Thursday, October 8, 2015

Portfolio Update #5

Mid-to-Long-term portfolio (In USD unless otherwise stated):
(changes to positions highlighted in bold since the last update)

-Long physical gold from $950
-Long physical silver from $14
-Long paper silver from $15
-Short US 30-year bond futures from $150 (COVERED)
-Long sugar from 16.50 cents (CLOSED)
-Long north korean gold coins 
-Long chinese yuan against sgd from SGD:RMB of 1:5
-Long RSX at $13.18
-Long GDX at $18.95
-Long SLV from $14.30
-Long RMB vs SGD at 5:1
-Long ruble vs USD at about 65:1 (or ruble vs SGD at about 45:1)
-Long GLD from $107.57
-Long SJB at $27.48
-Long North Korean silver coins at SG $60
-Long GDXJ at $19.88

Still Looking to:

-Long South Korean airlines (A play on North Korea opening up/collapsing)
-Long RJA (Agriculture has taken a beating in recent years, and given my long-term bullish view on agriculture, this could be a good chance to accumulate some. Well, let's wait till later in the year).

Tuesday, March 31, 2015

Portfolio Update #4

Mid-to-Long-term portfolio (In USD unless otherwise stated):

-Long physical gold from $950
-Long physical silver from $14
-Long paper silver from $15
-Short US 30-year bond futures from $150
-Long sugar from 16.50 cents
-Long north korean gold coins 
-Long chinese yuan against sgd from SGD:RMB of 1:5
-Long RSX at $13.18
-Long GDX at $18.95
-Long SLV at $15.25
-Long RMB vs SGD at 5:1
-Long ruble vs USD at about 65:1 (or ruble vs SGD at about 45:1)
-Long GLD at $111.20 
-Long SJB at $27.48
-Long North Korean silver coins at SG $60

Still Looking to:

-Long South Korean airlines (A play on North Korea opening up/collapsing)
-Long RJA (Agriculture has taken a beating in recent years, and given my long-term bullish view on agriculture, this could be a good chance to accumulate some. Well, let's wait till later in the year).

North Korean Silver coins

In line with the idea that North Korea will not be around for much longer, I went to the Singapore Coin Fair again with my Gf this year. It was supposed to start at 10.30pm last Friday. We arrived at 10am and registered ourselves. We found that the exhibition was already open at 9am for paid visitors. Those who pay $100 can enter the exhibition hall at 9am for each of the 3-day event. My hope of getting some silver coins dimmed.

Thankfully, we did not have to wait until 10.30am, because they allowed us in earlier. The North Korean booth was very crowded. It was more crowded than last year. Having no chance to squeeze in with the crowd, I took a photo of it from behind:



We watched as these people pass the coins around to each other and examine them. The lady in black and the guy with the black sling bag said that it costs SGD 60 per coin. That was a 100% mark-up on normal silver coins. I said that it is a little pricey, but the guy replied that the Chinese Pandas are even more expensive at $90. I didn't think that pandas are so expensive. I later confirmed with my friend that pandas can be bought for just a little over $30.

We waited for the crowd to disperse. There were a handful of silver coins left, and I got myself 5 of them:


I did not see any gold coins (well, I didn't look carefully). They've probably been snapped up earlier. There were still tons of copper coins though. Those were selling at $3 per coin (1 oz). I calculated that each 1 oz copper coin should probably cost just about $0.20-$0.30 on the market. $3 was a huge mark-up! Too huge for me.

I am pretty satisfied with my collection of 3 North Korean gold coins and 5 silver coins so far. I may return again next year for more. But who knows what the price will be by then. I expect gold prices to hit bottom sometime in the next 1 year or so. Coupled with the fact that demand for North Korean coins seem to be hot, I expect this North Korean company to mark up the prices of their coins even more next year.

Reason for drop in oil price

About 2 months ago, I did some research on global oil supply. I cannot remember if I've posted something about this. But in any case, I found that it was mainly the increased supply from the US that has caused the increase in the global supply of oil. Many people were going along with the media and blaming OPEC or Saudis for the oil glut. This is yet another classic case that one should always do his/her homework instead of simply relying on the media or hearsay.

Yesterday, Bloomberg came out with an article that confirmed what I've said back then:

http://www.bloomberg.com/news/articles/2015-03-30/these-charts-show-clearly-why-oil-prices-crashed

"The geopolitics of oil are complicated, but last year's oil crash isn't. There's one reason above all others for the drop in prices: The U.S. oil boom. Last year was the biggest spike in U.S. oil production since at least 1900, according to a new analysis by the Energy Department. 
U.S. production jumped by 1.2 million barrels per day in 2014, to 8.7 million barrels per day."

Russia aggression put in perspective

I've seen a lot of online comments about Russia's behaviour in Ukraine. I am not trying to defend the government's action. I'm trying to provide some other perspectives.

Here's a recent short discussion with a stranger on a Bloomberg article on Facebook. The article was on how the Russian central banker convinced Putin to allow the market to set the price for the rubles:

=====================================================================
Him: wonder if she can convince Putin to stop invade other countries

Me: US officials have been caught on tape saying they want to change the govt of ukraine. This probably took everyone by surprise, and that was probably the reason for russia's actions. I'm sure there're much more complications. But I just want to show that there're always another side to the story.

