Why do Restaurants Cluster?

When you visit an established shopping centre, have you ever wondered how the variety of restaurants survive amid all the competition? Why do such restaurants choose to be located near each other? Wouldn’t sales dwindle due to the close proximity to competitors? It sure seems ironical to be located close to a competitor.

Such clustering is called “agglomeration” in economics. When restaurants cluster together, there may be advantages because that cluster attracts more customers than a single restaurant alone could. Restaurants agglomerate when the benefits of agglomeration are higher than the costs involved.

A great example of the above would be a group of adults going for lunch. Would it make more sense to go to a venue where there are many restaurants to choose from or go to a place where there is only one standalone outlet of McDonald’s? The former makes more sense since there is a variety of restaurants and food to choose from instead of sticking to burgers.

Therefore, the next time you visit the restaurant cluster at Basement 1 of Jurong Point, you can appear smart by explaining to your friends why those restaurants are clustered together.

Safety Bubble?

Two articles in today’s Straits Times caught my eye. One was “Reits look like good bets to yield-hungry investors” and the other was “GIC more cautious in going for higher returns“. Both talked about a “bubbly” situation.

The first article touched on the FTSE ST REITs Index outperforming the Straits Times Index by 4% since January. It also touched on this term called a “safety bubble” where investors are “wanting yield and earnings visibility in the shares they buy – and this has caused a run-up in sectors such as Reits.”

In the second article, Government of Singapore Investment Corporation (GIC) is “more cautious about seeking higher returns as yields remain low ahead of the “end game” in the next five to 10 years.” Borrowing costs are low and therefore, investors are seeking higher-yield assets. Bill Gross, who is running the world’s biggest bond fund at Pacific Investment Management Co., said that, “We see bubbles everywhere. As long as the Fed, and the Bank of Japan and other central banks keep writing checks and don’t withdraw, then the bubble can be supported.”

The two articles tie back to my previous blog post on “Are SGX-listed REITs in a Bubble?“. The REITs Index is going higher and the valuation of REITs are increasing in tandem. This article from Fundsupermart makes a good read to tie up my thoughts.

Investors have to be cautious going forward amid this low-interest rate and rising asset prices. It’s better to be safe than sorry!

2011 – A Review

These past year has been a tumultuous time for the stock markets. Stock markets worldwide saw great volatility amid various global economic scenarios. The US credit rating getting downgraded to AA+ from top-notch AAA rating in August by S&P and the European debt problem raging filled the financial pages of newspapers worldwide. Even though most of the problems were in Europe and US, the Asian markets fared worst than most of the US and European markets as we will see later. This shows that it’s hard to predict what the markets will do even if the problem are concentrated in a particular region per se.

Straits Times Index (STI)

Starting of the year of 2011, I went to a market outlook seminar by one of the top stockbroking houses and the researcher predicted STI to reach 3,500 points in the first quarter of 2011 and to even reaching 3,600 in the year. However, the highest STI ever reached last year was 3279 points on 6th Jan 2011. On the contrary to predictions, the STI was actually down 17.1% for the year. On 31st Dec 2010, it closed at 3190 and on 3oth Dec 2011, it closed at 2646. It even threaded close to a bear market scenario, which means coming down at least 20%.

(Source: Yahoo! Finance Singapore)

Hang Seng Index (HSI) and other Asian markets

HSI wasn’t spared as well. HSI fared worst than STI in 2011. On 31st Dec 2010, it closed at 23,035 and on 30th Dec 2011, it closed at 18,434. It was down 20% for the year, taking it into a bear market region for the year.

(Source: Yahoo! Finance Singapore)

According to Straits Times report on 31st Dec 2011, the Shanghai Composite Index is down 21.1% for the year and Nikkei 225 is down 17.3%.

Dow Jones Industrial Average and S&P 500

Surprisingly, the Dow Jones Industrial Average (DJI) finished 5.5% up for the year and the S&P 500 finished off exactly flat for the year. Thus, it can be clearly seen that the Asian markets got a bigger beating than the American counterparts.

(Source: Yahoo! Finance Singapore)

(Source: Yahoo! Finance Singapore)

To add on to the surprise, we will see later that 3 out of the 4 European markets finished 2011 better than STI, HSI, Shanghai Composite Index and the Nikkei 225.

