Things Have Changed... I Have a Plan

I've had a fantastic 18 days away from the office. I've walked through the canals of Amsterdam, spoken in a conference in Paris to a group of European bankers, travelled to London to make important contacts with business people that will help me achieve my goals.

I've visited Le Catacombes beneath the streets of Place Denfert-Rochereau, seen the little house where Anne Frank and her family lived in for a few years, walked along The Seine River (river that cuts across Paris) late at night, where the pavement is lit with classically designed lamps. The temperature in Europe is mostly just nice; between 12 to 25 degrees. In the evening in May and June, it never gets uncomfortably warm at night. I could dress up in the evening, head to the Latin Quarter area for wine and have Kebab for supper. Then I could catch the midnight train back to the hotel.

In Amsterdam, the city doesn't sleep even at 2am. I could party until then, mostly drinking beer with the youngsters from all over Europe who come here for stag or hen nights. I could visit some very nice Jazz pubs  and chill out. In the day, I could visit the Museums of Rembrandt or Van Gogh... http://www.amsterdam.info/sights/top10/ Europe is a very large playground and there is much to roam.

In Singapore, if you are bored, you head up north into Malaysia where sometimes policemen ask you for money. Crime is rampant in JB and if you're unlucky enough to be robbed, I don't think the police will be bothered to help you, especially when they find out that you're a Singaporean. Indonesia is no better. Bantan and Bintan are not places that allow you, a foreigner that obviously looks different from the locals, to roam freely on the streets.

I have solidified some life goals that will enable me to achieve financial freedom and I know how to get there. It does depend on a stable job. But the "DELTA" does not come from my job. Rather, it comes from investments. I intend to invest worldwide. I mentioned in my previous post that I think the real estate in the US will have the most upside. Today's data vindicates my point http://www.marketwatch.com/story/us-home-prices-jump-13-in-april-case-shiller-2012-06-26

I should achieve my objectives within 10 years, if not 5. I do not think much opportunities exist in Singapore because it is in the wrong part of the cycle. So because of my international investments, I have to travel frequently overseas.

Stock Markets Worldwide are Stabilising

The Problem with Europe

The Greek election on 17 June is holding the world in bated breath. But whatever the outcome, ECB will be pumping a lot of liquidity into the banking system. If Greece were to decide to leave the Eurozone, the first thing ECB will do is to lend trillions either directly to the affected banks or to the governments. This is to ensure there will not be a run on banks and that the banks will be adequately capitalised. Bond vigilantes may attack Spain and Italy by driving the yields up, but Germany will surely decide to sanction money printing to buy up every EUR of bond that the Spanish and Italian governments sell. Germany has to, otherwise the Eurozone will break up. The Eurozone has benefited Germany a lot more than it has helped the other states because the EUR currency is so devalued that Germany's conglomerates find it easy to export. They have a huge industrial sector after all. But the EUR currency hasn't been kind to the rest. It has made the other countries' exports very uncompetitive. Decades of high personal and corporate taxes has made companies wary of investing in the countries. The tax revenues were ploughed into generous retirement benefits, social welfare, which is consumption. Consumption drives present growth but takes away future growth. The huge tax revenue could have been used to boost infrastructure to boost competitiveness. The labour laws are so rigid that companies have to contend with taxes eating away their profits, and unable to restructure their workforce. If you find it difficult to fire people, you will definitely be afraid of hiring. I was told by a French colleague that if you work for a French MNC, you cannot be fired and even if the company is in financial trouble, you will always be given a position of same pay and rank within the company.

If Greece choose to stay, the saga will drag on. As long as Europe cannot reform, cannot lower their personal and corporate taxes, cannot raise the retirement age, reduce drastically unemployment benefits, dismantle labour laws, it cannot get out of this current mess. Greece, along with the rest of Europe, will find it very difficult to balance their budgets. They will try to move towards the East Asian economic models, but the people will revolt violently against any sort of reforms. Queen Elizabeth the First made paying taxes voluntary, the British economy flourished during her rein and tax revenues rose to record levels. So to encourage people to work harder, to entice companies to invest more, Europe has to dismantle its tax regime. Look at the tax rates of the Nordic countries against Singapore. Sweden's personal income tax for the median earner is 16%, but its highest tier is 57%! Its value added tax is a whopping 25%, which is a huge disincentive to work and spend. Singapore's highest tax bracket is 20% and median income tax 0%. GST is only 7%. Singapore must never move to the European tax model because we will surely degenerate into the same malaise.

