One phone to rule all; Fintech, the healthy disruptors of forex


Software rules: Less than 20 of the iPhone comprises hardware and labour costs. The real profit is in software, which is all about knowledge and mindsets. – Bloomberg

WHO dominates the phone dominates the Internet. The whole world of information is now available in your hand, replacing your own mind as a memory base for instant decision-making.

The reason why traditional bank shares are dropping like a stone is that mobile phone companies and financial technology (FinTech) platforms “get it”. Banks and conventional financial institutions are stuck with so much legacy hardware (branches and outdated mainframes) and complex regulation that their CEOs feel beseiged by bad news – cyberattacks, privacy leakages (like the recent Panama leak), capital requirements and huge fines.

No wonder top bank talent is leaving the industry. In Silicon Valley they get fat bonuses to become “cool” without regulations. Regulated bank CEOs are held personally responsible for everything that goes on in their bank, having to deal with soul-destroying staff and expenditure cuts, on top of their own pay cuts.

I was at the Singapore Forum this month moderating a panel on FinTech when the Alibaba strategist mentioned that the current battle for market share is all about “mindset and handset”. The mindset of the Internet age is that you do not need to own any assets – you simply share or rent them from those who have excess capacity. The mobile handset is where most of the world’s population is moving towards doing business, from dating to buying a house, phone, using your fingerprint and retina as digital signature.

Finance today is an information business and FinTech (see below) can deliver payment services at 1-2 cents per transaction compared with US$10-US$12 per paper-based payment. Increasingly, we spend more on apps and software than on the actual hardware.

Did you know that the fastest adopters of technology in the world are porn, gambling and politics, in that order?

The financial consultants Oliver Wyman have come up with a major report on “Modular Finance”, which argues that technology has transformed finance into modular parts – modular supply (provision of financial services by specialists); modular demand (buying new services from such specialists).

Oliver Wyman’s report begins with a cartoon about a customer buying a house, arranging a mortgage and insurance, selling stocks and wealth products for the downpayment and paying for all fees through a single mobile phone. Equipped with the latest encryption, digital signatures and right apps, the mobile phone has empowered the customer to everything what used to take several visits and weeks to the bank, the lawyer, real estate agent and even land registry to complete the transaction.

In short, the game of finance is being fought by one super-bank to rule them all (Goldmans?) or one phone to rule them all.

The global supermarket model (one brand to rule them all) is having a serious re-think about being labelled G-SIFIs (global systemically important financial regulations), requiring special regulatory attention and additional capital and liquidity requirements. Increasingly, these universal banks do not need to own and supply all services in-house – they simply outsource the back-office or even key services to trusted specialists.

On the other hand, FinTech aims to change our lifestyles through different types of technology. First, frictionless and seamless inter-operability integrates businesses like logistics with payments, such as Alibaba, making it easier to buy, pay and deliver in one pass.

Second, Big Data analytics, which Amazon uses suggest to you what to buy next and understand how customers are changing. Third, Blockchain and Distributed Ledger technology, which makes systems more secure. Fourth, artificial intelligence, such as robo-advisers on investments.

Fifth, data secrecy and unique identity codes that ensures privacy and confidentiality.

FinTech platforms have less staff, less legacy assets, less regulation and more flexible mindsets. These barbarians at the gate are only stopped by regulations that currently protect the banking franchise. This is not to say that they don’t have defects, such as lack of attention to anti-money laundering, terrorist funding and cyberattacks. When they reach super-scale, they are also Too Big to Fail.

The rapid evolution of FinTech means that Asia now has the money and the technology to transform our antiquated financial systems into the 21st century.

The Asian population is young, tech-savvy, mobile and willing to experiment with new services and equipment, which we are creating in Asia. The good news is that if our young startups get it right, the world is their market. The bad news is that if our regulatory and government support services don’t allow our startups to compete, our markets and jobs will be someone else’s lunch.

