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Monday, Apr 07, 2014 - 01:26 SGT
Posted By: Gilbert

Riding The Current

Secure in the knowledge that the hamsters were meaningfully occupied with their new venture, I dropped by their home for a look-see, to find Mr. Ham immersed in conversation.

Mr. Ham: ...look, sir, who are you going to believe, a fat hamster in a suit - whom you've never met - or your wife? There, that wasn't that hard, was it? So how much do I put you down for? Five thousand? Please, that paltry sum does not befit your stature... yes, I specialize in liquidating college funds, no, there's no risk, and your kids are probably smart enough to get scholarships on their own merit, anyway. What, your wife's after you with a rolling pin? Sir, that's a lame sixties sitcom cliché... wow, that sounded like it hurt. My heartiest commiserations. Wait, don't pass out yet, be a man, dangit, at least give me your bank account number... six-oh-eight, come on, you can do it! Eight, seven, come again, I didn't catch that, hello... hello? Well! Good day, sir!

*slams phone down*

Me: Another botched sale, I take it.

Mr. Ham: *draws several puffs on cigar* Tarnation! I had no idea marketing had gotten this hard! I must be well out of practice, I was a born natural back in the day.

Me: Just curious, you had some... large associates with you, and met up in person, then?

Mr. Ham: I don't see why that should make a difference.

Me: Second question, why has Mr. Robo been standing behind you and yelling out random numbers all this while?

Mr. Robo: *in a hoarse voice* Four-fifty, nine! Four four nine and three eighths! Six of four-five-one...

Mr. Ham: Oh, background ambience. It helps to look and sound the part, when sealing deals.

Me: Erm, even if so, wouldn't it be more efficient to make a voice recording, and then play it back on loop?

Mr. Robo: Give me half at four-four... that's... *pant* that's what I told him!

Mr. Ham: Sir! At H.L. Ham, we prize authenticity!

Me: ...Fine. And one last thing. You don't end conversations on smartphones by hanging up.

Mr. Ham: So sue me, I'm not a techie. In any case, it's not mine. It's Mr. Robo's. Well, on to serious business. You have arrived at just the right time to pick up the latest Bitcoin market tip from H.L. Ham; unlike other firms, who push out dense and near-unreadable heaps of paper that go on to end with some worthless recommendation such as "it will hit one million, but on the other hand, it could go to zero.", H.L. Ham sticks its neck out with a number up-front, no bullshit.

For the year of 2014, H.L. Ham's official call is: daily median low of no less than US$350 - that's three-fiddy - taking into account we had about US$420 a few days back, 20% money-back guarantee on our consultancy fees if that floor is broken. High of at least US$700, another 10% back if it doesn't make it that high before the thirty-first of December, but no refunds if that level is exceeded heavily, of course.

Me: That feels... optimistic.

Mr. Ham: *stubs cigar out* It is a principled projection, obtained from H.L. Ham's executive director of financial operations Mr. Robo, a lot of forced speed-reading, and a pointy stick. Hey, Mr. Robo, how about you explain your reasoning? You can stop with the shouting of numbers.

Mr. Robo: Five zero-one, hut hut hut!... ah, good. Um, about that, I ran a few tests, but at the end it's mostly a gut feel from estimating the price support from equipment sunk costs and dedicated buy-and-HODL-ers, and the likely maximum enthusiasm that can reasonably be expected.

*Mr. Ham points to his gut proudly*

Mr. Robo: I concede.

Mr. Ham: Let's say that dealing with clients as a Gang Leader gives you an... insight into reality. Hard not too, after hearing ridiculous promises all day long. If I were you, I'd place buy orders about uniformly in the range between US$350 and US$450, and shift the lower orders up if the current prices hold for a few weeks. To be honest, I don't see US$1000 again this year, but I wouldn't be sad if I got that wrong.

One more bonus bit of advice - don't go out of your way to introduce friends and acquaintances to such ventures. It's simply not worth it. Sure, you may get some cred if you're right, but far, far more stick if you get it wrong - and maybe even when you're right, if they get caught up in the fever and start plowing in at the top, and then it becomes your fault for pulling them in in the first place. Nope. Bad idea. Rule number one, if they have to ask, they shouldn't get involved.

