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)

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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).

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!)

Kingsmen Pulses Article

I went to purchase the Sept issue of Pulses magazine after reading one of SG Musicwhiz’s posts, saying that Kingsmen was featured in the magazine. Buying it turned out to be a good idea.

The article featured an interview with the founders of Kingsmen, Simon Ong and Benedict Soh. I liked a few of the points brought up in the article. I would summarise them as below and also add some of my personal views after the     “–>”. My personal views may seem too optimistic to some. This may be because I’m a shareholder. So, exercise prudence when reading the post.

  • Both the founders hold 24.6% of the company. –> Insider holding is great and shows that the management is interested in the company by having a substantial stake in it.
  • From the beginning, Kingsmen sought to stand out through its professionalism. Mr Soh said, “In our kind of services, at the lower level, it’s a dime a dozen – and we admit that. The entry level is rather low. You don’t need a professional degree. But a lot of people claim to be designers when they are not trained”. –> This shows honesty from the management as he agrees that this industry has low barriers to entry. However, the kind of services Kingsmen provides is not at the low level anymore. Its work demands a premium nowadays. Kingsmen has now become a prominent company in the communications design and production industry and I’m sure it has more room for growth. It’s not easy for small-scale design companies to just spring up and be profitable for the long run as there are many players in this industry with Kingsmen and Pico having lots of the market share.
  • Mr Soh also added that Kingsmen does not compromise on its professional standards and quality, whether in design, production or after-sale service, especially the later. “We have demonstrated to customers that we are here to stay, and this is why we promise good after-sale service no matter how small the complaint is”.  –> This shows that Kingsmen is a quality company with customer satisfaction as its utmost priority. This keeps the customers coming in repeatedly and revenues locked in. 70% of Kingsmen’s revenue are from repeat customers and this shows that the customers value Kingsmen’s products. Also, this is good for Kingsmen as it’s more cost-effective to provide for repeat customers than to find new customers. Having said that, Kingsmen is still looking out for more opportunities for growth, especially in this region.
  • Mr Soh singled out the Universal Studios project as being the most challenging so far. However, it accomplished the work in 16 months, about half the time that an average theme park elsewhere would have taken. –> This shows honesty and that the company recognizes its strengths and weaknesses. Even though Universal Studios project was the first of its kind and the learning curve was steep for Kingsmen, it delivered a great job beyond expectations that’s evident when one goes to USS.
  • Kingsmen wants to expand in the region which offers promising markets, including China (currently has offices in Beijing and Shanghai), India and Middle East. –> Kingsmen has more room for growth and having set the track record and branding for itself, it’s poised to do well in the future.
  • Kingsmen is also enjoying growing demand for its store fixtures, which it exports to its retail clients in the US and Europe. –> Companies as far as Europe and US recognize the quality work that Kingsmen does. This is heartening to hear.
  • During the latest financial crisis, Kingsmen benefited from the rapid growth in some of its offices in North Asia, including China. “During tough times, clients have better choices and they will select companies which they know will not disappear”. Its repeat customers prefer to rely on Kingsmen than engage a new company –> Kingsmen is not operating in a recession-proof industry. During a crisis, companies engaging Kingsmen may cut costs to lower their expenses. But, the repeat customers know Kingsmen’s working style and they can work towards cutting a deal that is attractive to both parties (cost savings for customers but not compromising revenues for Kingsmen).
  • The founders have said that their children would not be joining their companies and they are clear about that. They want to be able to attract professionals to run Kingsmen and do not want it to be treated like a family business. Mr Soh said “If you have children in, you get more of a headache”–> I’m glad that the founders are clear on who to pass on the batons to. It’s not right for a founder to pass on a business to his/her children without regards to merit. Mr Soh is 61 and Mr Ong is 57. Even though they still have a long way to go and still seem very energetic from the pictures in the magazine, they are reaching an age where they need to take a breather. I hope Kingsmen can attract talented professionals who are both honest and competent enough to run the business, enabling Kingsmen to reach greater heights.
  • Mr Soh gives talks in schools and is also involved in grassroots activities. He said that contributing to society is good for the soul. He went on to add that a teacher learns twice and it’s that kind of happy thing to do.
  • Staff like to work for Kingsmen as “outstanding talent is given due recognition”. “There’s no glass ceiling over here. They all have opportunities to rise to the top based on meritocracy”. “We put in a lot of effort into training”. “We have a certain culture that is very design-led, and driven by quality and service”. Someone whom Mr Ong met recently likened the group’s working culture to Apple and its competitors Microsoft. They also have their own sports club and there’s a get-together every month for 2 hours. Teamwork is emphasized in Kingsmen. Mr Soh said that he often tells the staff that if everybody holds hands, you cannot drown. He also said the team spirit at Kingsmen is very strong and the staff take pride in doing a good job for the clients. –> Teamwork and a positive company culture promotes a good working environment for all staff and the staff will be motivated to work for the company’s good. Kingsmen also has a mascot in the form of Humpty Dumpty and this shows a fun side to the company. The staff call the founders by their first name as well. This shows a relaxed atmosphere in the company.
  • Next year, Kingsmen is celebrating its 35th anniversary. –> Hopefully, shareholders can get a big bonus in the form of special dividends.