Here is my reply.

I’m not a pessimist. I’m an optimist! I’m looking forward to a world (including Taiwan) where people don’t obsess about their worth in terms of how a pile of bricks is valued; where a family can choose to have an extra room AND have a child; where people don’t need to trade their entire working life to own a small, 2-bedroom apartment in nowhere-ville.

In fact, dropping prices is great even for owners! It means you will be able to trade up to an even nicer house, if you like, more cheaply. The world would be a much nicer place if house prices were considerably lower. The only people that gain from high house prices are landowners, housebuilders, very old people (who downsize), banks, estate agents and the government (through taxation). Most people don’t fall into one of these categories.

Besides, housing is not a measure of wealth. A country’s wealth comes from its productive ability in terms of tools, art, ideas, … Housing on the other hand is generally just a (poorly) assembled collection of mud and dead trees. People would hardly go screaming with joy around the streets if food prices doubled, or if water charges tripled, or electricity bills quadrupled. So why should anyone be cheerful when some other basic, needed commodity goes up? It’s bad news for everyone except those who make that commodity or benefit from its trade!

For me, the pessimists are those who think that high house prices are good, when really they tie up the capital of a society in a completely unproductive way, and transfer wealth from young to old in an entirely unfair and disproportionate way.

Anyway, my view on what will happen to housing is not coloured by what I would *like* to happen to housing or what I think is best for society. Rather, it’s just based on what history shows us, and the ‘laws of finance’, as far as they seem to exist. And besides…

To get a feel for his audience, he asks “How many people here believe in ghosts?”

About 90 students raise their hands.

“Well, that’s a good start. Out of those of you who believe in ghosts, do any of you think you’ve seen a ghost?”

About 40 students raise their hands.

“That’s really good. I’m really glad you take this seriously. Has anyone here ever talked to a ghost?”

About 15 students raise their hands.

“Has anyone here ever touched a ghost?”

3 students raise their hands.

“That’s fantastic. Now let me ask you one question further… Have any of you ever had sex with a ghost?”

Right at the back of the room, one guy raises his hand.

The professor takes off his glasses, and says, “All the years I’ve been giving this lecture, no one has ever claimed to have had sex with a ghost. You’ve got to come up here right now and tell us about your experience.”

The student begins to make his way up to the front of the class. When he reaches the front of the room, the professor asks, “So, tell us: what it’s like to have sex with a ghost?”

The student replies, “GHOST???? I thought you said GOAT!”

Meanwhile, in today’s news…

“National Chengchi University’s English Department yesterday defended its annual year-end production about man having a sexual affair with a goat as an appropriate choice and said they were puzzled why people would consider the play profane and foul.”

Michael Turton has just written an excellent short article about Taiwan’s economy. I should probably make some comments of my own. My main concerns at present are:

• Exports. Particularly, Taiwan’s DRAM manufacturers are being slaughtered by the Korean DRAM manufacturers, because the Won is cheap. Makes me wonder if Taiwan is going to crash the TWD to try and save its industries. I keep getting a feeling that every country in the world is simultaneously trying to say ‘we’re the worst’ and competing to offer the lowest returns right now, to try and make their exports cheap, so that employment stays up.

• Surge in unemployment - locals and foreigners alike. Local unemployment is now at a 5-year high and approximately 1 in every 20 people are out of work. This statistic ignores employees who’ve been put onto ‘unpaid leave’ for the time being, which is becoming quite a problem currently.

  Taiwan is also striding into first place for sacking foreign workers right now, as they make big steps towards addressing the ‘weiguoren problem’ that was commented upon in newspaper letters earlier this year. For example, these Philipino workers. Or the hundreds of thousands of very worried Indonesian workers. There is a phrase in English that foreign workers might use to describe some local employers: ‘fair weather friend‘.

  Check out this amazing quote from an article about a huge drop in charitable giving.

  ---

  “The results of recent surveys conducted by several online employment brokers suggest that 100,000 Taiwanese businesses are likely to lay off workers at the end of the year, and that 90 percent of salaried workers have suffered investment losses equal to six months’ pay or more.

  Meanwhile, 27 percent of workers have had their salaries cut, and 20 percent either are going to be or have been dismissed.”

  ---

  Thankfully, Taiwanese government employees have been unaffected by the downturn. :-|

  “In contrast to a faltering employment market in the private sector, workers in the public sector have not been affected at all. DGBAS figures show that civil servants enjoy an average monthly salary of NT$63,000, which is much higher than the NT$36,000 average in the private sector. While the general public is suffering from the economic downturn, civil servants do not have to worry about their jobs. “

• Bosses showing their evil side. If you look at the unemployment numbers, you’ll note that “those who quit because they were not satisfied increased 2,000″. Now, think about that. We’re going into a recession, people are losing their jobs, yet an extra 2000 people suddenly decide - in just 4 weeks - to quit in these scary economic conditions? It suggests to me that mistreatment of employees is rising sharply. This comes as no surprise to me.

• Curious policy decisions.

• Drop in salaries. What exactly is the point in a one-off $3600 ‘voter bribe’ handout supposedly to stimulate spending, when people are getting $20000/month chopped off their salary? Even the biggest, most profitable companies in Taiwan are making giant cutbacks, for example, TSMC, the world’s biggest semiconductor manufacturer:

  “The company said manufacturing staff would take five days unpaid leave per month, starting this month, with other departments taking one day a week unpaid leave from January.”

  “Industry sources told Reuters last week that TSMC and its cross-town rival UMC were preparing to cut costs by up to 20 percent. UMC had told employees they may soon be put on a four-day week, taking the fifth day as unpaid leave.”

• Giving up children. Quite remarkable statistic this one. As hard times bite, people are downsizing their families.

• Local banks. If HSBC, UBS, Citigroup, … are in trouble - then how in heck’s name can local banks pretend they aren’t affected by the dramatic downturn in Taiwanese industry? Maybe they think they can all pretend they weren’t involved in lending huge sums of money directly into Taiwan’s insane housing bubble. I expect painful consequences.

I think I’ll close with some amusing quotes.

