When keying in PIN, cover the keypad, 'nuff said.

By now, everyone and their mother should have heard about the theft of funds from DBS bank accounts through card skimming.

This is such an old scam that there are forum posts on it dating back to the early 2000s. Just do a Google search on it.

And just like in previous years, it was done in almost exactly the same manner: a card skimming device attached to the card reader and a spy camera to capture the PIN as it is punched in by the cardholder.

[Obviously, the ATM card you carry doesn't hold the PIN information. That is stored centrally at the bank itself.]

Which is why, for years and years since the first skimming incident, I have always covered the keypad with my left hand as I enter my PIN at the ATM with my right hand. In fact, I don't even look at the keypad when I enter my PIN. I use all five fingers to punch in my PIN with my right hand on the keypad, just like on a keyboard when I am at a desktop computer.

So, for those who haven't adopted such a habit yet, and the statistics indicate at least 400 / 2700 = 15% of users haven't, please do yourself a favor and cover the keypad when you are entering your PIN at an ATM.

Amazon Mechanical Turk

I've been spending a not inconsiderable amount of time on mturk.com lately.

I had heard of Amazon's Mechanical Turk quite a while back, but had never really bothered to check it out until recently. Basically, mturk allows humans to either request or work on what are known as Human Intelligence Tasks (HITs) for micropayments. Read more here. If you're based in the USA or India, you can actually cash out your earnings. For everyone else, your earnings get deposited into an account with Amazon which you can then use to purchase items on Amazon.

It's generally difficult to make serious money (i.e. more than minimum wage) on mturk, although it's not unheard of. For Requestors, who may range from corporations to graduate students, the quality of work that you can get back from Workers on mturk is also of uncertain quality. But mturk is still a useful resource; that's why it's been around for a while.

I've been working on and off on mturk for the past two weeks or so as a personal project and experiment, and while I never really got to the point of making serious money, it was substantial enough to score me a chunk of change. I made about USD100 over about 10 to 15 hours of work spread over two weeks...and my first shipment of Amazon swag courtesy of mturk is en route to Singapore as we speak via vpost. This is probably an unsustainable figure though, as I scored some high-paying HITs that don't come by too often (One paid me $15 for a 750 word article I cranked out in a little over an hour). 

I think I could probably sustainably make about $10 to $20 a week turking. That may not seem like a lot, but it does add up. More importantly, it doesn't feel like work. I complete HITs while surfing on the Internet, waiting for videos on Youtube to load, or just because doing HITs is fun. For instance, I've been completing a set of audio transcriptions of interviews done for a documentary on Polaroid, and it's been interesting hearing artists and photographers talk about why they still use Polaroid despite the prevalence of digital photography.

I've done transcriptions of classroom lectures by Mormons (deathly boring, and for some reason, mturk is stuffed with them), interviews with venture capitalists, interviews with an American manager of an auto components plant in Mexico who talks about offshoring of the auto industry (obviously part of a research study or dissertation), and an interview with the maker of the just released video game Mafia II (probably part of an entertainment channel that wanted a transcription). 

So I'm a little picky with my HITs, but that's because I don't do it just for the money. Turking can be fun too.

If you ARE interested in making money on mturk, then you would probably want a strategy that maximizes profits and minimizes the time spent. Lots of strategies that you can google for out on the web. But personally, I'm just happy to make a few dollars each day doing something that's mildly enjoyable and not having to spend any cash at all the next time I order something from Amazon. 

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.]  

Doing Business with DBS

In Singapore, it's difficult to avoid having a DBS account, and more broadly speaking, a local bank account (local referring to DBS, UOB or OCBC). This is because so many services are tied to local bank accounts.

These services include GIRO, direct debit of income tax, electronic payment of shares (EPS), dividends from shares held under account with the Central Depository, and receipt of transfer payments from the government (GST rebates, New Singapore Shares etc.)

Some of these services can now be provided by foreign banks with Qualifying Full Bank (QFB) licences (Maybank, HSBC, Citibank, StandardChartered and ABN AMRO, now acquired by RBS). But if you're like me, and you've already set up numerous banking arrangements, it's unlikely that you'll switch to a foreign bank for these services.

In addition, notwithstanding the atm5 network, the greater size of the local banks' ATM network islandwide generally make them more convenient to bank with.


