Personal Finance

THE CURRENCY CRISIS PAST AND PRESENT

Lee Chee Keong — Fri, 29 Jan 2010 02:33:10 +0000

By Dr. Mahathir Mohamad on January 29, 2010 9:45 AM

1. It is now more than 10 years since the currency crisis struck Malaysia. Much has been written about the crisis and the controls imposed by the Malaysian Government to stop the devaluation of the Ringgit.

2. A few of the articles tried to defend the Malaysian Government’s action but mostly the blame for the crisis was attributed to the alleged failure of the financial and economic management of Malaysia. Practically no one has implicated the currency traders for the devaluation and the crisis. Even the writers who are friendly towards the Malaysian Government refuse to blame the currency traders.

3. Many are the reasons put forward by the writers to explain the crisis. It is alleged that the stock market boom contributed to the loss of confidence in the Malaysian economy and the Ringgit. Some blame the failure to rationalise and consolidate the banking systems. Others suggested that too much money had been channeled to the property sector. The other causes identified were the total loan-to-GDP ratio had increased; the rapid expansion of credit leading to deteriorating loan quality. Then the blame was put on companies assuming that the economy would forever be on the growth path. The two-tier regulatory system on banking introduced by Bank Negara and the failure to use the interest rate as a policy tool were also cited. Contagion i.e. infection from the financial disease which had affected Thailand was regarded as a major cause.

4. Some even blame a lack of democracy which triggered the financial crisis. And many more. But as mentioned above, no one placed the blame on the manipulation of the currency, by currency traders.

5. The fact that the chairman of the IMF, Michel Camdessus had enthusiastically praised Malaysia’s management of its economy and finances, had praised the Central Bank (Bank Negara), for the healthy state of the Malaysian economy and finances just a few months before the crisis struck Malaysia which run counter to the negative remarks about Malaysia’s economic management seem to be disregarded. The fact that after praising Malaysia for good management Michel Camdessus himself had about-faced and condemned Malaysia for bad management after the crisis occurred did not seem to strike these writers that the IMF was faulty in assessing the performance of a country’s economy. And if the IMF is incapable than is it not likely that others too, including the rating agencies may not be capable of making good assessments and that they too are not the experts that they claim to be; and that in refusing to implicate the currency traders, these experts and the writers and analysts were themselves “in denial”.

6. In the light of the meltdown and the collapse of the financial bubble which had struck the great democracies like the U.S., Britain, Germany and others, should not these analysts and writers realise how ridiculous it is to attribute the Asian Crisis to a lack of democracy.

7. The present crisis which is far more serious than the Asian crisis began in the great democracies of the world. One can almost say that it is democracy which caused the crisis and one can actually prove that elements of democracy are indeed to be blamed for the crisis.

8. This is because of the idea of less Government of Ronald Reagan and the advocacy of the free market, meaning free of Government regulation and oversight, a part of the concept of liberal democracy, which precipitated the current crisis.

9. Malaysia’s democracy does not accept that the absence of Government supervision in a free market is a part of democracy. It is therefore free from the effects of the sub-prime loans by banks which gave the first indication that the economies of the great democracies were not as healthy as they make it out to be.

10. Democracy, particularly liberal democracy must therefore be a cause of the present crisis, and not the lack of democracy. If further proof is needed that a lack of democracy was not the cause of the Asian crisis, one only has to look at China. It hardly suffered from the Asian crisis and today it is economically and financially much more healthy than all the democracies of the world.

11. There may be some weaknesses in the administration and policies of the East Asian countries which contributed to the crisis of 1997 – 1998. But it is time that the role of the currency traders be thoroughly exposed so as to understand the true causes of the devaluation of the currencies and the serious crisis which followed.

The Situation Prior To The Crisis

12. The whole world acknowledged that in the decade before the crisis, i.e. in the period between 1987 and 1997, East Asia was booming. Certainly Malaysia was doing extremely well growing at an average rate of 8% p.a. continuously during that ten year period.

13. The Malaysian growth was not accidental. It was a result of the policies of the Government and the management of the economy and finances. National savings at 40% plus was the highest in the world and the reserves could sustain 4½ months of retained imports. The Ringgit was strong and steady – being valued at about 2.5 to 1 USD for most of the time.

14. Foreign borrowings were insignificant and the deficits in the budget and the trading accounts were small and manageable.

15. There was political stability, a factor that was appreciated by foreign investors who came in droves.

16. As I said no less a person than the head of the IMF, Michel Camdessus publicly stated in a speech on 17th June 1997 that “Malaysia is a good example of a country where the authorities are well aware of the challenges of managing the pressures that result from high growth and of maintaining a sound financial system amidst substantial capital flows and the booming property market……… The Malaysian authorities have also emphasized maintaining high standards of bank soundness”.

17. Although Paul Krugman had commented that Malaysia faced the possibility of the growth rate slowing down in the mid-90s, there was no mention of any possibility of currency devaluation or of a crisis in the offing. Neither did the great rating agencies.

18. The situation in Malaysia was certainly not like that in Thailand where foreign debts were incurred by the business community due to the low interest rates as compared to the Thai rates. There was much money expanded on development of highrise buildings in Bangkok. A lot of new property development was taking place all over the country, financed by foreign loans.

