Singaporean household, and how despite the recession, the average Singapore household has actually grown in wealth and is in relatively good shape for the economic downturn. I reproduce the statistics below:

                                              End-2000                             End-2006

Assets

Currency & Deposits          $136,310                               $157,930

Shares and Securities         $75,340                                 $120,360

Life Insurance Equity        $30,750                                 $76,820

CPF/Pension Funds           $94,190                                 $119,930

Residential Property          $386,830                               $384,920

Total Assets                     $723,420                              $859,970

Liabilities                              

Mortgage Loans                  $106,800                               $110,390

Personal Loans                    $38,450                                 $39,180

Total Liabilities             $145,250                              $149,570

NET WEALTH                 $578,160                              $710,400

The source is from the Yearbook of Statistics Singapore, 2008. Interestingly, the figures that Zhen Ming cites are slightly different from those I found online (p. 201), but they are in the same ballpark (no foul there).

This column is a reminder why everyone should school themselves to have at least a passing familiarity with statistics.

What are the problems here?

First up, "average wealth of the Singaporean household" can refer to the mean, median or mode. In this case, (I have to admit that I didn't check) it seriously looks like the figures refer to a mean rather than the median. There is good reason to believe this since households run the gamut from young couples with no kids, to nuclear families to retirees whose children have flown the nest. Each of these types of households have a different spread of assets vs liabilities (retirees are likely to have much less in the way of liabilities vs young couples) so it wouldn't really make sense to calculate a median instead of a mean.

Now what's wrong with reporting the mean. Nothing, except that it is well known that Singapore has a high and rising Gini coefficient (p. 14) and that the mean conceals the fact that many Singaporeans have far less in the way of net assets than the figures above suggest. 

Next, time lags in the data being reported. The Yearbook of Statistics provides data only up to end-2006 (which admittedly was still boomtimes), and Zhen Ming compares these figures to end-2000 (when Singapore was just coming out of the Asian Financial Crisis). I think it's safe to say that the comparison in net wealth between these two periods, while informative, tells us little that we would not otherwise expect. Oh, and if you're thinking of the comparison between end-2000 vs end-2006 and vs end-2008, I also think that it's safe to say that the economic environment in 2008 has deteriorated markedly since end-2006 (like duh).

In particular, assets such as currency deposits (especially forex holdings in AUD and NZD, highly popular among naive Singaporeans for their high interest rates), shares and securities, equity-linked endowment assurances, and real estate are likely to have fallen in value since end-2006 (and will continue to fall in value).

Finally, the effects of inflation may not have been accounted for. If they haven't been adjusted, the figures for end-2006 should be deflated by approximately 4.32% going by the CPI figures reported by Singstat. Adjusting for inflation however, does not address the other problems I have listed above. It's also pertinent to note that inflation has been especially detrimental to the finances of the lower income groups, particularly since it has been reported in the past that their real income has actually fallen in past years.

[I understand the irony in analyzing an article published in a tabloid like the New Paper in such detail as I have done here, but the same accusation could be levelled at Zhen Ming. Harvard-trained or not, telling the typical downmarket New Paper readership that their average household wealth is north of half a million dollars is to invite ridicule.]  

Fed Swap Line Redux

I mentioned the Fed's swap line to Singapore in a previous post.

The Straits Times picked up the Fed release and published it in today's paper.

MAS has explained that the swap line is a precautionary measure, which is a reasonable explanation given what I, and many believe, to be the stability of our local banks. Having a swap line also means that the Singapore financial system is not disadvantaged vis-a-vis many of the Western European countries that have exising swap arrangements with the Fed. That's all good news indeed. 

Letters of credit

Thanks to the ongoing financial crisis, it wasn't so long ago that the public had to be educated on formerly esoteric finance jargon like subprime security and collateralized debt obligation (CDO).

The next finance term that the public is likely to be acquainted with depends on which shoe is the next to drop. Until recently, I had thought that it would be credit default swap (CDS), which we are hearing increasingly more of.

(Personally, I believe that CDS's had something to do with the Lehman Minibonds and DBS High Notes that we had been hearing so much in the news about. Specifically, our poor Singaporean retirees who had been bilked out of their life savings were unwittingly writing credit protection to the big banks. But I digress.)