Me: Agreed. In economics, it is well-established that losses hurt more than gains for most. Those who mostly don't give a shit, then, have an unfair advantage, which is of course assuming they have the basics right. I have found it calming to accept that if I die, I die. There is nothing more to be said.

As opposed to the famous football anthem

Mr. Ham: Yes, that helps too. Makes me want to enter advice-dispensing mode too. Alright here goes - what do you think is the most important attribute for those in our main line, i.e. personal advisor-consultant, to be successful?

Mr. Robo: Huh? Isn't it giving accurate predictions and recommendations, by definition?

Mr. Ham: *slyly* Nuh-uh. Oh, that helps, I will give you that - but it's far from the most important factor.

*takes a long, deep draw*

You see, most of the time, when somebody hires a consultant, he already has an idea of what he wishes to hear, whether he admits it to himself or not. The main trick, then, consists in identifying what he wants to hear, deep down, and devoting the bulk of your report to reinforcing that. For example, if you gather that he's bullish on the market, you match him with a similarly-optimistic analyst, and sell him stock. If he's a bear, assign him a sulky fellow and ply him with short options. Either way, it was their idea all along, and you get repeat business.

Now, say that we follow Mr. Robo's straight-arrow style, and give them our real best-faith judgment, even if it goes against their own opinion. If our advice turns out to be correct, then we just proved our client wrong, which goes against the basics - and I tell you, a lot of them don't like that, even as they take the money. And if we're wrong? That's even worse, we robbed them out of their winning hand! It's a no-win.

Me: Doesn't H.L. Ham only have two employees, as of now?

Mr. Ham: I'm bull. Mr. Robo's bear.

Me: And haven't you just made a year-on prediction...

Mr. Ham: *waves a dismissive paw* Oh, that's long term in this market. Plenty can happen in the meantime. Ah, the phone still works! Another potential patron! Hello? Yes, CEO of H.L. Ham speaking... you want to know about Robocoin ATMs? You've come to just the right place, we have their inventor, Mr. Robo, as an executive director!

Mr. Robo: What the... I never...

Mr. Ham: You want to order some of them? No problem. How many? Two? Sir, just for you, today only, volume discount, a quarter off if you take a dozen. Not quite in your budget? Alright, six will do. Sure, great. You want some modifications? Absolutely. We'll throw in an added encryption layer for free! Update intervals of ten minutes too long? I'm sure Mr. Robo can get it down to two minutes. Easy.

*Blood drains from Mr. Robo's face*

...That's it, then. Nice doing business with you. *Ends call* Done! Ok, Mr. Robo, go order six of those whatchamacallit ATMs from their website, make those little tweaks that the customer wants, and have them on my desk by tomorrow.

Mr. Robo: Do... do you even know how the blockchain works?!

Mr. Ham: Mr. Robo, I may not know much computer science, but you sure as hell don't understand sales.

*puffs on cigar contentedly*

[N.B. Actually, he just needed to invent seven-dimensional paper]
[N.N.B. They're right on the cute critters, though]

Mr. Robo: Please stop him before he gets us all arrested!

Mr. Ham: *grinning* Hey, you two! Good news! The guy just now, he wants to set up an interview with the creator of Robotcoin! You know, same as Bitcoin, but they can walk about and do your dishes too? Mr. Robo, I'm looking at you. Doesn't sound too difficult at all. Stop that sobbing in the corner, you have two weeks to do it.

The Market Is Free!

Me: To be honest, I don't think even Mr. Robo will be able to pull this one off.

Mr. Ham: Well, you never know. I'm prepared to raise him to senior executive director if he manages it. And anyway, the important thing was to close the deal pronto. Specifications and costs can be... negotiated.

Me: Let's just say that I don't see myself ever being a good consultant, then - how some of these things can be said without blushing, I do not understand.

Mr. Ham: Fine, continue being a scrub.

Me: Anyway, the Committee of Inquiry for the Little India Riot seems to be leaning towards pinning the whole affair on alcohol, as expected, with one of the rationalizations being that "beer bottles were used as projectiles" - but if so, should they not implicate parking lots and cleanliness too, given that pavement slabs and rubbish bins were also used?