“The Taiwanese economy has entered into a bottom during the third and fourth quarters,” - Chen Miao, director of TIER’s Economic Forecast Center.

“I am sure that the Taiwan economic miracle has not come to an end. We are merely in a transition period.”- Taiwanese President Ma.

Just one problem. It’s completely daft, and it doesn’t work.

As I understand it, Keynes’ idea of monetary stimulus involved government spending on projects in situations where consumers had stopped spending, in essence, becoming a forced spender of last resort. Handing out extra money to consumers, when they have started saving and paying down debt, is only going to make them save more or pay down debt more. A meaningless transfer from the public debt to private debt balance sheets, that has no short-term effect, and will be reversed years down the line, for no net gain overall.

Aha! But wait. There is a cunning plan. They’re going to give out ’spending coupons’ that you can’t save, so you’ll have to spend them.

The problem is that after about ten second’s thought, people will just substitute these coupons for ordinary money in their normal spending. Then, they will save or pay down debts with the money they saved.

There’s another cunning plan. Why don’t we give out ‘50% discount’ coupons - that way people HAVE to spend some money to get the government handout? Again, a moment’s thought makes it obvious that people will just use up the coupon in place of everyday spending, over twice as long a period. When it comes to adding unnecessary flourishes to a bad idea, you can always rely on academics and public officials. I am sure this weekend will be busy, as people work hard to re-arrange the deckchairs on the Titanic.

Don’t get me wrong. I’m sure a few people will get in the mood and go and pointlessly buy crap - after all, they’ve been doing it for the last 5 years with great enthusiasm, using borrowed money. But where is this money coming from? Ultimately, it’s coming from taxation, increased debt (which must ultimately be repaid through taxation) or from inflation (which is a form of taxation). So guess who’s paying for this mystery bonus? Either ‘future you’, or your children. And what could be better than stealing from the pockets of unborn generations? Isn’t that how society improves?

So, here’s my question. How does pointlessly buying crap fix a problem of overindebtedness, which is at the heart of the current difficulties? How does it fix the problem of overvalued assets (houses, particularly) which drove that excessive debt? How does it fix the problem of an export-driven economy when no-one is importing Taiwan’s stuff?

The answer is, it doesn’t solve the problem, or even come close. Actually, it makes it much worse. It pushes up public debt and price inflation at a time when people have not much money anyway. This drives up the short-term costs of debt, and increases future taxation.

Besides, Japan tried this years ago as a solution to recession in 1998 and surprise surprise, it didn’t work there either - even during the dotcom boom worldwide, Japan remained firmly stuck in recession as it handed out pointless spending coupons, while public debt ballooned. And did I mention that the JPY devalued completely, to record lows, over the decade that followed?

But, I guess it makes people feel good to ‘get money from the government’. Even though really, it’s just deferred taxation, and even though really, it does nothing but piss money up the wall, wasting the government’s ability to actually solve the problem later.

I mean think about it for a moment. The problem is that people have taken on something like 8 M NTD of debt, to buy houses that are worth perhaps 3-4 M NTD on a good day. We’re talking millions of dollars of unsustainable debt. And the government’s solution? Hand out 10,000 NTD to solve a 4,000,000 NTD shortfall per household? It’s like shouting into a hurricane.

Oh, and you know what annoys me most of all? This!

“At least one banker said the government should consider issuing a “tax reduction/rebate card” to all citizens if the Cabinet wants to see an immediate effect to encourage spending.”

So who will probably get these coupons? Voters, since this is a idiotic voter bribe as much as it is an idiotic effort to stimulate spending. But who will pay for these coupons? Taxpayers.

If, like me, you are not a Taiwanese citizen, I want you to think about the distinction between voter and taxpayer. It implies a forced transfer of cash from non-Taiwanese resident’s wallets to Taiwanese resident’s wallets. But I guess weiguoren probably deserve it because of their weiguo-ness and its apparently horrid effect on the Taiwanese economy.

In unrelated news. While ’supporting the price of shares’, the Taiwanese government has been busy buying shares at prices higher than their current level, as the market dropped. So… you, Joe Public, are now sitting on a gigantic stockmarket loss, thanks to the government. Gong xi!

- Opposition politicians being arrested and detained.

- Noticeable restrictions on public freedom of movement and expression.

- Protests are taking place but are being stopped by police.

- It has reached a stage where some taxi drivers are being questioned by police as they move around Taipei.

I am not Taiwanese, but I am concerned to see this happening. Of course, part of me says, ‘well, what did you expect when you voted for these guys? Didn’t you study Taiwan’s history?’.

Here are some articles with more information, from people who are better informed than I am:

Michael Turton’s roundup.
“Are Taiwanese Fed Up Yet?
“Is Taiwan becoming a police state?”
Students protest peacefully at “Freedom Square”. Police remove them. Students re-assemble.

Looking back in history, partly, it was pressure from the USA that lead to Taiwan moving away from a period of repression. Maybe America can exert some useful influence again.

“The real-estate market is becoming a buyers’ market, with nearly 70 percent of home buyers expecting to see falling property prices over the next year” - and that’s from a real estate agency!

“We believe property owners may face a 10 percent to 20 percent downward correction in their selling prices in order to close deals” - in other words, take the ‘official price drop reported’ and add 10-20% to reach the real number!

They add that ‘people have apparently been over-optimistic about Ma’s policies’. Really? Are you sure? Are you trying to tell me that there aren’t endless hordes of mainland Chinese businessman trying desperately to buy up flats in Linkou and Banciao?

Also: the Japanese market dropped 24% last night in overnight trading. Japan’s NIKKEI is now substantially cheaper than it was 25 years ago. In other words, if you bought 25 years ago, and held on to those shares your whole working life, you have lost money in aggregate, apart from dividends. Crikey.

The US isn’t looking too cheery either! DJIA at 8284 as I write. In January 2004, it was over 10000! I drew a graph on Yahoo, but the fall is so sharp, you can’t even see it at the right hand side. Basically, we are ‘back to 1998′. The graph below will update over time, automatically.

