The Nature of Risk

Nobody invest with a view to risk. Everybody invest in the belief that they will make money for sure. If they are not sure, they would not have invested.

But there are risks in investments. And people do lose money in investments.

So what happens?

People believe that prices rise and fall for all assets over time. Even those who are absolutely convinced that property values will keep rising in city centres because the population keeps rising and there is limited space in city centres.

But city centres do shift. There are many inner city decays and inner city slums and poverty.

People keep building new assets, designs keep improving as well as the way of life.

Nothing is static. Things in life keeps changing.

It is not true that if you just sit on your assets and do nothing, the prices of your assets will keep rising.

There is this fantasy that one can just accumulate more and more assets and become richer and richer.

All that happens in the end is that there will be companies that grow and grow with assets, and there are people running the companies and they are not owners of the companies. There are these non-human legal entities that just keep accumulating, apparently under the same name, but inside the companies, the corporate ownerships have changed many times, and the founders and their descendants have long sold off their grandfathers' assets and blown off their wealth.

It is true that as the world gets older and more and more people are building more and more assets, more and more assets will come into existence and they will all crowd around certain areas for critical mass. These assets will be owned by people and companies of all shapes and sizes. Or they could all be left in ruins, like all ancient cities and civilisations.

The real question is where do we as individuals come into the picture?

Do we want to become like individuals who spend all their lives accumulating gold and carrying sacks of gold on their backs?

Or are we masters of ourselves and living this world and, at the same, making sure that we have just sufficient means to be able to enjoy this short life that we have. No more, no less. If not, only slightly more but no less.

In which case, we should be spending our younger days working hard and saving, so that we have the means to enjoy our lives when we are not physically or mentally capable of exerting ourselves in the struggles of living.

The risk of accumulating assets is that we have forgotten the primary purpose of accumulating them and have forgotten to live and enjoy our lives.

Some would ask with vastly accumulated assets, we can have all the riches to live our lives the way we want. It is very hard to be rich and humble. It is also very hard to be rich and know the value of living. When very rich, we also know our cleverness and become arrogant and try to reshape the world around us to our own whims and fancies.

It is very easy to fall into the trap and think that what we believe is reality.

The truth is that we are all nothing and we will all die and there is nothing about us to be arrogant about.

We should be spending our remaining days enjoying the quietness and solitude of time spent with ourselves and loved ones, saying all the things we want to be able to say to each other face to face one simple word at a time.

All the assets are like the roof over our heads and rooms to keep us safe and warm. We can use money to buy things and comfort, but we can only discover for ourselves the true happiness of quiet contentment, that we alone are quite sufficient for us alone.

Asset values rise and fall with the madness of people as they react in fear to the uncertainty of the future which is always uncertain and hence always at risk.

The Value Of Gold

The value of gold can hold only when everybody wants to buy gold and keep and does not want to sell.

The only people in the world who keep gold forever are those from ancient civilisations which must have known, from history, that gold is something that has lasting value.

The only institutions in the world which keep gold forever are the central banks when gold is the only money and money is gold. This was true in the past when first it was the silver standard (Spain and the Incas) and then evolved into the gold standard. During the silver standard, silver was dug out in Peru and after trading was buried in the soil in China by corrupt officials. The gold standard was used by the British and abandoned by the Americans. 

The reason was that the standard restricts trade as there was a shortage of the money supply. When money becomes fiat, there is no shortage of the money supply and the only problem becomes an oversupply. The answer to the problem of the money supply is a rule on the restriction of the money supply which no government today seems to be willing to adhere to. The alternative answer is a return to the gold standard whereby the supply of money is constrained by the output in digging gold out of the ground.

Bitcoin ostensibly comes in to replace gold as a standard for the money supply where the supply of bitcoin is dependent on some computer algorithm and the amount of precious electricity required to run the program. But this is no different from a money standard based on the number of kangaroos in the world, or any other exotic or esoteric output. Furthermore, who gives the authority to bitcoin for bitcoin to be the world standard for money - nobody. But this does not detract people from buying paintings of dead people as the supply would certainly be restricted to the existing available.