What is holding back this transformation to FinTech Asia is still mindsets. Look at how Jakarta taxi drivers are protesting against Uber. Regional banks are expanding their footprints by buying the franchises of retreating European and American banks in investment and private banking. But they and their regulators have not thought through how to use FinTech to cut back their legacy systems, many of which are obsolete and operating under-scale, because many regulators still insist on each bank owning and running their own hardware and branches. To be fair, not all regulators think that way.

Barriers to FinTech are sometimes regulatory mindsets. Asian regulators are more willing to accept the entry of financial institutions from outside the region than from their neighbours. Without regulatory concurrence, many banks and financial institutions do not dare to experiment with new technology.

We now have Asian customers moving to global service providers like Apple, Google and Amazon, if Asian financial service providers do not get their act together. Compe-tition is good – look at how Sri Lanka is negotiating with Google to provide balloon-suspended cheap high-speed wifi coverage.

Asian bankers and regulators need to think hard about what Asian customers really want to achieve global scale in terms of efficiency, stability and trust.

FinTech and mobile handsets are not the solution to all our problems, but they will change how the problems are resolved. The real problem is our mindset. Less than 20% of the iPhone comprises hardware and labour costs. The real profit is in software, which is all about knowledge and mindsets.

That belongs to the realm of politics and education, which is another story.

Andrew Sheng writes on global issues from an Asian perspective.

Image for the news result

Fintech, the healthy disruptors of forex

SINCE the global financial crisis of 2008-2009, investment banks have spent much of their time and energy on regulatory compliance, leaving them “on the back foot” innovation wise.

Faced with growing regulatory demands in recent years, investment in new technology has had to take a back seat. This does not come as a surprise given the lack of deals and flows as well as the broad-based decline in commodity prices. That little space innovation wise has been quickly filled by fintech firms.

There are traditional fintech firms that act as ‘facilitators’ (larger incumbent technology firms supporting the financial services sector) and there is emergent fintech firms who are “disruptors” (small, innovative firms disintermediating incumbent financial services firms with new technology).

The fintech space can be further broken down to four major sectors – payments, software, data and analytics and platforms.

In the foreign exchange market environment, a typical trading would include sourcing for the best price either via electronically or via the voice broker.

In Malaysia’s financial market landscape of foreign exchange trading, the wholesale price or in other words interbank market is dominated by investment banks facilitated by money brokers who source the best available price to match foreign exchange trades.

With the wholesale market dominated by firms with deep pockets and ample liquidity, customers are subject to a spread cost, whereby prices they receive naturally takes into account a spread from the screens and a spread from the interbank price as well as a spread that is subject to the credit profile of the customer.

Global fintech firms however are altering this process or at least are gradually making inroads.

These firms provide a platform that offers a comprehensive foreign exchange solutions, including live mid-market exchange rates updated in real-time, customised foreign exchange rate alerts, a fully automated transaction information dashboard, multi-user and multi-subsidiary control panel as well as on-demand forex reports.

The best part is, these firms charge a flat fee of which is detailed before each currency trade with absolutely no additional or hidden fees.

Until recently, SMEs have had little choice in terms of where to go, other than to the banks, but now it seems a different foreign exchange model is emerging in the fintech sector, giving banks a run for their money.

The crux of these business models by fintech firms in the foreign exchange business is service via the use of technology.

The automation of the process, eliminates the middlemen and therefore reducing cost, fintech has enabled companies to be more transparent with their pricing.

In the case of Malaysia, SME’s play a vital role in Malaysia’s economy, with foreign exchange risks increasingly being a volatile variable in their cost structure.

These form of fintech solutions are likely to witness exponential growth, but the cost would be, a gradual erosion of SMEs foreign exchange business that are currently held by our local investment banks.

Fintech firms’ foreign exchange model broadly encompasses four major steps, namely, the SME firm carries out their foreign exchange transaction by selecting the currency, the amount, delivery date and beneficiary account and confirm the exchange rate.

Once this is done, the next step is, the SME firm sends the fund to the fintech firm whereby the fund is segregated and held in a local bank.

