Après Ho Ching, Le Deluge? - AsiaSentinel

Read this interesting article from Asia Sentinel.

The following paragraph caught my attention:

Temasek's overall performance is hard to assess. Although more transparent than most sovereign wealth funds, it still falls far short of what a public company would have to report. The performance of its major listed subsidiaries is easy enough to track but there is a lot that does not appear, including methods of valuation of some huge, leveraged investments made in private equity funds.

Injections of capital from the Ministry of Finance are also a key to its expansion. For example, last financial year its portfolio value rose by 13 percent to S$185 billion but much of this was apparently accounted for by an official injection. Nor are there any details on dividends, if any, paid to the MoF.

Indeed, not only are the accounts skimpy and largely lacking in the notes normally found but anyone wishing to track the latest Annual Review against past ones will be unable to do so via the Temasek Holdings website, which now has only the latest Review (2007-08) not the previous ones.

Hmm. I wonder how I can find out what MoF does. I noted a new flash yesterday which says that MoF is asking each government ministry to publish annual account in 2010. Until then, I wonder what can I do to find out more?

Income inequality

Income inequality is measured by Gini coefficient.

1 means totally unequal. 0 means perfect equality.

Rich countries generally have low Gini coefficient, ie more equality. It is interesting to note from Wikipedia that US, Hong Kong and Singapore are the exceptions: these are the rich guys with higher inequality.

The Singapore department of statistics recently published a report.  Using monthly income, it basically concludes that the Gini coefficient is falling, and therefore income disparities have declined.

A friend reminded me that for high income earner, it is their annual package (ie monthly salary and bonus) that count. If we look at their monthly salary, that is not really the monthly average of their annual salary.

So the question is, why aren't the statisticians there not using a more relevant way of measuring high earners' income? Is it because they have to find a way to get a declining Gini coeffcient?

Someone's measuring the red ink

Someone emailed the following to me:


Temasek lost almost US$2 billion of a badly-timed US$3 billion in Shin Corp at a peak of 49.25 baht(Shin shares are now trading at around 15 baht) in 2006.

This state-linked investment company committed S$401 million in ASX -listed ABC Learning Centres at near the peak price of A$7.30 and then averaged down at between A$1.20 and A$4.00, bringing it's commitment to over S$500 million. That investment is now essentially
worthless although Temasek has yet to write it down.

The company also bought 19% of LSE- listed Standard Chartered in 2006 only to see the market value of that stake melt 55% by November 21st.

More fiascos include a 975 million pound stake in Barclays Bank bought at the peak of 740 pence(with a further 100 million to subscribe for a rights issue at 282 pence), which have now sunk over 70% at 138 pence.

Most heinous of all is its US$6.88 billion stake in Citigroup bought with a minimum conversion price of $31.34. Citigroup has since plunged 88% to $3.71, singlehandedly delivering S$9.11 billion of red ink to Temasek's books.

Overall, the paper loss on these bank investments has exceeded S$35 billion as of October 21st.

Is CPF my social security or social bondage?

I have been thinking about CPF recently, since my government, on top of getting me to do compulsory saving, is now telling me I have no choice but must buy an annuity.

I came across an article in CFA magazine on social security. 

Here's the abstract of the article:

The disappearance of the defined-benefit (DB) pension plan is one of the greatest financial tragedies to befall the U.S. citizen. As demographics have changed and as defined-contribution (DC) plans have become the primary vehicles for retirement savings, retirement planning has become fraught with uncertainty. This article argues that DB plans, such as the U.S. Social Security system, are fundamentally superior to DC plans and that the Social Security crisis is largely a crisis of demographics and funding. Social Security’s assets should be invested in a single portfolio that holds both stocks and bonds, and its risky return should be swapped for a fixed return to enable the provision of a DB. This proposal inexpensively affords insurance against a market decline and allows pensions of any kind to be made portable.

The authors argue that fixed benefit is better than fixed contribution for the owners of the social security system. That way,  people know how much is their guaranteed return, and can plan for retirement peacefully. 

To get the guarantee return, the social fund swaps its market return for a fix rate return with another party. The social fund will then be able to deliver a fixed return, ie a defined benefit. This will be in the interest of the citizens, who are the owners of the fund. 

Citizens will be able to see the defined benefit which is expressed explicitly in the form of an expected return (guaranteed by government). The expected return will be transparent and subject to comments by the public.  More importantly, if the expected return declined as a result of political interference in investment decisions, by virtue of  the guaranteed return, the government would be seen making more frequent and larger net payment to the social security fund. This will make the cost of political interference explicit.