The Thai Situation

19. The situation in Thailand could not but lead to a devaluation of the Thai baht. When it happened the Central Bank stepped in to shore up the exchange rate. But very quickly the bank found that it was unable to halt the decline in the value of the baht. It decided to stop intervention and to allow the baht to float. As soon as the baht was floated, speculators and those fearing devaluation sold the baht for USD. This caused the baht to devalue faster. As the baht continued to devalue foreign investors started to sell off their shares denominated in baht to avoid further devaluation. This caused another round of devaluation. It would seem that the devaluation of the baht would go on forever.

The Malaysian Situation

20. The Malaysian situation was not like that of Thailand. Growth in 1997 was still expected to remain high. There were few Malaysian borrowers of foreign currencies and there was no fear that servicing and repayment of the loans would require more Ringgit than was budgeted for.

21. Foreign direct investments were still coming in both for new industries and for the shares in the Kuala Lumpur Stock Exchange. All the other financial indicators remained healthy.

22. The Malaysian Government did not therefore anticipate any devaluation of the Ringgit. There was no reason why it should.

23. Then the press began to talk about contagion. It seems that the devaluation of the Baht would infect and drag down the Ringgit. This was worrisome as Thailand was a competitor in the export of various manufactured products. If a devalued Baht lowered the cost of production in Thailand, then to remain competitive, Malaysia may have to devalue the Ringgit.

24. But this was thought to be manageable. The Central Bank would go into the market to sell the Ringgit and keep its exchange rates down. The Malaysian industries would have to improve efficiency in order to remain competitive.

25. So confident was Malaysia that its finances would not be affected that it lent to Thailand one billion U.S. dollars to help it out. Even when the Ringgit started to depreciate a little Malaysia lent another billion U.S. dollars to Indonesia.

26. We believed that the financial problems of Thailand and Indonesia would be temporary. They would recover and there would be no problem for them to repay the loans.

The Financial Markets

27. The rich countries of the West had grown and prospered because of their industries i.e. the production of goods and the supply of services to their domestic market and to the world. Their cost was going up rapidly as the labour unions kept demanding for higher wages and expensive perks. But for as long as they remain the principal producers of the high-value goods and services, they could still sustain their production of goods and supply of services.

28. Then they discovered the poor countries with their cheap labour. Whenever they could they transferred their industries to these low labour cost countries in order to reduce cost and compete with the newly industrializing countries of East Asia. If whole industries could not be moved because of protest from their labour unions they would invest in the low labour cost countries for the production of simple parts and components. This way the European and American countries could compete with Japan and Korea.

29. But then the Japanese also did the same and they were able to remain highly competitive producing the same manufactured goods that were once monopolized by the Western countries. It was clear that the Japanese were going to displace most of the American and European manufactured goods in the world market.

30. Famous brands of American and European goods disappeared from the market altogether. The British gave up manufacturing cars, cameras, radios and televisions and other modern consumer products.

31. In America (the U.S.) well-known car makes were also disappearing. Well-known makes of radios, television, cameras, motorcycles and a whole range of branded goods also disappeared from the shelves.

32. In their places, including in Europe and America, all kinds of Japanese goods had made their appearance. Initially the Japanese goods were considered of inferior quality but soon it became clear that the quality had improved so much that they were superior to those of European and American make. In fact they exceeded the standards set by the west.

33. Thus when Japan started to export cars to the US, the US Government insisted that repair shops be set up everywhere. To their surprise these repair shops had hardly any business as the Japanese cars very seldom broke down.

34. When Honda exhibited their motorcycles in England, the British engineers were shocked to find that Honda engines were like the precision motors of high quality Swiss watches.

35. When later the South Koreans got into the act and they practically monopolised the construction industry in the world, the West saw the writings on the wall. There was no way for them to compete in the manufacture of goods, or to bid for the huge construction projects worldwide.

36. The financial market which had started in the 60s and 70s were not very attractive at first. But gradually the potentials were recognized and developed. New products were invented which gave ever increasing returns on investments.

37. Beginning with the sale of shares in order to raise money for capital, the smart players discovered that the buying and selling of shares could yield a lot of profits. The value of the shares were initially based on the profitability of the business.

38. But it became clear that the value would appreciate if there was demand. From then on the value of the shares became decoupled from the profitability of the enterprise. Demand or lack of demand determined the value of shares irrespective of the performance of the enterprise.

39. This led to the smart ones moving the share prices up and down by buying and selling. From this a short step led to the big players developing short selling.

Short selling

40. The actual shares became irrelevant. Simply by offering to buy or to sell shares not in the possession of the party who offered was enough to move share prices. So large numbers of shares (non-existent) would be sold to depress the price. Then when the price reached a sufficiently low level, they would be bought at the low price to deliver to buyers who had bought earlier when the prices were higher. A tidy profit was sure to be made this way, now termed short selling.

41. It was realised that the bigger the funds available the easier it was to move prices up and down. Individuals would not have enough funds and they run the risk of being countered by those with bigger funds. Nor could individuals borrow much in order to be a substantial player in the market.

42. And so companies were formed to manage funds invested by individuals or companies. With funds running into hundreds of millions, there was a greater capacity to manipulate share price.

43. But to be even bigger the fund managers borrowed from the banks. This is called leveraging on the invested funds.

44. The banks agreed to lend as much as 20 to 30 times the funds held by the investment companies or hedge funds so that their capacity to play the market would be greater.

