Money Talks
16 Nov
THE RETURN OF A STRONG DOLLAR
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 16 November 2012, 7.55 am, and Saturday, 17 November 8.35 am)
n the 1990s, major US oil companies believed that there was no more oil left to tap under American soil. But a middle-aged American geologist by the name of Richard Findley thought otherwise.
He calculated that large amounts of oil were still trapped in the adjacent shale rock, especially in the old oil fields of the Bakken formation in Montana.
uietly, he bought over the drilling rights on the cheap. Unfortunately, Richard had no money to conduct any drilling. He and a new partner also realized that conventional drilling methods could not extract oil out of the shale rock.
They eventually tied up with Halliburton Co, the big Houston oil-services company. This was critical because Halliburton had a new drilling technique called “horizontal drilling”.
Basically, instead of drilling vertically into the ground, “horizontal drilling” uses computers to drill vertically deep down and then horizontally. When combined with a process called hydraulic fracturing, the drilling becomes commercially viable as long as oil is above $50 a barrel.
n May 2000, Richard’s calculation was proven right when the new drilling technique struck oil. More importantly, the oil discovery triggered a shale oil and gas boom across America.
Today, 12 years later, the new drilling techniques have unlocked huge hydrocarbon resources previously thought unrecoverable. It has been estimated that America’s reserves of shale oil are five times that of Saudi Arabia’s conventional oil.
wenty years ago, the US imported 60% of its oil. This is about to change. The International Energy Agency has just reported that the current US shale oil boom would make America the largest oil and gas producer by year 2017. Not only that, the US would be self-sufficient in energy by year 2035.
here are actually large shale oil deposits all over the world. But current techniques and rules make their exploitation almost impossible.
o this shale oil and gas revolution will just boost the US economy for the time being. With US energy prices expected to remain more than 60% cheaper than its European and Asian rivals, US industries are enjoying a big cost advantage.
In the 18th century Industrial Revolution, Britain was the global engine of growth. One of the reasons was its abundance of cheap coal. From the late 20th century, China became the global engine of growth. One of the reasons was its abundance of cheap labour.
It is possible that the US economy would soon regain its role as the global engine of growth, this time based on cheap energy. It would mean the return of a strong US dollar.
Two factors will help make this happen. Firstly, with the US economy rebounding, US interest rates would rise sooner than expected. Secondly, the persistent US current account deficit would reverse as US exports rise and oil imports fall.
If the current weak dollar can be traced to Ben Bernanke, then the forthcoming strength of the dollar can be traced to Richard Findley. Today he is living a very comfortable life and running a profitable business.
But before his big break came along, it was a constant struggle for Richard. In an interview made years ago, Richard revealed that money was always tight. He and his wife were tempted to give it all up many times and do something else.
But after many discussions at the kitchen table, they realized that Geology was the only thing Richard knew, and the only thing that Richard ever loved. So they refused to give up until they struck black gold.
09 Nov
NEWS BY COMPUTERS
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 9 November 2012, 7.55 am, and Saturday, 10 November 8.35 am)
The internet is a great place to search for almost anything. However, the amount of information available can be overwhelming.
Not to be outdone by this, a 17-year-old British student, by the name of Nick D’Aloisio, has found a solution, at least for those who want to keep up with the news.
He has created a smartphone app which provides summaries of news stories found online. The free app, by the name of “Summly” was launched last week and became, within hours, one of the Top Ten downloaded apps
“Summly” will condense news articles to about 400 characters, or less than 100 words. Future versions of the app could allow users to read the full article just by tapping on the app.
This ability to read the full article could lead to a pay-per-view business model. In future, readers could pay to read one newspaper article rather than pay for the monthly subscription. It will be very much like how we buy a single song for 99 cents now, rather than paying more than $15 for the whole CD album.
Its money-making potential is the reason why Summly has attracted investors like Rupert Murdoch and Hongkong billionaire Li Ka-shing.
The instant popularity of Summly could be due to it being the first-of-its-kind. Currently, there are services that provide news summaries. But these summaries are done by humans, and they are expensive. Summly uses computer algorithms, or software, and they are cheaper and faster.
Replacing humans with computer algorithms is not new to the investment industry. It has been estimated that between 40 to 80 percent of trades in the US$50 trillion global stock markets are already being carried out by computer algorithms.
Last week, UBS, Switzerland’s biggest bank, became the latest giant to replace human power with computing power in another area of their investment division.
Instead of paying their credit default swap traders million dollar salaries, UBS has invested hundreds of thousands of dollars to install computer algorithms that trade using mathematical models.
