6/29/2009

Revamping the financial system

Chok Tong talked about the changes in the financial industry and the fear of unscrupulous or toxic products. Investors are returning to basics, looking for smaller but steadier gains like bonds, govt bonds, not any cheap bonds. With all the cheats and thiefs exposed, and the American govt watching them like a hawk, hopefully they will not be allowed to design another batch of fraudulent products to cheat the masses. All the sins and crimes orginated from the US though they were brushed aside as something of lesser evil. Evil they were. So, how would all these white collar cheats and crimes affect us? Today we read in the ST that SGX needs to compete for IPOs. We either compete for good IPOs or be content with sub standard companies that ended up as another bunch of frauds. The confidence among our investors have also been hurt badly by all these fly by night companies. Many have been suspended due to frauds that were dressed up as pristine companies with great growth potentials. And the parties involved in the dressing ups, making all the fees, are still at large, laughing all the way to the banks. This is only one aspect of the financial systems that need to be placed under the microscope. The other are the practices adopted by big funds that capitalised on their muscle and technology to exploit the system to their advantage, often leading to the destruction of values of stocks. Dubious trading strategies and methodologies that are contrary to the well being of stocks and the stock market must not be allowed to be practised in our stockmarket. The gains of a little clearing fee and the fictitious churning to give the impression that the market is alive and healthy is not worth it for the huge losses incurred by innocent and small investors. There is a need to revamp the way the stock market is operating.

18 comments:

Wally Buffet said...

This is the investment strategy that has served me well for decades:

1. Invest only in heavy weight blue chips. Forget about penny stocks in budget hotels, water purification, food courts, contractors and assorted downstream small fries. Most importantly stay away from S chips like it is the plague.

2. Buy low, sell high and not Buy High, sell Low as ahem......, some of our big and venerated boys are wont to do.

3. Buy when everyone is bolting out the door. This way, you get the best of the lelong sale.

4. Have the resources to sit on your investments, so that no matter how low the stock value is, no obnoxious bank is going to pester you for margin calls.

5. As sure as the sun rises, a stock market cycle is typically 4 t 6 years, so expect to double your money within this time frame.

6. Throw all charting and assorted mumbo jumbo out to the garbage dump. They serve merely to justify some investors' stupid gambits.

7. Invest in a commodity currency like the Aussie dollar. If you knew how much goodies are below the pastures that the sheep and cows roam, you'll be rushing to buy up every penny of this lucky country's currency.

Lastly, leave all new IPOs alone. Just let other suckers have a chance. The real good stuff has already been IPOed long long ago.

Sometimes, the simplest methodology is the one that works!

redbean said...

hi wally, do you know how a casino operates? they are only interested in getting the players to gamble. that is why you have casino boats offering free food and lodging for the gamblers. they do not care if the gamblers win or lose as long as they get their cuts. and how many people can win just by gambling?

stockmarkets today are getting to be more like casinos. beware, the principles and models of the past may not work anymore.

Wally Buffet said...

I don't know much about casinos because I have yet to enter into one.Once, I tried to get into the Lisboa in Macau in my standard Singapore wear of round tee, shorts and sandals and was denied entry.

The stock market, at least in Singapore, becomes a casino only if you want to make fast money with trash stocks. The bluest of the blue chips can still be a good bet, ahem.....investment.

redbean said...

our blue chips are worth much more. but they can be shorted down to a frightening level by the big boys if no one is there to checkmate them. and the poor investors can see their shars plunged from $30 to $5. this will scare the daylight out of many investors and some will panic sell to protect their capital.

it is a different ball game.

Wally Buffet said...

I just buy and lock it up in my drawer then go fishing. I may sound cocky and dubious to say this but stock investment is for the stout hearted and never ever invest with something you cannot afford to lose.This investor characteristic separates the men from the boys.

Our blue chips were battered just a little while ago "in the worst economic tsunami since the last Great Depression". Look at their values now. My only concern now is when to sell and what profits I like to take.

Also, when people panic sell, that is a window of opportunity. Regular episodes of panic sell in the stock market cycle is the time to sweep great value stocks into your portfolio.

Matilah_Singapura said...

I don't like equities that much. I like constant cash flow therefore property (being the landlord) is my preference.