Same as for bitcoin, there is nothing to prevent gold being accumulated and used in some cases for the payment of bilateral transactions, if both parties so do agree, just as in any other barter trading arrangement.

The point to make is that the price of gold is very high now because first there are people want to buy and keep gold and are buying and keeping gold. Second, there is an enormous of fiat money that has been printed and because of the oversupply of the money supply, people are selling the fiat money for real and tangible assets like gold, silver, minerals, oil, etc. Not sure how real and tangible bitcoin is.

A more interesting question is: Will the price of gold ever reverse? If the people who are keeping gold do not need money and are keeping the gold forever, then no.

Under what conditions will the price of gold reverse? When the opportunity cost of holding money is too high. I.e., when the interest rate is high, say, 5% or 8% p.a., on fiat money. When the return of investment is high, such as in stocks and shares. This may be in certain stocks, as the global economy is adjusting the current technology which seems to be threatening every human job. This last point is interesting.

If computers and machines are doing all the work producing output, who will be consuming that output. If humans are out of a job and have no money, then humans cannot consume that output. The machine produced output will go bankrupt and have to stop.

What do humans do then? Humans go back to the farm and live a simple life eating durian.

There seems to be a way out for policymakers today. Forget about the super-rich investors in technology which are producing output that no humans can afford. Focus on the agriculture sector whereby owner-farmers can grow enough simple food to feed their families. There is plenty for farm-based industries to grow, using the use of super-machines.

Accumulate gold by all means. Most likely this is your savings, your surplus capital. You have more money than you will ever need. Trading in gold and other assets is just a game you play to while away your time alone.

For those who want to live, it may be more useful to engage in more physical and down-to-earth activities which have direct benefit to your physical and mental health, making you tired and hungry, so that rest and eating are joys in your life. The value of gold is just a theoretical consideration done at leisure in quiet solitude.

The Illusionary Nature of Value

When markets collapse, we hear of the loss of billions in value. 

Just like during good times when markets rise, people feel good because they feel they are extremely rich.

The funny thing is this - that the value of any class of assets is measured by the last market traded price of probably one unit of that asset class.

It is by simple extrapolation of that last market price to the entire asset class that has not been sold that value is measured - what they call market capitalisation.

Market capitalisation is a theoretical concept that has no representation in real life. You cannot eat market capitalisation. You can only eat the last assets that you have sold for cash that you can use the cash to consume. The assets that you hold of which you imagine to be worth so very much because of the price that is currently going on in the market is a fool's paradise. 

Of course, it is better to have assets in your hands than no assets at all - because at least at the end of the day, when need be, you have something to sell for cash.

My point is to discourage people from imagining how wild rich they are when in fact they are holding onto to something durable or tangible which carries some value in the future (before of their durability), of which we have no clue what it will be when we need to sell the asset.

It is for this reason that people with extra money need to work hard and pay attention to markets so that they can ensure that the assets that they are holding hold the value that they desire.

There is no guarantee to the value of their assets - because the value is dependent on market conditions.

This is the great disaster story about saving for retirement by entire populations. But that is another story.

Financial Market & The Economy

The financial market collapse has nothing to do with the economy.

The financial market collapses because there are no more greater fools coming after them.

Everybody is looking for a way out of the financial market without losing money.

They are all stuck with financial assets with prices so high that they are ridiculous. Everybody knows that but who is to blink first.

So there is no one to blink first. Everybody is looking for a common excuse to dump the market.

That excuse is the economy.

Everybody knows that the economy has been gone for several years now, ever since covid, ever since the Russia invasion of Ukraine, ever since the CCP cracks down on its own private sector and scare foreign investors.

Everybody knows that the economic problem will be covered up by a major war where sentiments are brewing now and threaten to blow up anytime soon.

The global economy is in trouble because all economies have reached the limits of their government debt financing and the limits of zero interest money supply expansion.