Hurray for America’s ‘glorious decade’…

For what it’s worth - I’m buying the market indices like mad currently, with every penny I have!

Fortunately I found that someone at the FT had already done it for me :-)

Of course… talk of whether McCain or Obama have greater support for Taiwan seems somewhat surreal to my mind - given another 4 more years of the present Republican party, America may not even exist anyway :-)

Elsewhere … Korea finds out the long-term costs of fueling an economy with high levels of debt.

“The won, which is already the world’s worst-performing major currency this year with a loss of 26 per cent, will weaken to 1,400 to the dollar as Korea struggles to refinance its short- term debt, CFC’s chief investment strategist Dariusz Kowalczyk wrote in a report Monday. The last time the currency breached that level was amid the Asian financial crisis, in 1998, when the won lost half of its value.”

Oh, and the FTSE is having the *3rd* worst day in all of UK history…. yawn. This crisis is getting boring.

Heading straight for Taichung/Hsinchu.
This picture mirrored from Taiwan CWB website.

According to the CWB, this one has a maximum sustained windstrength of 53m/s currently and gust strength of 63m/s. That basically puts it into the ‘worst type of Typhoon’ category in the Japanese system (grade 5), and the ‘pretty darned bad’ category (Grade 3) in the International system.

So I think we can call it ‘a biggy’.

1. Taiwan has at least 1 million houses that are sitting empty presently.

2. Taiwanese house prices rose 50% in the last few years, while wages rose 2% (I don’t recall the timeframe mentioned in the article - it doesn’t really matter with figures like these).

Now unless the population jumps 3-4 million in the next few months, I can see that 50% rise turning into a corresponding 33% fall. However, since correcting markets tend to overshoot… and since the market started out pretty expensive… we should expect a bigger drop.

Actions, however, speak louder than words.

Action 1: They are pouring taxpayer money into the stockmarket to stop it sinking so fast.
Action 2: They are handing out free/cheap money to the banks to keep them alive (top of article - 3.6 billion US dollars handed out in cheap money on Tuesday alone).
Action 3: They are reducing Taiwanese bank reserve deposit requirements (if the banks have spare money and are not at risk from the USA, why is this needed???)
Action 4: They are telling you not to panic. As they talk to the public following an emergency meeting. Think about it.

If you keep all your money in one place just now, you are MAD. Actually that’s true at any time, but especially true just now.

Check out this list of Taiwanese banks who took giant losses just from the failure of a single US bank.

If you want to see something really amazing, though, look at this. The line represents how ‘risky’ the banks see the world. (It’s the inter-bank lending rate, LIBOR, on which US home loan payments are based).

113 ETF funds collapsed.

The Russian stockmarket is down 17% and trading was halted.

Markets all across Asia were down 5-7% even from the start.

The Shanghai stockmarket is now down 66% since October last year.

HBOS (biggest home loans bank in the UK) dropped by 40% at one point. Huge UK and US banks have been downgraded to near-junk status or have collapsed in the last two days - or been forced into buyouts/mergers. Washington mutual, bradford and bingely, HBOS…

In the UK, all the online stockbrokers stopped working; lots of internet banking accounts stopped working ( I think it is because people are panicking and trying to withdraw money).

The Dow Jones index dropped 500 points; Standards and poor (S&P) had it’s biggest drop since 1989, even worse than 9/11!

The FTSE just closed at a 3 year low.

If you know what PER is, consider the UK’s biggest home loan lender (2/5 of the whole country) is on a PER of 1.3 just now, a fraction of their book value. Most of the other big banks are down an amazing amount.

International banks almost completely stopped lending or trusting each other all day. LIBOR rates had the highest jump ever in history I believe.

Prices on companies worth 10’s of billions of dollars were jumping and dropping by 10%, 20% easily on markets all over the world.

Oil dropped to under $90/barrel. Everyone was going crazy each time it went UP by ONE dollar in a day. Now it drops 5 dollars DOWN in just hours, and the news ignores it! You can hardly find it in the media!

Even the friends I have who are professional traders for large banks had no idea what would be happening next.

It’s so exciting!

Tomorrow might see the world’s biggest bankruptcy ever if AIG cannot persuade Warren Buffett (the world’s richest man) to hand them lots of cash. Apparently Lehman Brothers also tried the ‘oh, please, go on!’ line with Warren and he politely declined.

These are amazing times! If you are interested in finance, now is the time to learn about it! We have front row seats to enjoy a wonderful performance!

What makes me laugh most, though, is this: All of these huge 10%-40% drops in multi-billion pound companies - and indeed - 20% drops in ENTIRE ECONOMIES - were taking place in MINUTES! And yet people tell me their houses can never go down in value; and they laugh when I talk of big drops occurring within a year to house prices.

As though their houses are somehow more diversified and better value than a large bank with sources of income from many businesses, all over the world. As though their little pile of bricks and mud is ‘better’ than an entire G10 country. Insane.

Here is what happened in Tokyo and Hong Kong when their property prices zoomed in the way that Taipei’s have. I believe that in ‘house-price-relative-to-earnings’ terms, Taipei has recently exceeded the heights of these graphs.

So, dear reader, I show you a possible - indeed, likely - future.

Click on the pictures to view them fullsize. These pictures are mirrored from reinet’s site.

If you look at the high point on those graphs… well, that’s where I think we are now. And if you look at the low point…. well, that’s where I think we shall swiftly go: 70-80% falls in property prices, and most of it too fast for anyone to hope to escape.

“Taiwan’s housing prices will rise 5-10% annually through 2010 at least, according to construction company and real estate brokerage executives speaking at a “real estate summit meeting” sponsored by the Taiwanese real estate magazine Zhu Zhan in early November. Some even declared this rate of growth would be sustained through the next ten years.”

” Others noted that the Olympics in Beijing in 2008 would not only boost China’s economy, but the economies of other countries in the region as well, and that Taiwan’s real estate market would be among those benefiting.”

Now, let’s take a look at today’s media, too. Bear in mind these journalists can’t be bothered to do their own research, so they’re simply serving up numbers presented to them by estate agents - whose interests are served best if it seems house prices are rocketing up!