Bear in mind these funds don’t form the part of the assets of the fintech firm and are held separately to ensure full client fund security at all times.

The third step is, the fintech firm’s matching engine will proceed to the exchange, matching the SME firm’s fund with another company or through the wholesale foreign exchange market.

Throughout the process, the SME firm is provided full transparency on prices, giving the SME firm the liberty to be fully in control.

Once the trade is matched, the funds are sent to the chosen beneficiary account of the SME firm, either its own, a subsidiary or directly to its supplier.

A four-step approach that uses the middle rate of the foreign exchange, removes the so called spread cost that is usually charged by banks to these SME firms and finally gives full transparency on the whole process itself.

With the clout and importance of these fintech firms, the Monetary Authority of Singapore recently announced the formation of a new FinTech & Innovation Group (FTIG) within its organisation structure.

FTIG will be responsible for regulatory policies and development strategies to facilitate the use of technology and innovation to better manage risks, enhance efficiency, and strengthen competitiveness in the financial sector. The upcoming Singapore FinTech Festival, to be held in Singapore from Nov 14 to Nov 18 will be an event to watch.

Organised in partnership with the Association of Banks in Singapore, the week-long event, which is the first of its kind in Asia will bring together a series of distinct, back-to-back fintech events.

Bottom-line, Malaysia’s financial sector, in particular its foreign exchange market needs vibrancy and fintech firms are likely to add spice to the local foreign exchange market, aside from creating value added business processes and technology intensive jobs, it would provide a healthy competition to the local investment banking scene.

Suresh Ramanathan believes gone are the days when foreign exchange trading was noisy, loud and unruly. It’s more about savvy technology driven trading. He can be contacted at skrasta70@hotmail.com

By Suresh Ramanathan Currency Insights.

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Is FinTech Forcing Banking to a Tipping Point? “To survive, banks will be compelled to embrace many of the FinTech innovations …

 

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Exchange rates | Rightways

Modern finance and money being managed like a Ponzi scheme !


Ponzi schemes and modern finance

 

Andrew Sheng says when the originator of a scheme to pass on debt to others is also ‘too big to fail’ – like America – then the global economy is heading for some painful restructuring

 

The dilemma today is that the US is the world’s largest “too big to fail” debtor, with gross international liabilities of US$31 trillion, equivalent to 40 per cent of global GDP. Photo: AFP

THIS global financial crisis is not over, as the volatile start to the New Year showed that 2016 may be a precursor to the 10th anniversary of the 2007 sub-prime crisis, which itself evolved from 1997 Asian Financial Crisis, after which the US Fed cut interest rates and started the rapid financialisation of the US economy.

READ MORE: Don’t listen to the ruling elite: the world economy is in real trouble

Two terms came out of the crisis that we see almost everyday, but have not been explained well by modern financial theory. Most economists think of them as aberrations that are at the periphery of normal economic behaviour. In fact, “Ponzi schemes” and “Too-Big-to-Fail” are at the heart of individual and social behaviour which go a long way to explain what is happening today.

A Ponzi scheme is a scam named after American Charles Ponzi. The term Ponzi scheme started in the 1920s from an American Charles Ponzi, who thought of selling an idea in making money from arbitraging the value of international reply coupons in postage stamps to a larger and larger investor scheme where he made money by getting new investors to pay for promised high returns to old investors. Of course, this is the “borrowing from Peter-to-Pay-Paul principle”, where the music stops when everyone want their money back. Ponzi schemes should in principle collapse naturally because it is of course impossible to pay unusually high returns. By this time, the founder would have run away to the Caribbean with a lot of OPM (other people’s money).

A foreclosure sign tops a “for sale” sign outside a property in northwest Denver in this 2007 photo. The number of homeowners receiving foreclosure notices hit a record high in the spring, driven up by problems with subprime mortgages. Photo: AP

The securitisation (packaging) of sub-prime mortgages into CDOs (collateralised debt obligations) and turbo-charging these into CDO2 (creating a highly leveraged synthetic financial derivative) and selling these to investors with a AAA credit rating was a 21st century Ponzi variant.