The impact of relentless money printing in the last decades, apart from stimulating the China economy, has been to create a real estate bubble as evidenced by ordinary working people being unable to afford basic housing in the home land. Real estate in capital cities around the world has been fed by corrupt money inevitable from excessive money printing.

The adjustment in the real economy that needs to be seen is in the real estate sector. This has been long in coming because banks are trying very hard to stall the adjustment. Banks are inundated with actual and potential bad loans in real estate for which they are probably inadequately covered by their provisions. The collapse of the real estate in major cities and the collapse of major banks are the next major things to look out for.

This reaction in the financial market is probably major -we do not know how much the adjustment will be this time. Stocks and all kinds of financial assets include cryptocurrencies have been way over inflated. The extent of the adjustment will depend on the amount of spare cash that investors still have to buy up the fallen financial assets. If there is little money floating around, then financial asset prices will be depressed. This may spend problems for banks if they have been funding financial assets all the while.

The real estate adjustment depends on the state of the economy. The real estate sector needs rental to support their mortgage repayments. If business prospects are bad, then rentals will be low and insufficient. Real estate prices will have to fall. Probably by a sharp margin as well.

Bankers have a lot to worry about.

Finally, the saviour of the human race will be the IT sector, the electronics, the digital and everything that has to do with electrical and electronics. The feeding frenzy before has been a new frontier of technology which has brought about a new way of living. Everybody now interfaces with an electronic device.

But technology is now so well developed and embedded in consumer goods such that there is no necessity by the average person to constantly change the rice cooker, the TV, the laptop, the handphone. We are quite happen with what we already have now, thank you. So ends consumer demand for electronic goods.

The last frontier seems to the electric vehicle. Well, for now, no.

I think the human race has developed technology so rapidly in the last three to four decades that it has exhausted the possibility for further enticement of the human greed and curiosity. We are quite happy with what we already have. Our children are quite happy with what we have given them. There is no need to make more babies.

The one last adjustment that is needed is to align the cost of real estate with the purchasing power of the average person. With the end of indiscriminate money printing, there is no more corrupt floating about. The price of real estate in prime locations will have to adjust downwards. How much depends the quality of new jobs being created and the salaries they pay.

The economy is taking a path of its own to adjust. It has very little to do with the current financial market adjustment. The chicken have come home to roost.

Global Markets: Correction, Reversal or Normalisation?

When the Bank of Japan raised its costs of funds from zero to 0.25%, stocks tumbled and the currency strengthened. What is happening?

This is not just about Japan with its thirty years of zero interest rates but also the differential in interest rates among currencies.

The US Fed raised the interest rate on its Fed funds from zero by a quarter of a percentage point in March 2022, to 4.50% by the end of 2022 to 5.50% today. This major increases were to stamp inflation which unfortunately did not quite work because higher prices came from supply side disruption to the supply chain during covid and subsequently the oil price increases as a result of the Russian attack on Ukraine.

The US rate increases have created problems for many countries which fear the impact of significantly higher local interest rates on their domestic borrowers who are mostly heavily invested in real estate as well as the stock market. As a result, most of these currencies suffered depreciation as savers opted for higher rates in the US dollar. This happens to the yen and the ringgit as well.

In Japan, its main problem had been deflation as a result of the asset bubble which burst in 1991 and real estate had deflated and had been unable to recover since. Borrowers were caught with multi-generational loans and these basically prevented any youngsters from borrowing anew to fund new activities while in the meantime diligent housewives continued to save. Japan pursued a zero interest rate since 1990 to try to persuade housewives to spend and reflate the economy. Perversely, the government was trying all means to create inflation in the economy but to no avail for a long time, until recently.

Tourism is now its tool for reviving the Japan economy which after covid has gained tremendous interest such as there is now an aversion to too much tourism. In the meantime, online trading of ordinary Japanese goods has also increased. While all these economic activities are good for creating jobs and profits in Japan, the currency continues to weaken despite the inflow of tourist money. They discovered that Japanese online trading has been too dependent on foreign logistical and payment systems which they have to pay significant fees on. Of course, underlying the Japanese financial story is the borrowing of zero interest yen from Japanese banks and investing those funds abroad, not only to earn higher interest rates or better profits from expanding markets (see the many new Japanese stores open in major cities in Southeast Asia), but also to benefit from the weakening yen.