Besides reducing costs and other benefits, the move would phase out the current practice of making deals over the phone. It is very much like how stocks used to be traded before computers took over.
Of course, there are dangers of introducing computerized trading into the US$30 trillion credit default swap market. Critics have said that it could lead to violent price swings. They say that the flash-crash of May 2010, when a computer error brought US stocks down by 9%, is an example of what could happen.
Some have claimed that the financial crisis of 2008 was the result of computer models misleading investors into thinking that all was well. These fears are not far-fetched, especially when different computers usually come up with the same logical solution.
Despite the weaknesses, the attractiveness of replacing humans with computers cannot be ignored. It’s the same with the Summly app. The cost savings can be huge if its principle software is adopted by the news and research industry. Many jobs would be lost.
But most importantly, if we investors are fed the same computer-generated news summaries and investment advice, our views would become one.
A potential disaster exists when we combine computerized trading with computerized news summaries. There will be no diversity of investment views and investment strategies.
We would be like the group of farmers who chose to plant one strain of food crop because it is the most convenient, or we are too lazy to try another strain of crop. With no diversity of crops in the farmlands, when a disease strikes, all crops will be wiped out.
02 Nov
THE RAINBOW AFTER THE STORM
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 2 November 2012, 7.55 am, and Saturday, 3 November 8.35 am)
The US Fed has been moderately successful in getting Americans to spend and boost the economy. But as the year comes to a close, Americans are zipping up their wallets.
This is because they fear the approaching fiscal cliff. This is when around US$600 billion of US government spending cuts and tax hikes will kick in from January 2013.
This fiscal cliff is bad news. As a proportion of GDP, the US spending cuts are comparable to the cuts troubled European countries like Greece and Portugal have been forced to undertake.
How did this fiscal cliff come about? It’s a fluke really. Like the perfect conditions that created Superstorm Sandy last week, two factors led to the creation of this fiscal cliff.
The first factor is the end of numerous tax holidays next January which the Bush administration generously gave out a few years ago.
The second factor is the agreement made in August 2011 to reduce the US budget deficit by way of spending cuts starting in January. This agreement was made in Congress as a condition for raising the US debt ceiling, or the legal amount the US government is allowed to borrow.
Just as Americans living along the east coast had braced themselves for Superstorm Sandy, global investors have been bracing themselves for this approaching economic disaster.
Unlike hurricanes which cannot be avoided, this fiscal cliff can be avoided if US lawmakers, from both the Democratic and Republican sides, come together after the US Presidential elections to thrash out the issue.
But these lawmakers are known to drag and bicker. So there is little confidence that any sort of agreement could be reached before January.
This pessimism is one of the main reasons why major stock indices have been trending down as investors brace themselves for another US recession.
But all is not lost. The US economy may yet be saved by Superstorm Sandy which devastated the east coast of the United States. This wealthy region of the country accounts for 20% of the total population and 25% of total GDP.
The bad news is the damage caused has been estimated at between US$20 to US$50 billion. The good news is that in many cases of natural disasters, the rebuilding effect on the economy exceeds the disruptive effect.
For instance, after the Japanese earthquake in March 2011, the economy picked up strongly two quarters later.
Of course, every case is different. After Hurricane Katrina hit New Orleans in 2005, the rebuilding effect was weak. But this is mainly because New Orleans is a poor region and US lawmakers did not feel any urgency to act.
This is not the case with Superstorm Sandy. This time the wealthy region of the country has been devastated and lawmakers, who live mainly in the region, will be under intense pressure to act quickly.
These lawmakers will also be pressured to do something about the fiscal cliff and the US debt ceiling. So it looks like there is a good chance a US recession can be avoided.
If this rainbow after the storm appears before us, as I expect it to, it would be bullish for global stock markets. Then the S&P500 should rise towards the 1,500 level, and the Straits Times Index should rise towards the 3,300 level.
19 Oct
REWARDING DENIAL
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 19 October 2012, 7.55 am, and Saturday, 20 October 8.35 am)
For a long time, Sir Jimmy Savile, who passed away a year ago, was a big name in British society. He was a TV and radio star, and well known as a funny and popular do-gooder.
Then early this month, a British TV documentary exposed his sexual abuse of underage girls. A few victims even testified in the documentary. It stunned the British public. Worse, after the broadcast, more victims came forward.
Apparently, Saville wasn’t just abusing underage girls in his dressing room. He also abused them in hospitals, children’s homes and schools.