Taxes in Scandinavia Much Higher Than in Singapore

I took the Eurorail recently from Paris to London. A female entrepreneur that sat next to me told me how when she was promoted, she actually earned less! She was from Tanzania and was a very accomplished restorer of castles and luxury properties. A mortgage broker from London joked that every year, he works for free from Jan to May before he starts to pay himself! If you have very high taxes, you will choose leisure over work and your incentive to get a promotion will greatly diminish. If you are a business owner, you will hire fewer workers because the tax burden reduces your profitability. If you earn $10m a year, your staff cost is $1m per year and material costs $5m per year, you'd achieve $4m of pretax income. But if the corporate tax is 50%, your net profit will only be $2m. If you're a listed company, you will pay less dividends to shareholders. But if your corporate tax is only 20%, you'd pay only $0.8m, leaving you with $3.2m of net profit. For the next year, you'd be thinking of expanding your headcount (creating more jobs, who will in turn generate more tax revenues). You'd be considering to invest in more machinery. But if you have high corporate taxes, you'd be giving up on France and thinking of expanding in Singapore / Hong Kong instead.

When I walked the streets of Barcelona, Paris, Geneva or Brussels, I see a lot of refugees from African and central Asian countries. They are uneducated, many of them illegals, roaming the streets. Don't get me wrong, I am not against humanitarian efforts. But if the type of people that you attract is mainly such, then you have a big problem. Europe needs to attract the most skilled talent. It needs wealthy entrepreneurs who will invest. There are many Indians, Chinese, Americans with top notch degrees in IT, Business, Medicine, Accounting etc. but strict labour laws that prevent hiring non Europeans make it impossible to attract talent. And even if they are offered jobs, the high income tax deters many talents from working in Europe.

Stock Markets Are Stabilising... Tentatively

Speaking of the stock markets, I think it is slowly showing support. Whether it is short covering, or by bargain hunters, it is indicating a temporary halt in the decline. With the probable QE by ECB very soon, it is highly possible that gold, silver and stocks will rise again, at least for a few months until the next crisis hits us. 

But valuations are very cheap. Earnings yield in the S&P500 is around 5.5% higher than 10-year bond yield. The same goes for Nikkei, FTSE100, Australia, Canada, France, Germany, Hong Kong, Italy, Singapore and Spain. The only markets where stocks offer lower yields than bonds are Greece and South Africa. It is even rarer that dividends are higher than bond yields. But this is indeed the case for S&P500, Nikkei, FTSE100, Australia, Canada, France, Germany, Hong Kong, Singapore and Spain.

Earnings Yield vs Dividend Yield vs 10-yr Bond Yield

With such attractive valuations and unless interest rates spike up (unlikely until 2014), it is highly likely that any correction from hereon will be small... This looks a lot like 2000 - 2003 when stocks bounced along the lows until global economy starts to pick up. 

Amsterdam

Amsterdam is a beautiful city. It has canals with boats which serve as homes moored along the sides. The government does not mandate that all sewage from these boats should be treated so I was quite lucky not to take a swim on the murky waters of the canal.

Public Toilet for Gents

 Amsterdam is a city of Van Gogh and Rembrandt. Anne Frank's House is also located near the city centre. I took many walks along the beautiful streets and the most moving part of the tour was the visit to Anne Frank's House. What stirred me was the complacency of the Jewish refugees who left it too late to leave Germany. Many fled to neighbouring European countries like Holland and expected to find safety. The smarter ones fled to far away lands like the US and Palestine.

Beautiful Canal and Its Murky Waters

I found one of the best Tapas ever in Amsterdam. Not even in Barcelona did I taste such good stuff. Here's a picture that I took. There are many more food pictures but I'll download it slowly. This restaurant is called La Oliva. The service is fantastic. I must write more about it later.

La Oliva - The Best Tapas Ever!