In simple terms, this is like selling a box of rotting apples, getting a rating agency to say that the box is worth more than the individual apples, with a guarantee against losses by adding more (rotten apples). In the end, the investor is buying a box of rotting apples, in which all his savings have been eaten up by those who sold the boxes (the derivatives) in the first place.

There are two fundamental elements of Ponzi operations – the promise of very high returns (false expectations) and the widening of the investor circle. Variants of the Ponzi scheme can be found in asset bubbles and pyramid schemes, in which more and more investors (new suckers) are enticed in until they are the ones who bear the final losses. Like the game Musical Chairs, the ones who did not get out when the music stops are the losers.

Actually, Ponzi schemes work by the originator taking profits by selling (or passing) his losses to all his investors – the more suckers, the bigger his profits and the more people to share the losses.

Technically, a Ponzi scheme is sustainable if the new funds that come in actually deliver good returns, but because the Ponzi promises a return higher than anyone can actually deliver, most Ponzis end up as fraudulent schemes.

READ MORE: Bank woes bode ill for world economy as talk of another global financial crisis gains traction

 

Under globalisation, the smaller reserve-currency countries like the euro zone and Japan can engage in quantitative easing, because instead of getting inflation, their currencies depreciate against the dollar. Photo: Reuters

But the Ponzi element in modern finance should be understood with another phenomena – the Too-Big-To-Fail (TBTF) dilemma. We all know that if we borrow US$1,000 from the bank, we are in trouble if we can’t pay, but if we borrow US$1bil from the bank, it is the bank that is in trouble. Thus, if a Ponzi scheme reaches the scale of TBTF, it has to be “rescued” somehow, because if everyone had bought the Ponzi product, everyone ends up being the loser.

This is the essence of modern money. Advanced country central banks can engage in quantitative easing (QE or printing money in whatever way you want to call it) to bail out banks that are losing money, because their banks are TBTF. The difference between QE and Ponzi is that the QE interest rate promised is near zero to negative, but the escalation of scale is the same. I call these Qonzi schemes.

In theory, in a closed economy, if you print too much money, you would get higher inflation. This is why the Germans are very much against the European Central Bank’s QE measures.

However, in a world with excess production capacity, you would not get into high inflation, because there are many more people in the emerging economies who are willing to hold reserve currencies like the US dollar, euro and yen. Under globalisation, the smaller reserve currency countries like the eurozone and Japan can engage in QE, because instead of getting inflation, their currencies depreciate against the dollar. The losers call such action “beggar-thy-neighbour” policy.

In other words, currency depreciation countries gain by passing “losses” to others, because they gain competitive trade advantage. But if everyone depreciates at the same rate, the whole world ends up with more deflation. Remember, when the Ponzi music stops, all losses are crystalised. As Warren Buffett used to say, when the tide goes out, you know who has been swimming naked.

READ MORE: Chinese scramble to safety of US dollar as yuan weakens and forex reserves drop

 
Rail cars and oil tankers sit on railway tracks as water vapour and smoke rise from a steel plant in the distance in Tonghua, Jilin province. The city’s once-vaunted state-run steel mills have slipped inexorably into decline, weighed down by slumping global markets and a changing economy. Photo: Bloomberg

 

READ MORE: The crisis in markets shows how our financial and political leaders have failed since 2008

The dilemma in the world today is that the US is the largest TBTF debtor in the world, with gross international liabilities of US$31 trillion, equivalent to 40% of world GDP (gross domestic product). In a world where interest rates are near zero, the threat of the Fed increasing interest rates causes capital flight into the dollar. But a dollar that also yields near zero interest rate, with the inability to reflate due to political constraints, plays exactly the deflationary role of gold in the 1930s.

Hence, a strong dollar is deflationary on the whole world. As geopolitical tensions rise, flight into the dollar causes its own deflation. The latest US net international investment position is a deficit of US$7 trillion or 40% of GDP at the end of 2014, sharply up from US$1.3 trillion in 2007. A strong dollar in which the US would run larger even current account deficits is clearly unsustainable for the US and its creditors.