The worst revelation was that many of Savile’s colleagues knew about it or heard rumours about it. But no one did anything about it. The question is “why?”
The simple explanation is that Savile’s fame offered him protection. He dazzled the British public with his talent and good deeds so much so that they could not see his dark side.
The real explanation is that Saville’s work benefited many parties. His TV and radio shows were important to his employer. His fund-raising activities were important to the charities where the underage girls were abused.
So the real explanation is that no one wants to complain about the person who brings home the bacon.
Unfortunately, this culture of denial happens elsewhere too. Investment banking also had its share. A few years ago, the names of the big credit ratings agencies were tarnished for not telling us investors that the mortgages backing the investment products were bad.
Why would they when they made money giving high ratings to the mortgage-backed securities? And why would anyone else in the industry tell the truth?
It does not mean that all bankers are bad. It is just that the culture encouraged denial. Like the media industry, the investment industry can be very rewarding. Competition for jobs is fierce. Reputation is as important as your job skills.
So not many dare to raise doubts about the investment products sold. Because doing that would label them as troublemakers. And that would be career suicide.
In an industry with no job security, where even top management turns a blind eye, the conscientious players are resigned to putting up and shutting up.
In the end, investors lost money. In Jimmy Savile’s case, the girls suffered. It is not easy to come up with safeguards to protect future victims. This is simply because the benefactors and the victims are so many steps apart.
The least we can do is to be very careful about rewarding those individuals and firms that promote the culture of denial.
When the British Queen awarded Jimmy Savile his knighthood in 1990, there was a track record to support it. This cannot be said of last week’s Nobel Peace Prize to the European Union or EU.
Many people, especially Greeks and Spaniards, think that the EU has done nothing to bring about peace, only rioting and suffering. A more worthy recipient is the North Atlantic Treaty Organisation.
The decision to award the Noble Peace Prize falls on a committee of Norwegians. The irony is that Norway is not in the EU. In 1994, the Norwegians voted to stay out of the EU because they thought it was a bad idea. By giving this Nobel Peace Prize, they think the EU is a good idea as long as they are not in it.
Imagine the uproar in Britain were the Queen to give Jimmy Savile his knighthood today, all because none of the Royal princesses have been abused.
12 Oct
Cutting Loss
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 28 September 2012, 7.55 am, and Saturday, 29 September 8.35 am)
When our investments go wrong, one solution is to cut loss. Instinctively, we carry this cut-loss solution into other aspects of our lives.
Currently, there is a heart-breaking drama happening in New York. It involves a 28-year old Korean American woman by the name of Ms Grace LEE Sung-Eun.
A year ago, she was a Manager for Bank of America in New York. She was training for the famous New York marathon and had everything going for her.
Then doctors told her that she had brain cancer. Last month, while undergoing treatment, a seizure left her paralysed from the neck down. Today, Ms Lee communicates mainly by blinking her eyes.
However, Ms Lee is still conscious. A fortnight ago, she told doctors to remove the ventilator keeping her alive. Two court rulings supported her decision. Essentially, Ms Lee chose the cut-loss solution.
Then things became complicated. Her family members were against her wish to die for religious reason. They rallied support to stop doctors from switching off the ventilator.
Legally speaking, Ms Lee has the upper hand. Last Saturday, in the middle of the faceoff, Ms Lee suddenly changed her mind and now wants to remain on life support. We may never know what changed Ms Lee’s mind.
In cases like this, there are many other considerations. Let’s focus on two others. The first one is the quality of life. For the patient, being bed-ridden is torture. So the patient wants to go. For the loved ones, death is painful so they refuse to let the patient go.
The second consideration is financial. It can be costly to keep a patient on life support. For the patient, he or she might not want to impose this financial burden on others. For the loved ones, it is not easy to withhold measures just to save money.
So we have a typical case whereby what the patient desires goes against what the loved ones desire. It is more complicated when the patient is unconscious. Many of us could face this situation one day.
One way to lessen the complications is to prepare an Advanced Medical Directive, or AMD, when we are conscious. This gives clear instructions on how we want our final days to be when we are unconscious. This takes care of the first consideration of what kind of life a patient wants.
It also helps to sort out the second consideration of money. If the AMD favors life support, the bills could soar. It costs at least $1,000 a day in ICU in Singapore hospitals. But if the AMD does not favor life support, the costs are lower.
This is when hospice and palliative care units step in. They are specialized medical units that take care of patients in their last days. Usually, most patients require just regular home visits from a specialist doctor. This service is usually free.