This is the type of CPF that I would like. The government guarantees us (ie Singaporeans and PRs who contribute to CPF) a fixed return. It is then the job of the administrators of the fund, ie the government, to find market speculators who are willing to accept return volatility.

The other thing in my mind, as I ponder over CPF is this: Ultimately, can we shift the risk of managing the retirement fund to the owner himself, and therefore allowing the owner to control his own money? Some people like me would want to have that choice, as early in my life as possible. I can understand why government has to balance this, because they don't want to deal with people who are not responsible with their own money. Well, they can always examine how people deal with money in the past, and give more control to those who are more responsible. 

I have developed the following Q&A after looking at CPF's 2007 Annual Report.

Questions that I would want to ask government regarding CPF

I. What is the size of CPF?

$136.6bn. Assuming 3.6m Singapore residents, that's $38k per head.

II. What are the main investment instruments of CPF?

$117.8bn (86% of fund) in "investments". 95% of that in long term Singapore government bond. These are floating rate bonds (Note 12, page 73). 

III. How much is the return performance over the years?

2007: $4.2bn "interest credited to member's account plus $68.7m surplus, against members' account of $136.6bn. (page 43, 44). This works out to be 3.12%

2006: The respective numbers are $3.9bn, $66.5m and $125.8bn. This works out to be 3.15%

IV. What is happening to CPF now?

Government is saying, sorry, we are going to let floating rate takes over from now, instead of fixing it at 4% for members. The floor rate of 2.5% will stay though, because of provision 6(4)(b)(i) in the CPF Act (Government can always change the law though).

Notice from III that the entire fund return is more than 3%, even though members were paid 4% interest previously. Adjusting the interest payable to CPF members by pegging it to the yield of a long government bond, will mean the overall fund performance may perform better or worst. If I am the administrator (note: not the owner) of the fund and my salary depends on positive performance of the fund, what would I do?

V. What is the real reason behind the delay in redemption for CFP fund owners?

The government is softening the ground in order to get people to accept the idea that they should work longer, get their CPF later and save more in the meantime (see the huge words on page 4 of CPF 2007 Annual Report). This is like my fund manager telling me, look, you can't withdraw your money; you got to invest more and wait a bit longer before you see your money. I am very unhappy and I think many neither. The question is, why would the government wants to spend time and resources to shape people's behavior so that they won't mind getting money out later? See Google's answer.

VI. What is the objective of the CPF Fund?

The front cover the CPF 2007 Annual Report says "Retirement Planning Made Simple". I interpret the CPF scheme as a compulsory saving scheme to allow workers to benefit in their retirement. 

VII. Why is the government lowering the fix 4% guaranteed return to 2.5%? Is that in line with the objective of the CPF fund? Is CPF not instituted to looking after the interest of the owners, who are trying to plan for retirement?

First part of this question is answered in IV. 

If the objective of CPF is to implement "force saving," then getting rid of fix return does not contravene the objective. However, if the objective of CPF is to make "retirement planning simple", as loudly printed on the cover page of CPF 2007 Annual Report, then lowering the fix 4% return to 2.5% is certainly undermining the interest of CPF members, since long term inflation rate is typically 3%~4%.

Based on IV and V above, government is saying, sorry, you cannot afford to retire early, and even after you retire, you won't be allowed to control the money which is yours.

VIII. What can be done on how CPF is run?

See Google's answer.

IX. If CPF goes for fixed benefit (fixed guaranteed return), does that mean that there will have to be a change to members' contribution?

If my fund manager tells me that in order to get a fixed return for my money, I need to invest more, I will tell my fund manager that he might want to consider looking for a job elsewhere.

X. Who can  take over the variable swap to provide fix return for CPF?

There are many speculators in this world who are willing to take higher risks for higher return. It is the job of the administrator of the fund to find them.

Looks like Paulson forgot Jefferson's reminder

Read the following here:

"I place economy among the first and most important virtues, and public debt as the greatest of dangers.To preserve our independence, we must not let our rulers load us with perpetual debt."

"Dissent is the highest form of patriotism."

"The principle of spending money to be paid by future generations, under the name of funding, is but swindling futurity on a large scale." 

"The spirit of resistance to government is so valuable on certain occasions, that I wish it to be always kept alive."

"A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor any bread it has earned - this is the sum of good government."

"All tyranny needs to gain a foothold is for people of good conscience to remain silent."

"I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

"Do not bite at the bait of pleasure, till you know [that] there is no hook beneath it."

"Experience hath shewn, that even under the best forms of government, those entrusted with power have, in time, and by slow operations, perverted it into tyranny."