Him: Come on, Russia has been influencing Ukraine internal policies since Yanukovych took power. They are no saints on that either. They lose the political game, but that is not a reason for them to start a war.

Me: Nothing surprising about that. All big powers try to influence their neighbours. I am just showing you that there's more to the story than meets the eye, and from another perspective. We dont have complete info. So I am not siding with anyone but it seems that you already made up your mind against russia. Maybe they will start a war, and that will be bad. 

The russian govt are no saints. But what if they have tried to get rid of the govt of mexico. Will you support the US to start a war/invade mexico?
=====================================================================

That was the end of the discussion. Short and sweet!

Bank runs prior to the Fed

Courtesy of the Fed:

-The total losses borne by depositors in closed banks from 1865 through 1933 were at an annual rate of .21 percent of total deposits.
-Before the Great Depression, the general trend of these loss rates was downward.
-The loss rates were .19 percent in 1865-80, .12 percent in 1881-1900, .04 percent in 1901-20, and rose to a peak of .34 percent in 1921-33.
-Depositors’ losses on total deposits exceed .25 percent in 12 years: 1873, 1875-78, 1884, 1891, 1893 and 1930-33.
-The average loss rate in these 12 years is .78 percent of total deposits.

Not even a 1% loss in deposits prior to the creation of the Fed.

Back in 2008, people were howling that the end of the world is coming if we do not bail out those big banks.

Banks have been failing for as long as they have existed. It's not the end of the world if a bank fails. It is a healthy process. Prudent banks should be allowed to buy up the assets of the failed banks and gain market shares. Instead, what we've seen in 2008 was the bailout of failed banks and the punishment of prudent and sound banks. There were more than 7000 banks in the US prior to the crisis. It is no big deal to let a few of them fail.

People always tell me that more regulation is needed. But the banking industry is one of the most, if not the most, regulated industries. Piling on more regulations will just push the problems away to another area. The problems will resurface again, no doubt about that. The root problem was government guarantees and the back-door provided by the Fed. These had encouraged banks to take excessive risks. Trying to control this with more regulations is the classic case of "two wrongs don't make a right"! The best regulation is market regulation. If you mismanage your bank, you fail. Period. In the market, banks should be treated like any commercial enterprise. Greed has to be balanced with greed. Instead, they have special privileges. They do not have as much fear as other commercial entities.

Those bailed-out banks are bigger and more leveraged today. Collectively, they hold more than $2 trillion of US government debt. In the Fed's stress test of the banks, they did not consider a scenario whereby bond prices have a meaningful drop in prices. Is it any wonder that the banks passed the test?



Durable US economic growth?

"US economic growth may be mild, but it's also really durable"
https://sg.finance.yahoo.com/news/us-economic-growth-rate-stays-2-2-percent-123559891--finance.html

Absent from this article is the fact that the Fed did not have rounds and rounds and trillions of dollars of stimulus in the past, or anything comparable in scale. Up till now, people are still trying to justify the disappointing growth. It has been 7 years into this emergency mode now. And the market has gotten very used to it - always not a good thing in financial markets. What happens when the next problem hits? How do you get into an emergenci-er mode than this current 7-year emergency mode? It would be really interesting to see what happens to the market in the next 1-3 years.

Lee Kuan Yew

Singapore has lost its founding father on 23rd March 2015, 3.18am.  I have not studied his work in detail, so I do not have much to say. Even though Mr. Lee is being viewed as being oppressive by foreigners, foreign leaders nevertheless flew to Singapore to pay their respects to him. It makes me wonder if these foreign leaders really believed in democracy themselves. Even if they do, it still makes sense that they're paying respect to him as a nation-builder. It must not be easy to lead and build a nation.

Democracy has been over-hyped. Though a good system, and probably better than dictatorship, it has its flaws. There had been prosperous and powerful empires in the past that did not have democracy. I do not buy the idea that the population as a whole knows what is ultimately good for the nation. Democracy will ultimately degrade into deep divisions among the populace. The founding fathers of US studied Greek democracy and decided that it is unsustainable. That was why the US was created as a republic.

That said, nothing lasts forever. I do not know what the best system of governance is. If there is a great leader who truly wants to build a prosperous nation, as I've been increasingly convinced that Mr. Lee was doing, democracy may not be the best system. That said, we do not want a Kim Jong Il either.

While libertarians like myself may not agree with certain policies of Mr. Lee, I am inspired by his hard work and dedication. I always appreciate hard work. This is what I always try to instil in my students. Hard work may not necessarily lead to results, but there is no substitute for hard work.

In the spirit of motivating ourselves, I ask the question: He built a nation. What have we built?

Friday, March 20, 2015

Business lesson #5: Don't do it half-heartedly

coming up..