Some patients require 24/7 care in hospice wards. This would cost $300 a day. But most patients don’t pay anyway because of donations and government assistance.
Hospice care isn’t just about saving money. The underlying aim is to improve the quality of the patients’ last days. Basically, hospice care can address our two considerations.
Many say that adopting a cut-loss solution makes us better investors. Likewise, many say that if we are prepared for our last days, we will live better lives.
This Saturday is World Hospice and Palliative Care Day. Perhaps we could review the cut-loss solution for our own lives.
5 Oct
The M I C Solution By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 28 September 2012, 7.55 am, and Saturday, 29 September 8.35 am)
In 2008, a public danger involving tainted milk was discovered days before the Beijing Olympics began. As it would be bad publicity, the Chinese authorities hid the danger while babies continued to consume the deadly milk.
By the time the danger was revealed, six babies had died and about 300,000 seriously ill. In their attempts to look good, the Chinese authorities ended up looking bad.
It was also not an isolated case because many more food scandals have since appeared. The relevant authorities claim that they do not have the resources to address the issue. Disgusted, Chinese consumers have reacted by buying imported food. This has hit the Chinese food industry.
Like consumers, countries also react in ways that can lead to unintended consequences. The Asian Currency Crisis of 1997 has such a lesson to teach us.
In that Crisis, Asian central banks tried to use their foreign reserves to stop their currencies from plunging.
The Indonesian rupiah for instance, fell 30% in the first few months of the crisis. So dangerous was the social situation that 15 years ago this weekend, Indonesia had no choice but to seek help from the IMF.
There is a famous photo depicting Indonesia’s humiliation in the Crisis. In the photo, Michel Camdessus, the IMF Managing Director, had a stern face and crossed arms. He was standing over a seated President Suharto while he signed and handed over to the IMF Indonesia’s economic sovereignty.
For Asians, President Suharto’s humiliation and subsequent downfall symbolized the arrogance of the West. “Never again”, they told themselves, would they be humiliated like this.
To ensure that this would not be repeated, Asian countries reacted by exporting furiously to accumulate foreign reserves in the following years.
Their excessive foreign reserves subsequently created the global imbalance, whereby Asian exporters saved too much and Western countries spent too much. This had the unintended consequence of paving the way to the US housing bubble and the current Euro Crisis.
Like President Suharto in 1997, Spanish PM Rajoy finds himself in the same situation today. If he asked for help, he would be admitting that his government cannot cope. Instead of the IMF in 1997, we have the rich countries of northern Europe standing stern faced over the poor southern Europeans.
The Asians in 1997 could export their way to prosperity. Unfortunately, with the single euro currency, this avenue is not open to the southern Europeans. They will face prolonged spending cuts, which will be bad for the Eurozone and the world.
The US economy should step in to fill this spending gap. But this is not going to happen because come January next year, previously agreed spending cuts and tax hikes will kick in. This will remove more than US$1 trillion from the US economy over the next decade.
The rich Asian region, led by China, is the only region left which can still spend. But will the next generation of Chinese leaders open the wallet? Clearly, the export model doesn’t work anymore.
Instead of more buildings and highways, China should spend more on developing its soft infrastructure, for a better quality of life. Yes. This would include addressing the food scandals.
If China doesn’t come up with its “MIC” solution, the world will slog through a long slow-growth period. Chinese food scandals will continue and we will avoid foods which are labeled “MIC”.
By the way, “MIC” means Made In China. We can add this to Singapore’s growing list of abbreviations, which in recent days have included “MU”, “DIY”, and “SP”.
28 Sep
Judgmental Heuristics
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 28 September 2012, 7.55 am, and Saturday, 29 September 8.35 am)
Other than the best places to eat, we love to hear juicy stories about other people’s sex lives. Whether it is sex-for-grades or sex-for-business, curiosity drives us to search for photos of what the parties involved look like.
Having studied their facial features, usually with great satisfaction, we quickly and very unscientifically form our intuitive judgment of them.
Never mind if it is not the truth. Worse, when we next meet someone with the same facial features, we assume that their personality traits are the same.
In Behavioral Economics, this shortcut behavior is known as judgmental heuristics or judgmental shortcuts. This behavior happens because there is too much information for us to process.
We respond to the information overload by looking at only a small part of the whole picture. Basically, we like to simplify things. We like to draw analogies and see identical situations where in fact there are important differences
Unfortunately, this behavior applies also to our investment decisions.
Four years ago this month, the financial world went into a tailspin after Lehman Brothers collapsed. In early 2009, the global economy looked grim. Singapore property prices had already slipped some 35 percent. Potential buyers were told not to buy because prices would go down further.