During the Asian financial crisis, countries with net liabilities of over 50% of GDP got into crisis. But the US is the TBTF country in the international monetary system. Further QE will not solve this dilemma. The only solution is painful structural adjustment by all concerned. This is why investors are all so downbeat.

Consequently, I see no alternative but a coming new Plaza Accord to ensure that the dollar does not get too strong, with a concerted effort to have global reflation. Otherwise, watch out for more “Qonzi” schemes.

 

– Andrew Sheng writes on global issues from the Asian perspective.

Remembering the legacy of Bandung, Sandakan death and Hiroshima bombing


THIS year marks the 60th anniversary of the historic Bandung Conference
and the 70th Anniversary of the end of the Second World War.
 A copy of the final “atomic bomb” leaflet, I think? I don’t read Japanese, but this was attached to the above memo. If you do read Japanese, I’d love a translation. Please ignore my thumb in the corner — it’s hard to photograph documents that are bound like these ones were.  http://blog.nuclearsecrecy.com/2013/04/26/a-day-too-late/

In order to commemorate the past, a series of conferences and events have been held, the most recent being the Afro-Asian Conference hosted by Indonesia President Jokowi this week. The first Bandung Conference was called by the first Indonesia President Sukarno in April 1955 among newly independent Asian and African nations, beginning what was later known as the Non-Aligned Movement against colonialism. Twenty-nine countries participated, representing 1.5 billion people or just over half of the world’s population. It was the first time that leaders of these countries met to discuss their future after the end of colonialism.

The conference was historic because it was attended not only by Indian Prime Minister Jawaharlal Nehru, but also Egyptian President Gamal Nasser, Chinese Premier Zhou Enlai, Muhammad Ali Jinnah of Pakistan, U Nu of Burma, Nkrumah of Ghana and Tito of Yugoslavia, all giants not only in their countries, but makers of history in the 20th century.

The United States did not attend because it was not sure whether it sided with the European colonial powers or its new role as an ex-colony liberating the world.

The Bandung Conference was a conference of hope that the newly independent nations would build themselves into a zone of peace, prosperity and stability. On the whole, despite some failures, they succeeded. By 2013, these countries together have a GDP of US$21.2 trillion or 28.1% of world GDP, significantly improved compared with their share of less than one-fifth of world GDP in 1955.

Aug 6, 2015 will also mark the 70th anniversary of the horrific atomic bombing of Hiroshima, which led to the end of World War Two on the Pacific side.

Lest we forget, World War Two was a horrific period, since the world lost between 50 million and 80 million people or 3% of world population. Japan lost 2-3 million during that war, but the rest of Asia suffered estimated losses of up to 10 times that number.

Even though memories are fading, there is still a generation who remembered the hardships and atrocies of war, from personal experience of family being killed, bombed or flight as refugees. Even a remote country like Australia could not escape that war. Australian soldiers fought heroically in Kokoda Trail to repell the Japanese invasion of Papua New Guinea in 1942. If not stopped, Australia could have fallen to Japanese hands, changing the course of history.

Image result for sandakan death marchBut the 625 Australian deaths defending the Kokoda Trail paled in comparison to the Sandakan Death March, in which 2,345 Australian prisoners of war died marching from their prisoner of war camp in Sandakan across primitive jungle in Sabah. Only six Australians survived those marches in early 1945, only because they escaped. One in 12 of every Australian who perished in the war died in that death march.

My impressions of this incident are indelible, growing up in Sandakan and following the trail across Sabah on a road built by the Australians to commemorate their dead. It fascinated me that man could be that cruel to other human beings to send them across the virgin jungle without food to certain death.

On June 9, 2014, when Japanese Prime Minister Shintaro Abe addressed the Australian parliament, he did mention Kokoda and Sandakan. In it, he did not offer an apology, but he did sent his “most sincere condolences towards the many souls who lost their lives.” This was very Japanese English, because one gives condolences to the living, not the dead.