Business lesson #4: Know your product inside out

I went into tutoring after about a year working in 2 companies. I partnered with a student's mother to start a new venture. We imported diabetic-friendly rice from South Korea. I went along with the venture because it seems like I can learn a thing or two. Everything happened in a rush. We created business cards and printed several huge banners with the product information on it. But the resolution was so bad that the words on the banners were blurred and unreadable. We set up a booth in a trade exhibition in Singapore Expo. My girlfriend came to help. I felt bad in the days leading up to the exhibition, because I knew nuts about the product! But there was no turning back. Things happened very fast. I had wanted to discuss strategy with my partner but was afraid to do so. She had prior experiences selling products too, and I did not want to question her. On reflection, that was a bad mistake on my part. I had a few suggestions which could have really improved our chances had I been more determined to make them, rather than drop feeble hints now and then.

The supplier claimed that the rice was doing miracles to diabetics in Korea. They had anecdotal evidence in the form of a video, which we played in front of our booth. We had tried to get endorsements from doctors for our products, but failed. I had tried to understand the technical documents on the product that the supplier sent over, but couldn't understand it. It was too late to get a knowledgeable representative from Korea to help us, not that we had any chance of getting him even if we had the time. I tried my best to explain to visitors to our booth.

And then it hits. I was somewhat anticipating it. A man with his wife and son came to my booth and questioned me about the rice. I had nothing better to offer him other than to ask him to trust me. I referred him to the huge, unreadable banner in our booth in an effort to save the situation. But it just made matters worse. He yelled at me, saying that I should not be selling such stuff and telling me that his son has diabetes. Fortunately, he left without creating more commotion.

That was a really bad experience. Although we had some sales that day, one bad incident was enough to ruin everything. One bad incident was enough to expose your vulnerability - in my case, my lack of knowledge of my product. So, always be prepared. Know your product inside out. Not only will it help you in your sales, but it will also give you greater confidence and passion in selling.




Business lesson #3: Quality. Price. Reputation.

I had to repay my debt. I set up an eBay account with my good friend Ajan, and we sold watches and online gaming guidebooks, and those unsold aromatherapy products from my failed venture.

We visited some sort of a flea market in Bugis, bought tons of watches, and tried to sell them online. The watches were really cheap. We tried to strike a deal with the stall owner, but he could not lower the prices further. We marked up the price by at least 100%. It was dirt cheap. It was still cheap at our selling price. We managed to sell a few, but soon, we gave up. The watches were of really poor quality. Mine broke down after I've barely started wearing it (like maybe once or twice?). It barely sold. Cheap products do not necessarily sell! Looking for a quality, affordable supplier is probably one of the hardest things to do for a new venture. And this is probably what puts most people off from starting something new. Capital was always the excuse, but I doubt that this is the number one hindrance. At the back of our minds, surely most of us think that we need to have certain connections with businessmen and suppliers. And since most of us don't, we simply give up trying. Well, I would like to say that this is certainly not true at all, and my recent experience confirms it. But I will share it in another post.

The gaming guidebooks sold really well though. We sold guidebooks for 2 games - Runescape and MapleStory. I remember waking up each morning and checking my email in anticipation of sales notifications from eBay. Each email notification meant $3.99 in sales. It was so easy! There was virtually no work involved in selling digital books. I can't recall what happened to the guidebook business. It probably died out over time - either because everyone already has one, or because we did not update our guidebooks. The guidebooks were not created by us. We had no means of updating it or making it more exciting. We had great knowledge of Runescape. I was growing my virtual wealth in the game so fast through sheer hard work and dedication. But hey, it is always easier to do it in a virtual world. I always told myself that I can make it really far if I transfer that hard work and dedication over into the real world. In any case, those knowledge of Runescape was not translated into our own original guidebook. We were probably too late to the game. Creating a guidebook may take months, by which time all the market shares would have belonged to the incumbents. As for MapleStory, we had zero knowledge of it. So, no original guidebook for that for sure.

The aromatherapy products sold extremely well. I was out of stocks very fast. Ajan helped me. We tried to set up a website to circumvent the eBay fees, but our primitive knowledge of web-building got us nowhere. I had to sell the products through eBay in the end. Through this experience, I learnt a great deal about international shipping and postage, not that there is too much to learn. I got a feel of the costs and time involved in shipping - by sea or by air. I got a feel of what is allowed and not allowed to be shipped. I would wrap up the products nicely in a bubble wrap, purchase some small boxes from the post office, drop the products and thank-you notes in the boxes, and ship them out. I had buyers from US, Europe and some parts of Asia. I had people who wanted to order tons of it, I had people who kept asking me when I will have new stocks (of course, I was never going to get any new stocks).  My customers gave me glowing reviews. After graduation from my university, I was able to show these reviews to my interviewer cum boss in a small company. And I was hired.

Lessons learnt:
-There had to be a minimum standard in the quality of your product. The watches were never going to see daylight because they were really bad, even though their appearance was nice.
-Selling digital books are great. You create it once and you can sell unlimited quantities without incurring further costs other than electricity and transaction fees. But it is even greater if you can create your own content. Since I do a ton of research on investment and economics, I can probably create some contents myself and sell them. This is in the pipeline. A future project.
-Reputation is very important to me. My aromatherapy customers enjoyed the great product at reasonable prices and relatively fast shipping times. I answered all of their questions promptly and sincerely. I tried my best to deal with any discontent. If I remember correctly, I even sent a replacement product to an unhappy customer. If your reputation is good, customers will stick with you, and they will probably tolerate some rough patches that you might go through.