Housing Oversupply On the Horizon... Hear, Hear

Here's my take on the situation in Singapore. I believe we will enter into another global recession in 2013. The reasons are:

 

1. The US is in a fiscal cliff. Next year, tax cuts for the rich expires. That's good. But spending will be capped as the budget deficit hits another ceiling. In order for the government to raise the ceiling, there has to be horse trading. A Republican President will be able to extend the tax cuts for the rich and perhaps even extend the debt ceiling, so that there won't be any cuts in defence spending (be prepared for more wars!). If Obama gets re-elected, he will have a tough time asking for the debt ceiling to be raised because the Republicans controll the house. To continue spending and raising the debt ceiling, he will have to extend the tax cuts for the wealthy and not cut spending on defence. Either way, even if the debt ceiling is raised, whoever wins the election this Nov will want to start balancing the budget. Obama, if he wins, will want to balance the budget, if necessary get another recession out of the way so that the US economy will be recovering by the next Presidential election in 2016. If Mitt Romney gets elected, he will surely want to cut spending on consumption right away, risk a recession and blame it on the previous administration. 2013 doesn't bode well.

 

2. The Eurozone is still in crisis. A lot depends on whether the Greek government that's elected in June 17 agree to the bailout terms. Whichever way, if Greece continues to ask for bailout, and Germany and the Eurozone's inflation rises, it will come to a point that even France will want Greece to leave. It may occur this year or 2013, or even 2014. Then there will be a massive QE in trillions to bailout the affected banks in the rest of Eurozone. We will survive this crisis and it will be a great buying opportunity because valuations are very cheap. Equities may become cheaper than even in 2008 by then.

 

3. China's economy is rapidly cooling off but their inflation is still high. It's between the devil and deep blue sea. The adjustment period where China transform to a more consumer driven economy will take 5 to 10 years. Mean time, I think we will muddle through 2012 and 2013, if not 2014 too.

 

Against this backdrop, Singapore's residential real estate seems in danger of a big correction. Rental yields at 2.5 - 3% look attractive only because interest rates are zero, and borrowing costs are 1 to 1.5%. But you have to remember that in 2007, borrowing costs were 4.5%. Many people will start to throw their properties in 2014 when and if interest rates start rising.

 

I'm not saying that Singapore residential, or indeed any kind of real estate will not rise. But the return to risk ratio is not good. At most our property index will rise 10% to 15%. The drop could be 10 - 30%.

 

 

 

 

 

 

 

Mr Cheng: 'So where do the foreigners go to now? They go to strata industrial, office, shops and shophouses. So when you fill up the hole on one side, a new hole pops up on the other side!'

'Tactical policies must have a sunset clause because they are enacted to deal with certain dislocation of market forces. It's a temporary phenomenon, and if you don't remove the policy as fast as possible when the problem no longer exists, you're creating a distortion yourself ...'
- Mr Cheng

[SINGAPORE] Just as pent-up demand saw housing prices shoot up over the past few years, a reverse situation could be at play now, says Wing Tai chairman Cheng Wai Keung.

People are bringing forward their decision to buy property as they fear prices may rise. As a result, demand in subsequent years may be lower than what is projected based on current demand. This could worsen an oversupply situation. "On top of that if the economy is not so good at that time, it will compound the problem," says Mr Cheng in an interview.

"The current housing cycle has lasted longer than I expected," he adds. "The effects of five rounds of property cooling measures have been short-lived. And despite the fact that the government has increased supply for so many years, the property market has not subsided. This means the pent-up demand is more than I expected."

He attributes this to a cocktail of past undersupply, Singapore's population growth and liquidity.

"In 2003, 2004, 2005, when the economy was not so good, only people who really needed property would go out and buy. The people who were concerned about whether their jobs are secure tended to delay their purchase and that was why after the global financial crisis, all of a sudden, demand shot up in 2009, 2010 and 2011.

"Now, it's the reverse. Because of liquidity, people feel more secure, and even though the government continues to say that the economy is not doing well, apparently Singaporeans are still confident in general. Now some people may be bringing forward their buying (decision), thinking: 'I'd better buy now because prices are going up'.

"But my argument is that there is a danger of people bringing forward their demand, so subsequent years' demand may be lower than what they call average demand every year (based on current demand statistics).

"This will create an even bigger supply and demand inequilibrium; it will create an oversupply more than we think."

Analysts have also attributed strong property demand since 2009 to investors' distrust of financial instruments following Lehman's collapse. Strong liquidity and low interest rates and the onset of inflation have made property investment all the more alluring.

In addition, developers have also taken to minting small apartments to keep lumpsum investment size affordable, to draw a wider buying catchment.