Image result for Hitler's Abe imagesIn the Afro-Asian Conference this week in Bandung, he rephrased his words as follows, “Japan, with feelings of deep remorse over the past war, made a pledge to remain a nation always adhering to those very principles (of Bandung) throughout, no matter what the circumstances.”

We note that he is already shifting the official Japanese view on the war from his predecessors Murayama and Koizumi, who offered “deep remorse and heartfelt apology,” in their statements about the war in the 1995 and 2005 anniversaries respectively.

I always thought that the difference between remorse and shame is one that differentiates Western and Asian values. A remorse is a feeling of regret that something has happened but there is no sense of guilt. Shame is a feeling you have injured someone else and you feel guity about it, and you want to make amends.

There is a sharp difference between the German and Japanese attitudes. Seventy years after the war, the German courts are going to try the 93-year old “bookkeeper of Auschwitz”, whereas the Japanese are still revising their history books on what really happened.

What makes Abe’s “deep remorse” poignant is that he is a leader of a faction that wants to re-arm Japan by changing its constitution and he regularly visited or sent ritual offerings to the Yasukuni shrine, which contains the shrines for 14 class A war criminals. Even the Japanese emperor has not visited Yasukuni after these enshrinements.

Most Asians like myself have great respect for Japan, but feel uneasy that the Japanese are beginning to whitewash their role in the war. The Yasukuni shrine has an accompanying museum that seems to suggest not only that the Nanking massacre did not occur, but that US actions to deny Japan energy resources pushed it into war. But these do not explain why Japan invaded China in 1937.

On the commemoration of the 70th anniversary of the end of the Pacific War, will the US leader express an apology or remorse for bombing Nagasaki or Hiroshima? If the Japanese want to understand how the rest of Asia feels about its actions during World War Two, just changing the history book will not solve the deep sense of injustice that war brought to the region. Could those who died or suffered during that period appeal to the rule of law that Abe-san so proudly proclaim today?

All of us want to move on, but not through denying the past. As the philosopher Santayana said, those who cannot remember the past are condemned to repeat it.

Think Asian by Andrew Sheng

 President of Fung Global Institute
http://ineteconomics.org/people/andrew-sheng
Sheng is Malaysian Chinese. He grew up in British North Borneo (todaySabah, Malaysia). He left Malaysia in 1965 to attend the University ofBristol in England, where he studied economics.

Datuk Seri Panglima Andrew Sheng (born 1946) is a Distinguished Fellow of Fung Global Institute, a Hong Kong based global think tank. He started his career as an accountant. He served as Chairman of the Hong Kong Securities and Futures Commission (SFC) before his replacement by Martin Wheatley in 2005.

THE AUTHOR IS CHIEF ADVISOR TO THE CHINA BANKING REGULATORY COMMISSION, A MEMBER OF THE BOARD OF MALAYSIA’S KAZANAH NASIONAL BHD AND A MEMBER OF THE INTERNATIONAL ADVISORY PANEL TO THE AUSTRALIAN TREASURY’S FINANCIAL SYSTEM INQUIRY

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Making monkeys out of markets


IT’S now official. Even monkeys can beat the stock market index. Cass Business School researchers in London simulated 10 million portfolios of US stocks selected at random. They found that a US$100 invested at the beginning of 1968 would have yielded US$5,000 by the end of 2011, but half the monkey (computer-simulated) portfolios managed US$8,700, one quarter made more than US$9,100 and 10% made more than US$9,500.

Monkeys

So, does the market beat all the professionals if monkeys beat the market?

There is a real lesson here for investors. I had a great debate with a good friend last month regarding the benefits of investing in a world where fast trading algorithms (using super fast computers to detect market opportunities to buy, sell or short stocks make it hard even for traditional asset managers to compete. So what chance is there for retail investors? My friend decided to get out of trading stocks.

Investing has been such complicated business because there are just too many variables to handle. Gone are the days when you think you can understand how markets perform. The rules of the game changed when policymakers began intervening through unconventional monetary policy and politics become part of the equation.