Now, I think it likely that the next (trade) finance term the public is going to hear about is letter of credit (LOC), which strangely enough, I came across for the first time in Robert Jordan's Wheel of Time fantasy fiction novels (I swear, I'm not making this up).

Anyways, there's been a substantial amount of blogging and news about how the ongoing credit crisis is resulting in banks refusing to guarantee transactions between importers and exporters. This in turn has caused problems in shipping. All this is occuring in the background, with a plunging Baltic Dry Index in the foreground.

Recommended, but technical, reading is here, here, here and here. [And yes, in addition to being a full-time engineer, I am also something of a finance wonk.]

What's the likely fall-out from this side-effect of the financial crisis? Yves Smith from www.nakedcapitalism.com writes that it could metastasize into "Smoot-Hawley on steroids", or a manufacturing shut-down plus depression scenario (which is, no pun intended, really depressing to contemplate).

My interpretation of that is that in addition to severely depressed economic activity as a direct result of a slow-down in trade, we might also see persistent shortages of goods as well as higher prices. Inflation, or more properly, stagflation, could stage a come-back.

Of course, given the gravity of the situation, I can't imagine that governments around the world would sit back and do nothing. So perhaps such a dire situation is unlikely to come to pass. Still, it's one more thing to worry about.

The Fed provides Singapore with a swap line

I caught wind of this from one of the blogs I frequent: www.nakedcapitalism.com

The Fed is providing Singapore with a USD30 billion swap line. Now I wonder why this didn't make the local news? 

Private Banking and Trickle-down Economics

My previous post on private banking focused on it as a career option. Thinking about private banking led me to consider the wider effect of private banking, and more broadly, finance on the economy.

Singapore has aggressively pursued the finance hub idea for the past decade or so to boost economic growth, but with decidedly mixed success. Just a simple glance at IPO figures and you’ll see that Hong Kong and Tokyo are leagues ahead, particularly Hong Kong. With the size of the larger Chinese companies listing on the Hong Kong exchange, it’s New York and London that are starting to feel the heat of the competition. Competition from Singapore is a non-issue for Hong Kong.

But in the area of private banking, we are doing much better. This is thanks mainly to the strong banking secrecy laws here (stronger than Switzerland, which has to comply with EU directives) and the Singapore government, which is, how shall we put it, politically stable and open to foreign investment.

While private banking does create a number of high paying jobs, it’s interesting to consider what the high-flying banking industry means to the ordinary population. This is especially so since doubt has been cast on trickle-down economics in the US of A.

Mainstream economics would contend that any industry doing well would lead to trickle-down effects. For example, a private banker needs teams of assistants and analysts (which means jobs), and their consumption would in turn benefit providers of other services (such as restaurants, real estate agents and nannies). This goes for the private banking clients as well, assuming they reside in Singapore at least some of the time.

But as a thought experiment, sometimes I do wonder how much the wider economy benefits from banking and finance as an industry. For example, while New York City does derive a large chunk of its tax revenues from Wall Street and spends this on public services, it’s undeniable that the greatest beneficiaries from Wall Street’s largesse, aside from the bankers themselves, are the luxury car dealerships, real estate agents, jewellers, luxury retailers and the like. We can include the $400 dollar a head restaurants, $300 a cut hair stylists, the highly paid Mandarin-speaking nannies, the couturiers, furriers and spa therapists.

It’s less than clear how much the general city population benefits from such an industry that consumes mainly high-end goods and services no one else can afford.

This is especially so when we consider the damaging effects of income inequality. The obscenely wealthy tend to bid up the prices of goods that they desire, and this causes knock-on effects on all sorts of goods. Real estate is a good example. We have had whole floors of condos purchased by foreign money in Singapore in the last two years for investment purposes, at the peak of the real estate boom. This surely influenced the affordability of HDB flats.

The economist Robert Frank has written on some of the pernicious effects of income inequality, and it’s worth thinking about whether gains from economic growth that encourage income inequality are worth their detriments.