Business lesson #2: Raising Cash, and business strategy

When I was 10, I left Malaysia for Singapore to study. I focused on my studies and did very well. Money was always tight. I was always waiting for my mother to send me some cash. I know that it was tough for her financially, but I did not know the full extent of the problem till years later. I found out that my dad was in debt. A humongous debt. I had to do something to help. But what? At that time, starting a business seems like a way forward. I want to be a businessman, and I also want to help my dad.

My next venture: MLM. I joined a network-marketing company called Bel'Air. They sold aromatherapy products. The entry fees was really high. But the returns look really good as well (what did I expect? Those returns come from the really high entry fees from new members). I borrowed about SGD 20k from 15 people to give myself a head start in the venture (the more you invest, the greater the potential returns). In exchange, the company gave me several cartons of aromatherapy products. I had to start looking for new members. You see, we don't really go out and sell these products one by one. We look for what the company called "franchisees". The company said that each of us were selling franchises, not individual products. That was how the money rolled in so fast!

The leaders in the company often used me as an example of a "driven individual", someone who raised so much money even at such a young age (18, I think?). I did not think that much of myself, because I know there are younger people who have done even more than me in other businesses. I will forever be grateful to the individuals who lent me that money. The highest sum was $5k, and the lowest was $90. I have a former teacher taking out money from his retirement funds to lend it to me. I have another teacher who told me that I do not have to repay her the money. She wanted me to learn. What absolutely great, kind and generous teachers. I am forever indebted to them. I have a hostel owner lending me money, when I had barely spoken to her before. I have a friend who lent me money even though I was never close to him. I have a friend who lent me money even though he doesn't have much. I have my brother reveal his stash of money hidden in a suitcase in a cupboard in his room. I never knew he managed to accumulate so much cash so secretly!

Business was hard. I can write a ton about it but I shall not. About 3 to 4 months into it, I gave up. I could see that the company had abandoned its principles, just within the short span of a month or two after I joined. Initially, the way we acquired a new franchisee was to do prospecting patiently. Set up a meeting, have a good chat, exchange books and CDs (these are carrots, so we have an excuse to meet the individual again), talk about our business ambitions, and the likes. The franchisee would slowly learn more and more about our company, and we would slowly coax him or her in.

But everything changed once we heard about how well the company was doing in Taiwan and China. Franchisees seemingly become rich overnight. They would prospect multiple individuals, suck in those who're ambitious, and discard the rest. Turn over a stone, find a gem on its bottom, and shove it into the pocket. Find nothing underneath, and simply toss the stone away. It was really fast and furious. Over here in Singapore, the leaders galvanised the entire team, giving everyone great energy to copy this tactic. It worked. It was euphoric.

I saw the problem with this strategy right away. Taiwan's and China's populations are huge compared to Singapore's. We do not have the luxury to pursue the same strategy! We were made to list out EVERY single person we have come across in life. And contact EVERY single one of them immediately, and set appointments with EVERY single one of them right away. I thought all of us would soon run out of prospects. I thought it was unsustainable. I remembered staring at my sketchbook on which I had drawn up a tree of prospects grouped accordingly to where I got to know them. I stared at it all the time. Most of them are not people whom I am close to. How can I use this aggressive strategy on them? I like to pull people in, not push them in.

Those of us who couldn't keep up with the rest of the team felt enormous pressure. I was one of them. I did not like this new tactic at all. I wanted to bring in new prospects, build relationships patiently, and really make them see the merits of the business before making an investment. I brought in 2 friends this way, within a month or two. This new tactic was nothing like the old model of patient prospecting and build-up. As days and weeks go by, I got drained. The distance between the headquarters and my dorm did not help. The late nights did not help. It was interfering with my studies (as if I bothered about studying). I gave up after having made back about $8k. It was a loss of $12k for me, plus tons of time and money spent on food and travel expenses. Soon after, those 2 friends of mine quit too. And needless to say, the company disintegrated months later.

I learnt 3 things from this experience:
-The first is that raising cash is not as difficult as most people think. My sincerity helped me raise cash from relatives, teachers and a hostel boss. But sincerity alone is not going to cut it when I am dealing with serious investors. I've learnt a lot about business-pitching through the TV show Shark Tank. And I would encourage budding entrepreneurs to view those shows too. Raising cash gets easier the more you know how to do it. What's more, with recent deregulation of crowd-funding (seriously, what's with all these regulations?), it has never been easier. Of course, it does not mean that anyone will fund your project. You have to do some groundwork, which may take months. One just need to learn the ropes.
-The second thing I learnt is that a business should not be blinded by the short-term profits like the MLM company. Think long-term. The business has to grow really fast initially, but it has to be sustainable in the long-run too. Bel'air made the mistake of not thinking long-term. If you chuck away 9 people after prospecting 10 people, very soon you will run out of people to prospect, especially in a small country like Singapore, with a population of just a few million! On the other hand, if a business went on too slowly, market shares will be lost. MLM was really hot back then. Even so, I believe that a business with really strong fundamentals will survive. So, one really has to strike a good balance. Build up a company with strong foundations. Bel'air's foundation was shaky to begin with, and I should have realised it earlier. Their products were too highly-priced. They wanted to use the "sell a franchise right" concept, instead of "sell a product" concept. These 2 factors were what made them money. But what happens when consumers came to their senses? These highly-priced products are going to work against the company! And make no mistake, there weren't really consumers in the traditional sense for Bel'air products. The consumers were the franchisees themselves! I remember being told that. This shaky foundation, coupled with the copy-Taiwan and copy-China strategy ensured the downfall of the company.
-How to do sales and project yourself. Those sales trainings were really useful! There were some intimidating incidents for an 18 year old. I've been shamed and embarrassed in front of a large crowd. But I learnt so much from it. The experience was invaluable.