45. With this an investor would benefit from the 20-30 times bigger funds borrowed by the hedge funds. Besides the huge investments by the fund managers almost guaranteed that they would make profits through actually influencing the price of the shares.

46. The investments by the hedge funds and their leveraging (borrowings) are mysterious. It seems that they need not report to the Government on their activities. Besides, by operating from offshore tax-free havens, they needed to submit reports to no one. Investors in hedge funds were thus able to make huge profits.

47. Once the idea of leveraging became known, the fund managers began to look into other possibilities of investing the huge loans they had access to.

48. The currency traders designed their operations in the same way. Leveraging by between 20-30 times the investors’ money held by them, they were able to invest and make huge profits. Again they need not report to anyone. Again, by operating out of tax havens they found themselves free from oversight of their operations by any Government.

Western Banking System and Practices

49. The banks were able to lend huge amounts of money for these operations simply because in the Western banking system, banks are allowed to lend more money than they have by way of capital and other assets and the deposits held by them. Normally they would be prudent and lend only certain multiples of the money held by them. But because Governments often bail out banks when there is a run by the depositors, the banks were emboldened to lend as much as 30 times their assets. This means that very much more money could be lent by the banks than they actually have. The banks are in fact creating money out of thin air to lend to the funds.

50. With huge loans available from the banks, billions of dollars could be lent for mergers and acquisitions. Consultants and experts appeared who were able to advise on mergers and acquisitions, getting huge commissions from their services. Not having the billions of dollars to purchase the businesses was not a problem as banks could lend the money they had created.

51. Now mergers and acquisitions became a business in itself. Rumors of impending mergers or acquisitions were enough to push share prices up or down. No matter whether the shares appreciate or get devalued, speculators would make money. The actual businesses done by the companies involved were not important. The purchase price of the companies bear little reflection of their profitability.

52. Then a couple of crooks invented junk bonds. The shares of poorly performing companies were bought and all kinds of manipulations were made to make them look good. Mike Milken and Ivan Boesky were eventually jailed.

53. Another scheme was to buy up companies to dispose off their assets. Slater Walker Securities developed this scheme.

54. Given the power to literally create money out of thin air, the banks were on the lookout for more ways to lend money. The returns for the banks were based on prospects of a return on the loans given out. The bigger the loans, the better.

Banking Prudence Discarded

55. And so instead of prudently ensuring that the borrowers could pay the loans extended, the banks began to lend even to very high-risk people – the so-called sub-prime loans. The assumption was that even if a percentage of the loans turn bad, the earnings on the rest would cover the losses.

56. But in order to make sure, the banks insured the loans with insurance companies or sold them to secondary mortgage companies. The banks believed that they were well covered for the loans. The risks were being taken care of by the insurance and secondary mortgage companies. But when huge numbers of the loan became non-performing, the bubble burst.

57. Then came the credit cards. Devised in order to make spending money more convenient, the credit card industry grew tremendously. The cards very quickly displaced cash and cheques.

58. Individuals may carry numerous credit cards so that they would not know really whether they have enough in the banks to cover the cost of the purchases they make. This led to a consumer boom as more goods and services are paid with credit cards irrespective of the money in the banks owned by the comsumers.

59. For the banks, any expenditure above what the customer had with the banks would be regarded as loans. Unlike ordinary loans, the interest rates are very high – as much as 18% to 20%.

60. Such are the calculated earnings of the banks from the credit card loans that even if a percentage of the loans became non-performing the banks were confident that the earnings from the rest of the credit cards would cover up the losses.

61. From all these activities, from hedge funds to mergers and acquisitions, sub-prime loans, financing insurance and secondary mortgages, credit card loans, currency trading, huge wealth seems to have been made. The Western countries appeared to be growing as shown by their per capita incomes and GDP growth. It would seem that their abdication from the real business of producing goods and services had paid off rather handsomely. Certainly their people seem to be enjoying very high standards of living.

62. The failures in the financial market here and there were ignored or covered up. No one thought there was anything wrong with the systems and the financial products they had created.

63. Then came the sub-prime crisis. Apparently the non-performing loans to the housing sector were too many to be compensated by the successes. First the banks and then the insurance and mortgage companies were pulled down. The economy went into a state of crisis as bank failures affected the share markets. Share prices plunged and the hedge funds sustained huge losses. It should be remembered that just as the profits would be much bigger with the 20-30 times the investors’ funds invested, the losses too would be that much greater. There was no way for the losses to be covered or the huge loans from the banks to be repaid. The hedge funds therefore collapsed, pulling down the lending banks with them.

64. Attempts by the Governments to bail out the financial institutions and companies have not really succeeded. If the economy was doing well then the banks and companies bailed out by the Government would be able to make some recovery. But it would take time because they would have to do prudent business and such business would be slow in giving a return. They can only recover quickly if they were allowed the abuses they had indulged in before. But obviously they shouldn’t although there are some who believe they should be allowed to. As for the companies, the general contraction of the purchasing power of the people must reduce sales of their products and therefore their profits. Even if they recover they would not be as financially healthy as before.

65. The recent talk of recovery is therefore not based on reality. Actually it is to justify not doing anything with systems which in the past had been so lucrative. It would take another worldwide crisis before the west would consider dismantling their banking, monetary and financial systems.

