For the past few trading sessions, the overall stock market in the US and over the world have been plunging. In essence, losing trillions of dollars in value over a matter of days.

Liberation Day was the day that Donald Trump announced his sweeping tariffs. As referenced earlier, this was on the 2nd of April 2025. What was he liberating the Americans from you might ask? Perhaps the Americans were liberated from being able to purchase goods from all over the world.

Why a stock market plunging is worrying for many Americans is multi-fold. The immediate concern are for those looking to retire. In the US, many Americans plan their retirements by using their monies in their 401(k) account to invest in stocks. Generally, the monies in this account can only be withdrawn, penalty-free, when the account holder reaches 59 1/2 years old. For those who are reaching this age, to see their stock portfolio plunge overnight is extremely worrying. This means that they will have less monies for their retirement.

The next immediate concern are rising prices. One can appreciate that Trump is trying to force manufacturing and production back to the US. However, if you tax imports like coffee, there is no way that Americans can immediately produce coffee once these tariffs kick in. What will happen is that coffee imports into the US will be hit with a tax. Hence, if you are a coffee importer in the US and you buy USD$100 worth of coffee from Vietnam, once that USD$100 worth of coffee reaching the US port, the US tax department will hand you a bill of USD$46 as the tariffs on Vietnamese products is 46%. This is an oversimplification of the process. There is usually a declaration procedure where the importer has to fill in a form before the bill comes but you get the point. To those Americans who think that prices are not going to rise, you are going to realise that what you think is not going to happen.

The tariffs are not really reciprocal

Trump mentioned that it cannot get any simpler than the US merely taxing others what others are taxing them. In fact, Trump mentioned that he is merely taxing the other party approximately half of what they impose on the US. However, this could not be further from the truth. This is what they came up with:

I will let CNBC explain this formula to you. I will not belabour the point.

The essential part of this formula is that it takes into account the trade deficit with a particular country and includes it in the tariff calculation. This is how Vietnam got hit with a tariff rate of 46%. For the record, Vietnam does not impose 92% tariffs on the US. It never has. However, Vietnam racks up large trade surpluses against the US. Hence, there is clearly a trade imbalance in favour of the Vietnamese. The US buys more goods from Vietnam as does Vietnam from the US.

Is it possible to have a perfect trade balance?

This is what Donald Trump wants. He wants there to be no trade imbalances. He equates trade imbalances with tariffs. If you sell more goods to us than we to you, you are imposing tariffs on our goods. However, it is not that simple. Trade imbalances are part and parcel of global trade. It is a principle and the bedrock of how goods and services flow around the world. Imagine a scenario where there are perfect trade balances. This is before the advent of money. Barter trade dictates that I give you what I have in exchange for what you have. Hence, in the past, before there was the concept of money, if I grew rice and my neighbour grew vegetables and I wanted vegetables and he wanted my rice, I could exchange some of my rice for his vegetables. This is only workable if both parties have what each other desire. In the case where I want his vegetables but he does not want my rice, I cannot barter trade with my neighbour. The only way to get vegetables would be to look for some other person who has vegetables and is willing to trade for my rice or I had to grow my own vegetables. This is where money comes in. Money is useful because it acts as a store of value. Therefore, I can sell my rice for money to someone who wants to buy it. The money, as a store of value, can be used to buy the vegetables that I want. What this means is that I can just focus on growing rice. If I keep growing it and trying to improve my growing practices, I will get better at growing it. I do not have to divert my resources to growing something that I am less good at. This is the basis of global trade. Every country focuses on what it is good at and we use money as a store of value to trade with each other.

What Trump wants is akin to a reversion to barter trade. You have something that I want and I am going to buy it from you. In exchange, you must buy something back from me with at least the same value of what I buy from you. Alternatively, since you have something that I want and you do not want to buy things from me or at least of the same value of what I am paying you, then I am not going to buy it from you. I am going to produce it in the US.

I have this analogy to him and his advisors. I go to my. hairdresser for a haircut every 6 weeks. I pay her money for the haircuts but she does not buy anything from me. I have a trade deficit with my hairdresser. That does not mean that I stop going to get my haircut and cut my hair by myself.

The concept of no trade imbalances against the US is impossible. This will never happen because globalisation and specialisation dictates that certain countries will buy more of certain goods and services from others and vice versa.

Can there be a way for countries like Vietnam to rectify the trade imbalances to go to a zero tariff rate with the US?

Of course Vietnam would want there to be no tariffs on the products they sell to the US. However, the reason why the US is buying products from Vietnam is because Vietnam is producing these products very cheaply or that certain produce grown in Vietnam is desirable to US consumers because of certain characteristics. For example, Nike makes its clothing in Vietnam because they are cheap. The reason why Americans buy products from Vietnam and China is because of price. They are cheap and generally of good quality. Even if the quality may not be as good as if the product was made in the US, the American consumer is ok with that because of the low price.

Can the US shift manufacturing back to the US and make the US a manufacturing superpower and yet keep prices low?

The strict answer to that is no. There is no way Trump can get factories to shift from places like Vietnam and China to the US and have these factories produce their products at the same cost as before. This is because the working conditions in Vietnam and China are so much worse compared to the conditions in the US. Running sweatshops are cheap. Workers are not unionised and hence you can work them to the ground. Long hours, low pay and little regulation may sound wrong to these workers but the truth of the matter is that consumerist countries like the US love products made in this manner because they are cheap. Look at US culture. It is a consumerist one. You look at TV shows and the rooms are filled with stuff. The US consumer loves shopping and the world loves producing goods for the US. If the US were to domicile all manufacturing, it is likely we will see products that are much higher than they are now. This is because there are proper labour laws in the US. Workers are unionised and hence if conditions are not ideal, workers go on strike or start negotiating for higher pay or better conditions. In the worst case scenario where we take the ends of the spectrum, imagine a dilapidated factory in Vietnam that employs extremely poor workers and even child labour (I am against such exploitation. I am just using this as an illustration). Now imagine a factory in the US. Do you see the same dilapidated factory with such impoverished workers or do you see the possibility that the workers in the US know their rights and are part of unions? There is no way you can produce an iPhone in the US at the same price as you once did in China. Trump is not going to be able to make American manufacturing great again because in most cases, the jobs are gone forever and will never come back.

Let us analyse the reason why the US runs so many trade deficits with so many countries around the world

One of the main factors driving the trade deficits is the strength of the US dollar. The US dollars strength causes its goods to feel relatively expensive by foreign countries. On the flip side, the people in the US holding US dollars will feel that products from outside of the US are comparatively cheap. The means that more people in the US are buying foreign products than foreign countries buying US products. The main reason why there is a constant strong demand for the US dollar is because of its role as the reserve currency in the world. The US must decide whether it can accept a scenario where the US dollar is no longer the reserve currency in the world and no longer enjoy such demand. In my personal opinion, the US will not want this to happen and it also cannot afford to do. Ceding the US dollar’s role as the reserve currency would mean that demand for its bonds and securities will not be as high as before.

It is because of this that the US runs trade deficits. So make no mistake that the trade deficits are not of the foreign country’s own making. The US dollar does contribute to this situation as well.

The question is whether there is any logic to this madness.

Now there could be. Trump’s advisors are likely to be steeped in economic knowledge as well. They would have made their calculations as well. They are likely to know that the tariffs would elicit a negative response in the stock market. It is unconceivable that they would not know this. So let us try to find some sense in what seems like a whole load of nonsense.

Imagine the scenario where the Vietnamese coffee exporter exports 100% of his coffee to the US. In that case, when the US government slaps a 46% tariff on the coffee, it is likely that his US importer will not want to pay an additional USD$46 on top of every USD$100 worth of coffee. In this case, if the Vietnamese coffee exporter only has one client and that is to that US importer, then the US importer not buying any coffee from him would be extremely detrimental to him. What he could do would be to lower the price he sells his coffee to the US importer. For example, instead of selling the same amount of coffee for USD$100, he could sell it for USD$70.

In this case, after the tariff, the coffee would cost:

$70 + (46% x $70) = USD$102.20

This would not make much of a difference and the US importer can leave the price relatively the same. In this case, the cost of the tax will be born solely by the Vietnamese coffee exporter. Instead of collecting USD$100 for that amount of coffee, he collects USD$70.

However, the truth is perhaps somewhere in between. The Vietnamese exporter is likely to have other parties he can sell his coffee to. In this case, he is likely to maybe reduce his price less than the USD$30 that would keep the eventual price somewhat similar to before the tariff. Say he lowers the price to $85.

In such a case, after the tariff, the coffee would cost:

$85 + (46% x $85) = USD$124.10

In such a scenario, it would be unlikely that the US coffee importer would agree to keep prices stable as he is paying approximately 24% more for the same amount of coffee post-tariff. He can then pass on the cost to the US consumer. Hence, coffee prices in the US are likely to increase.