While I may continue with my existing banking relationship with POSBank, however, today I have made the decision that I will not do any new business with DBS.

Lest you think so, this has nothing to do with the Minibonds fiasco. I don't do bank structured products, period.

If you flip open today's edition of the Straits Times and turn to page A5, you will see a full page ad from DBS on shopping mall discounts for DBS cardholders and how they will donate up to $15000 to Focus on the Family (Singapore) based on festive redemptions.

While family seems like an innocuous enough cause, and certainly no one could object to donating to a family-related cause, FotF (Singapore) is affiliated with the ultra-conservative, right-wing and evangelical Focus on the Family. Of all the charities out there, DBS had to pick this one.

I am completely against conservative, right-wing evangelical organisations like FotF. I disagree with their positions on so many things (politics, social policy, religious intolerance, LGBT rights, evolution/intelligent design, manipulation of research) and on so many levels (me being a social liberal, humanist, scientist and biomedical engineer).

I'm not against the Christian faith per se (and believe me, I spent 10 years in Methodist institutions as a student), and I support the right of freedom to worship, religious tolerance and interfaith dialogue. But I find the conservative and right-wing character of evangelical organisations like FotF especially objectionable. Odious even.

And now DBS has decided to support them for this holiday season. That's it, DBS, I'm not doing any new business with you anymore. No to your credit cards, fixed deposits, home loans, bank accounts, mutual funds and Hell no! to your structured products. Just the plain vanilla savings account that I've had since I was a child and even that is really a concession to POSB (you can tell where my loyalties lie). And frankly, it's not a hard decision to make because service at DBS generally sucks.

CPF Tax Relief

Many working adult Singaporeans give a portion of their paychecks to their parents each month. And a number of parents actually don’t need the money at all. In some cases, the parents may still be working and may in fact be drawing larger paychecks than their offspring. In other cases, the parents may already be retired but have very substantial retirement savings or investments to draw upon. In such cases, the money given by adult Singaporeans to their parents is symbolic, a reflection of filial piety.

If you fall into the category of Singaporeans who give money to retired parents who do not have working income, but also do not require your contribution to get by, here’s one way to make your dollars work harder for you.

The CPF Board allows up to SGD7000 contributed each year into the retirement accounts of retired Singaporeans by their offspring to be eligible for tax relief. In other words, if you already give money to your retired parents, and they don’t need it, it’s far better to contribute it into their retirement accounts with the CPF than to give them cash. This way, you get to claim tax relief on the amount contributed. In the current low interest rate environment, your parents also get to enjoy the higher interest rates that the CPF provides (assuming they would have kept the cash in a lower-interest rate bearing bank account).

Full details are available at the IRAS, CPF and Singapore Budget websites.

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.]

The two-income trap

Several years ago, I read a book entitled The Two-Income Trap. While the book focused on the financial situation of two-income American households, the basic ideas behind the book are still applicable to the modern Singapore nuclear family. In fact, given that the Singapore two-income family is more prevalent today than ever before, it can be argued that the perils of the two-income trap are more relevant now than when the book was published.

The idea behind the two-income trap is simple. Decades ago, when the nuclear family was composed of a working father and a stay-at-home mother, most families subsisted on a single income while still being able to afford a middle-class lifestyle. If Mom worked at all (usually part-time), her money was “pin-money”, to be spent on little luxuries like restaurant meals and weekend trips to the amusement park (recall the American context of the book). Certainly, the family didn’t depend on Mom’s income to get by. In the unfortunate event when the father was no longer able to be the prime breadwinner, due to death, disability or retrenchment, the mother could leave the home and get a job, and the family would still be able to struggle through.

Fast forward to today. Now, most families are two-income, with both parents working. Families today enjoy a higher standard of living than ever before, and pay for it with their dual incomes. In other words, most families need their dual income. When I say higher standard of living, I don’t mean frivolous luxuries like holiday trips to Europe or fine dining. Families in general are not spendthrifts; they spend large amounts of money, but on things that are considered vital or worth spending on. These include a good home, a car, domestic help, and childcare (remember Mom is working too). For the kids, there are the computers, private schools, extra lessons of every kind, savings for college tuition etc. Most people would agree that these expenses are justifiable, hence my remark that families need their dual income to pay for all these expenses.