"I find that the harder I work, the more luck I seem to have."
"I'm a great believer in luck and I find [that] the harder I work, the more I have of it."

"It is neither wealth nor splendor, but tranquility and occupation which give you happiness."

"One man with courage is a majority."

"The care of human life and happiness, and not their destruction, is the first and only object of good government."

"Where the press is free and every man able to read, all is safe."

"I predict future happiness for (Americans) if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”

Quotations from
Thomas Jefferson [1743-1826]

Victims of Biggest Ponzi Scheme ever

Found the following through another blog:-

http://projects.nytimes.com/creditcrisis/madoff_clients/table

Will monitor to see if there is any familiar name.

So far, only GE. Exposure does not seem bad. 

On the other hand, I heard a local SWF got a USD 300m exposure....

The other generic question is, so what happens if a fund operated by an insurance company blows? My insurance agent reminded me that the guaranteed value already delcared to policy holder will be protected up to 80%. Probably this already considered by people after the AIG event.

There are some MAS insurance guarantee regulations. I am getting a headache here trying to understand. I suppose no lawyers would help?

Property contra play unwinding next

[Thanks AndrewPKYap, for helpful comment]

I pay attention to reports on property. Just read this:

SINGAPORE, Dec 19 (Reuters) - Singapore said on Friday there were 10,450 uncompleted private homes purchased under the country's deferred payment scheme, revealing for the first time the potential number of homes that may be returned to developers. About 4,560 of these homes are scheduled for completion next year while another 2,540 will be ready in 2010, the Urban Redevelopment Authority (URA) said in a statement. Singapore introduced the deferred payment scheme in 1997 in a bid to boost the then-moribond property market. The scheme, which was withdrawn in 2007, allowed buyers to buy property under construction without lining up bank financing in advance so long as they made a downpayment of 10-20 percent. The recent fall in Singapore home prices, coupled with the financial crisis that has made banks reluctant to lend, has led to concerns about a jump in the supply of unsold homes due to the failure of buyers to get loans. "The data is provided to enable the public to make a better informed assessment of the private housing market," URA said.

The source is from URA: http://www.ura.gov.sg/pr/text/2008/pr08-119.html

Ok. So now I know that there are 10,450 private properties that were bought with 10% - 20% money upfront. Some of these guys I'll call them contra players (ie speculators) because they have no intention of paying for the balance. What is the percentage of contra players? I have no idea. Maybe 10-15% (because that is the subsale vs overall sales number from URA).

I also know that, since deferred payment scheme was scrapped, some properties were sold whereby the developer, instead of buyers, pays banks the interest till TOP, after the 10%-20% downpayment by buyers. I am not sure whether buyers need to arrange financing beforehand in these cases. Maybe whatever arrangement will depend on the risk appetite of the developers or its banker. Will just assume that the number is small, for now.

Let's take a look at transaction volume of the private property market.

3Q numbers are here: http://www.ura.gov.sg/pr/graphics/2008/pr08-107d.pdf
URA's analysis is here: http://www.ura.gov.sg/pr/text/2008/pr08-107.html

I am seeing about 4,000 to 4,500 units sold (either through primary or secondary market) per quarter in Q2 and Q3 this year. The volume has come down from the peak of more than 10,000/quarter in 07.

This post cited ST's report of a steep drop in caveat numbers, and someone (to me a very optimistic fellow, because I have been watching what he said) reportedly said, ‘The average number of monthly transactions for the last 10 years is about 1,300 per month, so we should be seeing lower than average transaction volumes.’ So maybe the 4Q quarterly volume might see another shrink of up to 50%, to 2,000-2,500?

Let's go back to the deferred payment scheme numbers. It is stated that about 4,500 units are "expected to be completed" in 2009. Another 2,500 are coming up in 2010. I am going to assume that there is no reason for developers not to complete the units, unless they run out of money to build.

So come 2009, against the dwindling say 10,000 units (Colin Tan reportedly expects 5,000, but then he is always the bear. Todayonline's report here) that the market is trying to digest, a certain number of the 4,500 will have to be off loaded by contra players (10%-15%?) or those that suddenly find themselves with no bankers (8%? HDB 3 month bad loan number is 8%), or foreigners who have decided to pack up and go (15-20%? Read IHT Sep 2007 report on foreign buyers of Singapore property). My estimate is that about quarter of the DPS unit will have to be dumped. The current big picture of recession and job loss is not helping those 1,000-1,200 (?) sellers. And who knows? 2010 might get worse.

Contracting volume, force selling and bad sentiment. I am wondering how this will affect the price of that condo that I am looking at. Besides, next to it there are potentially another 11,200 that agents will be trying to sell next year.