With that in mind… take a look here at the China Post (Aug 1, 2008).

First of all, it again mentions the 10% July price drop in Taipei; and 15% drop in transactions.

Secondly, more information about the rest of the island. Taichung sees a drop of 5% in one month, in July alone. Closed deals were down by 30%. 5% a month annualises to… a 46% drop this year, before taking into account inflation… Kaohsiung had flat prices and a slight raise in transactions, but there’s no indication if this is just a normal seasonal ’summer rise’, or a seasonally adjusted figure.

I’d be interested to see if the other figures were seasonally adjusted - if they aren’t, the drop in Taipei and Taichung may be even more steep than the figures suggest!

Apparently there is an additional Autumn pressure on Taiwanese houses that I didn’t know about - Ghost Month! Quoting the China post, “Furthermore, as the Ghost Month has arrived, more sellers are expected to lower prices to attract buyers. In the Chinese culture, Ghost Month is the month of July on the Lunar Calendar, which this year lasts from Aug. 1 to Aug. 30. Most people are hesitant to buy houses during this period.”

Very interesting stuff - but the thing that stands out the most to me, is this quote from an estate agent who is talking about why people are selling, again from the China post article (my own emphasis added):

“most sellers lowered their prices in the hope of getting rid of their property as soon as possible, due to the mounting mortgage pressure“

Mounting mortgage pressure? With interest rates still near historic lows?

How on earth will these people cope if mortgage rates reach levels such as 15-25%, as they have in developed countries across the world in the past?

On the one hand we have the risk of even more price inflation if interest rates stay low and the currency gets weak. On the other, we have this ‘mounting mortgage pressure’ showing up at rates as low as 3%! Something tells me that Taiwan is not in for a good time in the next few years.

p.s. Other news just in. Housing transactions in Taipei are now down by 60% in just 3 months… going into the summer! 60% down in 3 months…blimey!

Finally, it seems like we’re there. The number of house sales is continuing to collapse (minus 15% taipei, minus 30% taichung in just one month) at what should be one of the best times of year for sales in most cultures. In other words, bye-bye buyers.

Of course, this is not even remotely surprising to anyone paying attention to the crashes in America, Australia, the UK, various European countries (Spain, Ireland, Italy), New Zealand, … all of which have followed nearly identical courses in the preceding 12-18 months.

Banks stop lending. Potential buyers stop buying (no ability to borrow). Sellers flood the market as they realise ‘the train has left the platform’. Potential buyers definitely stop buying as they see what’s happening! A two-tier market forms; some people who ‘have to get this money or we’ve lost everything’ with unrealistically high prices and houses that never sell; and some people smart enough to realise that a 20-30% price cut is probably still better than what they’ll get in a year’s time.

International money markets have been messed up for almost 12 months now, so even if people do want to buy, they can’t get the money because the banks can’t get the money. The banks just don’t have any capital left to lend out of their own and there is no willingness from large scale international institutional funds to take on bundles of mortgages.

In 6 months, price drops should be really obvious indeed, as estate agents scream at sellers to drop their prices. According to the article I quoted, prices are already down 10% in one month in Taipei.

Remember, a 50% drop cancels out a 100% rise, so a few 10% monthly drops relative to the peak can quickly become more significant than they first seem. Besides, annualising a 10% monthly drop shows you how serious it is, if it continues for any length in time.

10% monthly drops would turn your 10 million NTD Taipei apartment into a 2.8 million NTD Taipei apartment after 12 months. That might seem too much, but looking at history in a few different countries, you’d reasonably expect a market starting on a HPER of 12 to end up around an HPER of 2.5 or 3 (which is around or slightly below the long term average house price). Again, that represents about an 75-80% drop in prices.

This is extremely unfortunate for my friends in Taiwan who have bought houses in the last two years against my protestations. However, there was plenty of time to get out, and the warning signs that this was not a sane market were very obvious, specifically the crazy average-houseprice-to-average-earnings ratio in Taipei. There is not really any excuse for failing to take a few weeks or months to teach yourself about finance thoroughly, before you undertake what is probably the single most important financial decision of your life.

What happens next, I expect, is that most of the country is trapped ‘where they are’ - unable to change house, or escape debts they have built up. Meanwhile, interest rates rise as the central bank tries to keep inflation under control… gradually, people give up trying to stay current with their mortgage… and lose their house.

The next two to five years will be interesting to observe as a matter of academic curiosity, but for many people, I expect they will be very painful to experience.

A side note: Normally it’s a bit strange to annualise high monthly drops, the way I did above to get large implied annualised drops.

If a large, diversified, well run international company can drop like that; if a house in a US state full of wealthy people can drop like that; then by god, a crappy little Taipei apartment can drop 70-80% too!

She had a great time - all my friends were really nice to her, and helped me to show her some cool places. I saw a few new places myself, too..

Mum, Leila, Ethan, and their children, shopping in a giant mall in Zhongli.

Exploring Taoyuan city centre

Tasting shui jiao (dumplings) for the first time, near Taipei Main Station.

Taipei City Hall area.

Enjoying the view from Taipei 101.

Looking out across Taoyuan city.

Exploring ceramics at Inge with Sean, Kyle and Leila.

The main Taoyuan city temple.

Visiting the Grand Hotel, Taipei.

Enjoying the decor, before lunch.

Travelling to Hualian County.

Discovering that in one Taiwanese hotel, only midgets can use the facilities (look carefully).

Reaching Toroko Gorge, Hualien.

Can you see mum on the bottom right?

Walking through the corridors of the Toroko.
This part of the road is said to be as ‘twisty as a Chinese dragon’.

Mum with Davie (our friendly host in Hualien) and his daughter Tina.

Stopping for a break at a lake near Hualien City.

Late night shopping in Hualien City with Davie, his son and a friend.

Exploring the beach.

First view of the Pacific Ocean

Myself, mum and Tina near “Cow Mountain”.

Exploring a temple on the East coast.

Back to Taipei. Looking from the Chinese Culture University (YangMingShan).

What’s that little building over there on the left?