66. The leaders of the West are still in a state of denial. What is more likely is that they are aware of how the financial market operations have brought about the crisis but are unwilling to do away with them because they have made so many of their investors rich and have contributed much to per capita and GDP growth in their countries.

67. And so we may see the crisis continue, albeit de-emphasised so as to sustain the financial market.

68. The real solution would be a return to real business i.e. the production of goods and services. But then the developed countries of the West would have to accept being somewhat poorer than the good old days.

Source: CHEDET.CC

THE WEALTH OF NATIONS

Information On Third Avenue Fund’s New Credit Fund TFCVX

Lee Chee Keong — Wed, 27 Jan 2010 05:37:17 +0000

By Jacob Wolinsky, January 27th, 2010

Third Avenue Management recently launched a new mutual fund on August 31, 2009. Normally, it is difficult to get information about a new fund as soon as it opens. However, the company provided information about the fund and its objectives in its recent shareholder letter for Q4 2009, which was able to help me in writing this article.

Third Avenue’s opening of a new fund is noteworthy because the fund family has not opened a new fund in over a decade. What makes this announcement even more noteworthy is that the fund will be a credit fund titled, Third Avenue Focused Credit Fund. This is the first fund to be operated by Third Avenue management which is not an equity fund.

The fund manager will is Jeff Gary. He only joined Third Avenue in 2009, however he has more than 20 years of experience in the field of distressed debt, credit and high yield strategies investing. Gray states that the fund was opened now because Third Avenue sees opportunities in credit, which has not existed in over 20 years.

Grey lists the following differences between his fund and other credit funds

1. The Fund utilizes a value-oriented investment process that relies on extremely thorough and intensive fundamental research;

2. We focus our capital on our highest conviction ideas based upon our fundamental credit research – the Fund will normally have 50-70 investments;

3, The Fund has an opportunistic mandate that can invest in any part of the credit spectrum;

a. Bank loans, high-yield bonds, busted converts or distressed securities;

b. Invest in the security with the best upside potential versus downside risk;

4. The investment team must identify an event or catalyst to drive value and the security price higher.

The investment objective of the Fund is long-term total return, which may include investment returns from a combination of sources including capital appreciation, fees and interest income. Third Avenue’s goal is for the Fund to achieve top quartile ranking within the universe of highyield/credit managers.

Grey categorizes the fund’s investments into five different categories of credit:

1. Performing bonds and loans that have low risks of default.

2. Stressed Performing Credits this consists of companies with higher uncertainties that mature within the next two years.

3. Capital infusions including Rescue, debtor in possession, and exit financing

4. Distressed performing credits where the firm believes the market is assuming a higher risk of default, than truly exists.

5. Cases of debt-equity restructuring inside or outside of court, such as CIT unsecured senior bonds due in 2010

Grey believes that there are many opportunities in these areas due to inefficiencies in the credit markets that have increased in recent years due for three main reasons:

1. A significant increase in the size of the opportunity set to choose from

2. A meaningful decrease in the number of credit research professionals

3. An increase in the amount of time and expertise required to research

companies. “
Below are some statistics of the funds including their top ten holdings, and what categories of credit they hold.

TOP 10 LARGEST INVESTMENTS

Intelsat Jackson Holdings 3.4%

TXU Corp 3.4%

Fortescue 3.1%

Murray Energy Corp 2.8%

Nielsen 2.7%

HCA Inc. 2.7%

Digicel Group Ltd. 2.7%

Compton Petroleum 2.6%

Hertz Corp. 2.6%

World Color Press Inc. 2.6%

Top 10 Holdings 28.6%

TOP 5 LARGEST SECTORS

Financials 8.6%

Telecommunications 7.9%

Metals & Mining 7.5%

Transportation 6.2%

Top 5 Industries 40.6%

PORTFOLIO SORTED BY BOND VERSUS LOAN

Percent

of AUM

First-Lien Secured Bonds 11%

Second-Lien Secured Bonds 6%

Unsecured High-Yield Bonds 32%

Total First-Lien Secured Terms Loan 23%

Total Invested 72%

Cash 28%

Total Portfolio 100%

Percent

of AUM

PORTFOLIO SORTED BY PERFORMING/STRESSED/

DISTRESSED, ETC.

Performing High-Yield Bonds 32%

Performing Bank Loans 4%

Stressed/Distressed Performing/

Capital Infusions and Debt-for-Equity 36%

Total Invested 72%

Cash 28%

Total Portfolio 100%

One thing that disappoints me about the new fund is the that Martin J Whitman will not be involved in its management. Whitman announced earlier this week that he plans to scale back his duties at Third Avenue Funds. I am disappointed because Whitman in addition to being an excellent stock picker, is also an expert in distressed debt. Whitman recently wrote a book on distressed debt titledDistress Investing: Principles and Technique . While I have read Whitman’s other books on investing, I have not had a chance to read this one yet. However, I have heard from colleagues that it is a good read, and he appears to be a guru in these areas.

However, I think despite Whitman’s lack of involvement in the fund it is worth a look for any value investor considering investments in distressed debt and other areas of credit. Third Value Funds has provided excellent returns in the past and I think they want to keep this reputation as they expand into credit. In addition, I looked at Grey’s full resume on Third Venue’s website, and he seems extremely qualified to run this fund.

