True Wealth (I)

I am almost finishing the book by Juliet Schor entitled ‘True Wealth‘. It has been quite life changing.

Yesterday, incredibly, I chose hawker food over one of my favourite fast food burgers. The reason? It takes approximately 2400 litres of water to make one. (Pg 64) Currently, too many people are already exceeding the ecological footprint – taking too great a toll on the planet’s limited resources. What irony that at a time when industrial production can probably help feed the entire world, many are still dying of hunger and starvation.

See also:

http://www.huffingtonpost.com/2012/06/25/hamburger-water-footprint_n_1624394.html
http://www.fao.org/worldfoodsituation/csdb/en/
http://www.waterfootprint.org/?page=files/Animal-products

Advertisements

Carry Trade

Based on the review on the book Nowhere to Hide, I further researched an instance of carry trade. In the 2007 article from Forbes , one sees the constant balancing act maintained by the New Zealand central bank. It had to manage various goals under influence from local and external factors.

Definitely not an easy task…

For the sake of financial/macroeconomic stability, scholars like Matthew Richardson of NYU Stern School of Business recommended banning carry trades and those activities similar to them for banks altogether. New Zealand in the above example was somehow able to regulate hot money flows into its domestic housing market thereby averting a meltdown. Perhaps this was conceptually similar to how China stayed clear of the Asian Financial Crisis by having Capital ‘A’ and Capital ‘B’ markets where local and external investors were kept apart.

Please also see:

Definition of carry trade and its dangers (accessed 28 July 2014)

Exchange Traded Funds (ETFs) / Index Funds (IFs)

Depending on how you see them, ETFs could be a subset of IFs. John Bogle of Vanguard Group fame (see earlier post on Index Investing), was initially against ETFs for fear that it encouraged trading and consequently increased costs.

Yet ETFs has other risks. Of these, let me bring up Liquidity Risk. The ETF units are bought and sold, just like those in the market. At times, even when you truly want to sell them, there may be no takers (no demand). Or you may need to sell at a price lower than what you bought them for. There is no maximum limit to your losses.

Also, cash-based ETFs may be involved in stock lending. This means after buying the stocks and/ or bonds, they loan out the ownership certificates to hedge funds or bank traders who bet on the stock/bond values. In return, the ETF manager/custodian earns fees; and to achieve safety takes a collateral. The manager may further invest the collateral in money market securities. Problems (potential losses) arise when (a) the hedge funds/bank trades bets go wrong and the collateral is insufficient to repay the ETF manager; or (b) those money market securities themselves go south.

All these lending and investing lead to more costs while the returns are not guaranteed.

Thus should you wish to invest, please consider the cost. I knew someone who lost $20 000 or so at one go. (This was probably in stock/equities.) I am not sure if I would have survived such a loss; that person definitely did.

Do refer to the below for your own independent analysis:

1. (Run by the Monetary Authority of Singapore) http://www.moneysense.gov.sg/Understanding-Financial-Products/Investments/Types-of-Investments/Exchange-Traded-Funds.aspx

2. http://www.etf.com/etf-education-center/21031-understanding-securities-lending.html

3. (March 2014 – HSBC ends stock lending) http://www.ft.com/intl/cms/s/0/831726de-af5d-11e3-bea5-00144feab7de.html#axzz36ekCuXpF

4. (Feb 2013 – Lawsuit against securities lending) http://finance.yahoo.com/news/lawsuit-raises-awareness-over-etf-210254085.html

5. (Actual instances of stock/securities lending) http://www.ft.com/intl/cms/s/0/740b1e6a-ce08-11e3-9dfd-00144feabdc0.html#axzz36ekCuXpF”>

Backup/Risk Management

There was once my laptop at work crashed 4 times in 2 weeks. Remarkably, there was negligible disruption to my work. 

Why? There was constant backing up of files. You never know when the file/programme might just fail or turn corrupt. Therefore, I encourage reasonable attempts to backup data/work at secure alternate locations on a habitual basis!

Book Review: Nowhere to hide – Michael Lim Mah-Hui and Lim Chin (2010)

Sometimes I think I have a morbid fascination for financial crises. Just as well, since I think all life is actually chaos and order is a mere facade or (possibly) fading interruption.

To return to the topic at hand, it was rather reluctantly that I borrowed the above title. Yet it turned out to quite a gem. Apart from adopting a multidisciplinary approach and refocusing on historical context, it highlighted very interestingly the ‘carry trade’ cause in financial crises. Investors/speculators would borrow currency with low interest rates to re-invest in those countries with higher interest rates for profit. These investments were sometimes in local property resulting in an asset bubble. The book gave the example of New Zealand staving off such a crisis in 2005/2006. (See pages 103-105). 

Apart from that, its greatest merit is clarity and brevity. Particularly rewarding were pages 117-124. It surmised broadly the structure and foundations of the current economic/financial order. 

It is highly worth reading if not for investment then for a window into how the world is.