In the Singapore context, it is getting increasingly difficult, if not impossible, for families to get by on a single income, especially if they aspire to a middle-class lifestyle. How will your kids get into a premier school unless you pay to buy a house and live in the same prestigious district? How are your kids going to compete if they don’t have the extra lessons and costly after-school programs? Are you going to squander your time or your kids’ time on house chores, when domestic help is available? Is your kid going work summer holidays to help with the household expenses, or are you going to pony up for those expensive overseas student immersion programs? The resume arms race starts ever earlier …

[As an aside, higher income families tend to pass on lasting cultural advantages to their kids that help them compete better: better education, healthcare, nutrition, free time, discipline and attitudes. The idea that meritocracy is unequivocally good needs to be qualified by the understanding that the playing field is inherently uneven. A high achiever's performance could simply be a reflection of their privileged circumstances. More in a future post.]

Although families with dual incomes enjoy standards of living higher than ever before, they are more vulnerable in the event that either spouse is unable to work. This is because the family that needs the dual income has no ‘spare capacity’, unlike decades ago when only one parent worked (and only one income was needed). Once one parent is unable to work, the two-income family immediately falls into a distressed situation. And it doesn’t take a genius to figure out that with both parents working, a two-income family has approximately twice the probability of falling into a distressed situation as a result of income loss, as compared to a single-income family.

An even sharper irony can be observed if we analyze the expenditure of the most responsible parents. Responsible parents want the best for their kids and as a result, are usually more willing to leverage on their finances for better homes, better schools, better everything. The sticking point is that expenses associated with these better things are recurring in nature. You can’t automatically lower your mortgage payment for instance. If you bought your house on the assumption that a dual-income makes the house affordable, the loss of one income immediately raises the specter of foreclosure.

Contrast that with a family that bought a smaller home and a smaller car, but habitually eats out and spends on ‘frivolous’ things like holidays to Europe. In the event of income loss, the family can immediately tighten its purse-strings by cutting back on these discretionary expenses. This family will have an easier time than the family that bought a bigger house, put their kids in private school, and depended heavily on domestic help and paid childcare, despite all these being “worthwhile” expenses.

The lessons and dangers of the two-income trap are still present today and are arguably even more relevant given the extinction of the working father, stay-at-home mother family model.

So how should families guard against the dangers of the two-income trap? Here are a few suggestions:

1. Earn two incomes, but make a conscious choice to live on only one or one and a half.

2. Limit your exposure to recurring expenses. Instead don’t feel guilty going out to nice restaurants and take relaxing holiday trips! These are precisely the things you can afford to cut back on when times get tough.

3. Save. A lot. And don’t touch it unless you really need to.

4. Understand the competitive environment we live in today, but don’t let the cost of competing overwhelm you. Be conservative with your finances. Having no safety net is worse than ‘missing out’ because a drastic life-changing event can seriously impact you and your family’s future forever.

5. Buy insurance, and make sure it’s the right kind. This includes mortgage, life, health, critical illness/disability, unemployment etc. And buy term, because you get the most protection for the fewest dollars. Yes, you don’t get it back unlike say whole life, but consider it protection money to keep the big bad black swan from your door.

The price of being financially unsophisticated

This post is timely given the recent interest in OCBC preference shares. The Sunday Times had a good article explaining the difference between fixed deposits and preference shares, highlighting the fact that most people only focus on the superior yields of the shares.

I'm going to talk about a kind of investment that I almost never use. I'm talking about fixed income assets. It's quite a deviation for me, considering that I invest my money mostly in equities and related assets. But considering the poor financial literacy of many people I know, this post might make useful reading. A caveat though, I use financial jargon here so some terms may be confusing. The gist of this post should be clear enough though.

First, let's talk about why I don't invest in fixed income assets - bonds, money market funds and time deposits. While preference shares behave mostly like bonds, I will not include them in this discussion as they rank after debt in receiving the residuals following liquidation. Preference shares are equity, and as such have considerably higher credit risk in the event of default.