Source: valuewalk.com

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How to invest in gold

Lee Chee Keong — Mon, 11 Jan 2010 14:17:15 +0000

Gold has traditionally been regarded as a good hedge against inflation. Investing in gold is one of the simplest and most convenient way to preserve the value of our money. So, what are some of the ways to invest in gold? What are the pros and cons?

In Singapore, you can invest in gold in a few ways:

1) Buy physical gold (coins and bars);

2) Invest in gold ETF;

3) Open a Gold Savings Account;

4) Buy gold certificates.

PHYSICAL GOLD:

The best way to invest in physical gold is to buy them from UOB bank.

UOB sells readily recognisable gold bullion coins like the Gold American Eagle, Canadian Maple Leaf, Australian Kangaroo Gold Nuggets and Singapore Lion Gold Bullion coins, in weights ranging from 1/20 oz to one oz (two oz coins are sometimes available).

Investors should take note that there are two categories of gold coins, namely, gold bullion coins and numismatic coins. You will want to buy gold bullion coins, which are sold at a small mark-up to the spot price. Numismatic coins are sold at very high prices relative to spot and are meant for coin collectors. You should avoid buying numismatic coins unless you are a coin collector or numismatic coin expert.

PROS:

Owning physical gold is probably the safest way to invest.

UOB issues receipts for the gold that they sell and is committed to buy them back at a small discount to the spot price of gold at any time, as long as the receipts are presented. That means you can sell your gold back to UOB at your convenience without having to look for a buyer yourself.

CONS:

You will be charged GST (presently at 7%) when buying gold bullions in Singapore. Physical gold may not be easy to sell for a good price when you need money urgently, unless you buy them from UOB. Physical gold may also be susceptible to theft or burglary.

CONCLUSION:

Owing physical gold is one of the safest and fun way to invest.

The best way is to buy them from UOB since they are committed to buy back the gold at any time. Just make sure you keep the receipts and the gold bullions in good condition. I personally think UOB is providing a very good service for investors by selling the gold at a competitive price for buyers and providing a ready buy-in market for sellers.

I will try to buy physical gold at as close to the spot price as possible (price is my number one consideration). I will also prefer to buy an internationally “recognisable” or well known legal tender coins, such as the Gold American Eagle, Canadian Maple Leaf and Australian Kangroo if they are sold at the same price as other “less known” bullion coins.

Gold American Eagle

Canadian Maple Leaf

Australian Kangaroo

GOLD SAVINGS ACCOUNT (GSA):

This is another service provided by UOB. Investors can open a Gold Savings Account from OUB just like opening a cash savings account. The difference is that your savings will be recorded in “gold grams” instead of dollars and cents.

PROS:

GSA is another convenient and liquid way to invest in gold. Investors can deposit or withdraw gold grams at their convenience in cash form.

Investors can also open a GSA using part of their CPF money under the CPF Investment Scheme.

CONS:

Gold grams cannot be exchanged for physical gold for retail investors. They can only be deposited or withdrawn in cash. UOB also charges a small monthly fee for GSA.

I have heard critics saying that GSA is just another form of gold derivative and is therefore not as safe as investing in physical gold. Furthermore, unlike cash deposits, GSAs are not covered under the Deposit Insurance Scheme. The risk therefore lies in the solvency of UOB. I personally would not worry too much as long as UOB remains a stable and well-managed bank. In fact I have invested part of my CPF money in a GSA account with UOB.

CONCLUSION:

GSA is a convenient and low-cost way to invest in gold (derivative). The safety of your investment is tied to the solvency of the bank (UOB).

GOLD CERTIFICATES:

UOB bank sells unallocated gold certificates in Singapore. These certificates are sold in kilobars and are redeemable for physical gold at any time (Note: I believe the redemption is on a “best effort” basis though, ie. non-guaranteed).

GOLD ETF (SPDR):

Investors can buy Gold ETF listed in the Singapore Exchange under the ticker symbol GLD 10US$, also known as SPDR (prounounced as “spider”) Gold Shares. This is a low cost fund backed by physical gold (held in custody in the US) and is traded in US dollar.

PROS:

Gold ETF is one of the most convenient ways to invest without having to take physical delivery of gold. All you need is a share trading account and you can buy or sell it at anytime, just like buying or selling shares of any other publicly listed companies. Investors have assurance that the fund is 100% backed by physical gold. Investors can also buy SPDR using part of their CPF money under the CPF Investment Scheme.

CONS:

Since it’s traded in US dollars, you will have to incur a foreign exchange fee. There are also other fees built into the fund (eg. audit and storage fees) which, in my opinion is quite negligible.

Even though the fund provides for the possibility of taking physical possession of the gold bars, it is generally unrealistic in practise, since under the fund agreement, physical gold can only be redeemed in blocks of 100,000 shares (ie. close to SGD$2 mil at today’s price).

There is also a concern that it is susceptible to fraud, just like any other listed companies.

I personally think that the possibility of fraud is very slim as long as proper safety measures are in place. In the case of SPDR, the gold is held in the form of a “Trust” and the trustees are allowed to visit and inspect the gold held by the custodian, HSBC bank USA, twice a year. The Trust’s independent auditors may also audit the Gold holdings in the vault as part of their audit of the Financial Statements of the Trust.

However, US has a precedent of gold confiscation which investors may want to take into account. This happened in the year 1933 during the Great Depression.