I think there is some benefit to tariffs. Yes, free trade protagonists will argue that all tariffs are protectionist in nature and are bad for free trade. However, protectionist measures do help to shield certain local industries which otherwise would be decimated by the availability of cheap goods from countries like Vietnam and China. However, not everything needs to be produced in the US. Moreover, what industry are you trying to protect if that industry was never there in the first place?

Let us take a ridiculous example. Let’s say the US imports Mao Shan Wang durians from Malaysia. Imagine if the US sets a tariff of 24% on these durians. What is it trying to achieve? Can the US actually produce its own Mao Shan Wang durians from Malaysia? It does not have the climate and expertise to do so. Even if it did, it takes approximately 8 years for a tree to bear fruit. For these 8 years while the US is waiting for the newly planted trees to bear fruit, its consumers will have no choice but to continue buying Mao Shan Wang durians from Malaysia. This is exactly why Singapore welcomes so many products into our country. This is because we do not have the capacity to produce those products!

Trump is taking a broad brush approach. He levies a flat tariff for all goods coming into the US from a certain country. If he were concerned with the trade deficit, would it not be ideal to actually understand why there is a trade deficit? There are reasons for running one especially when there are goods from a certain country that cannot be produced in the US for legitimate reasons. Just like me not wanting to cut my own hair, Trump has to ask himself whether his US workers want certain jobs. Remember this fact: when China was producing low value products like shoes and clothes, there was a lot less clamour from the US than when China started producing its own chips that goes into smartphones. Remember the ban on Huawei? Was there ever a ban on shoes?

So what should the US have done?

When it comes to a policy that affects the global economy, the precision of a sniper is favoured over firing a bazooka. It should have identified industries it would have liked to protect and domicile. For example, it is possible and arguably ideal to domicile car production plants in the US. The same can be said for the production of computer chips. However, to levy a 46% levy on Vietnam is just pure wrong. Which of Vietnam’s industries do you desire to domicile in the US?

So why did Trump do it?

Perhaps it was to show off that big beautiful chart…

Well done Trump! It is a really well made chart.

Yours sincerely,

Daryl

The post Making sense of Trump’s tariffs appeared first on Daryl Lum's Blog.

When we invest in property, we have to determine the metrics that we are looking at. Once we determine this, we need to stick to it. For property, whether a property is a good investment, I will consider factors like location attributes which include proximity to city centre and the central business district, proximity to the nearest train station, proximity to amenities and the availability of a catchment area of tenants. I will also look at the price of the property in comparison with other properties in the area. This is why when the property agent tells me that the property he is selling will definitely make money because the next plot of land was sold for a higher price, I do not take that into account. Imagine how difficult things can become if every time you visit a showflat, you consider different factors. Every new launch that a buyer walks into, many buyers will feel like that new launch is a good investment. This is because the agents in the sales gallery are telling you the good things about that property. The rational investor should disregard this as noise and stick to his investment metric. Easier said than done. In sales, selling on emotion is much easier than selling on logic. This is because humans are inherently emotional creatures.

For stocks, this is actually even simpler. This is because a stock is just a ticker on a screen. Your monitor or mobile phone shows the stock as a ticker code. Imagine stock markets as traditional markets. Companies can choose to sell their goods, i.e., in this case, their stock, on a market. For example, if I were Tesla, I want to sell my stock to raise money. Buyers of my stock will give me money and I can use that money to expand the business. I can choose the market I want to list my stock for sale and for my stock to be traded on. If I want to do it in Singapore, I can do it on the SGX. In the US, there is a market called the NASDAQ. In the case of Tesla, it chose to list and have its stock traded on the NASDAQ. Therefore, it is listed on the NASDAQ as TSLA.

Imagine you looking at the ticker TSLA on your mobile phone. It is just four letters. In fact, you can just Google “Tesla stock price”. This is what you will see.

Tesla Stock Price

You do not see pictures of cars. You do not have an agent telling you all the good things about the company. In fact, the news online are people who are not connected to the company. In many cases, they see the CEO of Tesla, Elon Musk working with Donald Trump. They then see the stock price falling. They then equate the fact that the stock price is falling because of Elon Musk’s association with Donald Trump.

Let me explain the concept of causation. Just because something happens after an occurrence does not mean that that occurrence caused that something. For example, there is an increase in the rates of colon cancer among people under the age of 30. Then someone says that this is caused by the COVID-19 vaccine.

This does not actually make sense because you cannot say that but for the COVID-19 vaccine, the young people under the age of 30 would not have gotten colon cancer. There needs to be a clear link to the something that happened.

Let me move back to the metric when investing in stocks. The truth of the matter is that most investments in stocks by institutions are done by computers. Heard of the term robotrading? There are institutions that are trading on algorithms. Technical analysis allows such trading to be highly efficient. A computer is not affected by what is on YouTube or news platforms like CNBC, CNN or Bloomberg. The most logical and common metric when looking at stocks is the P/E ratio.

So what is the P/E ratio?

For this we need to go back to how stocks are priced. Just because Tesla is now trading at USD$259.16 and Google is trading at USD$156.23 does not mean that Tesla is more expensive than Google. Apple is trading at USD$222.13. It also does not mean that Apple is more expensive than Google.

Google Stock Price

Apple stock price

The prices are just prices of 1 stock. The company can split the stock. i.e., divide one stock into multiple stock. Apple can say that it would like to divide 1 stock into 222 stocks. So whoever is holding 1 stock would, after the stock, hold 222 stock. We therefore need a metric to see everything on a level playing field. This is where the P/E ratio comes in. What this does is take the current price of the stock against the earnings of that one stock. The P stands for Price and E stands for Earnings per Share. To get earnings per share, you take the earnings and divide it by the number of shares (stock) issued. In the case of Apple, the P/E ratio is 35.31. This means that for that one Apple stock that you are holding, the price is 35.31 times of the earnings of that one stock. E, being the denominator, would mean that if the E were a larger number, the P/E ratio would be lower. And of course if the E were a smaller number, then the P/E ratio would be a larger number. A lower P/E ratio would mean that the current trading price is a lower multiple of its earning and hence a cheaper stock. It is not always the case where we only look at the P/E ratio. I may decide to buy a stock with a higher P/E ratio if that stock is in an industry with more innovation and growth. For example, I may decide that Apple, being a tech company, has more growth than companies in the banking industry.

Citigroup stock price

Therefore, Citigroup is trading with a P/E ratio of 11.94 but I might be more interested in Apple at current prices because of the industry or sector that Apple is currently in. Please note that this is hypothetical. I am not saying that I am currently choosing tech over banking as a sector.

With the knowledge of P/E ratio at hand, let us look back at Tesla’s current stock price in comparison with Apple’s. Apple’s P/E ratio is 35.31. In comparison, Tesla’s P/E ratio is 127.14. On all metrics, this is a very over priced stock. Google is trading with a P/E ratio of 20.23 and Amazon is at 34.43. The reason for the sell off of Tesla stock is because their reported earnings are falling. If earnings are falling, the denominator in the P/E ratio is getting smaller. This results in a larger P/E ratio. Traders who trade through numbers will immediately see this and determine that this is a good time to stop holding the stock. In fact, they may even consider shorting the stock (i.e. “betting” that the stock will fall by selling the stock and buying it back later). Now is there any reason to still hold Tesla with a P/E ratio of 127.14? Apparently the market does not think there are many reasons to do so. The reasons are most likely that Tesla is no longer the market leader in electric vehicles (EVs). Players like BYD have broken into Tesla’s lead. In fact, Teslas are no longer the world’s leading manufacturer of EVs. Other traditional car manufacturers like Toyota, Honda, Kia, Hyundai, Mercedes, BMW are also catching up in the EV space. Also, when someone buys an EV, he most likely does not change his EV every other year. This is called the replacement cycle. I believe this replacement cycle for EVs is not as frequent as compared to the replacement cycle when it comes to replacing mobile phones. If everyone who wants a Tesla already has a Tesla, then buying activity is likely to drop.

Is there some glimmer of hope when it comes to Tesla? I do think that as crazy as it sounds, Tesla may be able to pull off the robotaxi plan. If so, that would mean that Tesla would have a monopoly over autonomous ride hailing services. Tesla is the only EV maker to execute autonomous driving. It can constantly improve its autonomous driving capabilities because every Tesla EV and subsequently robotaxi is collecting data.

Think about it. Elon Musk, the CEO of Tesla is close to the US president Donald Trump. This sentence in itself is a positive thing. In fact, Tesla’s stock did rise the moment Donald Trump won the elections. Now that there is unhappiness at what Elon Musk is doing and that Tesla stock is dropping hence it must be caused by his association with Donald Trump?

If only markets were that irrational. We would have much wider swings with more opportunities to take advantage of this irrationality.

The post Why is Tesla stock falling? Other compelling reasons to explain the price correction. appeared first on Daryl Lum's Blog.