Business lesson #1: Confidence building

I had not intended this blog to be on anything other than investment and economic-related issues. But I thought I'll put this down somewhere. It serves as a reminder to myself to work hard and also, it'll be interesting to re-read my own posts/thoughts a few years down the road.

I had always been interested in running a business. When I was young, maybe around 7-10 years old if my memory serves me correctly, I remember playing the "business game" with my 2 brothers. Back in my home town in Muar, we live in our grandmother's house - a big house. We each chose our own corners of the house and set up our business stall. We used small tables and chairs as our stalls. We wrote our company names on a paper and propped it up in front of our tables. My company name was in Malay: "Syarikat Jin". It means something like Jin Pte. Ltd. in English. We fashioned out of cardboards and papers the sort of games that you see in fun-fairs. We would visit each other's stalls to try out the games. We used coins that we find lying around the house as money. We used marbles and erasers to play the games. We gave each other small rewards (erasers, as far as I can remember) if we beat the games.

Naturally, as the eldest brother, I always end up with the most money. If I remember correctly, I would encourage my brothers to visit my stall often, while not repaying that in kind.

This small activity further increased my appetite and confidence for doing business. I wanted to make real money, not subtly making my brothers hand money over to me. Over the years, I've learnt that confidence is what really matters. And confidence is best built up when one was young. Imagine the confidence that you will have if you had gone selling products door to door when you were still a kid! I never had that experience. But I always imagined it as though I had it. Even if you fake it, it will still work. I came across a phrase recently, and that is: Fake It Till You Make It!

Thursday, March 19, 2015

Portfolio Update 3

I've added a little more gold and the SJB inverse ETF into my portfolio.

Mid-to-Long-term portfolio (In USD):

-Long physical gold from $950
-Long physical silver from $14
-Long paper silver from $15
-Short US 30-year bond futures from $150
-Long sugar from 16.50 cents
-Long north korean gold coins 
-Long chinese yuan against sgd from SGD:RMB of 1:5
-Long RSX at $13.18
-Long GDX at $18.95
-Long SLV at $15.25
-Long RMB vs SGD at 5:1
-Long ruble vs USD at about 65:1 (or ruble vs SGD at about 45:1)
-Long GLD at $111.20 (Well, I do anticipate gold going down further, even below $1000. But I can't help myself. The long-term fundamentals for gold are too much to resist)
-Long SJB at $27.48 (A play on shorting US junk corporate bonds. Let's see how this plays out in the next 1-3 years)

Still Looking to:

-Long north korean silver coins (A play on North Korea opening up/collapsing)
-Long South Korean airlines (A play on North Korea opening up/collapsing)
-Long RJA (Agriculture has taken a beating in recent years, and given my long-term bullish view on agriculture, this could be a good chance to accumulate some. Well, let's wait till later in the year).

A few months of bad US data

US data has been largely below expectations for the past few months, ever since the end of QE3. Maybe economists will start to REALLY lower expectations and we can get some "above expectations" data in the weeks/months ahead.

The only "bright" spot in the data has been the payrolls data. I've watched analysts conclude that the economy is improving based on this data alone, and they're just waiting for the rest of the bad data (housing, manufacturing, sales, etc.) to catch up with the good payrolls data. In their mind, the 
payrolls data is correct, and the rest of the bad data are outliers. 

There are several factors that pad the payrolls data. I am not an expert in this data because I've not studied it deeply, but here's what I know:
1. The government counts the underemployed - those working part-time or having low-quality jobs relative to their qualifications - as full-time jobs.
2. A person having 2 or more jobs is not counted as just 1 job. Eg. A person having 2 part-time jobs adds 2 jobs to the jobs data.
3. BLS has not subtracted the jobs lost in the energy sector sufficiently. According to them, only a handful of people lost jobs in the sector, whereas other independent research organisations reported much higher jobs losses.
4. BLS uses the birth-death model and make assumptions about job gains/losses. The numbers may be adjusted downwards months later, but by that time, the market is probably not paying as much attention to it.


Doesn't it make more sense that all the bad data are correct, and that the payrolls data is an outlier?

Market is surprised?