Executive Order 6102 (Gold Confiscation Order, 5th April 1933)

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Conspiracy of the rich

Lee Chee Keong — Sat, 09 Jan 2010 14:18:02 +0000

I had just finished reading the book “Rich Dad’s Conspiracy of The Rich“, written by Robert Kiyosaki.

Robert writes about, among other things, the founding of the Federal Reserve (which was under a high level of secrecy) and the fiat monetary system. Until today the Federal Reserve continues to operate in a highly secretive manner.

What caught my attention is Robert’s contention that the public school system is designed by the rich for their own benefits.

According to Robert, the public school system trains people to be employees and self-employed rather than to be entrepreneurs and investors. In other words, financial education has been deliberately left out of the school system and we are being brainwashed and conditioned to “submissively surrender our hard-earned money” to the rich.

I do not know whether the school system is indeed part of the “conspiracy of the rich” but I have to agree with the author that it is strange that the subject of “money” or financial literacy is not being taught in school.

Many years ago I read Robert’s best-selling book “Rich Dad, Poor Dad” and it helped me look at the world from the perspective of the rich. I began to see the world in a different light and it stirred in my heart a desire to be financially free.

Since then I had read dozens of books on economics, personal finance and investing. The more I learn, the more I find it unbelievable that the public schools do not teach financial literacy. Like Robert, I believe that financial management should be made a compulsory subject to be taught in every school.

Robert highly recommends the book “Grunch of Giants” but I’m unable to find it in the local bookstores. Amazon doesn’t deliver the book to Singapore either.

If you have any idea where I can buy the book please leave a comment and let me know. Thank you! :)

The best way to hedge against inflation

Lee Chee Keong — Tue, 05 Jan 2010 14:20:27 +0000

Inflationary pressure seems to be building up as evidenced by the persistent rise in prices of stocks and commodities.

On 4th January 2010 (ie. yesterday) , the S&P 500 rose 1.6%. Gold rose 2.23% to US$1120.90 and Silver rose 4.21% to US$17.61. Platinum and Paladium also rose 3.75% and 3.20% respectively. Oil rose 2.70% to US$81.51.

Inflation makes our money worth less and it makes sense for us to hedge against it. But what’s the best way to hedge against inflation?

To address this question, it’s useful to understand what causes inflation.

Simply put, inflation is caused by an expansion in money supply.

Under the fiat monetary system, governments can increase the supply of money and credit at will (aka. printing money), which is what they have done since the onslaught of the “subprime” crisis. Once the economy recovers and banks start to lend again with the expanded monetary base, the velocity of money increases, chasing after other asset classes. In addition, the prohibitively low interest rate (close to zero percent for US dollar at this moment) forces investors and speculators to get out of their short-term cash to invest in higher yielding assets (see my previous post here).

Therefore, the best way to hedge against inflation is to invest in high-yield bonds or stocks.

Another way is to buy hard assets like commodities, including agriculture commodities and industrial metals, as well as precious and semi-precious metals (eg. Gold and Silver).

The idea is to get out of cash, which the government can create out of thin air, and exchange it for some other assets.

I believe that inflationary pressure will continue to gather pace from here resulting in another asset bubble.

Super Boom In Asset Prices

THE WEALTH OF NATIONS

Lee Chee Keong — Sun, 03 Jan 2010 23:25:51 +0000

By Dr. Mahathir Mohamad on January 4, 2010 6:55 AM

1. Adam Smith wrote about the above title a long time ago (1757). He talked about invisible hands which were instrumental in growing the wealth of nations.

2. In the latest financial crisis in the United States the invisible hands certainly played a big role. It took the form of abuses of the banking, monetary and financial system.

3. Pushed out of the international market place by the cheaper and better manufactured goods of the East Asian countries the West turned towards the financial system in order to enrich themselves. The opportunities for abuses were abundant.

4. They discovered that banks could create money out of thin air; without Government control (free market) any amount of loans of non-existent money could be given by the banks; the sale of commodities need not involve the commodities at all. It is the same with selling shares and currencies; having physical possession is not necessary. Sell and buy imaginary shares and make tons of profit.

5. Their fertile brain soon gave birth to hedge funds, short selling, leveraged purchases, junk bonds, currency trade, free markets etc etc.

6. All these systems promised great wealth to speculators and manipulators without the need to produce or possess anything. Better still they need not employ substantial number of workers who may make demands and threaten business with industrial action.

7. A good example is the trade in commodities. Without possession of the physical commodity, a speculator may sell huge quantities of it. The effect of this dumping is to depress the price of the commodity. When the price reached a low level the sellers would buy the commodity to deliver to the buyers that they had sold to earlier at a higher price. Thus without ever touching or seeing, much less possessing the commodity, the manipulators would make handsome profits. They call this short selling and the public is persuaded that this is fair trade.

8. Individuals cannot do this. The amount of money involved is too big. So funds were set up and managed by smart people.

9. The fate of the real producers is not the concern of these fund managers. As the price of the commodity become depressed the producer countries and their people would suffer.

10. If the producer country bought the non-existent commodity from the speculators at the low prices for future delivery, and if at the delivery date the speculators could not deliver the commodity, they would be forced to buy the physical commodity at prices higher than they had sold. They would lose money. This is as it should be. But no. Their market controllers would save them by declaring that they need not honour their contracts.