For starters, let me explain how a bank works when you put your monies the bank. For example, DBS is a bank. When you place SGD$100 with DBS, that $100 does not belong to you. In fact, when you open up the DBS app to check your balance and it shows SGD$100, that is not monies that belong to you. That is a debt that DBS owes to you. Therefore, when you put say SGD$150,000 in your bank account with DBS, DBS owes you SGD$150,000. In the event that the bank goes bankrupt, you are a creditor of the bank. You will rank equally with all the other creditors. In this case, if your friend has a bank account with that bank, he will also be a creditor, just like you. Hence, if upon bankrupcy. the balance is only sufficient to return half of what all the bank owes to all creditors, then all creditors will only get back half of what the bank owes them. All depositors rank equal. In my example, you will get back SGD$75,000 of the SGD$150,000 that you placed in the bank.

Singapore has a Deposit Insurance (DI) Scheme. This protects insured deposits held with a full bank or finance company. The maximum that will be compensated is SGD$100,000. In my example, you will get back SGD$100,000 of the SGD$150,000 you placed with the bank.

If you want to learn more about the DI Scheme and who and what is covered, you can refer to the frequently asked questions on the SDIC website.

The Chocolate Finance platform works similar to how a digital bank operates. You put the monies with them and they provide you with an account. To most, it looks and feels like you are banking with a bank. However, you are not. Therefore your deposits with Chocolate Finance are not covered by the DI Scheme.

So how did it all start?

Chocolate Finance gave attractive terms to depositors who placed their monies with them. As of today, they are offering 3.3% returns per annum (p.a.) for the first SGD$20,000 placed with them. This is very high. As a point of comparison, a digital bank like GXS, which is by Grab and Singtel is offering up to 2.88% interest p.a.

(Update: At one point in time, they were offering 4.5% returns p.a.. I believe also on the first SGD$20,000.)

The difference, to me, is that GXS is a digital bank and Chocolate Finance is not. This is on GXS’ webpage. This cannot be placed on Chocolate Finance’s webpage because monies placed with Chocolate Finance cannot be covered by the DI Scheme as Chocolate Finance is not a bank.

However, the key benefit was Chocolate Finance’s miles rewards when you used their debit card. Their debit card is called The Chocolate Card. It boasted zero FX fees and 2 Max Miles for every SGD$1 spent. The key was that it allowed users to earn miles when they paid their bills on the payment platform, AXS. This was a major differentiating factor when comparing The Chocolate Card to other debit card rewards.

I do not think that you can earn miles off many cards while making AXS payments. When a debit card is used to make payments, there is a fee that is paid to Visa or Mastercard. Visa or Mastercard will then share that fee with the card issuer. The card issuer can then use that amount of money for their incentive programs.

In this case, AXS transactions do not attract any fees that are payable to Visa or Mastercard. Therefore, the card issuer, in this case Chocolate Finance, will bear the cost of the miles that will be issued to the card holder. I believe that Chocolate Finance’s strategy was that Chocolate card holders would not only use The Chocolate Card on AXS payments but also on other payments. However, the main reason why people signed up to The Chocolate Card was to make payments on their bills on AXS. Let’s call this the AXS-miles advantage. That was the main draw and that was how the card was promulgated to the public. Even if Chocolate Finance did not aggressively promulgate the AXS-miles advantage on The Chocolate Card, they did not set any limit to people who, according to them “gamed” the system. My question to them is, “how is that gaming the system when it was one of the functions of The Chocolate Card?”

In fact, six months ago, Chocolate Finance was featured on CNBC and the CEO was asked whether what he was offering was too good to be true. He was also asked about whether deposits are protected. To me, he did not answer the question directly. I saw this interview as rather confusing as the CEO did not seem to have direct answers to the questions which were posed to him.

Now back to my question, “how is that gaming the system when it was one of the functions of The Chocolate Card?” It is like you going to a buffet like Swensen’s Unlimited and then constantly choosing the most expensive item at the buffet to put on your buffet plate. For example, if you serve up snow crabs at a buffet and it is clear that that is the most expensive item at the buffet, you cannot tell customers that they should not take too much snow crabs as that is gaming the system. Also, when you remove the snow crabs from the buffet, it is expected that the number of people who will come to your buffet will drop. Therefore, when Chocolate Finance removed the AXS-miles advantage on The Chocolate Card, they must have expected that customers will no longer want to place their monies with Chocolate Finance. Anyway the main motivation for perhaps a large number of users of The Chocolate Card is the AXS-miles advantage. Then how can they say that they cannot handle the large number of withdrawals? You saw how fast you grew when you offered the AXS-miles advantage. Therefore, it would be reasonable for you to see an equally fast withdrawal of deposits from customers when this was removed.

This is a fintech company that has all the available information at its fingertips. It could see how many users were taking advantage of this AXS-miles advantage. It would have enough information to be able to anticipate the backlash when the AXS-miles advantage was taken away.

So why did Chocolate Finance come up with the AXS-miles advantage?

The way Chocolate Finance makes money is by using the monies that customers placed with it to make investments. Just like what I explained earlier. That money that you place with Chocolate Finance does not belong to you once you transfer it to Chocolate Finance. That is a debt that Chocolate Finance owes to you. Therefore, the moment that you pass the money to Chocolate Finance, it can use the money to make investments. If the market is buoyant, then the profits from these investments will make enough to cover the miles needed to be distributed to the users as well as the 3.3% p.a. returns that it needs to pay to depositors. Do not forget that Chocolate Finance still needs to generate money for its operations. Operations like the cost of maintaining its servers, salaries, rent, etc… The thing about every market is that there are always times where almost everything you purchase goes up. However, every market will inevitably go through corrections. If you are a participant in the market then you can only follow the market. You may be able to beat the market but your earnings will be closely pegged to how the market performs. For example, if the general market is giving returns of say 5% and your portfolio produces a return of 8%, you would have beaten the market. There will be times when the market is in negative territory of say -2% and you make a return of say 1%. You would still have beaten the market.

Look at the stock markets for the last two months. It has been easing off. Mainly due to uncertainty from all the tariff threats from the new US president. If you are Chocolate Finance and you need to make enough money to cover the promised 3.3% returns, provide the miles rewards and maintain operational costs, that is a tall order. In fact, in retrospect, I think they could have lowered their returns to just above 2% and depositors may not have left the platform in such haste. The question now is whether Chocolate Finance has sufficient monies to return everyone’s money if every one with deposits demands their money back.

The statement that Chocolate Finance put up on its website says little as to whether they have sufficient monies to return all deposits. It only states that the investment funds are secure and ring fenced. This just means that if Chocolate Finance received SGD$100 million, they could have invested this SGD$100 million. This SGD$100 million is secure in a sense that it cannot be used for any random purpose except within a certain mandate. In this case, that mandate is likely to be investing in various assets. The company cannot, for example, use this money to say hold a year end party for its employees. In the event that the market tanks say 20%, that SGD$100 million would become SGD$80 million. It would still be secure and ring fenced. However if everyone came to Chocolate Finance to withdraw their monies, then they may not have enough to return that SGD$100 million.

Let us consider the fact that not everyone withdraws their money. Perhaps only half do so. That would mean that SGD$50 million would be withdrawn, leaving SGD$30 million. That would leave a deficit of SGD$20 million. The market has to perform very well for that SGD$30 million to increase in value to SGD$50 million to ensure that all deposits are matched dollar for dollar. Judging from the recent market turmoil, this seems like a tall order.

The Chocolate Finance saga has highlighted one thing to the general public. There is a difference between companies like Chocolate Finance and traditional and digital banks. Banks are covered by the DI Scheme whereas companies like Chocolate Finance are not. This is something that the general public should know.

One more thing… if it is too good to be true, it probably is.

Yours sincerely,

Daryl

The post Chocolate Finance: When things are too good to be true, they probably are… appeared first on Daryl Lum's Blog.

In my personal opinion, before one starts investing, these are the things that he or she should get in place. These considerations will put in place the foundation for one to achieve favourable results with his or her investments.

1. Buying insurance

   You want certainty in life. You do not want fluctuations and shocks to your system. Contrary to what a lot of people say, very few people are contrarian. In almost all cases, people want to be able to live a life where there are little changes to their daily routine. Insurance provides one with a great degree of certainty.

   Imagine these two scenarios.

   In the first scenario, a person does not buy insurance. He is investing $1,000 every month into his portfolio. He unfortunately is hit with a serious illness. He has to fork out tens of thousands of dollars towards treatment of his serious illness. He has to stop investing that $1,000 every month.

   In the second scenario, a person buys insurance that costs $200 a month. He is investing $800 every month into his portfolio. He is unfortunately hit with a serious illness. The insurer is the one that pays for his treatment. He continues investing every month.