This bearish view was easily accepted because the preceding experience of property investors supported it. Because in 1997, a Bishan HDB apartment was sold for the record price of S$760,000. After that sale, the market sank and remained there for many years.
As it turned out, the bearish advice of early 2009 was wrong. Singapore property prices climbed soon after and went on to rise towards heaven. Many say the strong rebound was due to the massive money printing by the US Fed.
Two weeks ago, an HDB apartment in Queenstown was sold for the record price of S$1 million. There must be many reasons why the buyer paid that high price.
One possible reason could be the buyer’s confidence that the US Fed would print more money again. In fact, his confidence was justified.
“Just as in 2008, prices will go up. There is little downside risk.” If the Queenstown flat buyer thinks like this, he is not alone. Many investors think likewise and have been falling over themselves buying up properties.
Of course, the bears take the opposite view. They would say that the bulls are wrong. They are demonstrating judgmental shortcuts if they think that property prices will do a repeat of 2009.
While printing more money usually leads to inflation, the data show that the impact on inflation of the US Fed’s money printing has actually weakened since 2010.
It is like drinking our first cup of coffee. It kept us awake the first time round. But once we become coffee addicts, caffeine no longer has the same impact. We could drink a cup and fall asleep immediately.
The bears would also say that the situation today is very different from that in 2008. This time round, not only is the euro in crisis, the US government has serious debt problems, and the Chinese economy is about to cave in.
By pointing out that the two situations are not the same, the bears try to avoid making judgmental shortcuts. Even so, the bears can be wrong. Because very often, judgmental shortcuts work exceptionally well.
What this means is that next year, a Queenstown HDB apartment will be sold for S$2 million. And that girl, with what the Chinese say Peach Blossom eyes? She is really good.
21 Sep
Think Different
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 21 September 2012, 7.55 am, and Saturday, 22 September 8.35 am)
The adoptive parents of Steve Jobs have two reasons to be happy on 21st September. Both originally came from Armenia. And on this 21st September Armenians celebrate 21 years of independence from the once mighty Soviet Union. But more about this later.
The second reason for Jobs’ parents to be happy is because 21st September is also the release date of the latest iPhone. This is probably their son’s greatest creation. About 8 million iPhone 5s will be sold in the US alone before Christmas. It should bump up the US GDP growth rate by 0.5 percent. This is a significant number. Kevin Warsh, a Fed Board governor from 2006 to 2011, last week said that the iPhone 5 would do more for the US economy than the US Fed’s latest move to print money. If this is true, the European Central Bank, or ECB, should take note. This is because, a week earlier, the ECB said that it was ready to print more money to bump up the economies of the European Union, or EU. Central to the ECB’s strategy is to save the euro. This is because if any euro country were to leave the Union, economic chaos is envisaged. And the euro currency would collapse.
Because of this potential chaos, many European politicians believe that the euro must be saved at all costs. Any other outcome is unthinkable. The cost of failure is too high, we are told. Go back to the 1980s, and this is exactly what Soviet leaders were saying about their Soviet Union. In its early years, the Soviet Union did many remarkable things, like sending the first man into space. But by the 1980s, the socialist economic system had gone rotten. It was unsustainable. The central belief of socialism was not good at motivating people to produce. There was gross inefficiency. The bills could not be paid. At that time, Soviet leaders could not imagine any other alternative. The status quo, whereby the state told people what to do and what to produce, must be saved.
Today, the US and EU economies are in the same position. Their politicians cannot, or do not want to think of the alternative, other than to get their central banks to print money. In 1989, one after another of the socialist countries allied to the Soviet Union started to break away. The fall of the Berlin Wall was the most symbolic. Worse, the 15 Soviet Republics, Armenia being the first, began to fight for independence. At that time, many believed that the collapse of the Soviet Union would happen after the socialist states broke away. Today, many think that the EU would collapse soon after Greece and the others break away.
As always in life, things do not go as expected. For the Soviet Union, when the collapse finally came in December 1991, it was not due to the socialist states breaking away. Rather, it was Russia, the key member of the Soviet Union, which suddenly decided to break away from the Union. Instead of Russia in the Soviet Union, Germany is the key member in the EU today. If the cost of keeping the EU together becomes too high, will Germany, like Russia before it, suddenly decide to break away?
Steve Jobs used to tell us to think differently. The politicians in the US and Europe refuse to think differently. We laymen must therefore prepare and think of a different ending for the European Union.