What exacerbates problems in the case of private banking is that in general, wealth is not created through these activities. While many private banking clients that conduct their business through Singapore are nouveau riche, they didn’t create their wealth here. They created it in China, India, Indonesia…anywhere the pan-Asian and commodity boom touched. Singapore is merely a convenient place to park their funds.

Private bankers are essentially paid to push money around, and with the influx of foreign money into Singapore, it’s difficult not to suspect that at least some of the recent price increases in Singapore have been due to demand-pull inflation resulting from very large capital flows. Certainly, we saw it with real estate.

And with the rising cost (some say value) of real estate, we have escalating rents, higher business costs, and invariably … higher prices. Who knows how much of inflation something like private banking is responsible for?

The Law of Unintended Consequences

For the past few days, I’ve been pondering about how the law of unintended consequences might apply within the context of better baby benefits (BBB), in particular extended maternity leave (now 4 months) for working mothers.

As the mainstream media so lightly puts it, employers in Singapore have had ‘mixed’ reactions to the enhanced BBB. Even though the maternity leave will be funded by the government, companies will in many cases need to hire a part-timer or temp staff to replace the working mother on maternity leave. Naturally, this is an extra expense and is probably highly disruptive to the normal flow of work, hence the cool reactions of many companies, particularly SMEs, to the BBB.

Even though the government has legislated that companies must still pay for maternity benefits if a working mother is dismissed ‘for no good reason’ within the last 6 months of pregnancy, this is probably cold comfort to working mothers who lose their jobs as a result of getting pregnant.

So. What are the possible unintended consequences of BBB? Perhaps employers will be less enthused about hiring married women of childbearing age in the first place? This may impact the job market for all women. Such a situation isn’t impossible. Certainly, we have already seen anecdotal evidence of Singaporean men being discriminated against for reason of their NS liability. So the real winners in the job market in this case may not just be male workers, but to be more specific, male foreign workers. After all, they come with the least amount of baggage. To borrow a phrase from HR professionals, foreign male workers have “zero drag”.

One of the most interesting things the government has taken to habitually proclaim in recent years is that foreign talent is ultimately good for Singapore, because not only does foreign talent enhance Singapore’s competitiveness, it also makes the employment market more resilient, as foreign workers will take the brunt of the first wave of job losses. Presumably, foreign workers would get laid off first and then pack up and go home, reducing the surplus labour in the job market.

Personally, I’ve never fully bought that argument. One reason is that it’s awful PR. If you’re trying to attract foreign talent as hard as our government is, it would hardly do well to emphasize to Singaporeans that foreign workers are economic shock troops on the employment front, doomed to take the first wave of job losses, and all in earshot of every foreign worker professional on the island. It hardly encourages faith in the belief that this island is a great place to live and work. Certainly, it doesn’t encourage foreigners to take up citizenship.

On the other hand, there is some data to support the idea that foreign workers help to cushion job losses (they also help to soak up jobs during an economic boom). The overall effect of having some 30% of our workforce composed of foreigners seems to be to smooth out volatility in the employment numbers for Singaporean citizens (which is something good). Unfortunately, the data from the MOM report is too coarse; we can't tell for sure if the effect of having foreign workers is salutary across all industries, particularly the high value, high skilled jobs that comprise the core of middle class living. [I could dig into the Labour Force Surveys, but I'm too lazy.]

But I digress. Let’s focus on the situation at hand. The labour market in Singapore is currently quite tight due to recent growth, but the global economy is now on the cusp of recession. This, in my opinion, presents an excellent opportunity to test once again the hypothesis that foreign workers will take the first wave of job losses.

Or perhaps the opposite will occur. As I mentioned above, Singaporean men have their NS liability hanging around their collective necks like a millstone, while the employers-have-mixed-reactions BBB are restricted largely to female Singaporean citizens. It may be that the easy and available supply of foreign workers with zero drag becomes preferred to local Singaporeans during the coming recession, when cost-cutting inevitably becomes the watchword of the day. This is especially so when we consider the large numbers of finance professionals moving from the key financial capitals like New York and London to Asia.