   What you want when you invest is certainty. The ability to continue with your investment plan over the long term. You do not want anything to derail your investment plan. If you tell a person that he has to fork out a certain amount over the long term he will most probably be fine with that. This is why you see individuals with mortgages lasting in excess of 30 years. Remember that when you take on a mortgage, the lender is most likely going to require you to purchase a mortgage insurance. Hence in the event that you become ill and are unable to work, your mortgage is taken care of.

   The best investors all have this sorted out. They deal with the variables outside of investing. This is to ensure that they can stick to their investment plan. In the long run, the market tends to trend upwards. Hence even if your investments take a hit because you entered the market at a less favourable stage, things are likely to work out over ten to fifteen years.

2. Paying off debt

   I do not mean that you have to be debt free before you start investing. However, if you have multiple loans and credit cards on overdraft, then you should seek to clear almost all, if not all of such debt before you start investing. This is because it is very easy to trip up on repayments of such debt. In many cases, you missing a payment would result in additional interest being levied. This adds additional unwanted debt. Therefore, it is essential that before you start investing, you try to clear up most, if not all of your debt. In your investing journey you may also take on additional debt. Most commonly when purchasing a property and obtaining a mortgage. Therefore, if you own monies to financial institutions, it may affect your ability to obtain a mortgage. If there is such a thing as good debt, then leveraging on a property should be a good debt.

3. Determining your risk profile

   I have had individuals purchase a property or a stock and constantly look at other properties and the stock market constantly. They tend to inject self doubt over their investments and fret over whether they entered the market at the “best price”. For starters, there is no such thing as a best price or a best time. The best time to purchase a property was last year. However, because you do not have the ability to turn back time, then perhaps it is best to see what you can do moving forward. Instead of determining the best price and time, one should, more importantly, determine his or her risk profile.

   You can use many resources to determine your risk profile. For starters, all insurance companies have a series of questionnaires to determine a person’s risk profile. Typically you will be categorised as low, medium and high risk. Moving from there, you will then determine the asset allocation that should follow that risk profile. Take some time to research online as to suitable asset allocation for a particular risk profile. Perhaps for your particular risk profile you are suitable to have 50% of your portfolio in equities with perhaps another 30% in fixed income or low risk investments and maybe another 20% in cash or cash equivalent. As to where properties are situated in your portfolio, you will have to make that determination. For me personally, if it is properties in Singapore, I would place them in equities. My personal take is that Singapore properties are risky for the combined fact that prices are at an all time high and they are purchased with leverage. For overseas properties, they should be placed firmly with equities as they not only carry an investment risk but also an exchange rate risk. For example, if you are a Singapore who purchased properties in Thailand, you will not only have to grapple with the fact that the price of that property may fluctuate. You will also have to deal with the fact that the Thai baht may depreciate against your home currency, i.e. the Singapore dollar.

4. Coming up with an investment plan

   Now that you have settled my first three pointers, you are ready to come up with an investment plan. Typically, it would involve some periodic investments. Maybe you will make purchases of $5,000 worth of equities every three months. Maybe it may be putting aside all of your bonuses to investments. Whatever the bonus amount, it goes into the market. Sometimes it may be selecting a portfolio of stocks and setting an entry price. The price may not be a hard price itself but maybe if the stock is trading below a certain ration, say price to earnings, then you will make a purchase of a certain amount. Once you have a plan, you should stick to it. There will be a lot of noise from various sources. Your job is not to be distracted by such noise and to focus on the plan that you have created for yourself.

   Now can you see how a large event can throw you off your investment plan and hence I suggested taking care of such scenarios through insurance?

5. Letting the people who need to know about your investment plan

   You do not live alone. You may have a family who depends on you to provide for them. You may be married, or not. You may have a significant other who expects you to be open with what you intend to do with your money. You should be honest with the people who are closest to you. If you have an investment plan, do sound it out to your significant other and anyone else who should be informed of it. Your spouse may want to splurge on a holiday when you get your bonus. It is important for you to sound out to him or her that you intend to set aside that money to be invested. In fact, if you let them know about your investment plans, there is always the chance that the people closest to you may want to partake in the same investment journey. This is why you see so many family members coming together to invest in property and other financial assets. Whatever the case, you should always let the people who need to know about your investment plan.

Well that is a wrap. I do not think that these five considerations are your only considerations. They are certainly what I would do. If you are thinking of starting your investing journey, it would do you little harm to complete these five considerations.

Remember, it is never about when you start investing. It is always about how and for how long. If you put a long enough time horizon before you, your investments should reap the benefits over the long run. In fact, the economic cycles have been growing increasingly short. A long run in current terms may not need to extend beyond ten years.

Yours sincerely,

Daryl

The post Things to do BEFORE you start investing appeared first on Daryl Lum's Blog.

The fact that many in Singapore have made money from property does little to support the fact that Singaporeans are savvy investors. The reason many Singaporeans and foreigners made money in Singapore through property investments is because of the stability and competency of the Singapore government and the relative instability of other governments around the world. I genuinely do not think that it is due to the investment acumen of individual property investors in Singapore. Such investors were fortunate enough to be living in Singapore during the period when property prices increased. It was not like they scoured the whole world and concluded that investing in Singapore property would be a good way to make money. I have never heard a single individual make that analysis.

However, prices can never go up forever. On the contrary, prices never fall indefinitely. Even if it were trending in one direction, it would not be in a straight line. This is why contrarian investing as an investment strategy is applicable. Dips and spikes happen because of human nature. Human nature may not be the sole determinant of dips and spikes in the market but it is one of the reasons

Investing in a contrarian manner is counterintuitive. It is insanely difficult to do the exact opposite of what the majority of people are doing. In theory, it may make sense. However, it will not be something you can stomach when you get down to doing it.

The trick is identifying whether the current market is trending upwards or downwards. At first thought, the US stock market is weak. However, upon closer inspection, if we seek guidance from how the Dow Jones Industrial Average is performing, it is up 18.28% from a year ago.

Technology stocks are facing a correction. That is something that investors are freaking out about. The darling of the tech world Apple is facing headwinds and its share price is taking a battering. Or is it?

The stock price of Apple went up by almost 16.5% as compared to where it was a year ago.

Nvidia more than doubled in the last year.

Stock prices are not trending downwards, yet.

If we were contrarian in our investing philosophy, we would be shorting the market. Shorting a stock would mean “borrowing” the stock and selling it and then buying it back later at a lower price when the stock price has dropped.

When it comes to Singapore property, prices have similarly been trending upwards. In the second quarter of 2024, private property prices increased by 1.1 per cent. In the first quarter 2024, prices were up 1.4 per cent. In the last quarter of 2023, prices moved up by 2.8 per cent. Let me be clear, private property prices are still increasing albeit at a slower pace. This is inflation moderating. When prices fall, that phenomenon is called deflation. When buyers are hoping for deflation, they are not hoping for inflation to moderate. Instead, they do not want a single bit of inflation but instead want prices to deflate.

So then, properties in Singapore and even the stock market in the US is trending upwards. Whereas condominiums in Bangkok were trending downwards earlier this year.

Only in June and July 2024 did the Bangkok condominium price index see a pickup. For the first half of 2024, the Bangkok property market was deflating.

Let us be clear about one thing. Governments around the world need a good economy to remain in power. Therefore, it would be very difficult to see one particular asset class be in a deflationary cycle for an extended period of time. Japan’s deflationary spiral for the last three decades is the exception rather than the norm. Deflation is a difficult situation to be in. If people believe that prices will fall tomorrow, they will not buy today. Therefore, governments need a small amount of inflation to keep the economy running. Ideally about 2 per cent. This is why buying on the dips is something that you really have to be comfortable with. However, it is never easy to buy on the dips because there is always anticipation that tomorrow’s prices will be lower than today’s. By the time the data is released that there is a dip, most likely the market would have had some sort of recovery. Remember the time when it seemed like the US economy would never recover from the housing crisis? Mirror that to what the Chinese economy is currently experiencing. While it may seem like the Chinese will find it hard to recover from their current economic slowdown, this will pass faster than we expect it to. Similarly, while it may seem like Singapore property prices and the US stock market will continue to increase in value, the truth is that there will come a day where buyers just feel like prices are too high and unsustainable. It is sentiment and it is difficult to explain.

The question is, are you and I contrarian enough to use the tools and funds available to go against the existing market trend.

Yours sincerely,

Daryl

The post When it comes to investing, nothing travels in a singular direction appeared first on Daryl Lum's Blog.