European Markets

CAC 40 (French market) – CAC 40 closed down 17% for the year

(Source: Yahoo! Finance Singapore)

DAX (German market) – DAX closed down 14.7% for the year

(Source: Yahoo! Finance Singapore)

FTSE 100 (British market) – FTSE 100 closed down 5.5% for the year

(Source: Yahoo! Finance Singapore)

FTSE MIB (Italian market) – FTSE MIB closed down 25.2% for the year

(Source: Yahoo! Finance Singapore)

The Italian market fared worst among the European markets. It’s of no surprise since Italy is next most indebted nation after from Greece in the Euro region. What’s surprising as I mentioned earlier is that the Asian markets fared worst than CAC 40, DAX and FTSE 100. The crux of the world economic crisis is in Europe but Asian markets finished 2011 worst off.

In conclusion, it’s hard to predict the movement of the stock market and it is futile timing the market according to the crisis. Even though the crux of the problem was in US and Europe, the Asian markets fared worst off. A lesson for all of us – we just have to save up enough cash and buy bit-by-bit whenever the opportunity arises and not worry about how the global economy will pan out. Have a fruitful year ahead and remember, invest diligently!

The Federal Reserve and Money Creation Magic

“There are some things money can’t buy. For everything else, there’s MasterCard” is a famous advertising slogan associated with credit and debit card company, MasterCard. Have you ever wondered how this money is created for you to purchase goods and services? Are all the money in the world just printed from the mint or is there a more sophisticated way of how the money we use is created?

To understand how money is created, we need to look at the US monetary system. The US monetary system is controlled by the Federal Reserve Bank (the Fed), which was established in 1913 via the Federal Reserve Act. The Fed, despite its name, is not part of the government. The Fed is a central bank that consists of several secretive, private banks  (yes, u read it right, private banks). The Fed has several goals. Firstly, it loans money, with interest, to the federal government. Secondly, it adjusts interest rates according to the economic situation. Thirdly, it prints fiat currency to be used as legal tender. Fiat currency is money that gets its value from government regulations. In a US dollar bill, you can find the following phrase and it’s this phrase in all its bills that gives value to the US dollar:

(Image courtesy of http://epiac1216.wordpress.com)

Let’s say the US Congress needs money to fund certain projects. The US Treasury prints treasury bonds and these bonds are sold to the Fed in exchange for money. This money from the Fed is then used to fund the government projects. The money lent by the Fed is accounted for only digitally and is not physically printed (only around 5% of the money in the world exists as paper currency and the rest of the 95% of the money is all in digital form).

The Fed, like all other banks, uses fractional reserve banking system. It’s a system where 10% of the money deposited by someone is kept and the 90% of it is loaned out. By using this system, a mind-boggling 9 times the money deposited can be created out of thin air for others to borrow. To illustrate the fractional reserve banking system, let’s say a new bank started off with a $1000 deposit. This $100 deposit can then go on to create $9000 in the banking system (not the same bank as money flows). If you don’t believe what I have just said, take a look at the Excel spreadsheet that I created to make myself believe.

This fractional reserve banking system is made to work because not every single person in the world will withdraw his/her money at the same time. If this really happens, it will cause catastrophic failure to the whole banking system. This is called a “bank run” and it’s a dirty word among bankers.

Let’s sidetrack a bit. Why did the fractional reserve system come about in the first place? Why can’t we use the full-reserve banking system which is the opposite of fractional reserve system? The full reserve system (Gold Standard where each dollar is fixed to a mass of gold) was being utilized till 1971 when President Richard Nixon decoupled the dollar bill from the gold backing.  Banks make money by charging a higher interest on loans given out than on the interest given to money deposited in the bank. The difference in interest earned is the revenue of the bank. By having a full reserve banking system, the banks revenues are minimized as they cannot loan out more money than they have. By switching to the fractional reserve banking system, the profits of banks can be maximized as not everyone will withdraw their money at the same time.

By creating 9 times more money when using the fractional reserve banking system, you would have noticed something astonishing. When people borrow, money is created. So, essentially money circulating in the world is all debt. We are living in a debt-based monetary system. Yes, it is true. Money = Debt. Since all the money for the past 30 years (since 1971 when Gold Standard ceased) is debt, when all the debt is paid up, money will cease to exist. Ironically, debt is needed for the economy to flourish.