Right on cue at 2pm New York time. Market reaction to the fomc announcement. Looks like the market is surprised. They'll be in for more surprises in the months ahead smile emoticon

Fed finally drops the word "patience"

http://www.bloomberg.com/news/articles/2015-03-18/fed-drops-patient-stance-opening-door-to-june-rate-increase

They dropped the word 'patience' because they've been driven into a corner... by themselves. They may raise rates a little just to maintain some credibility. Will they do that, when the economy is almost in recession territory? Doesn't matter. Watch out for QE4 (or whatever colourful terms they wish to use to name it). That's the only tool they have, and they'll use it even though this tool has never worked in the long run. It is about time that the people who criticised Fed QE policies right from its inception gain some recognition. And no, not the Krugmans who criticised QEs for not being big enough, but the Austrians who criticised the QEs' implementation in the first place. Economic lift-off? Escape velocity? No such result after 6 years. Meanwhile the imbalances in the economy have grown to gigantic proportions.

Friday, March 6, 2015

US crisis soon? Shorting corporate/government bonds. Plus some reflections.

As I've mentioned last year, the US experiences a recession every 5-6 years on average in the 20th and 21st century. The last crisis was in 2008 and supposedly ended soon after that. If history is of any indication, the US should be overdue for a recession soon. I do not know in what form the crisis will take shape. Maybe it will be carnage in the corporate bond market. Maybe it will be a loss of confidence in the Fed. Maybe it will be a loss of confidence in the economy. Maybe it will be a crisis in the financial sector again, where banks have accumulated more than $2 trillion of bonds - ticking-time bombs.

Whatever it is, my game plan is to short US corporate bonds. I am currently looking to long the SJB, which is an inverse ETF based on the HYG, another ETF that tracks US junk corporate bonds. SJB moves in the opposite direction to HYG. If I am right, the US junk bond sector should be one of the most - if not the most - vulnerable part of the financial market. 6 years of zero interest rates have pushed speculators looking for yields. They are attracted to these questionable bonds because of the high yields. HYG holds about 1020 junk corporate bonds. My initial research has provided evidence that there is too much hot air in this area. I should start shorting these bonds (by buying an inverse ETF) pretty soon - possibly within this month or the next - once I've done enough research. I should be holding this ETF for a few years, or at least until the bubble bursts.

What about US government bond? Amusingly, this bubble has stayed inflated for quite some time. It has been built up over 30 years. It is crazy that in recent years, people will lend money to the US government for 1-3 decades for a tiny amount of interest, when the Fed is printing money like crazy and the USD is losing value against real goods so fast. I've shorted the US 30-year bonds around March/April 2013 (http://silvernjin.blogspot.sg/2013/03/sell-us-long-term-bonds.html). As luck would have it, I shorted right at the top. Till today, even though it has rallied somewhat, it is still some percentage points below where I first shorted it. I've covered this particular position some time last year. It was quite apparent that the market has not come around to perceiving US government bonds as being dangerous. In fact, people are still throwing the word "risk-free" and "safest asset" around with regards to these bonds.

My guess is that people will continue to have this perception for some time to come. So what I will do is to wait for the next crisis to hit the US. The US government bonds will probably rally as investors flock to "safety". These bonds will probably stay high for a number of months as the crisis unfolds, during which I plan to accumulate a sizeable amount of short positions on them.

Exciting times lies ahead for myself. This will not be the case for a lot of market participants because they will never see this coming. They have learnt nothing much from history. Or as Jim Rogers says, right now there is a bunch of fresh college graduates who think that the situation now is normal. But it is not. It is artificial. A huge bubble pumped up by years of profligate spending and money printing. These policies never worked in history. They always give a temporary short-term boost to the financial markets, while the underlying economy rots. The most unfortunate part of this debacle is that the middle class and the poor in America lose out. This is also the case for most parts of the world.

I have tried in the past few years to bring this to people's attention. I knew I am not going to change things, which is why I started this as an informal blog and had no intention to show this to the world other than the people around me. Not many people will listen. This blog is just an avenue to put down my thoughts. I have nothing against people who do not listen. What I am unhappy with are those investors and traders whom I've argued against over the years (and I've done a ton of arguments. Sometimes an argument on youtube runs to 150 comments, for example), who have advanced the flawed theories that the media feeds us. It is a detriment to society and possibly the people around them. People who trusted them. It is fine if it is an honest mistake. But what irks me is their stubbornness to ideas that they've never heard before. it is very hard to change their way of thinking. It is hard to show them that these economic policies will prove to be disastrous. It is hard to show them that there isn't only one way to invest. A lot of people I've argued with think only in terms of weeks and months ahead in terms of their trading, which is fine. But it becomes a problem when they then apply their own ideas (about how trading/investing ought to be done) onto serious, long-term investors like myself. And worst of all - and this is always the case - my arguments against them don't last long, because they always resort to personal insults and name-callings. In truth, they have very little material to argue against me. I stick to making proper arguments though. It always works. They will disappear from the comments section after a while.

I've once been guilty of putting down short-term trading too. But I learnt fast and changed tack quickly. I accept that trading can make (and lose) one tons of money in the short-term, but whether most (not all) people can sustain a good run for the long-term or even the medium term remains very questionable. I myself am looking to set up an "opportunity fund" to be used for short-term trading (or rather, speculation for me) - although I suspect that the way I will trade will be very different from others. We will see whether that works out for me.