Mr. Ham: Whoa, you want Master Political Analyst Herr Ahm for that. I'm now the proprietor of a boutique investment firm, and I don't want no trouble.


Haha, like, who gives a crap about that? Got you, didn't I? Life is too short to clam up due to some misplaced sense of duty, or unworthy sense of fear. Remember what I just said about getting the opinion that you want? That's happened again. That, and setting up a fall guy. What's new?

Me: And of not hearing what you don't want to. But then, the outcome's almost certain, given how the status quo has to be maintained - ban alcohol, ban gatherings, dole out reprimands, and it's back to business as usual. That said, there's been a slight shift in the local media towards identifying spiralling rents as one of the major problems facing businesses here, instead of trying to put everything down to labour costs - i.e. why aren't you happy about letting in an extra fifty thousand semi-skilled workers every year? Are you xenophobic, comrade? - so one can hope.

On this, we could mention the incumbents' latest foodie effort, a subject that has seldom gone well for them. This time, a DPM alerted his Facebook followers to S$1.80 chicken rice, and it was telling that the first comment was one of doubt (referencing December's unlikely nasi padang pricing). By now justly skeptical, netizens looked more closely, and reported that it was a promotional price. In an added touch of irony, the S$2.50 nasi padang shop has since closed, perhaps yet another casualty of the rental scourge. By the way, the local Ramly burger's gone from S$3 to S$3.50 too.

The local institutional response to the property situation is perhaps best summed up by a forum letter, which notes that even a one to one-and-a-half percent fall in prices has been described as "unnerving" and "not sustainable" by developers and agents, who were apparently all a-ok on sustainability when prices rose by 50% across-board in the past six years.

Mr. Ham: Actually, it's not the price that they're up in arms about, as much as the transaction volume. Or, just perhaps, there are too many agents around from the last bubble?

Me: It is my belief that in a healthy economy, real estate should play at most a secondary role - one oft-heard remark about the true state of Singapore's innovativeness, or lack thereof, is reflected by looking at what really pays here.

Now, one point of view is that these rental rates depend purely on supply and demand, and it is best not to interfere with the free market system. We could however begin by questioning the premise - how free is the market, exactly?

One could first and foremost suspect that commercial and industrial property owners, as a group, can be more aptly described as an oligopoly, while tenants are comparatively "free market"... as in free to take prices. For once, both economic theory and practice produce the same outcome - profit-seeking oligopolists exert market power, and their tenants pay more than in a truly free market.

This might be a little new for non-econs majors, so let me sketch it out for you:

It is often left unsaid, but nevertheless true, that Our Most Successful Investment Firm has a huge stake in local real estate yields, certainly a low-risk punt given the setup. Basically, the fewer viable options there are, the more aggressively tenants can be squeezed. Of course, the less said about residential property being a "free market", the better.

And The Runaround

At this juncture, I would like to discuss Ngerng's latest attack, entitled "Truth Exposed: The Dirty CPF-HDB Scheme To Trick Singaporeans", which seems to be gathering a lot more attention than the norm. One little quirk of his site is that it seems to consistently attact a majority of dissenting opinions, which is fairly rare with pro-and-anti-incumbent supporters generally segregating themselves quite neatly into their respective cyber-haunts. The frequent accusation of his site being anti-establishment is strange, though, given how many sources are dedicated to singing the incumbents' praises.

There have been plenty of dismissals, critiques and rebuttals for this article, and I will attempt to consider the main points as objectively as I can.
  • Claim: CPF payouts are inadequate, and among the worst in comparable developed nations.

    Rebuttal: The stats are wrong, there is no way our income replacement ratio is 20%. Instead, it could be as high as 70%.

    To begin with, I examined the source of Chart 2, and found that its own source was... an unpublished manuscript. Hmm. However, the rebuttal happens to claim that current retirees will receive S$1233 a month, if they manage to meet the minimum sum (currently S$148000). While this may be true with the old Minimum Sum scheme, the payouts would then cease after 20 years - which would leave most retirees high and dry right when they need the cash most, at current life expectancies.