In an apparent act of desperation to prevent the yen from a depreciating trend, the BOJ raised its interest rate from 0.1% to 0.25% on 31st July, 2024. This is an act against all global interest rate policies which is to lower interest rates as economies around the world as beginning to falter on account of political interference in private investor decisions which therefore entails a significant realignment of global investor strategies among global companies. (The horse the world has bet on has become unreliable.)

It is to be noted that, as of today, what the slight but contrarian interest rate increase by Japan has caused the yen to rise as (some) funds have been sold and repatriated back to yen. The currencies of some other countries have also strengthened, including the ringgit, in an apparent mimic to the yen.

Many commentators are arguing that this is because of the loss of zero interest rate on the yen, but it is only a 0.15 percentage point increase which is small. 

The significance of the (slight) increase in the Japanese interest rate is signal to where the global markets are. That the global markets have been too high for too long and there is now going to be a major adjustment. When this major adjustment happens, don't be the last one holding the baby. So the correct market behaviour is to sell first, and buy back later when prices have fallen enough. This is we see in the global markets today.

Which of course means that the market recovery can be equally quick but probably not to previous highs.

The markets have already known that the global economy is in trouble and they are playing US interest rates coming down. This game is still being played.

The reason for small currencies such as the ringgit to appreciate lately is because forex traders have also been playing on the depreciating trend of the currencies. They could be shorting the currencies and now they have to pull back and cover their positions. In doing so, the currencies strengthened more than necessary. Eventually, everything will fall back to fundamentals.

The economies in the world are in bad shape. Loans are drying up, regardless of whether cheap or expensive. This reduces liquidity. The money supply can be reduced by the decline in the velocity of circulation as less transactions are being made. Cash sits stale in the bank. If you have gold, there is no return and if the price of gold has dropped, then you have lost money. Of course, if you had bought gold earlier, just like every other assets, you are rich asset-wise. To spend you need cash.

The global markets are currently undergoing a quick correction, but they will before long continue as before. Interest-rate disparity among currencies are still there. Economies will continue to crumble. The prospects of war shines a light for economic recovery but what a lousy way to live and prosper (for some).

Cryptocurrency: Is It Money?

The only thing in cryptocurrency that is money is that it has currency in its name. 

Otherwise, it is just a computer generated digital product, just like any other digital products which are ephemeral i.e. can disappear when there is no electricity.

To be fair, cryptocurrency can be considered an asset because it carries a value. This value is determined by supply and demand. In this case, the supply is made limited by creating a process that requires a lot of energy to create. The demand is determined by marketing to the ignorant who have lots of cash but do not know where to put that cash.

The value of cryptocurrency like all other assets will rise when there is continued demand from surplus cash and its value will fall when there is a cash deficit which creates a need to sell the cryptocurrency for cash.

Cash is king because cash is the only real money. Money is any asset which is accepted, by convention or by law, to be the means of final settlement of debt by everybody in society.

The current argument that cash has lost and is losing its value because the government is printing lots of money. This is true.

But the situation will change when the government stops printing money. This is why, because of fiat money, there is a law which restricts the amount of money that the government can print, i.e., borrow.

It is not true that the government can simply print any amount that it likes. Money is a liability which is created on the back of assets, to be fair, paper assets such as government bonds. Once the government bonds are reduced, the amount of money in the system will be reduced as well. In the same way, once banks reduce their loans, there will be less money out there.

In reality, the main concern is not the reduction of the money supply but the reduction in the increase in the money supply. This is because we are talkin about acceleration or deceleration of the economy and hence the increase or decrease in the money supply.

A sustained increase in the money supply (through loan growth or increase in government debt) will generally accelerate growth of economic output along with increases in prices.

Output growth is generally driven by persistent inflation which everybody likes because they think they are making money in cash terms. A simple householder sitting in his little house generally feels wealthy when property prices go through the roof, thinking that it applies to his house but it is imaginary because he likes his house and he has only one house. Property speculators have been laughing till their teeth all fell off.

