In Korea…

“SEOUL, Nov 4 (Reuters) – Housing prices across South Korea will rise in 2010 for a sixth consecutive year and by the fastest pace in four years, an industry association research agency forecast on Wednesday.” (when do industry association representatives ever say anything else?) , “Kookmin Bank said on Monday housing prices rose for a seventh consecutive month in October from the previous month following a six-month decline.
http://www.forbes.com/feeds/afx/2009/11/04/afx7082777.html

In Singapore…

“Demand for private homes has experienced “strong growth” and unchecked price gains may expose the property market to risks in the global economy, the Monetary Authority of Singapore said in its Financial Stability Review today.”, “This comes after property prices rose 15.8% in the third quarter of this year, the most in 28 years, after dropping 25% in the previous four quarters.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aqr8hthy9z5k&pos=5
http://www.propertywire.com/news/asia/soaring-property-price-fears-200911133672.html

In China…

“Chinese real estate figures out on Tuesday show investment in the sector was up 18.9 per cent in October, while property sales soared 48.4 per cent year-to-date.”, “This is further evidence that strong bank lending and easy liquidity conditions are creating an overheated property market.”
http://ftalphaville.ft.com/blog/2009/11/10/82486/more-on-that-overheating-chinese-property-market/

In Hong Kong…

“Statistics compiled by CB Richard Ellis, an estate agent, show that prices of high-end flats have risen by 40% since January, and are now just 13% below their 2008 pre-crisis peak. Some are once again priced at record levels.”
http://www.economist.com/businessfinance/displaystory.cfm?story_id=14816657

In Taiwan…

“Nov. 13 (Bloomberg) — Taipei’s residential prices may rise 15 percent in 2010″ (That’s right – one random dude’s guess is apparently worthy of an entire news article at a major news agency)

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayxWM98dXAjA&pos=7

“Wealthy Taiwanese eye luxury homes in the south”

http://www.chinapost.com.tw/business/asia/b-taiwan/2009/11/13/232610/Wealthy-Taiwanese.htm

Also repeated here in the Taipei Times (Thanks Michael).

In fact, the Taipei Times also adds this little nugget: “Taiwan joined Singapore, Hong Kong, India and China in moving to prevent excessive property-market swings, after falling interest rates drove prices higher.”

So… wait a minute… how long have Taiwanese rates been low? (Answer: a long time). And how long has it been known that low interest rates cause asset bubbles (Answer: a long time – 80 years, at least). So why wasn’t this rapidly put in place when prices were swinging UP, effectively stealing the future earnings of the youth of the country and handing them to the old? Oh wait, maybe I know… taxes are higher when property prices are higher… and taxes go lower when property prices go lower.

So who do Asian economists blame for these Asian bubbles?

“Fed May Cause Next Crisis, Hong Kong’s Tsang Suggests”

http://www.bloomberg.com/apps/news?pid=20601080&sid=aU3AiTc_Q_vk

What a surprise.

“Where is the money going — it’s where the problem’s going to be: Asia,” Tsang said. “You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals.”

Oh dear, poor little Asia. At least they’re making serious progress in placing the blame elsewhere – the next stage of the crisis hasn’t even happened yet and yet it’s clearly America’s fault.

Summary & My Opinion.

Asian housing propaganda (’houses always go up!!!’) is once again filling the newspapers. Meanwhile, local governments pour money into the economy, keep interest rates low, and fail to regulate their housing and asset markets properly.

Yet when this all goes wrong it will be America’s fault apparently.

Hmm. My view is that a lot of people who failed to learn a lesson in 2008 are going to get burned again. More banks went bust in the USA this year than in any previous year, and losses are continuing. While modest GDP growth has been achieved in some countries thanks to a huge stimulus spending program and low interest rates, there is no indication that the world is really out of crisis yet. So why are people once again paying record prices to buy little piles of bricks and wood? I have no idea. It seems crazy.

As you may know, historically, economists/financiers seem to have held the view that although Japan had horrific government debt relative to the size of its economy (GDP), this was ‘OK’ since it was all lent by Japanese citizens (because of the high savings ratio). This meant the debt could be easily be repaid at any time by inflation, i.e. printing new money to pay back old debt.

Unfortunately, the debt was never repaid, it just grew and grew. It proved hard to generate inflation, and now all those people who provided the government with money via savings, are getting old, and they want to spend their savings.

So the Japanese government is trying to roll over some 250% of GDP into foreign borrowing instead of domestic borrowing at the worst possible time (i.e. when every other government and business in the world desperately wants to borrow money too).