In Singapore, public housing is very different. Most Singaporeans, over 70 per cent, live in public housing. The state of upkeep of public housing is very high. In fact, in many instances, public housing can be in a better state than private condominiums. The people who purchase public housing may include professionals like doctors and lawyers. Singapore is a very safe place to live and hence the guarded and gated community that comes with most condominiums is less of a draw in Singapore as compared to countries which are less safe. There are ample public swimming pools, public and private gyms, clubs and parks such that the draw of living in a condominium with facilities is no longer an appeal to many. Singapore promotes home ownership and there are many generous grants to try and offset the cost of owning a home. Here the term ownership is used broadly. The ownership refers to the ownership of the long term lease of the property. As this is a long term lease, it is imperative that the owners of these properties recognise that the property needs to be returned to the state at the end of the lease.

So then the mantra of buy property and wait is applicable in Singapore then? Well judging from how property prices have increased, it does seem like those who have purchased Singapore properties did make gains. Albeit paper gains if they never sold their properties.

However, property prices are not the only asset prices rising. Car prices have also been rising. In Singapore, car ownership is controlled using a ballot system where bidders will bid for a certificate of entitlement (COE) to own a car. Every bidding cycle, which happens twice a month, will have a number of COEs up for bidding. The COE price for that bid would be the last successful bidder with all the bidders matched from highest to lowest with the available COEs on offer. The Singapore government, is focusing on car ownership with the assumption that by controlling car ownership, they can control car usage. However, equating car ownership with car usage may be a fundamental flaw in the system. The tax should be on car usage rather than ownership if you are trying to control car usage. The negative externality presents itself when someone uses a car. If the car is kept parked, there is little to no externality. The demand is a demand for car ownership and yet the system is to limit supply to curb car ownership. The COE system is very effective at controlling supply. Which invariably, all things being equal, will result in an increase in price.

The same analysis can be mirrored to the property market. In this case, the Singapore government is trying to do the exact opposite. It is trying to promote home ownership. However, the supply of properties could not match up to the demand for housing. This actually helps the government with home ownership promotion because home prices will rise due to the shortage of supply. Buyers on the sidelines will develop a fear of missing out and rush into the property market, pushing up property prices even further. The only way to stabilise prices would be to match the increase in demand with a similar increase in supply. This is usually easier said than done. It is difficult to predict how much supply is to be released to match the increase in demand. Before we know it, two decades have passed since I have been following property prices and a five-room HDB flat has sold for a record SGD$1.73 million.

It seems like records are meant to be broken and every few months a new benchmark for property prices is set.

This then begs the question of whether prices can continue their upward trajectory. It is important to note that as of today, Mainland Chinese and Hong Kong home prices have continued to fall despite efforts to prop up the sector. In a global environment of falling home prices, Singapore’s increasing home prices is an abnormality. So then, what makes home prices rise?

The main factors are supply and demand. When it comes to demand, demand is driven greatly by affordability. This is the ceiling we are looking for. Just like car prices cannot go up indefinitely, home prices cannot do so as well. Imagine the extreme situation where a COE for a car were to cost SGD$250,000 and hence purchasing a family saloon car like a Toyota Corolla would cost approximately SGD$350,000. Assuming a downpayment of 30%, the car buyer would have to fork out SGD$105,000 as downpayment and take a SGD$245,000 loan for 84 months at 2.75% interest. This would work out to SGD$3,478 per month on instalments for this car. The median household income income was SGD$10,869 in 2023. This would mean that more than 30% of that income would be spent on replaying the instalments on that car. This is the reason why there has to be a ceiling for everything. Car prices cannot go up indefinitely and similarly property prices too have a ceiling.

So then where is that ceiling?

Remember that 2023 median household income number. SGD$10,869. The current loan to value limit is 75% for a borrower that does not have any outstanding housing loan. Therefore, if a property buyer purchases a $2 million property, the maximum loan taken is $1.5 million. This is perhaps what most buyers will be paying for a 3 bedroom condominium at a new project launch in a mature estate.

This loan to value only applies for loan tenures that do not exceed the borrower’s age of 65 years. This means that if a borrower wants to take a loan at the age of 40 years old, he or she can only have a maximum loan tenure of 25 years.

Therefore, if the buyer takes a $1.5 million loan at 3% interest over 25 years, the monthly instalment would be $7,113.

If the buyer is 35 years old or younger, the loan tenure can go up to 30 years. If so, that same $1.5 million loan at 3% interest over 30 years would result in a monthly instalment of $6,324.

Do note that I am disregarding a borrowers total debt servicing ratio (TDSR) for this example. This is the portion of a borrower’s gross monthly income that goes towards repaying monthly debt obligations. The current TDSR is set at 55%. This means that only 55% of a person’s gross monthly income can go towards repaying his debt. This includes all car, housing, credit card and other loans.

If we consider the TDSR, it is clear that the median household cannot afford to take up a $1.5 million loan. That household income would have to be approximately $11,500 to afford a monthly housing instalment of $6,324. That is with the household having no other debt. This household cannot take up any other debt obligations.

The current percentage of Singaporean’s living in HDB flats is 77 percent. If you want property prices to continue to rise, and I say it as a whole, private and public housing, you need the percentage of Singaporeans living in HDB flats to go down and the percentage of Singaporeans living in private housing to go up. However, this means that the household median income has to increase. However, real household income growth only rose 2.8 per cent in 2023. With the global economy slowing down, this growth is likely to moderate.

The next thing to do would be to depend on the foreign market to push private property prices up. At its recent peak in Q1 2023, foreign purchases accounted for 6.9 per cent of private home transactions. This was before the hike in additional buyers stamp duty to 60%. This was double the ABSD from before. This means that if a foreigner were to purchase a $2 million property in Singapore, he would have to fork out $1.2 million in ABSD on top of the usual buyers stamp duty. The result of this spike in ABSD was that foreigners purchased a paltry 306 condominium units from May 2023 to April 2024. Foreign buyers made up only 1.2 percent of resale condo units from January to March 2024. Americans are now the largest group of foreign buyers. If anyone was looking for wealthy Chinese to purchase their properties for an astronomically high price, it would seem like that is no longer likely. The Chinese generally do not want to pay such high prices, they are also finding issues getting their monies out of China and many have turned away from property investment due to their bad experience with the Chinese property market in recent years. The Americans are not affected by the hike in ABSD because they were never affected by ABSD in the first place. They are eligible for ABSD remission under a free trade agreement (FTA) with Singapore. My take on this would be not to focus on the foreign market to push up property prices.

The solution to this would be for there to be more Singaporeans. However, Singapore’s birth rate is horrendously low. We are not even replacing ourselves. The only way for there to be more Singaporeans would be to give foreigners Singapore citizenship. This is a sticking point for some Singaporeans and to some political analysts, this affected the ruling party in the polls in past elections. Remember the Aljunied GRC loss?

I personally think that this is the only viable option. To increase the number of immigrants. Singaporeans and PRs pay significantly less ABSD as compared to foreigners. The risk is for the ruling party to take. The alternative to this would be to reduce the ABSD that foreigners would have to pay. This would be hugely popular with foreign buyers but less so with locals who are looking to upgrade from an HDB to a private property.

I do not know if this is something that will happen. I personally feel that property prices are only affordable to households with income that are in the top 25 percentile. If the Singapore government strives to keep public housing affordable, then it is getting increasingly difficult for households to upgrade to a private condominium.

I feel like there is a chance we have been here before. Japan has seen stellar growth post world war 2 up to perhaps the 1990s. Property prices were also extremely high, past affordability. Households were saddled with debt such that spent the 1990s up till today paying off their debt. This resulted in a deflationary spiral. Household debt is not acceptable past a certain point. If a household is spending most of its income on paying off its debt, it will have less to spend on consumer goods.

Let us be clear that Singapore is not unique to typical economic cycles. In the 1980s, Japan was in an economic boom. Buyers were paying high prices for goods and asset prices. The unemployment rate was low. Somewhere in the range of 4+ percent. Do a search on “the Japanese economic miracle”. It refers to a period post world war 2 when Japan grew at such a rate to become the world’s second largest economy. However, in the 1990s, while worker productivity remained high, the Japanese population was stagnating in terms of growth as well as foreigners being added to the economy. The following three decades have seen years of economic stagnation with stubborn deflation. While many in Singapore may be waiting for markets to “crash”, you actually do not want to be caught up in a stubborn deflationary spiral like Japan. When prices are falling, consumers think that prices will fall even more and this wait and see attitude is what causes a deflationary spiral. Over time, as consumers are not spending, businesses will downsize and the economy will contract.

Will Singapore become like Japan? I do not think so. I believe the people who are in charge of monetary policies are well versed with what is happening in Japan and will always look to keep the economy vibrant. However, with an ageing population, extremely low birth rate, restrictive taxes on foreigners purchasing properties and a population who is more politically sensitive to polices that encourage excessive immigration (while it is difficult to actually understand what is deemed excessive. However, it is always a moot point for the opposition and it can be political points lost for the ruling party), I do not see how property prices can rise. Especially if the median household income remains at the current rate.

