Commonsense economics

Recently, I posted that NBER announced the recession is officially over. On a contradictory note, after NBER released the news, Warren Buffett said that the US is still in a recession.

Why made him say that? This was what he said on CNBC: “On any commonsense definition, the average American is below where he was before, or his family, in terms of real income, GDP (gross domestic product). We’re still in a recession. And we’re not gonna be out of it for awhile, but we will get out of it.”

In 2008, he was one of the first to declare a recession has begun based on the fact that most Americans were doing worse than they had before.

Just like what Warren Buffett has observed in the economy, we can also use some simple observations instead of complex data to know where the economy is headed or if it has recovered from a recession. For example, we can look at:

• Amount of people in shopping centres and departmental stores
• Amount spent during sale periods (eg. Great Singapore Sale, IT fairs, etc)
• Length of taxi queues
• How full/empty your favourite restaurants are during dinner time in the weekends
• Level of vehicle COE premiums
• The number of people turning up in car showrooms
• Thickness of classifieds ads section
• Number of tourist arrivals

In the Singapore context, we are surely out of a recession due to the very good GDP and manufacturing numbers. Also, according to the simple observations as above, I can see the shopping centres are getting more and more crowded and more jobs being posted in the classified ads section compared to 2008-2009 period. Furthermore, the number of tourists arriving in Singapore has been growing ever since and has even hit the 1 million mark!

(Reference: http://www.huffingtonpost.com/2010/09/23/warren-buffett-were-still_n_736148.html)

Shifting of Portfolio

As I have said in a previous post, I have changed around my portfolio a bit to reflect the current market conditions. I liquidated my holdings in PGJ, SPY and C and withdrew my US dollars from my US broker a few days back. Since I have sold off PGJ (a China ETF), I wanted a new position to take advantage of the China boom. Thus, I purchased “United SSE 50 China ETF” listed in SGX and in Singapore dollars (felt more comfortable with local currency).

I have also liquidated half of my positions in Thomson Medical Centre after it went way above my intrinsic value calculation after Standard Chartered released a buy call with TP at $1.10 on 16th September. I was reluctant to sell off TMC at first as it’s such a gem. However, I sold off after I told myself that discipline is key in this business. I sell off when the intrinsic value is reached (no more value in the business) or when there’s a major fundamental change for the worst in the company.  I managed to take out my capital less $600 after selling half of my positions. Thus, it’s kind of risk-free now with only $600 in the market compared with my initial outlay. I’m keeping the rest as I estimated a higher intrinsic value in FY2010 (going to be released soon in Oct I think).

A wake-up call

The headlines on today’s mypaper caught my attention. China urged US to fix its economy and not blame China for not appreciating the yuan. I feel that this will be a wake-up call for the US government.

Recession has officially ended BUT…

On 20th September 2010, it was announced that the US was out of recession officially. National Bureau of Economic Research (NBER) released the report. It stated that the recession officially ended in June 2009. The recession, which started in Dec 2007, lasted 18 months. It was the longest recession since World War II.  How did NBER come up with this deduction? The main numbers that were noted were the strong growth in real GDP and real GDI numbers since June 2009. The full list of the data NBER looked at is:

• Macroeconomic Advisers’ monthly GDP (June)
• The Stock-Watson index of monthly GDP (June)
• Their index of monthly GDI (July)
• An average of their two indexes of monthly GDP and GDI (June)
• Real manufacturing and trade sales (June)
• Index of Industrial Production (June)
• Real personal income less transfers (October)
• Aggregate hours of work in the total economy (October)
• Payroll survey employment (December)
• Household survey employment (December)

The trough dates are given in brackets. So, it can be seen that most of the data showed a trough in June. Take a look at http://www.nber.org/cycles/sept2010.html and http://www.nber.org/cycles/cyclesmain.html for more information.

When the recession started in Dec 2007, NBER called the beginning of the downturn only in Dec 2008. Now, the end of the downturn was called 15 months after it ended. Thus, this is a lagging indicator of the economy as the committee needs to confirm the numbers and data before calling the peaks and troughs. The markets, however, are leading indicators of the economy. Why do I say that? The markets have rallied a substantial percentage since June 2009. Thus, the recovery has already been priced into the markets long before. The STI has rallied around 750 points or 32% from 30th June 2009 till now. The DOW is at around 27% higher than June 2009. This shows that the markets always leads the economy by around 3-6 months (remember that markets bottomed in March 2009).

Yes, the recession has officially ended BUT (an extremely big BUT) not everything is rosy in America. The US is still in insurmountable debt of $13 trillion! Unemployment is still high at 9.6%! Unless all these have subsided, I will have minimal confidence in the US economy. Take a look at the chart below to see how much unemployment has grown since Dec 2007.