You would have thought logically that growth economies should produce growth stocks. The BRICS economies (Brazil, Russia, India, China and South Africa) met in Durban at the end of March. These five countries accounted for over half of total global growth since 2001, but their stock markets have not done that well. Since its peak in 2007, the BRICS index is down 37%.

Chinese retail investors have declined in number, based on the number of accounts closed. The A share index is down 31% since its peak in 2009, and the Brazil, Russia, India and South Africa stock market indices are all in negative territory since the beginning of this year. On the other hand, both the US and Japan are sluggish in growth and their stock markets performed 11.1% and 20% respectively since the beginning of this year.

Despite being overall in crisis and negative growth, even the European stock market performed in positive territory, mainly due to better performance in Germany and France. There are globally diversified companies in these economies that can outperform despite the slowdown in the European economy.

The real problem is that negative real interest rates around the world are truly destroying the ability of investors to judge what is the right asset to invest in. Markets are clearly bubbly when emerging market investors start investing in taxi licenses.

Accordingly to a Bloomberg report, Turkish taxi licenses today trade for US$580,000 each. My Hong Kong taxi driver was complaining to me that a Hong Kong taxi license was trading over HK$7mil (just under US$900,000) and yielding next to nothing.

It made no sense to him as a taxi driver himself to be an owner. This reminded me that in 1996, golf club membership was being touted as the best investment ever, with the 1997 Asian financial crisis wiping out all gains thereafter.

So what should an honest, no-inside information retail investor do? I guess the old-fashioned advice to invest in diversified and value stocks and maintaining ample liquidity is still sound. Global bonds have done well since the financial crisis due to the massive quantitative easing.

Even those who have speculated on Greek bonds when they were yielding more than 20% have done well. But it is difficult to argue that ten year US Treasuries and German Bunds at under 2% per annum represent no risk. Certainly, Japanese 10 year bonds at 0.55% per annum, when the official inflation target is 2% per annum, must carry considerable interest rate risks.

Over the long-term, there is no question that investing in one’s own home has been good investment. This is officially supported leveraged investment, since most mortgages still require not more than 30% down payment for the first home. The fact that there is a growing middle-class in most emerging Asia means that demand for housing is still on the increase, but given such low interest rates, it is hard to imagine how much further can house prices rise relative to the affordability index.

My own inclination is to go for high yield, solid growth companies that are globally diversified. You basically invested in the region that you are most familiar with, and in companies that demonstrate good governance and know what they are doing. The average price/earnings ratio of Hong Kong, Singapore, Malaysia and Thailand markets are still below those of the US (17.7). China A share has a PE ratio of only 8.1 and a yield of 3.7%.

Of course, the art of investing depends completely on the investor’s risk appetite, age and liquidity requirements. If you are fully invested in illiquid assets or in illiquid markets, you cannot get out even though the returns look good. Property markets are notoriously easy to get into and difficult to cash out, especially in the smaller markets. Bond investments may look good on paper, but when you want to exit, the selling price may be lower than what you think you can get, especially for retail investors.

Knowing that even monkeys can beat the market gives one food for thought. You can do better, but you must invest the time and energy to think through what you are investing in, what risk you are taking and what you want to achieve. My friend in Australia had no formal training in investments, decided that she could outperform the market, relied on her instinct and own research into companies and is now doing pretty well on her own.

Even monkeys know how to survive, so don’t look down on monkeys.

THINK ASIAN By TAN SRI ANDREW SHENG

Tan Sri Andrew Sheng is president of the Fung Global Institute. He was recently named by Time magazine as one of 100 most influential people in the world.

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The state as market


THE more I study the Indian and Chinese growth models, the more I realise that the current debate over the state versus the market is a false dichotomy.

Both the state and the market are social institutions that are not independent of each other. Indeed, they are inseparable, interactive and interdependent.

Human development or evolution is a complex interaction or feedback between the two. In Small is beautiful author EF Schumacher‘s view, “Maybe what we really need is not either-or but the-one-and-the-other-at-the-same-time”.