So the answer to the question in the title of this post. I do not think that prices can rise indefinitely. If it does rise to a certain level of unaffordability, then it will take a major policy and societal change to increase the number of buyers that can afford such properties. Just think about it, the bulk of the buying activity is local and the median household income is what it is. How then can households afford properties with prices that are way past their income?

It just does not add up for me.

So the next time a property agent tells you that you will make money buy buying a certain property, as why and after how many years.

Yours sincerely,

Daryl

The post What just may happen if asset prices continue to rise indefinitely appeared first on Daryl Lum's Blog.

When the Singapore government raised the Additional Buyers’ Stamp Duty for foreigners purchasing residential property from 30% to 60% on the 27th of April 2023, many property analysts were up in arms. Many considered that such a move was draconian and that the government failed to understand the nuances of the property market. Property agents were trying to make sense of this increase.

“buy now before the ABSD increases even further!”

Fear-mongering does work. Many times I’ve had friends who remarked that they would not rush into a property purchase decision only to commit to a property purchase when innocently walking into a sales gallery of a new project launch. These are not people devoid of intelligence. These are smart individuals with the financial capability to purchase properties in excess of millions of Singapore dollars. How they achieved such financial capabilities is due exactly to their intellect in their relevant professions. Just like the Lehman Brothers collapse in the US was not due to people with a lack of intellect running the investment bank. Instead, it was a culmination of many extremely intelligent individuals who were enshrined in a system that told them that prices could only trend in an upward direction. It was a culmination of greed fueled by easy money and commissions.

“if you say something to yourself often enough, it will become the truth.”

Well, it will not exactly become the truth but you will believe that it is the truth. This is true for information on the Internet. I realised that when I search for any news on the Singapore property market, the bulk of the results that I obtain will be one of immense optimism. That is not to say that it should be all doom and gloom when the market is clearly not veering in that direction. The questions I pose are…

“is property the sole stable investment available?”

“Is there something behind this boom that has been going on for the better part of the last 15 years?”

Let us break down the ABSD increase five months on.

There can be a barrage of considerations when it comes to why the ABSD was increased from 30% to 60% for foreigners. For starters, foreign buyers never made up a huge proportion of the local property market. The local property market was always driven by local demand.

Let us consider a foreigner who makes a purchase of a typical 3-bedroom property which costs about SGD$2 million. The ABSD that that foreigner will have to fork out would be SGD$1.2 million. This of course disregards the usual stamp duty as well as any other acquisition costs. For this discussion let us focus on the ABSD alone. There will always be some who will comment that the foreigner believes that Singapore property will increase by more than 60% in the medium to long term.

My personal take would be that it is still perhaps reasonable for someone to make the case if it were 30% ABSD. Properties in Singapore, on quite a long stretch, might still increase by about 30% in the next five years from 2023. However, to say that it will increase by 60% would be optimistic to the point that it would be illogical. Even if the foreigner had such cash to burn, his property market is not confined to Singapore. He has options aplenty across the globe. He does not have to purchase a property in Singapore. Even if he would like to live in Singapore, renting is much more affordable as compared to forking out SGD$1.2 million ABSD on that SGD$2 million property.

My conclusion: I’ve sat down, appreciated the silence and thought about it. There is almost absolutely no legitimate reason for the foreigner to want to fork out 60% ABSD.

It did not become clear until the news about the SGD$1.8 billion money laundering case came to light.

A money launderer’s primary motivation for purchasing an asset is to allow his ill-gotten gains to see the light of day. It might be money from bribes obtained by corrupt officials for favours or maybe money obtained from illicit human trafficking. Even if he has millions of dollars sitting in his home, he cannot spend the bulk of it. Sure he can use the money to fulfil his daily needs but then if he was an official he most probably would already not have to think much about how he can survive on a daily basis. What money launderers want to achieve is great wealth and the ability to enjoy this great wealth. The former can already be achieved through their illicit activities. However, the latter is something that needs a system to achieve.

Let us consider this proposition from the Wall Street Journal:

A new watch costs less than a second-hand one. The rationale that was given by the Wall Street Journal was that the demand for Rolexes is so high that people are willing to pay more for a used watch as compared to a brand-new one. Not just a bit more. A lot more.

This does not make any sense. This is also happening in Singapore. A luxury watch would cost more in the second-hand market than it would in the retail outlet itself. Imagine this, all the money that was spent by Rolex to build up the customer experience when a customer visits a Rolex outlet. Yet the customer would rather purchase from a second-hand shop at a much higher price. Let us leave out the risk that the watch at the second-hand shop might not be authentic.

There is a rational explanation for this. When a customer goes into the Rolex boutique and makes a purchase, his details are recorded. Be it if he pays via credit card or if he brings cold, hard cash to the boutique. The boutique is obligated to report a suspicious transaction if a client were to pay a significant amount in cash. These details can be extracted by the authorities whenever required. However, in the second-hand market, there is no such requirement. If a luxury watch is traded on the second-hand market, there is no need for the seller to collect details of the buyer. Imagine you selling something on an online platform. In Singapore’s case, it would be a platform like Carousell. Sellers do not ask where the buyers get their cash from. All they are concerned with is that they get the money which they are due. A money launderer would need such anonymity and the second-hand market provides it.

Now look at what was seized in the SGD$1.8 billion money laundering case. There were luxury goods which included luxury watches and designer handbags. These designer handbags came from fashion houses such as Hermes, Chanel, Dior, Louis Vuitton and Prada with some bags costing in excess of $100,000. The sheer value of the total amount of luxury goods seized is staggering. The second-hand market serves a very legitimate purpose for such money launderers.

So why do news agencies, property agents or investment analysts fail to see that what they propagate in the public domain may not be an accurate representation of the truth? The fact is when prices go up or down, we tend to gravitate to what we learned from the textbooks. Does it make sense? Human behaviour dictates that we can use what happened in the past to explain or predict the future. Also, if you are the source of credibility and have some sense of authority in a particular subject matter, then what you propagate would likely become the truth. This is why the Wall Street Journal creates such content to explain a particular phenomenon. It uses what it knows from the past to explain the strange present. If the present is strange enough it should be setting off alarm bells which obviously did not happen. The truth then becomes what the Wall Street Journal propagates. The logic is because the Wall Street Journal is a credible source rather than actual logic itself. It is easy to jump on the bandwagon of what every analyst is saying. It may be in the stock market or the property market. Everyone has a theory. However, in many cases, the theory was conceived not using actual logic itself but was plagiarised from a source of authority.

Investing in such a climate is truly a challenge. Sit down, appreciate the silence, and think about what is truly going on…

Yours sincerely,

Daryl

The post Sit down, appreciate the silence, and think about what is truly going on… appeared first on Daryl Lum's Blog.

For a significant period of time, global interest rates were extremely low. Possibly close to zero. This started with the Global Financial Crisis in 2008. The collapse of Lehman Brothers sparked panic and there was this great distrust in the financial sector. This then set off a period whereby the US Federal Reserve (The Fed) went on this unprecedented quantitative easing where they injected the economy with large amounts of money. This was in large part due to The Fed purchasing assets from the market. This had the effect of placing cash in the hands of the entities which they bought them from. The Fed Funds Rate, a barometer for interest rates across the US and many parts of the world, was set close to zero. Think of it from an extremely simplistic view (though this may not be the most accurate representation of what is going on). If the central bank is willing to lend money at close to zero interest, how can commercial banks stay competitive and charge significantly higher than what The Fed was willing to offer? On a global scale, why would borrowers then want to borrow money from lenders in Singapore if they could obtain a lower rate in the US? This set the tone for a period of extremely cheap financing. This is why borrowing rates like mortgage rates have been so low over the past decade and a half. In fact, I’ve known of individuals who purchased an HDB flat and decided to finance the flat using a 15-year HDB loan with a fixed interest rate of 2.6% when the private mortgage rate was hovering below 1.5%. The rationale was that they believed that the private mortgage rate would eventually rise above 2.6%. Fast forward almost 15 years later and that decision did not pay off at all. The private mortgage rate never got close to 2.6% for the majority of the loan tenure. This is the paradoxical nature of the world that we live in currently.

The quantitative easing that started in 2008 set the tone for more than a decade of cheap financing. It thus favoured risk-takers and spenders rather than those who were risk-averse and savers. If you were willing to stake your monies in assets, you were usually rewarded. Occasionally very handsomely. How handsomely one might ask? Look at this chart of the Dow Jones Industrial Average. In 2008/ 2009, the index was hovering around 8000 points. In early 2022, the index crossed 35,000 points.

Looking at the stock price of a company like Tesla would perhaps tell us how buoyant the market sentiment has been for the last decade and a half. Tesla stock started trading at a mere couple of dollars. In November 2021, the stock price of Tesla soared past USD$1,200. That is a 30,000% price increase over 12 years.