With oil trading at about $135 per barrel and food prices soaring, inflation is on the minds of everyone, from policymakers to CEOs to the proverbial man in the street. Under inflationary circumstances like now, fixed income assets are a poor performer in real terms. By definition, any asset that returns less than the rate of inflation is losing real value, and most fixed income assets today fall into this category due to low interest rates and high inflation rates (which may also be understated due to the vagaries in computing the CPI). In financial parlance, real interest rates today are mostly negative, so fixed income assets are almost definite loser investments.

Yet, most people find themselves uncomfortable with volatile investments like equities or equity funds. Indeed, due to poor market sentiment, equities in the near term are probably poised for even greater losses than have been seen so far. Hence, "no-risk" investments like time/fixed deposits are still where most people in Singapore put their money, even if they are loser investments in real terms. Even investors accustomed to risk-taking like myself find fixed income assets suitable places to park my money while waiting for new opportunities to surface, or for conditions to stabilize.

So if you must invest in fixed income, which fixed income assets to invest in? For myself, liquidity trumps return, so I leave most of my cash in my brokerage account, which earns a money market rate of return while being highly accessible for purchases of stocks.

But this post isn't about me. It's about the vast numbers of people in Singapore who place their very substantial savings in fixed deposits for fear of market volatility, and for lack of financial sophistication.

A quick check turns up fixed deposit rates here and here. The rates are truly dismal, obviously. And the marginally better rates require large amounts of cash to be placed on deposit.

Now let's look at Singapore Government Securities (SGS). For the uninitiated, and you know who you are, SGS are bonds and Treasury Bills (T-Bills) issued and backed by the Singapore Government, which, owing to decades of fiscal surpluses, is triple super duper whammy A rated.

The indicative "interest rates" or to be technically correct, yields to redemption, for the most recent tranches are here for 3-month T-bills, 1-year bonds and 5 or 10-year bonds. Look at the average yields. They are much higher than fixed deposit interest rates offered by the banks (though still lower than the rate of inflation).

SGS are open for investment to retail investors as well as institutional investors and the minimum denomination is SGD1000. Based on yield (clearly better), minimum investment (only SGD1000), security (backed by the Singapore Government for the full face value, and not just the first SGD20000 in deposits) and duration (as little as 91 days), they are clearly better than fixed deposits. On the measure of liquidity, SGS are slightly less liquid than fixed deposits and incur dealing costs (but not at subscription and not if held to maturity), but these are probably comparable to breaking the term of a fixed deposit before maturity.

In short, SGS are a closer equivalent to fixed deposits than preference shares can ever be, and they are superior to fixed deposits on almost all measures.

So why don't more people invest in SGS instead of fixed deposits? Simple, ignorance. Most Singaporeans have poor financial literacy, and also lack the skills to look for information independently. Furthermore, while the Monetary Authority of Singapore has appointed market makers for SGS, it is simply not in the interest of these dealers to cater to retail investors. Too administratively costly. So the primary dealers don't advertise this service.

Instead, they advertise their fixed deposits and the "attractive" interest rates. You can bet that some of this money that the banks get from depositors ends up in SGS. What is the price of being financially unsophisticated? One answer could be the spread between fixed deposit rates and SGS yields.

Foreign currency during travel

Everyone knows that you need foreign currency when you travel. The question is, where do you get your foreign currency from?

Most people I speak to get the currency of their destination from moneychangers, either in Singapore or at their destination. In other words, they carry rather large amounts of cash while travelling, and they change currency on the street.

I get my foreign (or rather local) currency after I reach my destination, from a local ATM on the PLUS or Cirrus network.

There are a number of advantages to doing so: convenience, safety (particularly in those autobanking lobbies), zero likelihood of a con-job, and an ability to better control how much cash I draw or will spend. I almost never have leftover currency after a trip, other than coins, which I consider souvenirs of my trip.

The biggest problem most people have with this method of getting local currency is that they worry about bank charges, and that they feel the rate is inferior to the street rate. More to the point, the rate is not transparent (you won't know until your next bank statement) and hence, most people are wary of drawing local currency from an ATM.

On the other hand, the pro-ATM argument states that since the rate at which local currency is drawn from an ATM is the interbank rate, the rate should in fact be superior to the street rate, and even after deducting fees and charges, should be broadly comparable to the street rate. [The interbank rate is the wholesale rate at which forex transactions between banks are carried out through the interbank networks. In theory, the bid-ask spread should be narrower than the street rate due to the sheer volume of transactions.]