Of course, I am cognizant that the government could institute measures during a recession to make hiring foreigners more expensive, such as raising the foreign worker levy or making employment passes more difficult to obtain. Such measures could have helped stem job losses among Singaporeans in the past Asian Financial Crisis and the dot-com plus SARS bust. These measures may once again help to make Singaporeans more competitive vis-à-vis their foreign counterparts.

Don’t bet too heavily on this though. Our government has a track record of favouring employers over workers. In addition, just look at how compromised our unions have become. When the economy starts its slide, companies are going to start clamouring for more business friendly policies, and in a high-inflation environment like today (inflation is NOT going to go away, whatever the oil price is currently doing), they’re going to do whatever they can to cut costs.

Cutting costs could well mean cutting loose Singaporean workers, instead of foreigners.

Climate Change and the Global Harvest

These are my notes from reading the aforenamed book in the title of this post. I mentioned this book in a previous post.

So what did I find out from reading Climate Change and the Global Harvest? Unfortunately, the book was published in 1998, so it doesn’t have any of the most current research. But here’s what I found:


Climate change will result in both positive and negative effects for agriculture.

Crop yields depend on temperature, CO2 concentration, water, soil, fertilizer inputs, solar radiation, albedo, pests, weeds etc. You get the idea. It’s a complex issue, so it’s difficult to say whether climate change will result in a net benefit or loss (globally).

Because of these effects, there will be a geographical re-patterning of agricultural activities.

The balance of positive and negative effects will be different everywhere in the future due to climate change. In other words, places that are great for agriculture now may suck in the future. Conversely, some places that totally suck now may be much better for agriculture in the future.

Gains in some regions may not fully compensate for losses in others.

That means a structural shift in global production levels and a global food crisis are distinct possibilities.

Aside from higher mean temperatures and precipitation, there will also be greater variability in these two factors in the future.

We are already seeing greater variability in the weather today. Like humans, plants hate unpredictability. If cultivars that can tolerate wide swings in temperature and water availability are not developed, crop yields may take a hit. Or we could suffer from greater variability in harvest yields, i.e. chronic famine. Monoculture makes us more vulnerable. So does loss of seed diversity.

Adaptive measures and intervention can help to mitigate the negative effects of climate change.

This generally means using better technology, irrigation, cultivars, subsidies and better farm management practices.

Adaptive measures are contingent on resource availability and socioeconomic factors.

Poor countries may not have the wherewithal to implement adaptive measures. Again, this emphasizes the irony that poorer countries that are less responsible for climate change will suffer disproportionately more from its effects.

Availability of fresh water will be a major issue.

You will see this point again and again in major climate change studies. It’s incidentally also a great growth industry to invest in. T. Boone Pickens thinks so too.

Regions that face the greatest risk tend to be least able to adapt. Conversely, some countries will be net beneficiaries of climate change. Places at higher latitudes and altitudes will see more positive effects, while places at lower latitudes and altitudes will see more negative effects.

The point on differential effects based on latitudes will be repeated again and again in climate change studies. Little data is available on places outside Europe and North America, particularly on South America. But this much is known. Under the most likely climate change scenarios, and I stress that these are just projected scenarios, and not what is definitely going to happen:

Sub-Saharan Africa, South Asia and Southeast Asia will likely experience negative effects. In the event of significant sea-level rise, many important crop-growing regions will suffer lower productivity. These include many river delta systems: the Nile (Egypt), Irrawaddy (Myanmar), Hong and Mekong (Vietnam) [I would add that China damming the Mekong is a potential geopolitical flashpoint], Ganges-Brahmaputra (Bangladesh) and Chao Phraya (Thailand). Even if permanent flooding doesn’t occur, soil and water salinization would still negatively affect crop yields.

Japan is likely to see slightly improved crop yields.

China is a mixed bag (and a big country if I may add). There are externalities like desertification and urbanization.

France and Italy would probably need to change the crops they plant to favor those that are better adapted to hotter, drier conditions. Spain might suffer from drier climate. Agriculture should improve in more northerly parts of Europe as climate change drives temperatures up. Wine is an interesting harbinger of this change in fortunes.

The USA will feel some negative effects, but is likely to be much less vulnerable for many reasons (lower dependence on irrigation, better technology, agriculture employs fewer people, large export crop etc).