Such cases are reasons why I always believe that an individual’s investment portfolio should not just be centred around properties but should definitely include assets like stocks. While there is usually less use of leverage when it comes to investing in stocks as compared to investing in property, the returns over some counters are truly phenomenal. If an SGD $1 million property were to increase by 30,000%, the property would be worth SGD $300 million. Of course, diversification would taper the returns greatly but it would not be difficult to find investors holding onto tech counters like Tesla, Facebook (or now most recently, Meta) or Apple.

So the simple question is, did the intrinsic value of companies like Tesla increase at the same rate as did their stock prices? The simple answer is no. Far from it. Yet the stock price rose considerably. The reason was that there was a lot of spare cash in the system. Governments were handing out money, interest rates were low and hence businesses were often borrowing money to expand. When it was perhaps time to deleverage, there were elections and then the subsequent pandemic. The Fed never got down to unwinding all the quantitative easing that it started during the 2008 financial crisis. Another key factor was that a strong economy wins elections and hence since the appointment of The Fed chief was done by the president, this would mean that the president could appoint someone who he thought was in line with his overall policies. While the Federal Reserve is supposed to be bipartisan, the appointment of The Fed Chief was at the discretion of the sitting president. In short, it is always in the interest, not only of the American people but of the sitting president to have a strong economy.

This then leads us to today. Almost 15 years have passed since quantitative easing started due to the 2008 Global Financial Crisis. Since then, the US and global economy has never truly ever deleveraged. People are used to their governments placing monies in their bank accounts. People were encouraged to spend. In Singapore, no amount of additional stamp duty can deter property buyers. COE prices for cars crossed the SGD$100,000 mark and yet analysts predict it could go even higher. The mindset is “if the economy was so good during the covid-19 pandemic, surely it would be roaring when the economy opens up post-pandemic”. The truth is less straightforward. Inflation is a huge issue. It will remain a huge issue for a significant period of time. How often are we hearing the term “better buy property now before it goes even higher” as compared to “the yields are good and hence this is a good property investment”. I understand that property is a tangible asset. However, just because it is a tangible asset does not mean that we can pay any price for a tangible asset.

So what is deleveraging?

In short, it is the removal of money from the system. There are essentially a few ways this can be achieved. This is a way that stubbornly high inflation like the one we are currently experiencing can be curbed.

1) Increasing interest rate

This would mean that the cost of borrowing would go up. It is going up at a very fast pace in the US. In the US the average rate for the benchmark 30-year fixed mortgage is close to 6%. Would such a rate present itself in Singapore? Possibly. Singapore is a price taker and our interest rates track that across the globe, namely the US, very closely. A high mortgage rate would also mean that fixed deposit and saving rates will correspondingly be high. Hence this encourages saving rather than spending. A simple demand and supply curve would explain that you would either have to curb demand or increase supply to lower prices, all things being equal. Throughout the past few years, governments have been trying to spur demand for the supply of goods and services that have remained constant. However, now that the pandemic has caused supply chain issues, the supply of goods has subsequently fallen and yet demand is strong, fueling an increase in prices. To taper demand, interest rates will need to be used to spur saving rather than spending.

2)  Reducing the central bank’s balance sheet

The Fed is currently reducing its balance sheet. During quantitative easing, The Fed would purchase assets from entities. This would mean that the Fed would be putting cash in the hands of these entities, thereby injecting money into the system. Now they are doing the exact opposite. The Fed is reducing the assets that it holds. Selling securities has the exact opposite effect. Entities would need to fork out cash to purchase securities, thereby reducing the amount of cash it has on hand. This would curb expansionary appetite somewhat. The effects of this can be felt globally. Companies like Tesla in the US have announced job cuts and so have companies in Singapore like Shopee.

What will likely happen?

In the US, a recession is likely. The fact is that the US economy has been so reliant on cheap financing that it is unlikely that the unravelling will be smooth. In Singapore, we are so far past full employment that we have a shortage of workers in many industries. This is perhaps the ideal situation to lead us back to normalcy and pull the demand for workers lower towards a more sensible equilibrium. That being said, the time has perhaps come for property price rises to ease off. Mortgage rates are expected to rise significantly and I would think that we should see fixed mortgage rates of more than 3% come the end of 2022.

So is this a good time to be investing?

Perhaps. Well not now exactly but in every recession or cooling-off period opportunities would present themselves. I do think that interest rates will put a huge damper on the local property market as buyers would be cognisant of the fact that interest rates can go up pretty quickly. When property demand is low, buyers can have time to think rather than being pressured to make an immediate purchase. The issue is that there will always be “investors” who think that prices will always remain low and will once again “miss the boat”.

Personally, am I looking to purchase a property during a downturn?

I am not looking for a residential property. I think that the restrictive additional buyers’ stamp duties have shaped my buying behaviour. I might look to purchase a commercial property but the numbers will need to make sense. Other than that, I think it is a great time to be looking at the stock market whenever the market starts falling. Us humans have a tendency to overdo things. Just like a decade and a half of leveraging caused us to overbuy, when the recession comes, if it comes, the possibility for us to oversell is also very high.

The fact is, none of us can predict what the future holds. Investing is always about having the ability to hold onto the asset even in times of deleveraging. Because of the scale of the leveraging that came before, we must be prepared for a similar scale of deleveraging that is about to unfold.

Yours sincerely,

Daryl

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The stock market is not the economy

Most investors may equate the stock market to the economy but in fact, they do not move in tandem. During times of economic prosperity, the stock market usually follows an upward trajectory. However, during times of economic contraction, the correlation does not seem to hold true always. The stock market is instead a barometer of where the market participants, in this case, the investors in the stock market, think that stock prices will be in the near future. If investors have reason to believe that stock prices will be higher in the near future, they will enter the stock market before the anticipated rise occurs. The current situation in the US stock market seems to be such. Investors seem to believe that the worst is over for the US economy. Ever since the initial lockdown in states across the country, the US economy has opened up and business activity has resumed to almost pre-lockdown levels. Other positive developments which might happen in the near term include the development and production of a possible Covid-19 vaccine. To cap that off, the current US President Donald Trump is continually talking up the economy, emphasising any economic improvements at any opportunity. All this helps to create a sense of euphoria in market participants.

The US Federal Reserve’s accommodative monetary policy

The US Federal Reserve (The Fed) is embarking on a policy that many are calling quantitative easing unlimited. In essence, the Federal Reserve has stated that it will act as a lender of last resort and will purchase as much corporate debt as needed to prop up the economy. This open-ended commitment to purchase as much assets as possible so long as it keeps the markets moving has let to a huge barrage of money into the US economy. Despite the gloom in the economy, corporations have access to unlimited easy credit from The Fed. To many large corporations, investing this easy credit in the stock market makes more sense than expanding production when demand for most products is expected to remain low.

The chase for yield

Inflation erodes the value of money and it is expected that with all the easy credit that is available, governments are trying to inflate the economy because the converse, deflation, is a more problematic issue. In times of economic contraction, asset prices tend to become cheaper. To some extent, things are getting cheaper in the current economic situation. As businesses struggle to cope with safe distancing measures, prices of many goods and services are coming down. As businesses close or jostle for sales, prices of goods and services are going at a discount. However, with all the money being pumped into the general economy, something has to happen. As banks and corporations are flushed with easy credit, yields in traditionally safe havens like fixed deposits are extremely low. This then poses a predicament for people and corporations looking for higher yields. The stock market is seen as a very viable alternative to chase for higher yields. The notion that if market participants in the stock market have a longer-term investment horizon they should profit is something that many believe in. Banks typically “borrow” from the public, individuals and companies, by using monies in deposits to lend to other borrowers but in the current situation, the government is a much cheaper source of funds offering near-zero interest rates. The public is then left to seek returns elsewhere and eventually gravitate towards the stock market.

Tech stocks are leading the way

The stock market rise is not universal across all sectors. Technology companies are benefitting greatly from the pandemic as more people are working and staying home. More online content is being consumed and companies like Netflix, Facebook, Amazon, Google and Zoom are benefitting from this. The S&P 500 is a market-capitalisation weighted index of the 500 largest publicly-traded companies in the US and technology stocks make up more than 25% of the benchmark index. As more businesses and households go online, the tech-driven rally is not perceived to be abating any time soon. To many stock market participants, investing in technology stocks are seen as safe bets on a technology-driven future. Thus despite the rally, the main rise in stock prices are driven by the technology stocks. Other sectors invariably are rising as a spillover effect from the tech-driven stock market rally.

Technology stocks are not a true barometer of the economy.