I believe in the pro-ATM argument, but after hearing so many people claim to the contrary, I decided to look into this myself. In the past month, I've made two trips, one to Taiwan on business and one to Bali for a vacation. For both trips, I drew local currency from ATMs multiple times and I checked my bank statements after I returned to Singapore. I computed the effective rates and compared them against the street rates I saw while in Bali. I didn't see any moneychangers in Taiwan while there, but I checked the rates on XE.com before my trip. Rates on XE.com really are the best rates you can get, XE being a forex broker. So any rate close to the XE rate is a really good rate.

Here's what I found:

In all cases, I drew currency using a Citibank ATM card, which according to the customer service officer I spoke to in Singapore, levies no charges on foreign ATM withdrawals. However, I was warned that the foreign bank that owns the ATM may choose to levy charges. 

Well, I saw no extra charges on my bank statement, so if there were charges, they were probably built into the exchange rates.

In Taiwan:

I drew NTD7900 from a Chinatrust ATM at Kaohsiung airport, and my statement recorded a withdrawal of SGD360.97. So the effective rate was SGD1 = NTD21.89. Not bad considering the XE rate was about just north of NTD22 to SGD1 at the time of my trip.

[Why did I draw such a funny number like NTD7900? To get the small NTD100 notes, duh.]

Incidentally, I also charged my ABN AMRO Switch card twice while in Taiwan.
The effective rates for those two purchases were SGD1 = NTD21.95 and SGD1 = NTD21.85. Both rates are comparable to drawing cash from an ATM.

In Bali:

The street rates in Kuta ranged from SGD1 = IDR6600 to SGD1 = IDR6800.
I drew local currency four times, from ATMS belonging to three different banks:
The effective rates were:

BNI bank at the airport: SGD1 = RUP6235
BII bank in Kuta: SGD1 = RUP6637
Citibank at the airport (after immigration but before customs; the only Citi ATM I saw while in Bali):
SGD1 = RUP6656

ABN AMRO Switch card purchase
SGD1 = IDR6601

The street rates in Bali were better, particularly when compared against the rate I got at BNI bank, which was clearly a rip-off. The fact that the BNI ATM was at the airport could be a factor though. More fees perhaps. The street rates were slightly better, but not substantially so, than the rate I got from BII bank in Kuta itself, and also the rate I got from the Citibank ATM at the airport (remember I used a Citicard to draw money).

From the above data, it also appears that it's cheaper to pay cash for purchases than to charge purchases to a credit card.

While the street rates appear to be better, I still think I'll rely on ATMs when I'm in Bali. Money changer scams in Bali are egregious. Just google for it and the horror stories will pop up. A slightly inferior rate is worthwhile insurance against con-artists.

So what's the conclusion to all this? My hypothesis is that the ATM rates are probably really good when you're drawing money in a developed country (which squares with my own experience back when I was a backpacking student in Europe), but street rates are probably better in developing or third world countries. Bear in mind that third world countries exhibit some peculiarities that probably account for this. For example, I've travelled to Peru and people there *love* US dollars, even if the dollar is going to the dogs in today's weakening US economy. And changing a single USD100 note compared to USD100 in smaller bills gives a better rate in many Southeast Asian countries (e.g. Thailand). It's no wonder that the street rates tend to be better than ATM rates. Still, this is balanced against exposing yourself to scams while changing money on the street.

Inflation and the CPI

Inflation will still ease in second half: minister
Nicholas Fang
Mon, May 26, 2008
The Straits Times

SURGING inflation will ease in the second half of the year despite spikes in global food and oil prices, said Trade and Industry Minister Lim Hng Kiang...
___________________________________________________________________________

When I read this two days ago, I had a thought: what the minister is saying really depends on what he means when he refers to "inflation".

Prices for a wide range of goods and services, many of them essential, have been rising at astonishing rates globally. This is well-known, widely reported on and discussed in the media.

What is much less well-known and understood are measures of inflation. Disclaimer: I am not an economist and have never taken a formal class in economics, so read what I write carefully.