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6480289/It-is-Japan-we-should-be-worrying-about-not-America.html

This should be interesting to watch.

(Britain is in a slightly similar situation, though with a growing population, lots of recently acquired debt, and a negative savings ratio which has now recently turned positive).

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 the marketplace these days? How much are people effectively paying each year, simply to rename the ‘owner’ part of the stock certificates, over and over again? What percentage of the Taiwanese economy’s earnings is being pissed away on simply renaming share certificates from Mr Yi to Mr Yang to Mrs Ting every few minutes?

Let’s look at turnover. Turnover represents the ‘dollar value’ of buys and sells on the stockmarket today, so it describes how quickly a particular value of shares is changing hands. Turnover in TAIEX stocks was 211 billion Taiwanese dollars on Friday. That means that in total, if you added up the value of all the shares that were bought and sold, it would come to 211 billion NT dollars.

Now, there are 365*5/7 = around 260 trading days in the year. So if Friday was a typical day, that means that there is 211*260 = 55 trillion NT dollars of turnover in the Taiwanese stockmarket per year.

What’s the size of the Taiwanese stockmarket? I.e. the ‘total price’ if one person was to try and buy every single company at once? The TAIEX has a total market capitalisation of around 21 trillion NT dollars. So from this we see that every single share in the Taiwanese stockmarket is having the name changed on the ownership certificate, every 5 months or so on average (55 trillion of turnover, divided by 21 trillion of actual shares available to be turned over!). Clearly investors here are overwhelmed by the terrifying prospect of long term company ownership!

Next, let’s assume conservatively that the costs of friction come in at around 1% of each trade (combining the costs of buyer and seller). For comparison, in the UK, these charges are usually in a range from 0.75->10% depending on the type of shares being traded. The costs happen on each end of the trade (the buyer and seller both have to pay their brokers and their taxes!). That gives a total cost for ‘friction’ of 0.01 * 55 trillion Taiwanese dollars = 550 billion Taiwanese dollars.

Example: So if you spend 100,000NTD on buying some shares, your frictional charges would add up to about 500NTD for you and 500NTD for the seller. That doesn’t seem unreasonable. Pretty cheap, in fact – you’d hardly notice 500NTD on the top of a 100,000NTD purchase, would you!

Last of all, how much profit are these companies actually making on their owner’s behalf? Correcting these figures for the current index value suggests an average company PER ratio of 14.6 for 2007. Turning that ratio upside down, 1/14.6, tells us that each company is earning $68 of profits per year, for every $1000 that gets invested into its shares, on average.

So we take the market capitalisation (21 trillion Taiwanese dollars), multiply it by 0.068 (earnings ratio), and we get $1428 billion Taiwanese dollars of profit this year, shared between all the major companies in Taiwan. That’s how much all the major companies made, added together.

Holy Friction, Batman! Can you believe it? We just worked out that Taiwanese stockmarket investors are (in aggregate) paying $550 billion NTD each year, out of their companies’ profits of $1428 billion NTD, just to alter the ownership details on the share certificates every few months, from Mr Yi to Mr Yang to Mrs Ting! This ‘changing ownership’ problem is wasting than a third of the company profits!

Example: Imagine you are living in a street with 8 hotpot shops. Every 5 months, the owners decide to sell up their shop and buy their neighbour’s hotpot shop since they think it’s probably doing better than their own. Over time, they all gradually move their ownership of a hotpot business up one side of the street, and back down the other, in a big circle. After a few years, they sit down together to work out how much this silly ‘buying your neighbours business, selling your own’ behaviour is costing them.

Imagine their shock when they find that moving their business up or down the street is costing them more than a third of their annual profits! Instead of making 60k a month on their hotpot stall, because they keep buying their neighbour’s business, and selling their own, they are all making just 40k a month after the costs of transferring ownership around. Do you think these people would keep moving around? Or do you think they would gasp in shock, and then decide that maybe the grass isn’t greener on the other side of the fence and decide to stay in a single business for the next 10-20 years?

The Taipei Times labelled the Taiwanese stockmarket as being red hot in an article they wrote last week. Clearly they are right – the money that is thrown into it is being burnt up – by stupid amounts of frictional costs, caused by swapping ownership around.

If anyone has the turnover, marketcap and PER figures for other regional stockmarkets, please do the calculations and email me – I’d love to know the extent to which friction is burning up the company profits of the markets of Asia just now.