Exploring the sulphuric geysers of YangMingShan.

Leila and Mum at an organic farm in YangMingShan.

Lots of wildlife…

Strange buildings in the mist…

Say Cheese…(Kyle, Sean, Leila, Mum and myself).

Kyle treating everyone to a healthy organic meal.

Picking Canna Lilies at YangMingShan.

Underground shopping at Taipei City Mall.

Visiting the Maokong Gondola, Taipei.

Since that post, the Shanghai stockmarket has fallen almost 50%.

The FT article (linked above) is quite interesting. It’s becoming quite normal to see 5% drops each day in the Chinese stockmarkets.

Of course, I’m quite sure everyone will pull their money out NOW rather than 6 months ago, before it was too late. People are quite amazing at doing things badly with money.

Actually, though, if I had money in the Chinese stockmarket, I’d pull it out now anyway. It’s still overpriced. Unless the government takes actions to prop it up, I think it could quite easily reach a much lower (and more reasonable) price in the future.

UPDATE:

1. I notice that October 2007 was also when Warren Buffet massively sold out of Petrochina at a huge profit. The company’s share price has since fallen 60%.

2. Apparently the Chinese government is now modifying the stamp duty (share tax) laws to try and keep the market afloat. Why are price drops seen as a bad thing? Who knows.

The idea that in Taiwan, I should avoid seeking ‘friends for the sake of friendship’, is one that I’m not very comfortable with. I don’t see my friends as tools I can use to achieve tasks. Therefore, it seems there may be some cultural lines that I am unwilling to cross in my engagement with Taiwanese society.

After writing my previous post, I received some interesting replies, particularly those from Cary Allen, and Kerim Friedman. Thanks for writing, guys! For the moment, I’m taking the original post offline while I reflect upon the ideas raised in correspondance, to make sure I am being fair to Taiwanese culture.

Particularly, the idea of ‘cultural translations’ as a way of understanding ‘white lies’ in other cultures, is an interesting one.

“I just wondered if I could borrow some coffee” might be considered an example of a similar situation in early dating in western society, which due to its familiarity seems more an excuse than a direct lie or misrepresentation.

Is that something to do with the ’short-term’ nature of borrowing coffee, as opposed to the longer-term nature of ‘language exchange’ or ‘research’? Or, is it perhaps the ‘distance’ of borrowing coffee from a stranger, as opposed to seeking closer forms of interaction such as language exchange? Or is it something else? Am I applying two sets of standards here?

Either way, the idea of the necessity of an excuse in Taiwanese society, as part of forming a friendship, seems to remain as a seperate issue. This is something I’m still puzzling over.

However, I have an illness that has meant I’ve been spending a little time in hospital, and getting plenty of rest. I’ll post more as the doctors find out more about the illness. I can say though that the preliminary results are reasonably encouraging, so far.

I am fortunate to have some awesome friends who looked after me when I was in hospital, who have helped me through this illness and been there to talk to. I don’t know how many of them read this blog. But, hey friends. You know who you are. Thankyou.

I also want to say thankyou to all the people who keep checking this blog to see what I’m writing. It is comforting to see that although I haven’t been able to write much recently, you are still popping by.

Unfortunately though, for the moment this blog is on vacation, hopefully to resume normal service next month, depending on what the doctors find.

For everyone else though, it’s Chinese new year. Rather, it’s about to be Chinese new year. There are a few more hours of pig year left; then the year of the rat will begin.

I quite liked the year of the pig. Apart from the bad luck at the end, most of the year went well; I made some new friends; I saw new things; I learned new stuff; and life was… well… not bad. Quite good, actually. My parents continue to enjoy the start of their happy retirement. My brother is still happily married. Some of my friends have new children, and some have children on the way. Life goes on.

Outside, there are firecrackers going off everywhere, even out close to the hills and countryside of Taoyuan. Fireworks are flying into the air and coming disturbingly close to my bedroom window. I had a direct hit against the window last year. This year has been a little less terrifying, but we haven’t yet reached the main event yet. I expect I won’t be getting too much quality sleep though.

Happy Chinese new year, everyone. I hope the year of the rat is lucky for all of us, and I hope I can resume normal service and start writing about Taoyuan and life in Taiwan again, soon.

Gong hsi fa tsai!

(picture via Spring’s Greetings)

I’ve been waiting for this exhibition for a month or two, so I went along this week to take a look. At the front door I was welcomed with a free guidebook and several computer games. The exhibition is well staffed, with guides on most exhibits, fluent in Chinese and English. The exhibits themself come from all around the world, from a number of famous digital artists.

Some artists are making a statement; the ‘bingmayong puppets’ for example have an interesting backstory. Others are experimental or geeky, such as HardDisko, the orchestra made from broken hard drives locked into an eternity of spinup cycles, or Khronos, which makes you feel like “Hiro Nakamura” from the TV show “Heroes”. Many exhibits may also look completely different depending on who visited them in the last half hour. You can quite literally leave your own mark on the exhibition - here’s my own brief appearance in one exhibit!

I took along several non-geeky friends, and they had a fun time, so this is definitely suitable for anyone, not just computer geeks. You can find the Red House theater next to the MRT exit (5?), near the ‘Ximen Walker’ statue, on Chengdu Road. I strongly recommend taking advantage of this extremely unusual free exhibition and visiting before it closes on Sunday.

More info here: Taipei Times, Open Play website.

Don’t worry - none of these photos give away the most surprising features of any exhibit.

One amusing quote worth picking up on:

“The main reasons for failed FamilyMart franchises are long working hours and a lack of employees,” said Hsu Shu-ching (徐淑卿), manager of the convenience store chain’s franchise department.

Oh I see! So it’s not because we have directly competing convenience stores positioned literally every 5 metres along every street in the country, selling identical goods at identical prices? :)

Taiwanese clothes store…

Read more about his experience (and see some wonderful photos) here!

Thanks Michael!

Michael, Scott, Graeme (thanks to Eva Wai).