(Charts from http://www.usatoday.com/money/economy/2010-09-20-recession-over_N.htm?loc=interstitialskip)

Wall Street 2: Money Never Sleeps

Wall Street 2 is going to be released tomorrow in Singapore. Wall Street 2 is a sequel to Wall Street which was released in 1987.

A tagline in the movie goes “Greed is good!”. This certainly doesn’t apply to investors who are looking to accumulate wealth slowly through the effect of compounding. Greed is a sure path to doom and greed has caused numerous crashes, including the recent financial crisis in 2008.

I’m sure to watch this movie as it centers around Wall Street and investment. However, I will be watching just for entertainment purposes and maybe learn a thing or two on how NOT to invest the Wall Street way.

Trailer for Wall Street 2:

“Greed is good!” from Wall Street (1987):

Book Review – How an Economy Grows and Why It Crashes

I recently completed reading a book called “How an Economy Grows and Why It Crashes” by Peter Schiff and Andrew Schiff after reading rave reviews from Amazon.com. This book teaches on how the economy works, why it prospers, why it crashes, among others. Even though this book is centered around the US economy, you can still learn a lot from this book. I thoroughly enjoyed reading this book as it has comic sketches as well. The book is so simple to understand yet the topics covered have depth. I have no economic background from school so this book makes it easy to learn about the economy.

This book espouses the Austrian School instead of Keynesian economics embraced by most politicians and economists nowadays.

To summarise this book:

• Economies grow by finding better ways of producing more stuff that humans want. This doesn’t change, no matter how big an economy grows into.
• A government’s increasing debt take-up has hidden the fact that real credit is limited by a finite supply of savings. Savings must be accumulated before it can be lent out.
• Savings create the capital that allows for expansion of production. A dollar saved makes a more positive economic impact than a dollar spent. If there is real demand, what is produced will be bought without needing artificial demand.
• Artificially expensive currency, high taxes and restrictive wage and labour laws makes US not as competitive in enough products ranges as compared to China. So, what if China can produce cheaper goods? Isn’t that good for US as its citizens can buy cheaper products?
• Recession is good as it re-balances the economy.
• US gets stuff without producing them and get to borrow money without having to save. For that, the Chinese get to work without consuming what they produce. They save but don’t get to borrow. Where’s the benefit there?
• US is simply fortunate to sell its debt to foreigners. But the “good fortune” can’t last forever. The US is gravely in debt in the tune of $13 trillion and it surely cannot pay up most of it. The US government is literally bankrupt! If it was a public-listed company, it would have gone bust long time ago. Now, the US has only two options: default (tell the creditors that it can’t pay up) or inflate (print money to pay off maturing debt).  Either options leads to painful consequences. However, defaulting is the better option as it offers a fresh beginning.
• With over 50% of the government debt currently sold to foreigners, who will pick up the sack when the foreigners stop buying? With little domestic savings, Americans alone will not be able to do it.

The US currency, like most currencies nowadays, is backed to thin air – nothingness! Its value is just what is perceived by people. It can be printed easily as per the government’s wish. The paper currency will become worthless when people lose faith in it. However, precious metals (eg. gold and silver) cannot be “printed” and the value will be there forever. Its value won’t be eroded. This is the simple reason why gold and silver prices are rising through the roof nowadays!

After reading this book, I have decided to shift my portfolio around after the warnings from the book. I had holdings in US stocks like SPY which were meant to be long-term investments. After reading this book, I decided to sell my holdings off and withdraw my US dollars from the broker. I’ve decided to invest them in a China ETF dominated in Singapore dollars and listed in SGX. I feel this is a much safer for me as I’m a very conservative investor. Some might say that I’m just too paranoid and that US will still retain its reserve status no matter what happens. However, I’m not taking any chances, at least for the next 20 years. I will just wait and see what actually happens and learn from it. I’ve more confidence in the Singapore and Asian markets than the US market.

The book covers much more than what was summarised on top. I just summarised from the book the main points to show why I chose to sell off my US holdings and convert the US dollars to SGD.

Anyway, two things still perplex me when it comes to the workings of China. Why must China “heed” US’s request to appreciate the yuan? Also, why does China still buy US debt when China’s economists should have understood long time back that US bonds are not worthy of holding? Hopefully, someone can enlighten me on these two issues that has been nagging me for some time.

(On a side note, MPH Raffles City is having 30% off on regular-priced items till end of the month. So, go grab this book if you want a simplistic yet deep understanding of how an economy works and why it crashes!)