Mr Cheng also acknowledges that global liquidity is a problem. "This is speculative flow of money, which is no good in the long run but we as a country have no way of preventing that. We are just a follower of the global liquidity. Nowadays, all countries are all for themselves. They don't care for other people. So whether this printing of money will affect other countries, nobody cares. They want to save themselves first. We as a small country, can't prevent that."

Mr Cheng says that he understood the government's measures to cool the property market but has a suggestion. "Government policies, especially tactical policies, must have a sunset clause because they are enacted to deal with certain dislocation of market forces.

"It's a temporary phenomenon, and if you don't remove the policy as fast as possible when the problem no longer exists, you're creating a distortion yourself, the other way."

He also says that because Singapore's economy is now more complex than when he arrived in Singapore nearly four decades ago, any policy introduced today may have unintended consequences.

He cites the example of the introduction last December of the 10 per cent additional buyer's stamp duty on foreigners buying any residential property here.

"So where do the foreigners go to now? They go to strata industrial, office, shops and shophouses. So when you fill up the hole on one side, a new hole pops up on the other side!"

Gold Equities is Making a Reverse

The correction of equities is not over. I suspect it will last another 2 weeks to a month before we see any meaningful rebound.

Germany will Blink


Stand by for another announcement of massive QE by ECB to bail out Spain's troubled banks. To keep the Eurozone together, it cannot afford Spain to exit. A Grexit is sustainable. But a Spanish exit may be fatal to Eurozone's survival. What's in it for Germany? Well, the EUR is very good for Germany's exports. EURSGD has virtually plunged by 27% from the high of 2.2 in Jan 2008 to 1.60 now. If you borrowed in EUR currency, quickly do a forex to SGD to invest in a good bond fund like AllianceBernstein Global High Yield, Templeton Total Return, your debt would have fallen by 27%. I am doing this strategy. Borrow in the weakest currency with the lowest interest rates. In my books, it's gotta be EUR first and USD second.

If Greece were to leave the Eurozone, Germany would be happy. It's a smallish economy that will never be able to pay off it's debt. Debt-to-GDP ratio is around 150%, which means interest servicing alone is around 4 - 8% per year. It also means interest servicing is around 6 - 12% of Greece's GDP. Yet Greece's GDP is falling by 5 - 10% per year. How can it realistically pay off the debt? The realistic solution is to declare a default and recapitalise all the affected banks in Europe. This meant large scale nationalisation. ECB has no choice but to print trillions to keep Eurozone together.

Greece cannot even balance its budget now, let alone pay off its debts. The EUR is too strong for Greece to dig itself out of trouble. Shifting to the Drachma will help Greece export its way out of trouble.

But if Spain and Italy gets into trouble, Germany has to help. Without Spain and Italy, which accounts for around 1/3 to 1/2 of Eurozone's GDP, the Euro will cease to exist. Germany will revert to Deutschmark and strengthen quickly. As long as Germany's inflation is below 3% it will agree to any form of money printing necessary to keep the ZONE together.

The ZONE will survive for now until next year. But what happens if inflation in Germany spikes up to 4%? Can it afford another QE to bail out its neighbours? The worst case scenario is when Germany falls into stagflation. We don't know what QE will do to inflation. So far it hasn't caused stagflation in Germany. But it has wreaked havoc in Singapore, China, India and the UK, who are struggling with high inflation and low growth. The problem is delayed at least one year before we face the ZONE's problems again.

Gold equities making a comeback


I bought gold equities recently. Just buy the HUI Index, which is based on gold equities, or NUGT, which is 3x leverage on gold equities. It's around 450 now. I bought at 400 and 425. A trailing stop at 430 to protect profit. Target profit at around 500 and next at 600. The return risk ratio is favourable to me. The rise in gold equities coincided with the rise in spot gold. It appears that the spectre of more QE in the US and EU is triggering a reversal in gold.

Charlot: Freshest Seafood in Paris

I've tasted one of the best seafood in my trips to Europe recently. It's at 81 Bd de Clichy, 75009 Paris.

Unlike in Singapore, there is no thick gravy. Everything, from shellfish, mussles, clams are fresh. The crab is so meaty and fat. I've never tasted such sweetness. It's incredible...

http://www.thefork.com/2_restaurant/Paris_restaurant/Charlot_restaurant/949/