My exasperation with people not being open-minded to these ideas probably made me more aggressive in my arguments, and increasingly, my style of argument puts people very much on the defensive, which makes them even more resistant to receiving new ideas. I've learnt a lot from Jim Rogers in the way he presents himself and his case. Maybe age has made him more mellow, for I am sure that he was just as "hot-headed" when he was younger. But what a fabulously smart investor. I have a ton of respect for him.

In any case, I've long ago decided that I will just enjoy myself arguing with people as I do my research and wait for my investments to come to fruition. It has been a very fine journey, and I have no doubt that it will get way more exciting in the years to come!

Thursday, March 5, 2015

Thoughts on North Korea

The more I look into the changes occurring in North Korea in the past few years, the more exciting it looks. A lot of people on the internet are criticising the North Korean leader. But here's the problem. They make too many assumptions, as usual. They assume that the young leader is like his predecessors. They assume that he is evil and out of his mind. He is fat, dumb and is the son of a dictator.

He is the son of a dictator. But that does not make him the same as his father. I will list out some changes I am seeing in the country. But this is in no way my endorsement of the leader. I just LOVE to point out things that people miss. Smash their expectations and assumptions. It is fine to be ignorant of a subject. I am ignorant on things like sewing and golf too. But it is NOT fine to not question your assumptions. To not always look at BOTH sides of the argument. To not always look for other perspectives. It is fine to be ignorant about North Korea, but it is not fine to make assumptions about it. We know all about the negative stuff about North Korea, so I shall not mention them. I will point out other positive things that are not obvious. Ok, so here goes. I will summarise what I've found out from various sources. I may miss some things. There are just so many things I've learnt and I am trying to recall them off the cuff:

-The young leader grew up wanting to improve the lives of his people.
-He wanted to emulate Deng Xiaoping.
-He studied in Switzerland, studied western culture and democracy.
-Like Deng Xiaoping, he has loosened control on agriculture and created special economic zones. One of the first thing China did in agriculture was to lift controls on watermelon produce. Prices shot up right away, but this spurred enterprising farmers to produce more watermelon. The price fell and watermelon flooded the market. In North Korea, Kim Jong Un is allowing farmers to keep more of their produces, allowing them to sell them in the market.
-He has given managers more flexibility to control production, purchases and sales, wages, and the firing/hiring of workers. This is a big change in a communist state.
-There is a huge underground economy in the country that started in his father's era, and ever since he took office, he has left it untouched. Some estimates put this black market economy to be as large as 50% of the entire North Korean economy.
-There are markets with hundreds of stalls and thousands of visitors. You have sellers peddling their produces and wares, and buyers making bargains.
-There have been international trade shows in North Korea, and international marathons in North Korea.
-The leader is encouraging more tourists to visit the country, in part because the government needs more foreign currencies.
-Technically, foreign currencies are not allowed to be used in the country, but the government allows it to be used in some special economic zones.
-The Russians and Chinese are pouring into the country. The Chinese want their resources. The Russians are building railways and ports. North Korea has the northern-most ice-free port in Asia. This port will probably become very important in the near future. The Artic ice has been melting and shrinking in the past decade or two, and more and more ships are traversing it to get from Europe to Asia. It cuts down shipping time by a tremendous amount compared to if they were to go through the Malacca Straits.
-The leader is trying to bring technology into the country. Bring internet into the country. Internet is already allowed in some special economic zones.

Could the young leader have done more? Definitely. But one also has to consider the fact that there is politics involved. As a leader he must be concerned about his own life as well. He has to placate the powerful military. He has to make sure there is no peasant uprising against him. He has to make sure that he does not tarnish his predecessors' reputations. He has to get allies in politics. He has to do all these while being only in his late 20s.

Could the world have done more to open up North Korea? Definitely. For instance, what are the US and South Korea doing with their military drills each year? They know that this has always drawn a strong reaction from the north. Do they really need these drills after having done it for decades?

Could the media have done more? Most definitely. How much of the information shown here does one observe in the mainstream media? Almost ZERO. And unfortunately that is the place where most people get their information from, and make assumptions based on that. To be fair, there is some coverage recently about the "Choco Pie" phenomenon in North Korea. Choco pie originated from the South, and made its way into the Kaesong Industrial Zone, a joint project between the North and the South. The snack is rewarded to North Korean workers. These snacks fetch a high value in the black market, and enterprising workers have collected and snuck them out of the industrial zone to sell them in the market. The media did cover this story last year. But they were a few years late. Other than that, I don't see much coming from the media other than negative things. And as a long-term investor, this is great for me. I love to see things earlier than the market. But it frustrates me to read comments on the internet that are full of assumptions.

What's next? It looks like the young leader has been consolidating his power well. His generals have lived in Moscow and Beijing in the past. They too, knew what is going on in the outside world. They see the differences between other nations and theirs. They want a better standard of living. The leader is definitely trying to reform the economy, and he has some support from his close aides. Actions speak louder than words. Will he succeed? There are interest groups that don't want to see this happen. They want to protect their luxurious way of life. So it remains to be seen whether he succeeds or not.