Middle of the road property, easily rentable, low maintenance — can't go wrong. If you own the thing, the worst that can happen is a bad tenant — or an act of god, of which a portion of it is insurable. You don't worry about the economy, interest rates, govt policy... and a bad tenant is easier to get rid of with less loss than a bad fund manager, CEO, corrupt investment bankers or lousy regulators sleeping on the job. Best part, no need to watch the market and get stressed.

Next best thing — agreeing with Wally — is cheap cheap blue chips when people are panicking and dumping them. I've been out of the market for nearly 2 years now. Fuck it — don't care about the opportunity, and I love the stress free.

I have good tenants who work hard and eran money, so I don't have to :)

Matilah_Singapura said...

The world's energy capital structures/supply/demand etc mechanism is going to get a whole lot more interesting.

Energy — we're fucked.

Crisis = opportunity

redbean said...

i am harping on the stockmarket because i think many people know that things are not right at the way we are going about it but no one got the guts to say so and do something about it. all waiting for god to open his mouth.

we need to dump the american ways of doing things, dump the hedge funds, return to basics and go slow. if not, we are only hurrying to the grave or be conned by the americans.

Anonymous said...

"Invest in a commodity currency like the Aussie dollar. If you knew how much goodies are below the pastures that the sheep and cows roam, you'll be rushing to buy up every penny of this lucky country's currency."

But Aussie debt is very high. Their banks are some of the most leveraged in the world.

Matilah_Singapura said...

anon 726

> But Aussie debt is very high. <

Not quite — Thankfully the last govt paid it down. However the new govt (check the web for Aust Govt Bonds) has inflated the money stock by 16% AND they are issuing more debt (every Wed and Friday) maximum of $800 million per issue, every week for the almost the next 2 years until the total is $90 billion.

However Wally has a point: if commodity pries "improve" as they might (because of all the money printing going on), the AUD will have a tendency to firm. HOWEVER, this present govt likes the borrowing and inflation — to pay for their social programs — and they have alot of expensive plans.

Anonymous said...

Public debt is low, but private debt is high. The Aussie banks are probably more vulnerable than they let on due to much higher levels of gearing too - they are tightly interlocked too (e.g. getting 90% of their cash from each other), so the failure of a single bank could lead to the freezing up of the entire Aussie financial system.

As for the inflation/deflation debate, I don't know - monetary contraction is still continuing despite extraordinary efforts, as it is I'm more convinced of the deflation case (more debt defaults down the line, though we could see short spurts of inflation). Hyperinflation in the short-medium term is quite unlikely i.m.o.

But we sure do live in interesting times.

Matilah_Singapura said...

anon 1045

> Public debt is low, but private debt is high. <

It would help if you provided figures and sources. The concepts of "high" and "low" are subjective/relative.

> the failure of a single bank could lead to the freezing up of the entire Aussie financial system. <

Not true. Banks have failed before. The Reserve bank will step in should the worse case happen, however it hasn't in the past. Banks which fail are simply allowed to fail — as it should.

> As for the inflation/deflation debate [...]

Actually in the present, I'm sensing deflation — which is desirable. Prices have more or less dropped across the board. The stupid govt however has given govt workers (the people who don't work but get paid anyway) pay rises.

Hyperinflation, I agree, is unlikely. But overtime, because of the amount of money supply increase, there is going to be some measure price inflation — which ALL GOVTS allow anyway, so they can get their political way.

It's interesting: The Swiss who are classically anti-inflation, and one of the most resistant free-market/private property societies — have put NO LIMIT on the amount of money they said they are willing to print.

Lucky, a few of the board members at The Reserve Bank are also members of the Mt Pelerin Society — started by Hayek to promote classical liberalism, free markets and freedom. In their defense, they are still sort of on that track. On a criticism of them: they have compromised many of their ideals about free markets and hard currency...you guessed it... mixed economy types.

Interesting times indeed!

Anonymous said...

Australia’s household debt to GDP ratio is around 150%, last I checked. There should be some stuff on http://cij.inspiriting.com and http://www.debtdeflation.com/blogs/


The Swiss had already severed the golden linkage of the Swiss franc about a decade ago (and foolishly sold off half their gold reserves when gold was at its lowest). Just goes on to show that central banks
should not only be independent of political interference, but also be independent of any human interference.