But even taking these imaginary profits into consideration we’re looking at forward PERs of 60. 60! My mind can hardly cope. And yet rock solid American, British and European blue chip companies with pedigree histories can be bought on PERs ranging from 7 to 20 (i.e. 1/3 to 1/9 the price!). Another nugget: house prices have risen 13-fold in some areas in less than a decade. 13-fold. I think it’s a fairly safe bet that wages haven’t kept up.

I was going to write a blogpost about this, but I’ve been spared the need by some fellow market enthusiasts. Michael Turton has gathered up a couple of great sources of info on this topic, and you can read all about it here. It’s a good read, and he has provided links to Newsweek and David Webb’s sites. I strongly recommend you take a look if you’re in any way interested in the state of China’s economy.

Here are links to the data on the earthquake - biggest we’ve had for a few months.

• CWB1,
  CWB2
• CWB1 (Chinese),
  CWB2 (Chinese)
• USGS

As usual, I have lots of respect for the incredible Taiwanese engineers that have built an electrical grid and internet infrastructure that just keeps on running during earthquakes.

Oh, and some good news. I noticed that the English language system is now running in-line with the Chinese system. It used to be that English language version of the CWB website would lag behind by 15-30 minutes (or so it seemed…).

If you have time, you can fill in a report on the USGS website and help seismologists do their work…

More Asian economics over at toshou…

Map of the UK.

Today’s Lesson: The capital cities of the United Kingdom!

London, the capital of the UK, was built near the demographic center of the UK, so that it could represent Northern Ireland, Scotland and England equally without having a huge political or economic bias towards one area of the country. It’s a very logical place for it to be, and so other countries (such as Australia and the United States) have copied this design.

Cambridge, the capital of England, is home to one of the oldest and most famous universities in the world. It’s hardly surprising that the people of Britain wanted to protect such a valuable place of learning from any natural disaster that might occur. So many hundreds of years ago, the city of Cambridge was built beneath the sea, inside a giant glass bubble. This way, if mankind should ever destroy itself, or civilisation collapse, the sum of human knowledge built over the centuries would be preserved. It also won’t shock you to learn that Cambridge has an incredible marine biology department, being surrounded on all sides by the seabed. Scientists need only walk up to the glass wall to be able to observe an incredible variety of underwater creatures. Cambridge University is currently planning on building a new floating campus to allow the university to expand its student intake.

Edinburgh is the world’s most unusual capital city. Built on an outcrop of rocks in the outer hebrides, and surrounded by vast herds of sheep, this capital city has confused tourists since time immemorial. Why on earth was it built in such a remote location? With a modern population of just 3000, it’s not even clear if Edinburgh will continue to exist in the future, as islanders gradually move away towards Glasgow, in the north of Scotland, seeking jobs. If you should ever visit Edinburgh by aeroplane, be sure to watch out through the windows as you land, for farmers clearing their sheep from the runways before the weekly plane full of tourists arrives. There is a city tour bus operating on a circular route of some 200 meters length. Don’t miss it!

Not many people know this, but Ireland and Northern Ireland are the only two countries in the world that don’t actually have any capital cities! Instead, everyone lives in (roughly) equally spaced-apart houses along three giant streets that stretch the length of the island. In recent years, small villages have been allowed to form, so that people can find the pubs more easily. It’s hard to become lost while on holiday here - just remember which of the three streets you’re currently on, and keep driving until you find a village. Be careful though! There’s a small error in this map. Northern Ireland, through a quirk of history, is in fact located in the very southwest of Ireland, near Dublin.

Wales is famous for the fact that it doesn’t really exist. In fact, “Wales” is just a traditional joke played on tourists by people in the west of England.

Next week: Canada, the 51st state… (of Australia).

Pushed by high-priced apartments and suites, the price of housing in Taipei City has continued to rise, increasing from NT$460,400 per ping (3.3m2) in the first quarter to NT$489,400 per ping in the second quarter, the report said.

You need to read between the lines carefully with housing data, to see what is really being said. Here, the claim is made that the price of housing has ‘continued to rise’ and that the housing market has ‘continued to boom’. But what is really given here?

- Asking price? (initial price sought?)
- Agreed price? (final price negotiated?)
- Achieved price? (the money that ends up in the bank, including transactions that fall apart?)

In fact, it’s the first; and this is often not a reliable measure of what is happening in the market (whether rising, falling, or stagnating). If I told you that X amount of Chinese food went on the ‘market’ today, and that Y of it sold - do you think it would be the ‘average’ priced piece of food that sold? Or probably more of the cheap stuff? It’s very much the same with housing, and in housing markets with low turnover, you often find a ‘two-speed’ market forms. A two-speed market is where high-priced sellers sit and wait for a year at a time, while lower-priced sellers clear their properties in weeks.

Here, we see that the collective value of housing ‘went up’, and also that the number of houses on sale went up too - in fact, considerably more. Let’s do the math:

1st quarter: 19,663 units collectively priced at 214.8 bn = 10.9 million NTD per house on average.
2nd quarter: 25,335 units collectively priced at 248.1 bn = 9.8 million NTD per house on average.

Implied quarterly drop in average asking price: 10%.

Quarterly turnover? Down from 30.14% to 27.43%. Doesn’t sound like much does it? But that means houses have rapidly gone from ‘10 months to sell’ to ‘11 months to sell’. This is particularly interesting, given that the number of estate agents needed to achieve that lower level of turnover was vastly higher than in the first quarter! (see the original article)

Being honest, I don’t think ‘mixed’ quite describes that performance. I don’t think ‘housing boom continues’ quite catches it either. In fact, I think completely frakkin awful far better describes a 10% drop in price and 10% drop in turnover - in just 3 months!

Consider also, this was as we entered the summer - which in almost every country of the world is one of the best times of year to sell a house, as opposed to a bone-chilling winter! Of course, I’m sure someone will write to tell me that Taiwanese people in fact LOVE going out to view houses in the bitterly cold winter weather.

Now, time to get even more skeptical. Did you notice I used the words ‘priced at’, rather than ‘worth’ as the original article did? That’s because the worth of something, contrary to the Taipei Times belief, is not actually defined by its asking price. If I offered you a house for free, would the house be worthless? If I offered you a tasty 12″ pizza for 1 million NTD, is it worth 1 million NTD? Of course not!