But what excites me is the black market. As the great investor Jim Roger says, the black market provides a lot of information about the state of a country. As I've mentioned earlier, some estimates put this market at as high as 50% of the overall economy. As people get exposed to profits and better lives, they will demand for more. There will be more murmurs of unrest in the society. There had already been unrest in the society under the father's reign. Reportedly, there were a few assassination attempts on him. He had also made people really angry when he tried to control the black market through currency controls. People literally lost their life savings overnight. I even read about protests in a university, and about people creating demeaning graffiti against that leader.

Last year, I started placing my bet on the direction that the country will go. I bought some North Korean gold coins. I figure that North Korea will open up further economically. I figure that the two Koreans will finally unite, and these gold coins will become more valuable as a collectors' item. I am also looking to buy South Korean or Chinese companies that will benefit from this. South Korean airlines come to my mind, for example. Reunification seems almost impossible if we were to judge from the media's reports. Maybe I will be wrong. Maybe not. Who knows. We'll see.

The reunification of West and East Germany seems like a distant memory. But I will bet that one will be quite surprised when he/she learns that it happened as recent as 1990. As the East opens up its borders, more and more East Germans poured into the West. Similar things are happening in the Korean peninsula now. The East Germans saw that they had been living under a lie, that their neighbours were way more prosperous than they were. They admired the shiny Mercedes and BMWs driven by the West Germans into the territory. The North Koreans are getting more informed about the outside world as time goes on. They have an increasing awareness of how rich their neighbours are. Some are repulsed by the differences in values and moralities (for example, when North Koreans watch foreign movies, they are shocked by the use of guns and the seemingly lawlessness in foreign lands - in contrast to their relatively crime-free society). However, I think that the rising tide of expectations for better lives will prove too hard to stop.

If and when the Koreans finally unite, it will be one of the greatest economic stories of our time. The North has a cheap and relatively educated labour. The South has managerial experience and capital. Many analysts say that reunification will cost the South tons of money. Maybe that is true. But unlike the unification of the Germans, the North Koreans have already attracted a lot of investments from other nations. That will mitigate the costs for sure. I look forward to that day, both for the betterment of humanity and for my investment.





Long-term vs short-term investing, and football

In investing, long-term predictions can be made with more certainty than short-term ones. It is like football. I see a team with a great manager, players and billionaire backing the club, so I can confidently predict that this team will be in the top 3 some time in the next 5 seasons. It is much harder to predict which game the team will win in a particular season or which players will score in a particular game. But then there's no market for such long-term betting in football. Maybe it should be created. Maybe it will make some fans think longer-term. Maybe it will make them reconsider their assumptions and expectations. Each time after a "poor" game (by the fans' definitions), I see lots of fans suddenly become pro managers. Blaming the players, blaming the formation, blaming the manager's tactics etc. Although they have a right to do that for sure. It's a free world. But when everyone is thinking the same way, someone is definitely not thinking.

Friday, February 20, 2015

Portfolio Update 2

Mid-to-Long-term portfolio (In USD):

-Long physical gold from $950
-Long physical silver from $14
-Long paper silver from $15
-Short US 30-year bond futures from $150
-Long sugar from 16.50 cents
-Long north korean gold coins 
-Long chinese yuan against sgd from SGD:RMB of 1:5
-Long RSX at $13.18
-Long GDX at $18.95
-Long SLV at $15.25
-Long RMB vs SGD at 5:1
-Long ruble vs USD at about 65:1 (or ruble vs SGD at about 45:1)

Looking to:

-Long north korean silver coins (A play on North Korea opening up/collapsing)
-Short US corporate bonds 
-Long South Korean airlines (A play on North Korea opening up/collapsing)
-Long RJA

Thursday, January 22, 2015

QE4

Many analysts are going to be surprised this year or early next year when the Fed announces QE4.
All the previous inflationary policies did not work, as predicted. If it fails, try the same thing again. And that is what the Fed is going to do. But for now, the market believes that QE3 worked. They will be in for a shock.
When that happens, will China do a Switzerland? Or continue to bleed their citizen's wealth propping up the dollar?

In the past few years, analysts say that if China were to dump the dollar, they will lose big time, so they have no choice but to keep buying US bonds. Well, the former is somewhat true, but the latter is false. Sure, they will lose out on their existing holdings. They made a bad bet. And they know it. It is probably done to gain political influence and friendship, although the citizens have to foot the bill. But will they go on buying US debt indefinitely? Not in my opinion. They may lose money if they stop buying, but they will lose even more money if they continue buying. So which is better? In the past 22 months, their treasury holdings have already tapered off and started dropping. Whether this will continue to be a trend remains to be seen.

With China out of the picture for now, Japan the Fed, and, mysteriously, Belgium, have been soaking up all these US bonds. No one can predict how long this will go on. But pretty soon these bond holders have to start cutting their losses. Treasuries have had over 30 years of bull run. It had a 30-year bear run before that. The next 5 years will be truly exhilarating in the financial markets. But my thoughts are with the hundreds of millions or billions of innocent citizens across the globe who have been footing and will continue to foot the bill.
 
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