Australia can mitigate the negative effects, if fresh water shortage is not an issue (and that’s a big IF).

Canada, Russia and New Zealand are likely to see improved crop yields, mainly because warmer weather lengthens the growing season and opens up regions that are currently unsuitable for agriculture. In general, poleward and altitudinal effects are positive, while the lower latitudes will see negative effects.

Fiscal Drag and the $8000 ceiling

Fiscal drag is one of those things that you never read about except in economics textbooks.

It refers to one of the pernicious effects of inflation. As the nominal income of a person increases due to wage demands that stem from inflation, a larger proportion of that person’s income goes into the next higher tax bracket, and is taxed at a higher marginal rate of tax. Hence, the real income of a person takes two hits: the first hit from nominal wage increases not keeping pace with inflation, and a second hit from a higher tax burden resulting from fiscal drag.

I am sensing the (minor) effects of fiscal drag as I keep careful records of my own income. The effect is minor because, well, engineers really are one of the least well-paid professionals around.

Fiscal drag is one symptom of a wider malaise that can be termed institutional sluggishness. Basically, this refers to the phenomenon whereby legislation is written in nominal rather than inflation-adjusted terms. Fines for instance, do not get adjusted upwards in line with inflation, although I don’t think anyone is complaining about that.

What people have been complaining about recently is the $8000 monthly salary ceiling for buying a new flat directly from HDB and for households to be eligible for a HDB loan. Now that is one example of institutional sluggishness par excellence.

[Normally, I wouldn’t care enough to write about this as I am single and currently have no plans to marry. But talk among my friends and colleagues about the $8000 ceiling and recent musings on inflation piqued my interest enough to want to post something on this.]

You could make a case that real income actually has risen in recent years due to the economic boom, so the $8000 ceiling should still stand to reserve public funds for the less well-off. But we are now entering an inflationary phase and wage increases (at least among professionals) are reflecting that. I have seen my own nominal wage increment this past year higher than in previous years, but I’m astute enough to realize that in real terms, my wages have actually diminished.

So, given that nominal wages have increased but real wages have fallen, why hasn’t the $8000 salary ceiling been revised upward, especially since so many young couples are hurting from high property prices?

The government could revise this figure rapidly if it wanted to. Indeed, when there is legislative need, the government has shown that it can move at lightning speed, compared to the glacial pace of other governments worldwide. So why hasn’t it this time round?

I don’t think the government is ignorant of this issue. The most probable explanation for not revising the $8000 ceiling upwards is that the income ceiling applies to a relatively small group of people (albeit a more educated and vocal group) and the government doesn't view the income ceiling as a major problem. And as mentioned above, a working couple that makes >$8000 per month is hardly destitute. The new "subsidised" flats and cheap HDB loan are arguably a privilege and not a birthright. After all, singles and permanent residents are not entitled to these perks.

But this explanation isn't very interesting [otherwise I wouldn't be blogging on the topic]. I have an alternative hypothesis, although I caution that this is more a thought experiment on my part rather than a concrete assertion.

My hypothesis is that while this problem has been brought about by the current inflationary environment, the government has consciously chosen not to revise the $8000 salary ceiling precisely because it is fighting inflation.

Inflation is composed of demand-pull and cost-push inflation. A bad analogy for this would be good and bad cholesterol. It would be more accurate however, to say that demand-pull inflation, while still bad, is generally symptomatic of buoyant economic conditions, and so is usually perceived in a better light than cost-push inflation. Cost-push inflation is just plain ugly.

Not revising the $8000 ceiling upwards while so many young couples are crying out for it has the salutary effect of curbing demand for real estate, and hence cooling the formerly red-hot property market. As mentioned in a previous post, property prices are a component of the Consumer Price Index. The net result is a lowering in the housing component of the CPI due to a fall in demand-pull inflation within the real estate sector.

The government, like most governments, can do very little to curb cost-push inflation, although you are unlikely to read about that in the mainstream media [taking credit, even for chance events, always gets published; admitting powerlessness over problems, never]. Beyond allowing our domestic currency to appreciate (up to the point when exports really start to hurt) and urging Singaporeans to conserve, our government's hands are tied.