Inflation at the retail level is typically measured in most countries by a Consumer Price Index (CPI). Very briefly, the CPI is the weighted average of the price indices for many classes of goods and services. Each individual price index is constructed to reflect the price levels of its components. The components of the indices, and the relative weightages of the indices from which the CPI is calculated, are chosen to reflect the consumption patterns of an average member of society. Information on how the CPI is computed in Singapore is available from the Department of Statistics. From a general eyeballing of a paper from the Department of Statistics, it would appear that the CPI in Singapore is computed largely along international guidelines (which is reassuring), and is free from some of the more glaring issues that the USA CPI is accused of. Of course, it could just mean that the Singapore Government is more adept at concealing any chicanery to do with the CPI. Not that I'm saying there's any chicanery of course.

For media reporting purposes, and in the minds of the average citizen, CPI is inflation.  This isn't surprising, as the CPI is judged to be the best and most accurate measure of inflation at the retail level. And its probably what the minister was refering to when he said that inflation would ease. The problem that arises is that most people forget that the CPI is a construct, and that changes in the CPI may not reflect actual inflationary phenomena on the ground, particularly pertaining to individuals.

Do you drive? If you do, with oil at about USD130 a barrel, and climbing, your inflation experience is probably quite different from mine. I am fortunate enough that I live close enough to my workplace to walk to work. Yes, I walk. So the oil price is a non-issue for me. What about people who rely on driving to make a living (taxi drivers, real estate agents)? Their inflation experience is probably considerably worse than yours. The key point here is that the CPI is constructed to reflect the price experience of an average member of society. The problem is that no one is strictly average. It's like the family with 2.5 kids; it doesn't exist. The man-in-the-street is as mythical as the Sphinx, especially in this age of personalization, self-expression, customized solutions and targeted marketing.

The CPI is a measure of inflation, but it should only be used as a yardstick. It is likely that your experience of inflation varies from changes in the CPI. Think about that before you swallow the line that "inflation" should ease. It may not mean very much to you even if it does.

What about the housing component of the CPI? The concept of imputed rent sounds arcane, but it has real consequences in how the CPI is calculated. Suffice it to say, if you own your own home or you don't pay rent (say, because you still live with the 'rents), then a fall in housing prices and by extension rentals means little to you (unless you're shopping for a place). Yet the CPI will still fall to reflect those changes. And hence "inflation" eases a little. Oh look, I think the steam is finally coming out of the Singapore property market...

Then there's that time-honored place where economic sentiment in Singapore is discussed. That's right, the hawker center. Perhaps you've noticed that the portions are getting less generous, or that there's less meat or vegetables with the rice or noodles. But the prices remain the same. Hawkers lack pricing power, so they make it up by reducing their food costs. So, how is that kind of inflation captured in the CPI? "Hedonic regression" the economist answers, but because that's a huge can of worms, the Department of Statistics doesn't do that with the CPI, and rightly so, I agree with that stance. It's one criticism that has been leveled at the USA CPI. But it still points to the CPI in general being an imperfect measure of inflation.

Still think that "inflation should ease" necessarily means clear skies ahead?

Choosing credit cards (in Singapore)

In Singapore, many people carry multiple credit cards. This is due in no small part to the aggressive credit card promoters and promotions that encourage people to sign up for every new piece of plastic peddled by the banks out there. So which card to sign up for? I hereby declare that I make no recommendations as to which cards are the 'best', since what works for one person may not work for another. What I am going to talk about are a set of guidelines that I use to pick my credit cards, and as far as I know, the guidelines I use are fairly uncommon, or at least not talked about often.


All the conventional wisdom of credit cards applies

Anyone picking up an (USA-centric) book on personal finance will find the advice familiar. Pick cards with low interest rates, try to pay off your balance each month, never use cash advance facilities unless you desperately need the cash because they're expensive and interest starts accruing immediately etc.


That said, discard the advice that is immediately irrelevant

That means that if you're like me and pay off your balance completely each month, you can ignore interest rates as a comparison measure between credit cards, because the interest rate is irrelevant. Be what the credit card industry calls a 'convenience user'. The same applies for cash advance fees and interest rates; completely irrelevant if you never use cash advance facilities.