    A fairer figure, then, would come from CPF Life, which extends for the lifetime of the retiree (like pensions are supposed to). The numbers, from the CPF Board's estimator, instantly become less inviting:

    RA SumS$148kS$100kS$50k
    LIFE StdS$796-842S$551-583S$282-298
    LIFE BasicS$712-754S$496-525S$264-278

    [N.B. Figures for S$100k and S$50k included as less than half of CPF members manage to meet the Minimum Sum]

    Further, the rebuttal also states that 20% is impossible, because that implies a median wage of S$6166 (still using S$1233/mth), under the definition that the ratio is computed by the average income over all working years. Finding that not quite right, I did some checking, and it so appears that standard practice is to use the final salary earned - which sort of makes sense, since why should one's burger-flipping early years influence his final expected standard of living?

    One issue with this measure is that there seems to be a distressing trend of seniors having to take up menial jobs to make ends meet here. That said, the median salary at retirement is still rather higher than that at mid-career, at least for those with qualifications; since the post-secondary group earn some S$3k then, while diploma holders earn near S$5k and degree holders over S$8k, it probably would not be too far from the truth to claim S$4k as the median salary at retirement.

    If so, using the CPF Life standard payout of about S$800-plus a month, we come very close to the claimed 20%; in any case, it is certainly closer to that than 70% - which, on closer examination, was commissioned precisely because international studies were not tailored towards the CPF.

    Reading the original report (which does disclose that median final income is about S$3.7k, indeed near S$4k), the main justification is... most Singaporeans "own" a HDB flat, so they don't have to pay rent, so if we use imputed rent, our income replacement ratio magically becomes a much-more palatable 70%!

    As far as I could discern, this rather-unique revised formula was not applied back to other countries (who, it must be said, are not exactly majority renters either), and I would suspect that at least some of them would get ratios of well over 100% if assessed this way.

    It should be noted that we haven't even gotten started on inflation, which has been well over 2% in recent years, but even assuming a generous 2%, this means that the fixed monthly payout would only have 82% of its original purchasing power in ten years, and 67% in twenty years... wait, the CPF Life payout isn't even guaranteed, which nobody seems to care about.

  • Claim: CPF contributions are the highest in the world at 37 (or 36)%.

    Rebuttal: So what? You think employers will pay you their 16% contribution, if there were no CPF?

    Frankly, I don't see why not. The effective cost to the employer remains unchanged, and I'm quite certain the effective cost is what employers are concerned with.

    On this, it seems that the incumbents are tightening their PR policies, with one of my labmates revealing that he is on only an S Pass (with attendant levy, i.e. tax). Well, I dunno what they are aiming for.

  • Claim: (Mostly from an older post) CPF incorporates a high implicit tax, since citizens do not recoup most of the (claimed) returns from Temasek (i.e. Our Most Successful Investment Firm) and GIC, which earn 6-16%. In comparism, most other countries, including Hong Kong and Malaysia, return 6-8%.

    Rebuttal: CPF is personal savings, and not a tax, which Social Security systems are; investment returns are a function of risk, so 2.5% is appropriate.

    First off, does Our Most Successful Investment Firm manage CPF funds? They say no, and I am sure that they are technically correct, but let's put it this way - without easy access to low-interest CPF bonds, would they have quite that much capital to work with?

    But anyway, on to Hong Kong's Mandatory Provident Fund (MPF) system, since we are so often compared to Hong Kong. The provided chart lists the MPF as having a 7.5% return. Is that true?

    Well, not totally. From the linked report, the 7.5% is for the most recent year (2010) only. Annualised, the return is "just" 5.5%, with fluctuations ranging from -25.9% to 30.1% in individual years. Further, it should be noted that despite having "Mandatory" in its name, the maximum mandatory contribution is just 10%, compared to well over 30% for the CPF. Secondly, the MPF system consists of hundreds of individual funds, with varying risk profiles.

    So, perhaps the returns for other countries may be slightly optimistic, with some of them possibly due to higher base inflation - but it remains true that CPF returns remain on the low side. Now, the official excuse is that low returns are due to effectively zero risk, with one minister arguing that accepting 2.5% is a fair tradeoff for the CPF Board hedging against volatility.