Technology companies like Zoom Video Communications (Zoom) do not hire as many employees as a manufacturing company like Ford Motor Company (Ford). Year to date, the stock price of Zoom has gone from USD$68.72 on January 1st to a high of USD$457.69 on September 1st with a market capitalisation of about USD$128 billion. Ford has instead seen its stock price from USD$9.42 on January 1st plunge to a low of about USD$4 in late March and is currently trading at about USD$6.90 with a market capitalisation of about USD$26.9 billion. Zoom hired about 2,500 employees while Ford hires about 100,000 employees in North America despite having a market capitalisation of about 5 times that of Ford. The impact of a soaring stock price in Zoom can only be felt by people connected with the company. A slowing economy should see a fall in the demand for motor vehicles. If Ford were to cut 2.5% of its workforce, that would be equivalent to the whole workforce of Zoom. The boom in the technology sector has resulted in wealth creation that is concentrated in a sector that does not hire a large proportion of the workforce. In fact, this recession is extremely worrying as the wealth transfer is from the masses to the already-wealthy few. 2020 will be remembered as breakout years for large tech companies as companies like Amazon, Apple, Google, Facebook, Zoom and Tesla saw their stock prices increase significantly. In many cases, the increase was in multiples. Tech stocks make up more than a quarter of the S&P 500 and thus a rally in this sector would result in an increase in the benchmark index. Singapore’s Straits Times Index (STI) is not filled with tech stocks like the S&P 500 and thus did not see the same level of recovery.

Too big to fail

Lessons learned from the Global Recession in 2007-2009 seemed to be that corporations deemed too big to fail will most likely be bailed out by the government. Lessons learned from the fallout of Lehman Brother’s collapse are still fresh in regulators’ minds. The debate as to whether Lehman should have been allowed to fail are still going on but the fallout from that collapse reverberated throughout the global economy. Even here in Singapore, there were investors who had ploughed their savings into financial products that were connected to Lehman. DBS Group, Singapore’s largest bank spent some US$53.4 million to compensate some investors who bought structured products linked to Lehman. Despite the US congress reiterating that they would break up the big banks and if the banks are too big to fail, they are too big, the truth is that Congress cannot afford another Lehman style collapse. Big banks and companies will continue to receive support from the US government and in today’s predicament, the government is also keeping many small and medium businesses afloat. Despite burning through hoards of cash, the truth is that governments around the world are propping up companies. The concern is that some of these companies may already be failing whether there was a pandemic or not. This propping up of inefficient companies is causing some economists and policymakers to be concerned about the rise of zombie companies. Christian Sewing, the head of Deutsche Bank, had highlighted this problem recently but acknowledged that this is a result of what needs to be done to counter the economic effects of the pandemic. The widespread support for companies is fueling the positive notion that investing in the stock market, which is essentially investing in companies, is a sure-fire way to make some money as these companies will not fail.

The retail investor has more time and knowledge to invest

As the world enters and exits lockdowns and as working from home arrangements become commonplace, more retail investors have more time on their hands to get involved in trading stocks. Information about investing is also readily available and many online brokerages have leveraged on technology to make investing extremely convenient for the common man. The rise of the home retail investor, the availability of time and knowledge and the constant barrage of news showing that stock prices are soaring cumulate to a very bullish stock market.

Fear of missing out

Finally, despite all the knowledge out there, herd mentality cannot be underestimated. There is a quote by George Carlin that says “never underestimate the power of stupid people in large groups”. To label all market participants in the stock market stupid would be inaccurate but the gist of the statement seems to be that when a large enough group of people partake in a certain activity, it seems to be right to the general public and many others start to join in thinking that if everyone is doing it, this should be right. I may be grossly inaccurate but when I look at the GDP and unemployment numbers versus the euphoria in the stock market and perhaps to a limited extent, the property market, I do think that there is some misplaced faith in the financial system. There is perhaps little that the common man can do as the wealth divide exacerbates while inflation erodes his savings. The search for yield directs the retail investor to the stock market and to purchasing property. We must always remember that not every investor looks at financial ratios like price to earnings and other fundamentals of a company but instead are driven to buy an asset in the hope of selling it off at a higher price at a later date. This is speculative activity is commonly mistaken as investing.

We are living in a very unique time due to the pandemic. Despite the fact that I feel that something is gravely broken with the financial system, the fact that inflation is eroding peoples’ savings is a real and present problem. Even if the markets, stocks and property, tide through this current situation, there is a large debt crisis just on the horizon waiting for the global economy. Many governments have borrowed to fund stimulus packages and the weight of this debt will weigh heavily in the years to come. Perhaps the one trait that most market participants should have is patience.

Yours Sincerely,

Daryl Lum

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Let us understand employment from an economics perspective to truly understand the job market.

In a typical job market, there are employers and employees. Just like in any market, there is demand and supply and an equilibrium has to occur at some point. An employer, let’s say a profit-driven company, is looking to hire a sales manager for $5,000 a month. The company would expect that the sales manager will generate more than $5,000 worth of profit for the company if not it does not make sense to hire that person. If the company’s monthly profit currently stands at $20,000, the company will expect the subsequent profit to be higher than $25,000. For the sake of this example, let us set this arbitrary number at $30,000. This means that the sales manager will add an additional $5,000 worth of cost to the company but bring in an additional $10,000 worth of profits for the company. It thus makes sense for the company to hire this individual.

Next up is the employee. The employee must value the salary offered to him or her more than his time to accept employment. In the case of the sales manager, the salary is $5,000 but the sales manager may value his or her time at $3,500. Only if the value of the salary offered by the company is more than $3,500 will this individual accept employment. In this case, the market sets the equilibrium at $5,000 and employment occurs.

Company profit without the sales manager: $20,000
Company profit with the sales manager: $30,000
Salary of sales manager: $5,000
Net effect of the sales manager on company profit: +$5,000

In the current scenario, the Covid-19 induced recession has caused many companies to become unprofitable. Business activity has been adversely affected and thus companies may not be making as much as they were. In some cases, especially in industries hardest hit by the pandemic, companies are generating little to no profit.

Let us once again use economics to understand this situation.

The company’s profit may have taken a significant hit. From making $30,000 a month with that additional sales manager, the profits may have dwindled to perhaps only $10,000. The company may be left with servicing its existing customers or are left to fulfil existing contractual agreements and this may become the main revenue source. The company may then look at the amount of profit that that particular sales manager on the $5,000 salary brings to the company. That amount may have dwindled down to $2,000 a month. This means that it is costing the company more money than it earns to maintain this particular sales manager. In every normal circumstance, the company would have to make the decision to end the sales managers employment with the company. However, due to the Singapore government’s Jobs Support Scheme, this particular individual has a reprieve. Let us assume that the company receives 75% salary support from the government. This would mean that the amount of salary borne by the company is a mere $1,250 a month. In this case, the company is only paying the sales manager $1,250 a month but if receiving $2,000 worth of profit by keeping the sales manager employed. It thus makes sense for the company to continue employing this employee.

Company profit during Covid-19 without the sales manager: $8,000
Company profit with the sales manager: $10,000
Salary of sales manager: $5,000
Net effect of the sales manager on company profit: -$3,000

Company profit during Covid-19 without the sales manager: $8,000
Company profit with the sales manager: $10,000
Salary of sales manager: $5,000
Government funding 75% of the salary of the sales manager: $3,750
Company pays 25% of the salary of the sales manager: $1,250
Net effect of the sales manager on company profit: +$750

This, however, has started to change. Since the end of the circuit breaker, there has been a gradual reduction in the amount of co-funding paid out by the Singapore government. The Jobs Support Scheme will be further reduced after August 2020 and most companies will only receive 10% of salary support for another seven months. In such a case, the salary paid to the sales manager by the company will be $4,500 with the government funding $500. If business activity post circuit breaker remains low and this employee only adds $2,000 a month to the company’s profits, then it would make sense for the company to stop the employment.

Company profit during Covid-19 without the sales manager: $8,000
Company profit with the sales manager: $10,000
Salary of sales manager: $5,000
Government funding 10% of the salary of the sales manager: $500
Company pays 90% of the salary of the sales manager: $4,500
Net effect of the sales manager on company profit: -$2,500

Despite the best efforts of the Singapore government, it cannot continue to save every job as this money will have to be funded by borrowing or by drawing from Singapore’s past reserves. The Singapore government faces a perplexing conundrum. To fund schemes like the Jobs Support Scheme in the hope that a medical solution is just around the corner or to bite the bullet and to let inefficient companies fail as we cannot afford to fund salaries indefinitely. I do think that the government is trying to take the middle ground by setting the co-funding portion of the government to 10% for another 7 months after August 2020. The government is also trying to use moral persuasion to get companies to hold onto their workers. The ministers have often given messages to companies encouraging them to use retrenchment as an option of last resort.

Let us be clear. Despite the mixed signals that we are constantly being bombarded from the media, we are in an extremely dire situation. This recession will become worse before we begin to see a recovery. In many cases, profits have dwindled for many companies and many employees, just like the sales manager in my example, are not relevant to the company. As the government co-funding portion of the Jobs Support Scheme reduces over time and if there is no medical solution to the current pandemic, we may see unemployment in Singapore start to rise inexorably.

Yours Sincerely,

Daryl Lum

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