Never pay annual fees

Singaporeans will be familiar with this, even though almost all credit cards on the market ostensibly carry annual fees. All it takes is a phone call to customer service to threaten a card cancellation and the annual fee will be waived for that year. The cost of acquiring a new customer is more expensive than retaining one, so banks will always acquiesce. The catch is that many banks reduce or cancel away reward points for annual fee waivers. This isn't surprising as fee waivers are built into the reward system as a possible redemption award.

There are only a handful of cards on the Singapore market that expressly state that they do not have annual fees. Most of these are associated with priority banking programs (anyone with SGD200000 to spare?). So if you have one of those, rest assured that you're already more than paying the annual fee with the fat-margin business you're providing the bank.


The value of rewards and credit card perks is tricky to calculate

Anyone who travels frequently will be familiar with the airline equivalent of this: frequent flier miles are difficult to value [rule of thumb used to be 1 mile = 1 US penny, but with oil at USD135 and airline cutbacks, all bets are off].

The first important measure to look at for credit card rewards is the duration that reward points are valid. There's no point (sic) applying for a card with juicy rewards if you know for a fact that you're unlikely to charge enough on the card in 1 or 2 years (the typical duration for most cards) to redeem for those rewards.

The second important measure is to consider merchant discounts associated with (co-branded) credit cards. If you would spend your money at those merchants anyway, then the credit card is usually a good product to choose. If not, getting the card for the discounts is not a good reason to alter your normal patterns of spending. You'll only be wasting money on unnecessary purchases. And complicating your credit card management, which could lead to late fees or interest charges if you don't pay off your balance promptly.

As a corollary, like frequent flier miles, consolidation of spending on one or two cards is the most efficient way of accruing points quickly. So consider choosing cards that give the best discounts or rewards for the broadest range of your normal expenditure.

The third important measure to look at for credit card rewards is:

Reward Ratio = Redemption value of an reward that you actually use / Spending needed to accrue that reward

So if a $40 gift card/voucher at your favorite book store requires 1600 points, but if one point requires $5 in expenditure (and not 'spend', as most banks are wont to call it, nouns versus verbs people!), the reward ratio actually works out to 0.5%.

Reward ratios are generally higher for less popular merchant vouchers/store credit, and lower for more popular ones, and lower still for cash credits given by the bank itself. Balanced against this is that merchant vouchers typically cannot be combined with existing discounts or promotions, while cash credits apply everywhere. Also, remember to compare like for like when comparing reward ratios between credit cards.

In the Singapore market, reward ratios range mostly from about 0.3% to 2% for general categories of spending. Some cards give cash rebates for spending at specific merchants or restaurants, and these can be particularly high (2-5%). However, as stated previously, do not allow the accrual of reward points to influence your normal patterns of spending. A credit card is a convenience tool, not a reward point generator. The reward points are an incidental benefit. Always remember that.


There are some fees that you should check on

One charge that very few people in Singapore check on, and practically every customer service officer in Singapore that I've spoken too is unfamiliar with as well, is the charge for overseas credit card transactions.

Signing for purchases outside your home country while travelling is normally not a bad idea (except in developing countries where credit card skimming is a real issue), because the purchase is insured automatically, and the currency conversion rate is favorable, since it's typically an interbank rate and not a street rate. The catch is that Visa or Mastercard levies a charge on the bank, which in turn passes it on to you, sometimes together with an extra charge of its own. This charge is frequently not transparent, as it is built into the exchange rate itself, but sometimes banks do disclose it. 1% is ok, 2% is not so ok. Check with the bank. Even with the charge however, sometimes the interbank exchange rate is still better than the street rate, particularly in developed countries.   


So those are my guidelines. Some of you might wonder out of curiosity which credit cards I carry, given the complicated set of guidelines I use to inform my choices. Well, as I've said, I'm not making recommendations. But for the curious, I carry just 2 credit cards, which is a rarity among many Singaporeans. I won't explain why, since that's just too long and personal, but the two cards I carry are the POSB everyday card and the ABN AMRO Switch card. As an aside, I carry also the Citibank ATM/Debit/EZ-link card and the ubiquitous POSB ATM card with the NETS facility.

Note: ABN AMRO's consumer banking business in Singapore has been acquired by Royal Bank of Scotland. Given the banner ads RBS has placed in the arrival hall at Changi Airport, I'm expecting some serious rebranding to happen soon, so ABN AMRO credit cards may be discontinued in the near future.