There’s a stronger argument that ‘achieved prices’ measure a sense of worth, where worth means ‘what people are prepared to actually pay’. But if some dumb guy pays 1 billion NTD for a Big Mac, does that make all Big Macs worth 1 billion NTD? I say, hell no - of course it doesn’t. And that is as true of houses as it is of Big Macs. There is nothing magical about a collection of bricks and mud, that makes it different to every other type of item in the world.

Instead, I personally prefer (and recommend) a more ‘financially real’ sense of worth which derives from the financial value of a thing. If I buy a house with cash, and it returns me a rent of 10,000 per month, and after costs I am left with 7,000 per month, then I can compare that with putting my cash in the bank; or shares; or I can compare that with the damage done by inflation. This sense of worth is often imprecise and subject to your own beliefs about the risks and alternative returns involved. But, I personally believe it’s probably the most valuable sense of worth that there is. I encourage you to develop your own meaning of worth by thinking about these issues, rather than believing the absolute junk you are normally fed by the mass media about financial assets.

But, we can be more skeptical still. There are other questions we need to ask about housing data. Is it averaged out over several months, or raw data? Are we considering regions or national figures? Are they seasonally adjusted (taking account of the ‘nice weather effect’) or unadjusted? Are the annual figures a 12 month average, since start of year average, or an extrapolation of the current month’s data? Are the figures measuring asked, agreed, or achieved prices? Net of costs, or without costs? Money borrowed or money spent? Who is measuring (estate agents? the government? banks? surveyors?)? Why are they measuring? What are they measuring (sentiment, prices?) How are they measuring?

In fact, it’s fairly trivial to ‘flip’ between 100 different types of housing data, so that house prices can appear to go onwards and upwards continually each month; or to present housing in a negative way continually. It’s worthwhile to watch journalists do this as they are spoonfed ready-made ‘press releases’ by banks and estate agents. Many such press releases are seemingly published without a moment’s critical analysis.

My all time favourite is the simple, ‘declare victory, and retreat!’. We saw this above in the Taipei times article, where they talk as though this news is actually encouraging! They start by saying the news was ‘mixed’, but then we were soon told ‘the market is continuing to boom’, and then we are told about a collection of statistics going up (value of houses on sale, number of houses on sale, number of estate agencies, …). Take a look at the full article online (or in print). Notice how much time was spent talking about the number of real estate salesmen’s offices in Taipei and where they all opened? Notice how little time was spent calculating the average price of a house, or the consequences of a rise in price per ping in a falling market?

No, most houseowners will worry when they see news of a mixed market, but then they will see ‘market continues to boom’, look at numbers going up, and they will feel reassured. The newspaper has succeeded! The scary headline sold the paper, yet the lovely story of the main article made the reader feel warm and happy.

To end this article, let’s look at the claim that the house price measured by ping went up. Intuitively, many people will think - oh ho - houses are becoming more expensive! But in fact, we’ve seen that collectively the ‘asking price per house’ went down by 10%; so if the price ‘per ping’ went up by around 5%, we can conclude that people have given up on selling big houses (generally) and are now selling pishy little apartments that are 15% smaller on average. Since the ‘achieved price’ should be considerably lower than the asking price in a low turnover market, this ‘house shrinkage’ effect may even be much worse.

As housebuyers in Taipei spend the next 30 years of their lives paying off around $10,000,000 NTD of debt - a sum which bought only a smaller-than-ever-before apartment - I wonder if they will question their sanity back in 2007.

Happy Corner. It’s not what you might think. More here at the Taipei Times.

Point 1: Old people are screwed. Can’t get a good return from the bank on their lifelong savings, because of low interest rates. Can’t effectively invest in assets like housing and stocks (prices are sky high, since people have borrowed money practically for free, driving up prices). Legal restrictions on their investment overseas. Ergo, old people are screwed.

Point 2: Young people are screwed. House prices are absurdly high (10-20 million in Taipei) relative to wages. Take long term (historical) mean interest rates of around 6%, plus bank mortage premium, and you come to the conclusion that either every single guy in Taipei is earning 2-3 million a year to pay for his living costs, or you have a lot of couples working super-hard in normal jobs, just to keep up. How will they save for their middle age and old age? How will they take time off work for kids? How will they pay for kids? What happens if one of them falls ill? What happens if they both fall ill, even for a month or two? How will they cope when interest rates rise beyond the mean, but wages don’t go anywhere at all?

Worse, there is a strong tendency for people to do what their parents tell them. And parents are telling kids to buy houses - many having never seen a really shocking economic crash in action firsthand, unless they were working in Japan 10 years ago. Oops. Practically every 20-something and 30-something in Taiwan has been set up for financial disaster.

Here’s a graph of Taiwan’s historical interest rates. Are we in a ‘normal’ or ‘abnormally cheap’ situation, do you think? How screwed will homeowners be if interest rates go back to 15%?

Point 3: Creative businesspeople are screwed. Yeah, for big companies with huge anti-competitive moats (i.e. the ultra-big fabs, TSMC etc.), life is pretty sweet, you can expand and expand and it costs you no money at all. But for small companies? No sooner do you think of a way to make a profit than 20 other guys are crowding in and destroying the profitability of your business niche! Damn!

Oh look, a street where no-one is running a hotpot store. 4 weeks later, after one guy has taken the risk and tried opening his pet store, everyone else sees the trade he’s getting, and muscles in with cheap loans (or cash from the oldies, who are desperately seeking any kind of return), and BAM!Every businessman in the fight is screwed.

Whether it’s pet monkeys, hotpot dishes, or mass-production of plastic widgets, as a businessman you are still going to get painfully screwed - time after time - in a ‘cheap and easy’ borrowing environment. Of course, everyone dreams of running their own business here… so they sleepwalk into small business failure.