So, while it can’t do much about cost-push inflation, it can reduce demand-pull inflation as mentioned above, at least in the property sector. Taken together, this has the effect of moderating the rise in headline inflation (the CPI). This is helpful as it reduces inflation expectations among the populace.

It’s not clear whether revising the $8000 salary ceiling or not is the ‘right’ thing to do. I won’t venture to make a value judgment on this.

I do empathize with young couples though. Assuming my thought experiment is correct, it is never easy to receive the short end of the stick in the government’s interest of ‘the big picture’. On the plus side, the government is increasing the supply of HDB flats, so hopefully that should make property more affordable.

Lorna Tan, July 20, 2008

Lorna Tan is a financial correspondent with the Straits Times, and the quality of her articles is generally good (a rare compliment from me for anything related to the rag).

She had two articles in the Sunday paper this past weekend.

Taking the right dose of health insurance was a good article on some general pointers when buying health insurance. I’m already aware of all of these pointers, but I think it’s still useful to summarize these for less knowledgeable readers of this blog:

1. Always buy private health insurance even if your employer provides excellent cover. The reason is that you will not work for the same employer your entire life, and the employer-provided cover will not persist when you change jobs or retire (the ‘portability issue’).

2. Always buy health insurance early on in your working life even if you are in perfect health. This is to avoid the problem of exclusionary clauses should you be diagnosed with a serious illness before cover has commenced (the pre-existing condition issue’). This is also linked to reason #1. I know of people who literally cannot quit their current jobs because they were diagnosed with a serious illness while not being covered with private insurance. Now, only their employment cover protects them; no private insurer will cover their pre-existing condition.

3. Always buy the insurance cover at or above the level that you think you will use. The simple reason is that downgrading coverage is a snap, while upgrading coverage later on may require underwriting.

4. Consider the optional add-on riders for your plain vanilla Health and Surgical (H&S) insurance. The most useful are the riders that remove the deductible and/or co-insurance portions of the claim amount (10% or 20% of a very big bill is still a very big bill). Also useful are the riders that remove category sub-limits on claims.

[As someone who trained as a biomedical engineer, I can assure you that many implants, particularly orthopedic implants, cost way more than the few thousand dollars that typically mark the limit on the ‘consumables’ category].

Somewhat less useful are the riders that cover outpatient treatment (such as physiotherapy and the like) and cash benefit riders/policies that pay a cash benefit for each day spent in the hospital.

5. Other health-related policies may also be considered. Critical illness coverage is one example, although some skeptics point out that the list of 30 (or some arbitrary number) of dread diseases is too short to cover the full spectrum of human suffering, far better to get comprehensive and heavy H&S coverage. Another important type of health insurance is long-term/continuing care insurance, best exemplified by Eldershield, although frankly, I think Eldershield the policy sucks. Not many insurers provide this kind of insurance, so far I have only seen Great Eastern provide this product, but then again, I haven’t shopped around all that much.

Lorna Tan’s other article was on inflation-linked investments, As prices rise, so can your returns.

As an explanatory article, the article was passable. As advice, well, you probably want to read up more on your own before committing to any investment.

I too have been hunting for investments that will offer a high likelihood of a positive real rate of return.

I haven’t found any that I’m really comfortable with yet. That should tell you something about the current market environment now.

My main beef with inflation-linked investments is that in general, most governments around the world are pre-disposed towards fudging the CPI numbers to make them look artificially low. “Core inflation” in the USA is a joke, and even the food and energy numbers have been fudged before stripping them out.

Why would governments want to deliberately fudge the CPI numbers to make inflation seem lower than it really it? Because it works directly on managing inflation expectations, and it also makes social security payments (normally indexed to inflation) and other payments (such as on oh, say, inflation indexed bonds) paid out by the government cheaper.

Needless to say, if the CPI systematically underestimates inflation, inflation-linked instruments will also fail to keep pace with the true rate of inflation.

The other reason why I am wary of inflation-linked investments is that countries with high inflation also tend to suffer from currency depreciation. Given the strong SGD now, the real return in SGD from such investments may still turn out to be negative. And even if the funds that manage these investments hedge their currency risks, you can bet that that will result in lower returns as well as higher management fees.