We have seen speculation bringing about an overproduction. Sky-high property prices have brought about an excessive number of property units. Every property speculator imagines that there are tenants for their many properties. There is indeed a high demand for housing but many people do not have enough money to rent a house. They make do with living in room, some shared even.

When there is a slowdown in the expansion of the money supply, there will be less extra cash to go around. 

The problem with speculation is that speculation does not slow down. Speculation either gets very frenzied or it simply fizzles out. The bubble simple bursts and speculation could not be found.

It is unfair for me to pick on cryptocurrency but it is a good example. There is now a popping of all the speculative bubbles on all assets, including sad to say the speculation in the value of degrees and diplomas.

Everything will simply boil down to confidence. Confidence is important - to be positive of the future is unknown. Especially when we are now in the period of panic and fear as the future doesn't look too good.

When asset prices come crashing down, and you know what are good assets, and you have cash, you should be sitting tight and getting ready to pick up some good assets at good prices.

The time is not now as it is still too early, because we can see the beginning of a major collapse.

Every up and down is an opportunity for investment. It depends on where you are positioned.

If you are in cryptocurrency or in gold, I won't know how you can buy up bargains in other assets.

Anyway, just to give you my thoughts on cryptocurrency and where it stands today in the sea of assets and economic adjustments.

Money & Wealth

In these days of retail price inflation, depreciation and falling asset prices, this may be a good time to ponder on the question of what is money and what is wealth?

The accumulation of wealth is the primary purpose in life of almost all human beings who are fearful of hunger and depravation tomorrow. It is this fear of the uncertain future that we are compelled, if we can, to save for the rainy day.

It doesn't matter how you save. You mostly start by saving cash under the pillow and deposits in the bank. You save from the surplus of your income after expenditure. If you don't have an income, then you cannot save. Instead, you may have to borrow to buy food - this is where the wisdom of saving for the rainy day comes in. If you spend more than your income, then you also have to borrow. Ideally, you spend within your budget. This is the bare bone economics of income and expenditure.

The key point is that when you have savings in the bank, and you do not need that cash immediately, then you could possibly invest it in earning assets - which basically can be anything that can earn you a return, if you know where to look.

Flat Economy

But spotting earning assets is not an easy task, in normal circumstances, i.e., when the economy is going flat. 

Since everybody has to have somewhere live, then residential property seems to be a good place to start. Instead of renting, you can buy your own house using a mortgage loan. Your house is an earning asset because you can save on rent and at the end of paying for the loan, the house is yours as an asset.

If you already have a house, you can also consider renting out your house and rent somewhere cheaper to stay instead, so that you can provide an income stream for yourself.

If you have lots of money, you can use your money to buy more houses than you can live and rent them out. Usually, under these circumstances, there is an increase in the supply of housing, so you can expect housing supply to exceed demand and therefore the rental would not be good enough to offset your mortgage repayment.

You can venture into stocks and shares. In a flat market, you have to know what you are doing. To buy well-managed companies in sunrise or global markets. In small economies, there are not many companies that can sustain their growth so you have to keep constant watch on company performances.

There are of course other financial assets such as government bonds, insurance products, etc., which are out there to tease out your savings from your bank account.

These are all very basic considerations in a normal but flat economy and market.

Booming Economy

In a booming economy, where the central bank follows a low-cost money policy and print money, you can expect money to be plentiful. This means (a) the banks are looking for good borrowers to lend money to; and (b) there will be asset inflation as borrowed money will be looking for assets to buy up.

It is a no brainer that in an economy when asset inflation exceeds the interest rate, one can borrow (if the bank would lend to you) and buy real estate. Your initial collateral would be your savings in the bank or the value of the house you already have (the bank willing to lend you an amount equivalent to the market value less your existing mortgage). 