Point 4: Consumers are screwed. Consumers have used up the next 10 years of consumption already. I look at the guys where I live, who struggle to earn a consistent $80-150TWD / hour. They are all driving super-cool cars; cars far, far cooler than those in the UK, supposedly one of the world’s richest economies. How the hell can they possibly afford them?

Of course, they can’t really afford them. It’s the magic of 10-20 year finance and low interest rates allowing a low monthly repayment - for the rest of your life. However, this repayment sucks up all their income each month - and as rates increase, it gets more and more painful. I’d say that most of the shiny, awesome, beautiful, expensive Japanese cars I see round here have bashes and dents somewhere. People can’t afford to have the car *and* get it repaired every time some scooter blasts into it from a blind corner.

But if you spend all your future earnings today - what do you spend next year, or the year after …?

Point 5: Importers are screwed. With the Taiwanese dollar as weak as it’s ever been, you wouldn’t want to be an importer. Hell no.

Point 6: Exporters will be screwed. Whenever the interest rates do go up, and the carry trade in TWD reverses, it will be UGLY for those exporters who have borrowed to their eyeballs to expand. Gearing up heavily is a nice way to set your business up for disaster. The only reason exports are rising in Taiwan so quickly is because Taiwanese Dollars are being handed out like candy to the rest of the world. What’s the good of selling 30% more stuff beyond the growth you’d have normally had, if the money you sell it for is worth 30% less?

Taiwan does more work, but gets the same money, in terms of international buying power. Great for employment numbers. Crap for increasing the wealth of Taiwanese people - which they find out as soon as they try to buy anything from other parts of the world, or go travelling, or pay their electricity bills…

Point 7: Houseowners are screwed. Besides the ongoing agony of mortgage repayments in a low inflation environment with rising interest rates, there’s the simple matter of negative equity. Low inflation means any ‘real’ drop in house prices will be a ‘nominal’ drop in house prices. I.e. prices actually DROP rather than stand still while everything else goes up in price. That means you can’t sell without taking a huge multi-million dollar loss. Which means, you effectively can’t sell. So you had better like the house you buy, people, because you will be living there a very long time.

Oh - and did you know that Taipei is famous for holding world records when it comes to house-price-to-earnings multiples? We’re talking about a earnings multiple of 10-15 in many regions of the city. That makes even America, Ireland, Northern Ireland, Australia, New Zealand and London look cheap. Heck it makes Hong Kong and Shanghai look cheap. Last time this happened in Taiwan was around the mid 90’s, and Taiwan’s housing market went nowhere for the following 8 years.

Point 8: Everyone servicing ‘young industries’ is screwed. Demographic decline. Basically, there was already a trend towards having fewer kids, (and later in life), but my belief is that it’s being accelerated by the ridiculous housing situation. Suffice to say I wouldn’t want to be Toys’R'Us in 5 years time. No money, no kids. Great for business…

Taiwan is also faced with a tough political choice. Either take in immigrants, boost your replacement ratio (number of kids per couple) or go into population decline like Japan. The last of those three options would not be good for house prices or businesses in this country.

Point 9: Energy screwage. Taiwan doesn’t have energy resources. You may have noticed the oil price recently. And last year. It looks like it may be with us to stay. Oh dear.

Und so weiter…

… I could go on. Now of course, there’s always something wrong in the economy. And there’s always something right. I mean, you could point to the superbly low unemployment in Taiwan and say, “hey, that’s pretty awesome”! But my view is that the good vibes of the ‘booming economy’ and ’superb unemployment’ are an accident, caused by people spending 10 years of future earnings, right now.

Analogy.

Imagine a car. What happens when you put your foot down hard on the accelerator all the time? You travel fast, everyone in the car feels pretty good…whee!… but you burn up your ‘future fuel’ early, and not as efficiently as if you’d just driven a little bit more carefully.

That’s what low interest rates do. And the effect is much the same. Then suddenly, and with little warning… you hear a funny noise from the engine and the car starts slowing down. And no matter what you do to the accelerator pedal at that stage… there’s nothing to stop your car grinding to a halt. It’s too late.

Don’t believe me? Look at Japan. They used up their fuel; their economy has stood still for more than a decade. Yet still they stupidly hold their foot down on the economic accelerator of cheap money, when there is clearly no gas in the tank. They need to raise their interest rates, get the old people spending for a while. Put a change of fuel in the engine.

You cannot have your cake, and eat it too. The people in your country either spend their future wages now (by borrowing money), or they spend them in the future (by earning them). But if they spend it now - it’s gone, and the future must go without.

Conclusion.

Will Taiwan take it’s foot off the economic accelerator pedal, and raise interest rates? Or will they hold the accelerator pedal to the floor, even as the car grinds to a halt, and find themselves stuck in the mud with Japan? It will be interesting to watch, either way.

Picture taken from globalpropertyguide.com.

http://www.who-sucks.com/people/the-exciting-world-of-south-korean-protests

I wonder, has anyone ever compiled a compendium of unusual Taiwanese protests?

Together, we can refer to these charges as friction. Just like air friction slowing an aeroplane, or road friction slowing your car, ‘financial friction’ slows your ability to make money by stealing little tiny chunks of it all the time.

Many people incur other costs on their interactions with the stockmarket beyond these three basic types of friction. You may incur capital gains tax if you make a big profit on the assets you’re buying. If you invest through a mutual fund, then you are paying some salaries for the people who run the fund, and you are also paying for their behaviour on your behalf. If they trade a million times a day, then the frictional costs they’re incurring on your behalf become rather high. If they trade once per year…. well, then they lose their job for ‘not looking busy’ while being paid a huge salary, which is one of the most unpardonable sins in Big Finance. There may even be another frictional cost involved for you, as you buy into the mutual fund or sell back out! Friction, friction, friction! It’s no wonder that the people who run stockmarkets are able to spend half their time driving around in Porsches.

Anyhow. I bought the Taipei Times today and was having a browse when I noticed that the ‘turnover‘ of the Taiwanese stockmarket was 211 billion Taiwanese dollars. Now just 7 years ago, turnover was considerably lower - about 20 times lower - following the Asian financial crisis of the late 90s. So this got me thinking, how much ‘friction’ does that imply in