Tuesday, January 21, 2014

L.A.M. on Money

When I was a college student, I could live on less than $300 a month but once I started working, that number has quadrupled and the more I earn the more I tend to spend.

Looking back, I think I have fallen prey to some very good marketing and self rationalization. Working long hours with very little free time has led me to justify certain kinds of spending which I normally wouldn't do.

For example I find myself taking taxis much more often especially when the nearest train or bus stop is too far or if the journey takes longer than half an hour by public transport. I justify this by claiming that my time is money.

My food budget has also increased. I spend more on " comfort food". A stressful day, a late night, getting paid, all become some excuse to eat at a restaurant. If I have to queue in the hot sun for a cheap plate of economical rice, I might as well pay ten times more to eat at a restaurant.

When I get a new pair of glasses, I can't buy a $50 pair. I use my glasses for work. It has to be a 1000% more expensive Armani one to keep up with that corporate image.

On hindsight, I'm beginning to realize that the more I earn, the more I spend, either out of self rationalization or to keep up with the Joneses and the more I spend the more I have to earn to maintain the lifestyle.

Looking at people higher up the corporate ladder than I am, I realize that at some stage that prestigious country club membership stops becoming a want and starts becoming a need. A condo with a pool becomes a necessity. A car becomes a good investment. Annual trips to Europe become that much needed break you need and flying by economy class becomes beneath you.

The bitter truth is that there are many things you have right now that you don't need. That people can live on less. But the bitterer truth is that we need people to want more, to be more consumerist, to buy homes they cannot afford so that they will be motivated to keep working in a job they don't like. If people stop buying birkin bags or stop building palaces for the rich in the desert or stop spending a few grand on a bottle of wine, the economy collapses. Companies that sells luxury goods start seeing their profitability drop. Shareholders start seeing the value of their holdings decline. Employees get retrenched, suppliers lose business, more people get retrenched. Everything goes downhill.

I guess the moral of the story here is that the wise man is the one who stops keeping up with the Joneses. But the wisest man is the one who is not only not envious of the Joneses but also grateful to the Joneses for keeping up with the Trumps who tries to keep up with Hiltons because in doing so they keep everyone in stable employment.


L.A.M. on Whether Singapore is heading for an Iceland style meltdown

Introduced by Nassim Nicholas Taleb in 2007, the black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

Let me try to give an example. Let's say that back in 2000, a FAA personnel had the foresight to improve airport security by increasing and enforcing checks on airport travelers. Forcing every traveler to remove his shoes, belt and jacket at the screening area, throwing every LAG into the dustbin, setting protocols preventing pilots from leaving the cabin. Because of the efforts of this FAA personnel, we would still have the World Trade Centre towers today. Osama Bin Laden will still be alive and would have never planned to strike America on 9/11 in such a way because he knew that his terrorists will never get through security. 

Will this FAA personnel be lauded as a hero? The answer is a huge resounding no. Travelers everywhere will curse him. Hundreds of complaints will be filed by people because he has made air travel and inefficient mode of transport. Pilots will complain that they can no longer flirt with that pretty air stewardess during the flight. This FAA personnel will be branded a villain and the world will never know that they evaded a catastrophe because of his efforts.

The other day, I read an article about Singapore heading for an Iceland style meltdown. The reaction to this article was quick and fast. The MAS replied within a day, the article was shared 50,000 times and that probably justified Jesse Columbo's pay cheque. 

Well, there are some very fundamental differences between Singapore, Iceland and the US credit crisis but if I were to pick one very big difference, it is the presence of a black swan event. In the US, Alan Greenspan has constantly refused to acknowledge that near zero rates were creating a credit bubble. Iceland ignored signs that it's debt has grown to Godzilla proportions. When the meltdown came, it was huge, it was tragic, it was unexpected.

Now Singapore is in a slightly different position. We have the benefit of hindsight and MAS has been preparing to cool off a credit bubble. Similarly in China, the PBOC has taken draconian measures to wipe out runaway credit in the world of shadow banking, even allowing it's benchmark rates to increase by 200%. Further South, Bank Indonesia has raised benchmark rates multiple times in 2013. Are the Central Banks aware of a credit bubble? The answer is yes. Are the consumers aware of a credit bubble? A quarter of them, yes. 

With increased awareness and action, will a black swan event occur? The answer is no. Singapore has a strong balance sheet. Singapore banks are poised to withstand huge shocks to the market. Will we have an Iceland style meltdown? Unlikely. But whether we have a property market collapse is up to the consumer.

If enough consumers buy into the theory that property prices have only one direction and that is up, eventually the bubble will burst and property markets will collapse. If enough people are swayed by recent news, make prudent credit decisions, then we will see a dip in the property market and a U shaped recovery. Whatever the majority believes in, the opposite will occur. How's that for a Paradox.

In conclusion, whatever analysis is made, what matters is not whether people believe it's true but whether enough people believe otherwise.