11. This was what happened when tin prices were depressed through the short selling of non-existent tin by the speculators. In desperation Malaysia bought the tin knowing that the sellers had no physical tin, whereas Malaysia had. When the delivery date arrived the sellers would be forced to buy physical tin from Malaysia at Malaysian prices in order to deliver. The price of the physical (real) tin would of course be higher. The sellers would lose money having to purchase at the higher prices in order to deliver to the buyers (Malaysia) at the lower prices.

12. When the short sellers faced this threat of losing a lot of money from their short selling price depressing activities, the London Metal Exchange which controlled the market ruled that the sellers need not honour their contract to deliver physical tin, allegedly because the purchasers were trying to corner the market.

13. Clearly the players in the financial market are protected. They can make tons of money selling non-existent commodities but they need not deliver if they have no physical commodities.

14. And so the financial market expanded until it became much bigger than the real market. The trade in currencies for example is twenty times bigger than total world trade. Hedge funds, through mysterious investments pay as much as 30% to their investors. Pyramid schemes gave huge returns and banks calculate their earnings on the amount of money they lent out, whether the borrowers were able to pay or not.

15. There were numerous schemes which gave huge profits to the investors, far more than investments in the production of goods and services.

16. With these financial schemes the wealth of these developed countries and their rich investors appeared to grow at a high rate every year and the people appeared to have the capacity to buy unlimited amounts of imported goods. These countries were apparently the locomotives of growth for the whole world.

17. Then the balloons bursts. The sub-prime borrowers, millions of them were unable to pay the housing loans they had taken. Neither could they borrow from other banks to repay their debts. The banks became saddled with huge non-performing loans and were headed for bankruptcy. Like a house of cards, the whole financial market collapsed. The crisis that followed is common knowledge now.

18. The wealth of the West, acquired through the financial market is not real wealth. Their Per Capita and GDP figure are not based on reality. Their money also has a bloated value, guaranteed by no reserves or gold. (Their money is truly fiat money).

19. Their Governments were forced to bail out their banks and companies with trillions of dollars. It can be said that their Presidents and Prime Ministers are all responsible for the trillions of dollars lost by their countries.

20. I am waiting for a good unemployed journalist to investigate and write a book on these leaders who presided over the trillion-dollar losses by their countries.

Source: CHEDET.CC

THE CURRENCY CRISIS PAST AND PRESENT

The Money Game

Lee Chee Keong — Tue, 29 Dec 2009 14:22:45 +0000

“Money is a game. If you know the rules, you win; if you don’t know the rules, you don’t win”

- Robert Allen

Income can be categorised into 3 broad types:

1) Active (earned) income;

2) Passive income and;

3) Portfolio income.

Most people are familiar with only one type of income, that is, active income.

However, it is often the second and third types of income, passive income and portfolio income, that will help us accumulate wealth. That is perhaps one of the reasons there is a widening rich-poor divide? The rich knows the rules of the money game and concentrate their efforts on building passive and portfolio income streams.

In his book “Multiple Streams Of Income”, Robert Allen says that in order to be financially secure, a person needs to build multiple income streams, in the form of passive and portfolio income.

What are the differences between these 3 types of income?

Active income:

This is the type of income we earn as employees or self-employed (eg. a hawker). We exchange our efforts and time for money. The moment we stop working, our income stream gets cut off (aka. the rat race).

Passive income:

This is the type of income we get when we do the work once but get paid many times over. For example:

i) An author writes a book once and get paid royalties for many years, for every book that is being sold (eg. Robert Allen);

ii) An artiste performs once and have the performance recorded and made into CDs and VCDs, screened in cinemas and televisions, and get paid royalties for many years (eg. Michael Jackson);

iii) An entrepreneur builds a business system and, instead of doing all the work himself, he hires others (employees or other small business owners) to work for him.

Portfolio income:

This is the type of investment income we earn when we own securities, such as stocks and bonds. We get paid interests or dividends. There is also a potential for capital gains.

Have you been building your passive and portfolio income?

Why I don’t buy life insurance policies

Lee Chee Keong — Sat, 26 Dec 2009 14:23:51 +0000

I don’t own any life insurance policy save for the NTUC Medishield which I bought using CPF money.

Life insurance policies can be broadly divided into 2 main types, namely particpating policies and non-participating policies.

A participating policy is an insurance policy that participates in the profits of the insurance fund, for example a Whole Life Policy or an Endowment Policy. They typically pay a yearly “bonus” or dividend.

A Non-Participating Policy is an insurance policy that does not participate in the profits of the insurance fund, typically a renewable term insurance policy.

Here are the reasons I don’t buy participating insurance policies:

1) The premiums are too high;

2) The insurer may cease operation or go bankrupt;

3) I don’t believe in “forced savings” for the following reasons:

a) If I become unemployed, or am unable to service the monthly premium for whatever reason, I stand to lose up to 90% or more of the premiums I’ve already paid, especially during the first few years upon purchasing the policy;

b) The “bonuse rates” or dividend rates of participating insurance policies (eg. whole life or endowment) are non-guaranteed. Furthermore, the rates are unattractive to me;

d) If I should need to withdraw the money prematurely for whatever reason, I may not be able to do so without a paying a heavy penalty. To surrender the policy would mean I stand to lose up to 90% or more of the premiums I’ve paid. To borrow against the policy doesn’t make sense to me since I will have to pay interest for borrowing against my own “savings”;