India and China could not have become global powerhouses of growth, without the leading role of the state in planning for development. But those states that have worked with markets have succeeded better than those that worked against markets.

London Business School Prof John Kay defines the market as a relatively transparent, self-organised, incentive-matching mechanism for the exchange of goods and services, usually in monetary terms.

In plain language, the market helps to match willing buyer, willing seller under certain rules of the game to determine market price. The market clears when it functions properly, but market failure happens when the market is imbalanced.

Kay reminds us that capitalism is less about ownership than “its competitive advantages its systems of organisation, its reputation with suppliers and customers, its capacity for innovation”.

Because of globalisation and technological change, we are living in a situation of change within change, as if the national state is not in total control of our destinies. Because of the global economy, state policies such as monetary, exchange rate and trade, cannot be independent of what is happening globally.

No man, no company, no state is an island. Globalisation has changed the rules of the game irreversibly.

Why is the state so much bigger and more powerful than before?

In the 19th century, most governments were not larger than 15% of GDP. By 1960, the size of governments in OECD countries had doubled to 30% of GDP. Today, the average has increased further to 40% of GDP.

The state has grown because there has been demand for more and more state services, but there is also concern that bureaucracies tend to grow to perpetuate itself.

I find it useful to think about the state as a market-like institution for exchange of power (in non-monetary terms). Power comes from social delegation the people give the power to the state to protect them and to fairly enforce social rules and laws. Hence, the “state as market” has the same dilemmas as the market information asymmetry and the principal-agent problem.

In large countries like India and China, there are many levels of government central, provincial, city, town, village and rural governments, each with their own departments and even enterprises. Most citizens find it difficult and confusing to deal with complex bureaucratic power. The Peruvian economist Hernando de Soto was one of the first to point out that rural poverty exists, because the poor’s property rights are not protected adequately and their transaction costs are extremely high because of complex government.

In other words, markets are efficient and stable when the state is efficient and stable. It is not surprising from recent experience that financial crises are results of governance failures. As the European debt crisis amply demonstrates, financial markets cannot clear when the fiscal condition of the state is on shaky grounds, and there is no mechanism to make fast, simple, clear decisions.

Finding the right balance between state and market is the real challenge in all economies today. As 20th century British philosopher Bertrand Russell reminded us, “people do not always remember that politics, economics and social organisation generally belong in the realm of means, not ends”.

Today’s demands on the state to provide stability, growth and social equity are complex, because recent dominance of free market ideology has ended up with serious problems of wealth and income disparities and environmental degradation.

Realising that large states with geopolitically significant human and ecological footprints cannot consume like the United States or Europe on a per capita basis, China and India are embarking on ambitious 12th five-year plans to change their growth models to become more environmentally sustainable economies with greater social inclusiveness.

But large economies with many layers of government struggle between centralisation and decentralisation of people, resources and power.

For systems to be stable and sustainable, they have to be adaptable to complex forces of change from internal and external shocks.

To maintain integrity, there are complex trade-offs between winners and losers in each society. Such rules and bargains are difficult when the causes and effects of losses are unclear (such as crisis) and when vested interests resist change for fear of losing what they have. Vested interests are often unwilling to change because they value present gains far more than uncertain futures. Politics is the compromise of contending interests.

The belief that markets are always right assumes that markets always balance. The market cannot balance when the state cannot balance the contending interests. The main reason for the advanced country debt crisis is because their consumption has happened today by postponing the costs to future generations.

This raises a fundamental problem. Whichever way you term it, central bank quantitative easing is ultimately state intervention.

The rise in Spanish bond yields, despite ECB long-term refinancing operations, suggest that the markets are saying there are limits to the growing euro public debt.

At the same time, global financial markets are watching carefully whether inflation in China and India will rekindle global inflation.

In other words, the anchor of global financial stability rests on state debt stability. The state cannot escape being priced by the market.

THINK ASIAN By ANDREW SHENGAndrew Sheng is president of the Fung Global Institute.

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