I noticed that the SNB has been managing the Euro-CHF exchange rate for a while now (even before the crisis). I suspect UBS is in quite a quandary.

At the end of the day, Switzerland is but a small country - and thus has weak bargaining power (especially verses the EU collective).

Would they be absorbed into the European Union? The lure of adopting a common "European" identity is very strong - that, together with joining supra-national organizations to participate in "global solutions" and "share the burden of humanity".

At least they have a few staunchly classical liberal parties (which is more than can be said for other countries).


btw it is interesting that Hayek favoured in later life a reflation of some sort for the Great Depression, to stem a "secondary deflation" which goes beyond the liquidation of mal-investments.

His idea in essence was to keep the money supply constant - increasing the monetary base M to offset a decrease in monetary velocity V. He also said that fiscal stimulus could be necessary to achieve this.

They are quite a number of Austrians who subscribe to similar views.

Matilah_Singapura said...

anon 1027

Thanks for the debt links. Now the picture is much clearer, and I can apply a heuristic analysis.

Aussie debt high? I'm not surprised now that I see the figures. There is a silly cultural belief here that "owning your own home is a good thing for everyone" and the govt actually encourages people to take on huge debt for home "ownership". Once borrowing is encouraged, interest rates are kept artificially low

Yes, Hayek says some 'funny things' and he's not always clear on what he means. You can check the work of Frank Shostak and Roger Garrison — they're he sort of defacto 'experts' in Austrian macro theory.

I've downloaded alot of their stuff over the years, but at some point the stuff makes my head hurt, so most of it remains unread in my archives.

I'm more inclined to side with Mises and Rothbard on the point of allowing the money supply (gold based) to grow at a natural rate — i.e. at the rate at which gold could be mined and converted to currency (among its other uses) and used as a medium of exchange. Then you don't have to worry about "velocity" as the "golden handcuffs" will prevent an irrational runaway spending from occurring for anything but short bursts.

As for the issue on the necessity for central banks: they should all be closed down. The there'll be no more interference — period.

redbean said...

There is a silly cultural belief here that "owning your own home is a good thing for everyone" and the govt actually encourages people to take on huge debt for home "ownership". matilah

at least, if i am not mistaken, they are paying for a freehold land. here, we are paying enormous sum for a 99 year lease, and not even land. how ridiculous would the million dollar flat looks when the lease draws down.

Matilah_Singapura said...

Depends. Land ownership varies, but not to over strain the argument, most of it is 999 year lease or "freehold" for all intents and purposes.

Govt encourages by "ownership" and thus distorts the market and capital structures by home ownership grants — which are a very popular election vote buyer.

Anonymous said...

re: matilah_singapura

Well, there are two ABCT camps - one which favours reflation of some sort (Hayek, Ropke, Selgin, Horowitz, Garrison), and those who are against it (Mises, Rothbard, DeSoto, Hoppe, Salerno).

Monetary contraction is perhaps even worse than monetary inflation, but the concern here is that you would never have the knowledge to 'reflate correctly'.

Personally though, the more I know, the less confident I am of my views - even if the basic thrust remains the same.

Sure, the gold standard is not perfect, but in a world with fallible humans with fallible knowledge, it is perfection.

The Austrian ideal of free markets and sound money is far removed from this world. These days it's Paul Krugpot who's calling the shots of course - even though he advocated the creation of the housing bubble, and now advocates the creation of another bubble to pull us out of this mess :)

The jester in residence, I daresay?

Matilah_Singapura said...

Ah, DeSoto and Salerno, of course. I reckon DeSoto is an awesome scholar.


> Personally though, the more I know, the less confident I am of my views <

Same here. Comes from being skeptical of one's own position, which always leaves it open to evaluate the veracity of other points of view.

Although I'm essentially prefer the ideas of a gold standard, I do understand the arguments from Selgin (for e.g. and Friedman) that a fiat money system could work. However the Misean/Rothbardian/Ayn Rand views about gold = individual freedom is difficult to dismiss.

Nobel Laureate Krugman: > The jester in residence, I daresay? <

Yeah. Protected by the political machine of the New York Times (among others). Everyone has the right to be wrong and to hold whacked-out ideas. However when those ideas are co opted my the state and its monopoly money-creator: the central bank, then the trouble starts.

I am of the view that we're going to crash again, and it'll be worse.