4) Most participating insurance policies only pay the insured upon what is known as a “total and permanent disability”, which typically means I only get paid if I lost two of my eyes, arms or legs. What if I lost one arm, one eye or one leg? I don’t get paid at all, even though the “partial” disability can be just as devastating financially. Needless to say, it’s many times more likely for a person to sustain partial disability than “total and permanent disability”. Meanwhile I still have to continue servicing the insurance premiums on top of the medical bills I’ll have to pay out of my own pocket. Of course, I can add a “rider” to cover the partial disability but that would mean I’ve to pay a higher premium. A term insurance policy would be a much cheaper and better choice to insure against a partial disability. Also, an insurance rider to cover “critical illnesses” typically pays only upon the end stage of an illness, for example, the end stage of cancer. That means I won’t be paid the moment my illness is diagnosed. Meanwhile I’ll still have to pay my medical bills and continue servicing the insurance premiums.

Investment-linked Policies (ILPs) are essentially professionally managed investment funds (can be likened to Unit Trusts) that comes with insurance benefits. Studies have shown that the majority of professionally managed investment funds consistently underperform market indices over long periods. I would rather invest the money myself or buy ETFs instead.

In my opinion, an insurance policy is a lousy vehicle to save money. Insurance can and should be used solely for insuring against unexpected medical expenses.

For such a purpose I would rather buy a non-participating, plain vanilla term insurance policy, which comes with the following benefits:

i) A much lower premium than a participating policy;

ii) I can stop paying the premium any time I want with minimum penalty;

iii) I can get a much more comprehensive insurance coverage at a much lower price.

I’ve often heard stories about people who over-commit to expensive life insurance policies only to give up halfway resulting in financial loss which often adds up to a few thousand dollars or more. In fact I myself was one of the “victims” in my younger days. =) I hope that readers of my blog would be able to avoid the costly mistakes I myself and many others have made.

You may want to read more insurance related articles in Mr Tan Kin Lian’s blog.

No related posts.

Why I don’t usually give or ask for stock tips

Lee Chee Keong — Tue, 15 Dec 2009 14:25:14 +0000

Here are some of the reasons I don’t usually give or ask for stock tips:

(1) The tip-giver may be wrong;

(2) The tip-giver may change his mind about a particular stock. For example, the prospect of the underlying company may change, for better or for worse;

(3) The third reason, perhaps the most important reason, is that for an investor to do well, he must have the correct attitude and mindset toward investing.

I believe in “self-reliance”, no matter what I invest in. I only invest in things that I understand. It doesn’t matter that there are very few things I understand, as long as I stay within my circle of competence. As time goes by, my circle of competence expands.

It’s important that I do my own research and decide for myself which company or what financial instrument I want to invest in.

The greatest investor of all time, Warren Buffett, once said that if a person cannot stand to see share prices drop by 50%, that person has no business investing.

That means an investor should do his own research. It also means he should stay away from leverage.

If I had done my own research, that alone will give me the confidence to hold on to a company I had just bought if the share price drops by 50%. That is if my research shows that the company is worth more than the price I had initially paid. I will be in a better position to decide the action, if any, that I should take.

In my experience, stock markets often behave in an irrational manner in the short to medium term. An undervalued company can become even more undervalued a few weeks or a few months later and vice versa. A rational investor can take advantage of such price actions.

An astute investor can often tell, with a high degree of accuracy, that a particular company is worth “much more” than a particular per-share price. The difficulty lies in the fact that most of the time, it is almost impossible to predict whether the company will continue to be undervalued or become even more undervalued in the short to medium term. In the longer term the share price will rise to reflect the intrinsic value of the company.

Trading or market timing can be highly profitable in certain situations but for most people the surest and easiest way to make a profit is to ignore the short term volatility and invest for the long term.

No related posts.

Super Boom In Asset Prices

Lee Chee Keong — Sat, 05 Dec 2009 14:26:26 +0000

“An effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive“

– Bill Gross

I believe we’re in the early stage of a super boom in asset prices, thanks to a stabilizing economy and an expansion in money supply around the world.

China had gone shopping all over the world for resources it knows it will need as the economy recovers, as well as to diversify away from the US dollar.

I’m expecting commodity and asset prices in general to go much higher over the next decade.

The credit contraction due to the “subprime” crisis has temporarily suppressed commodity prices and caused commodity producers to delay their projects which had suddenly become unprofitable. This will lead to a supply bottleneck as the economy recovers and demand starts picking up.

The unprecedented monetary expansion around the world will inevitably lead to much higher inflation rate which will be reflected in higher asset prices.

There’s a lot of money on the sideline waiting to get out of cash and into higher-yielding assets.

As Bill Gross has highlighted in his recent commentary, there are over $4 trillion dollars in the money market funds with a yield of “close to nothing”. That’s in the US alone. Bill noted that such prohibitively low interest rate will “force or entice investors to term out their short-term cash into higher-risk bonds or stocks”.

There’s also a huge amount of private funds and sovereign wealth funds on the sideline which will be chasing after higher-yielding assets as the economy recovers.

I’m therefore fully invested, particularly in commodity-related companies including oil, mining and agriculture. My portfolio is concentrated in companies that have businesses in China, Australia and emerging markets. I am particularly excited about the growth prospects of emerging markets as well as resource-rich countries like Australia, Canada and Brazil.

The best way to hedge against inflation