What the bank is doing here is a very dangerous thing because it is using inflated value as a collateral to support new loans. Dangerous because (a) it escalates loans and asset value, and (b) everything collapses once the economy stops growing and asset prices stop rising. You will appreciate that (b) is where we are today in the world, and (a) was when every investment gurus were boosting how clever they were in going into heavy debt to buy real estate.

So in a rising economy when real estate and financial asset prices are also rising in what is called asset inflation fueled by increasing expansion in loans by banks (because their executives want to take super year-end bonuses), of course, the rationale thing is to get out of money (by dissaving and borrowing) and get into very clearly earning assets. Because this move is so very clear and obvious and no brainer that even grandmas can be masters, what we get is speculation in real estate and financial assets.

Speculation is based not on real value but expectations of future value. And future value is based on the state of the economy in the future. What happens in the future depends on what happens today. If today is young, tomorrow we grow strong and healthy. If today we are grown and mature, tomorrow we will grow old and slow down. For speculators, however, because they are speculators, the future is always better than today. The future better be better than today - or else, we will be in deep trouble.

Speculation is Not Economic Growth

Speculation is not economic growth. Speculation is on asset prices where economic growth is based on output expansion. Rising asset prices can trigger future output and usually with a delay of a few months or a few years. This goes for real estate, and it goes for agriculture (e.g., musang king). In other words, speculation sets the stage for overproduction in the future.

Why overproduction? In real estate, demand is fueled by bankers who lend money out to borrowers who dream of becoming wealthy without work. 

To sustain this model, there must be people who are willing to rent at the prices they ask for. Over time, with everybody buying real estate for themselves to stay because developers keep building new units, there will come a time there will be units which nobody want to rent. Because also bad location, not near rail transport, etc. Demand fall can also be triggered by fall of nominal income (salary cut) or fall in real income (petrol price increase).

Economic Growth is Productivity Gains

For the economy to sustain its growth on its own, the assets invested in must be able to generate a higher output in the future and price is sustained by increase in wages through productivity gains. This usually happens through technological advancement as well as managerial or workplace efficiency improvement.

Politics Sabotaging Economy

When the economy is doing well, is doing very well, this create economic power because businessmen now have money or rather assets (buildings or factories?) and access to banks. This challenges the power of politicians. When challenged, politicians have a tendency to flex their muscles by a stroke of the pen. With such threats of the political masters looming, businessmen and investors become nervous and fearful of the future, an uncertain future, they become petrified. The first thing they do is to stop investment. This means no new money into the economy. Second, they leave the country. This means they close shop and retrenched the workers.

Political Restructuring through Economic Consolidation

Political masters are willing to sabotage the economy when they realise the economy is heading in a direction that is not in favour to their political future. Either you die, or I die. So, you die first.

This is quite a dangerous game. First, the economy will go into a depression not only because investment slows down but there is disinvestment, i.e., less investment than before. Massive number of workers become unemployed. They become hungry and turn to the streets. There is social unrest to get the political masters to help them. But they can't help. So they want a change in government. Even if the government is changed, the economic situation would not change. Unless, investor confidence is restored. Which brings the economic structure back to square one, which is unfavourable to the political regime. So there must be a regime change.

Money & Wealth

Now, we know money is wealth, but wealth is not necessary money. The beauty of money is that it is liquid. In times of trouble, you can take money with you. (Those who feel less secure take gold bars.) You cannot carry your many condos with you. The value of your condos may have plunged, and no rental. You still owe the banks lots of money in mortgage loans.

In these troubled times, health is wealth. Peace and harmony is wealth. Peace of mind is wealth.

Money is a means to an easier life. Wealth is a burden for those who are old and have no strength to carry on.

There is no clear case for debt to be wealth. Debt is unearned wealth.

Even when you have physical assets and financial assets without debt, you cannot use them unless you have sold them and converted them to money. Cash allows you to buy food.

The way forward to life is to live a simple life, with basic needs. You will be happy.

Why ride on the backs of those who must struggle to pay rent so that you can have passive income? If you have not bought units which you cannot use, housing could be a lot cheaper and they could have been able to afford to buy their own little house.

In the end, all that is considered wealth is just a pile of bricks and steel beams.