Other investments to consider using to beat inflation:

1. Real estate is normally a good inflation hedge, but is generally a bad idea now, given the deflationary climate in real estate.

2. Commodities. Uh, can you say bubble?

3. Precious metals. I am actually bullish on precious metals right now, but I suspect that precious metals are benefiting less from inflation fears than from the current credit crisis. You could make a case that precious metals are in a bubble right now, but unless and until the credit crisis is really over (it’ll take a year or two, at least), precious metals will probably remain at elevated levels, and will spike each time a major financial institution implodes.

4. Stocks of companies that have pricing power and hence can pass on price increases to their customers.

Investment #4 is probably the best inflation hedge over the longer term. But in the short term, the volatility will be extreme. Unless you can afford to hold onto the stocks for several years, and stomach largish paper losses at least part of the time, you might want to stay out of stocks until things settle down a little.

Anchoring Bias

Anchoring bias is a common but fascinating cognitive bias, and it’s highly relevant to be aware of it now.

Anchoring bias in the narrowest sense refers to the phenomenon when the mind fixates on a number brought to its attention, and how when a person is asked to estimate a given, possibly unrelated figure, that person unconsciously uses the anchoring number as a point of reference for those estimates. The truly amazing thing about this cognitive bias is that the anchoring number need not bear any relevance to the figure that needs to be estimated.

Anchoring bias, like many cognitive biases, probably has its roots in evolutionary adaptations in what Gerd Gigerenzer terms “fast and frugal” thinking. It may be a heuristic designed to allow humans to process information quickly and accurately (in a prehistoric environment).

Why is anchoring bias highly relevant now? Because the global economy and stock markets around the world are now at or past an inflexion point.

Unless you’ve been living in a cave, it should be common knowledge that economic problems are in focus around the world now. Stock markets have been tumbling far below their peaks in the wake of the (continuing) credit crisis, inflation is ravaging countries around the world when it formerly was not a problem, oil and food commodity prices have blown past their historic highs, and growth is slowing everywhere. We are entering a period of stagflation, with anemic growth accompanied by high inflation, when we were in an economic boom only several quarters ago.

At inflexion points when the direction of the economy and stock markets change, econometric forecasts and models are notoriously unreliable, and this is arguably when their forecasting performance is most vital.

And how does anchoring bias figure in all this? Think of all the economic numbers that are important to you, and then consider how anchoring bias has affected how you perceive these numbers, or how they are generated.

If you invest in stocks, think of how the target price of your favorite stock has changed since the go-go times of yesteryear. Is applying a ‘discount’ to the anchor of last year sufficient now that the external environment has changed so drastically?

If you rely on financial analyst reports, be especially wary of target prices that have been ‘revised’ and backed up by ‘adjustments’ to various models. What goes for the target price also applies to the entry price. If I had a penny for every analyst that I’ve read or heard say “such and such a stock is now great value since it’s corrected by X% from such and such a price”…well, let’s just say that the historic peak price is one helluva anchor for those unaware of anchoring bias.

If you’re watching the prices of oil, gold and other commodities, historic highs (whether inflation adjusted or not) also constitute huge anchors.

If you run a business, you’d better be aware of what goes into your sales and profit projections, instead of just extrapolating from your experiences in previous years.

Economists who do inflation or economic forecasts might want to re-look their entire model or all the underlying assumptions instead of just tweaking their previous forecasts.

If you’re bothered by higher prices for everything, well, I have no solution for you. However, you may want to note that your misery stems directly from anchoring bias and reality not matching up with expectations. We are lightyears away from the low inflation [in necessities, but not in assets] environment of the past decade.

If you’re looking to buy or sell a property, you should already be aware that real estate prices are especially sticky. Sellers are unwilling to let go at too low a price or too low a cash-over-valuation because the booming (in contrast to this year) property market of last year was full of anchors to reference from. A cooling property market is not so much marked by lower prices as it is by low liquidity.

[Incidentally, if you’re watching the US subprime mortgage crisis as closely as I am, you might be interested in research from iTulip here and here. The research has been made available free for one week only due to wide ramifications on the US economy, so you might want to read it now.]