When a person cannot afford to pay his/her debts (together with the interest owed), default looms. This gives immense pressure to the person on the brink of default as the amount owed will always be more than the amount borrowed. Let’s now shift our attention to a country. When a country cannot pay debt, it just simply prints more money. This creates more debt at an exponential rate. An apt analogy will be digging a deeper hole to bury oneself. This is what is happening in Europe and US. These debt problems were created after adopting the fractional reserve system. The world leaders are working hard to control this debt bubble from bursting. If it bursts, it will create a complete failure to the whole banking system!

Can this problem be solved if we go back to the Gold Standard? I think it can be since every dollar will be equivalent to a certain mass of gold and since gold is a limited resource, it cannot be “printed” as and when the government needs.

For a detailed understanding and to get a better picture of what I have just mentioned, you need to invest 47 minutes of your time to watch the following video. It will be absolutely worth the time (I promise!).

The next video is basically the same as the previous video but it’s a shorter version:

A brief U.S. history of money:

The problems the money creation method is creating and what does it mean in the future (must watch videos!):

“The Money Masters” Movie

I just watched a long documentary on the money system of the world today. The movie is called “The Money Masters” and it traces back history to find out how the current monetary system came about. It is also revealed (a widely known truth now) that the United States Federal Reserve is not a government entity but is actually a private bank and shows how the Fed came about.

I was really intrigued by the history of money and the controllers of money. It says in the movie that it’s these controllers of money or “money changers” who cause the recessions and depressions by manipulating the money supply!

You can watch the movie in entirety here. For abridged text-version of the movie, you can refer to this website.

Warning: The movie can get a bit draggy and boring for those who dislike history.

Jim Rogers vs Warren Buffett

The recent US debt problem has split the investor camp into two. One which believes that US will indeed go into a recession and the other camp that believes that US will not go into a recession. One of the camp has Jim Rogers as its patron while the other has Warren Buffett as its member.

Jim Rogers sees no way out of this US debt problem. He said in a CNBC interview yesterday that “it’s physically, humanly impossible for the U.S. to ever pay off its debt” and “they can roll it over and continue to play the charade, but the U.S. is bankrupt.” He also added that investors should “nearly always buy into panic just like you should sell hysteria.” The full article can be found here.

On the other hand, Warren Buffett thinks the US credit downgrade by S&P was absurd and that he would give the US a “Quadruple A” credit rating if possible. He also sees no double-dip recession in US. Articles on him can be found here and here. Maybe Warren knows something about US that we all don’t know?

Personally, I gravitate towards Jim Rogers’ view. I see huge trouble brewing in US and there’s a high chance that US will go back into recession. Also, like one of the articles said, America is running a giant Ponzi scheme – printing more of the green stuff to pay off the older debts. The truth is out there for all to see and the US has nowhere to hide now.

U.S. hits debt ceiling

The United States government has officially hit the debt ceiling of $14.3 on Monday, 16th May 2011 (U.S. time). Treasury Secretary Timothy Geithner cited that he will suspend investments in federal retirement funds until August 2nd so that the government can continue borrowing. Beyond this period, the Congress has to either raise the debt ceiling or the U.S. government has to default on some of its debt obligations.

For the first option of Congress raising the debt ceiling, the government will be able to borrow more money till the new debt ceiling that is going to be set is reached. However, the question is how long can this go on? How long can the Congress keep on raising the debt ceiling? Since March 1962, the debt ceiling has been raised 74 times and 10 of those times have occurred since 2001. This cannot go on indefinitely and the future generation has to face grave consequences of this action. The U.S. government will just continue digging a deeper hole to bury itself. The markets will then lose confidence in the ability of the federal government to repay those debts.

For the second option of U.S. government defaulting on its debt,  investors may lose confidence much more quickly in the U.S. government and this will create a mega catastrophe that is going to be worst than the subprime crisis in 2008. The world markets will plunge and unemployment will hit the roof. Remember also that U.S. dollar is the reserve currency of the world.  If U.S. defaults, the confidence in the currency, which is already waning, will drop even further.

Either option does not bode well for the U.S. government. Raise debt ceiling and you dig a deeper hole that has to stop some point in the future. Default and you will cause a major financial tsunami. Personally I feel the latter will be a better option for U.S. so that they can start from a cleaner slate and at least try to put a stop to the debt problem.

As for my stock investments, I’m thinking of liquidating some of the stocks that are overvalued and sit on cash. I will monitor the U.S. debt situation closely and act accordingly. But I will always keep in mind that time in the market is more yielding than timing the market.