    About that, let us introduce the U.S. ten-year Treasury Note, about as low-risk an investment as you can get:

    (Source: Yahoo! Finance)

    I have marked out the maximum CPF Ordinary Account returns in red, which already is an overestimate in some years from 1990-2000. Inflation in the USA and Singapore from 1990 onwards was comparable. Then, why are CPF returns so miserable? Put this way, if the CPF Board merely went out and bought ten-year T-Notes with incoming funds each year, and staggered payouts from previous T-Notes, they would have been able to - quite safely - exceed 2.5%.

    Thinking back, the volatility excuse holds even less water, when one considers that the Board had no qualms about adjusting returns downwards anyway. The Board's report tries to dress it up by displaying pitiful "calculated rates" (apparently using three-month interest rates, of all things) of as low as 0.21% for this year to try and make 2.5% look better, but the appropriateness of this benchmark must be suspect given that retail savings accounts are giving near 1%.

    In short, the concept of volatility being largely mitigated by long time horizons (which is, like, the whole purpose of such funds) seems completely lost on the CPF administrators (if, strangely, not on OMSIF). Another example: had they simply plonked it into an index such as the S&P 500 - no additional knowledge required - rolling twenty-year returns would have ranged from 7% to 18%. Does a "guaranteed" flat 2.5% sound so nice now, compared to the "volatility" of 7-18%?

    So it seems: tails you lose, heads you don't win.

  • Claim: The rise in Minimum Sum is to lock up your money.

    Rebuttal: It is necessary both to compensate for longer life expectancy and inflation.

    This seems true - the Minimum Sum has got to go up, if CPF is to fulfil its original objective; still, it has been outpacing inflation by a lot (supposedly 7.6% to 1.8%) in recent years, which could be explained as to make up for expectancy increasing by about four years since 1996 - but that said, the retirement age has been raised from 55 years in 1993, to 62/65 years today - and the incumbents are already eyeing 70 years! That considered, the expected number of retirement years probably has not changed much (and might even have decreased)

    Another angle by which this is rebutted, is that even if the Minimum Sum continues to increase by about 5% each year, and hits over half a million by 2035, it's not a problem because you then get a hefty payout of some S$3k a month! Well, back to the first point - more than half the CPF members are already unable to meet the Minimum Sum. If it continues to outpace wages by this magnitude, why should future retirees get anywhere closer to hitting that airy-fairy S$3k/mth?

  • Claim: The CPF is double-taxing you with 2.6% interest on the HDB mortgage (which came from your own CPF anyway), and another 2.5% when you sell your flat (accrued interest)

    Rebuttal: He is an idiot! He lacks fundamental economic knowledge! The HDB concessionary rate means that citizens are basically taking out mortgage loans for free! Where got other government so good one! All data taken out of context!

    This is likely the most original point raised... but also the weakest, which is unfortunate, because opponents are apparently discrediting it, before painting everything else mentioned as similarly flawed. To be honest, I haven't quite managed to follow the argument about accrued interest, so I'll stick to what I know.

    But before I continue - what is the CPF?

    It seems that it's a retirement and housing program, two-in-one (maybe three, if we add medical coverage)

    Therein lies the rub. Since CPF funds are available for housing, there arises a natural temptation to raise property prices - why not, since citizens will be more inclined to commit funds they can't touch otherwise? However, the result is that we are effectively running a pension fund that is overwhelmingly invested in the property sector, instead of being properly diversified.

    As one dissenting article inadvertently points out - Ngerng's post is rubbish, you will never have to pay anything back... if your HDB flat's value increases.

    Well, that shouldn't be a problem, they've been going up very energetically indeed for past decades, right in line with the consistent increase in our working population! A population that is, due to plunging fertility, expected to start falling when the current batch of young adults begin to retire... wait a minute here.

    Perhaps it becomes clearer now why the incumbents are pushing for heavy immigration. The mathematics is clear - if, each year, you have 40000 retiree households seeking to sell their flat and downgrade to unlock funds, and only 20000 new couples wanting to buy, what happens to property prices (i.e. pensions)?

    Nope, I don't wanna know either.

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