Just one problem. It’s completely stupid 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 farting into a hurricane.

Oh, and you know what PISSES ME OFF IMMENSELY? 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!

Finance has for a long time been the UK’s biggest sector, ever since we wasted all the oil we had on a gigantic social welfare system, and closed down our factories.

That ends today. Excluding HSBC which isn’t really ‘British’, there were only 7 big British banks in existance 18 months ago. Most of them have histories extending back 100-300 years. One of them, RBS, was described as ‘the biggest bank in the world’ by assets, and was top 10 rated by Forbes last year. We now have, after 3 weeks of remarkable change:

• 1 dead / bought out (Alliance and Leicester).
  
• 2 nationalised (Northern Rock, Bradford and Bingely)
  
• As of today, 3 more nationalised or part-nationalised (Royal Bank of Scotland, Halifax Bank of Scotland, and Lloyds).
  
• The last one is on the brink of nationalisation if a rights issue fails (Barclays)
  

Unbelievable. The People’s Republic of China has a banking sector with a better grasp of capitalism.

This is the UK’s biggest industry and it has just died in 3 weeks. How did it die? The government leaked information through BBC journalists, particularly a BBC reporter called Robert Peston. There’s no conspiracy theory here folks, go look at his blog - you’ll find government plans to support the banks being released outside of the UK’s official market news service. Needless to say, the consequences for the banks were dire, particularly since many of the details leaked through journalists were inaccurate (about resignations, about the necessity of a bailout, the size of a bailout)…

Consequently, the government has effectively taken over a number of highly profitable banks for next to nothing. And we now have an incompetent government running our biggest industry.

Their first move? “Let the LENDING BEGIN!”. They immediately forced the banks to return to 2007 lending levels. See the RNS statements from the UK banks for the gory details - you can’t make this kind of stuff up. This is madness. In a world that is being destroyed by debt, their solution is to steal the public’s pension and savings assets and at the same time, try to get the public deeper into debt buying overpriced piles of bricks. I suppose it’s no big coincidence that so many members of the UK’s ruling Labour party seem to own a portfolio of rented housing…

It’s OK though. The UK can become rich and prosperous again if we just keep building more houses and selling them to each other at higher and higher prices until everyone is a millionaire. Hurray! :-(

“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!

But I guess it wasn’t those ‘evil’ shorters that were causing the problem, was it? Of course… now, without shorters, we have no forced buyers in the market to flatten out the drops and start off recovery rallies.

And as for reintroducing low interest rates… well, what do you think it was that got the world economy into this problem in the first place?

So… what happens next, now that Taiwan has thrown away all this public money on busted attempts to prop the market up artificially?

More here at the China Post.

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

Suffice to say it’s been the most interesting two weeks in finance, of my whole life.

We’ve lost the world’s biggest insurer, and basically all the world’s biggest investment banks are dead or eaten by competitors. Most of this happened in just 10 days.

In the UK, we had about 8 big banks of varying sizes, so far 2 are dead (NRK/BB), 2 have been forced into takeovers (AL, HBOS). That just leaves LLOY, BARC, RBS, and HSBC. It’s exciting stuff.

Meanwhile in the USA, idiot citizens are phoning in to their representatives, trying to stop politicians passing a $700bn financial stability package. This is tremendously short-sighted. What do you think will happen if the banks become paralysed or bankrupt? Hundreds of thousands of businesses will be screwed. Hundreds of millions of individuals will potentially be screwed as the housing market begins a new and steeper nosedive, as their pension funds collapse, and as jobs disappear. John Mauldin has it right - pinch your nose and do the deal, because it’s the least bad of many bad options right now.

Meanwhile, Taiwan has tried to keep it’s housing market and stockmarket afloat by making money cheaper to borrow again, i.e. dropping interest rates. But this is foolish - the banks are paralysed by not knowing what losses they’ve taken and what losses their counterparties are taking. So, it doesn’t matter how low you put interest rates, the banks simply won’t lend. This is a liquidity crunch now, far more than an affordability crunch (though the housing market here is pretty bad in that regard too!)

Check out the Taipei Times. Wow, the media is catching up to the fact that houses are absurdly expensive in Taiwan, particularly Taipei, and it only took them two years to realise that.

““Taiwan’s housing prices are still overpriced,” Chiang Li-wen, manager of Taiwan Cooperative Bank’s (合作金庫銀行) personal banking unit, said by telephone.”

“Taiwan’s top five banks, including Taiwan Cooperative Bank, issued a total of NT$31.97 billion (US$1 billion) in new mortgage loans last month, the lowest since NT$21.19 billion in loans made in February, the central bank said in a statement this week.”

Here is what happened in Japan 18 years ago when the banks realised they had huge losses on their books (just like Taiwan), at a time of ridiculously high house prices (just like Taiwan), and couldn’t lend any more (just like Taiwan). Notice the interest rate graph - dropping interest rates doesn’t save you in a liquidity crunch.

House price declines in Japan, last 18 years. From this article.

Interest rates in Japan, last 18 years. From this article.

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.

Note: RBS and HSBA are the UK’s two biggest banks.
RBS is up 44.2% after the first hour of trading.

Also, a quick comment about Taiwan. The US is reporting some $80 billion NTD of losses for Taiwanese investors and banks. Taiwanese newspapers this week only mentioned about $2-3 billion NTD when reporting on companies that have been hit. If you are reading the Taiwanese press and thinking ‘it’s probably nothing’, you may get badly burned. If you think you are OK because your bank hasn’t been mentioned yet - consider the possibility it is because they are still trying to add up their losses. “No news is not good news” when it comes to admitting losses, unfortunately.

Addendum: check out this beauty of a graph!

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.

Lehman Brothers seems to have collapsed as a result of its exposure to the mortgage backed securities market (which has ‘imploded’ over the last 12-18 months).

$35 million is not much compared to some of the Japanese and US banks, of course, who are potentially out of pocket by billions of dollars in bank loans and bonds! Ouch!

In other news, Taipei county house prices are down 15%; some Taiwanese commentators already expect another 20-30% to come off the price. Michael Turton has some amazing coverage of the economy currently.

Meanwhile in other news, the government is going to combat inflation in house prices by … handing out free money every month to young couples to pay their rent or interest payments. Think about that for a moment… fighting inflation by handing out armfuls of money. Rather like trying to put out a fire by dousing it with petrol.

A more sensible way to make housing a realistic proposition for young people is to allow the market to correct naturally. After all, when houses get to 30% of what they are just now, young people won’t have many problems at all…

Ending on a cheery note: inflation is now rising faster than my salary, and the government is using the tax system to hand out giant armfuls of my money to other young people simply because they are married. Brilliant!

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!

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.

An ETF is just a form of index tracking fund, that can be bought and sold as though it was a company. Index tracking involves copying the performance of a group of shares, usually a well known group. For example, an index might contain the largest 500 companies in a particular country (the SP500, DAX or FTSE100, for example).

If you think of ETFs as a pretend company listed on the stockmarket, that performs like the average company in the market, you wouldn’t be a mile from the truth. For example, “ISF” is the name of one ETF, whose share price mirrors the level of the FTSE100. It also pays out the same dividend as the companies in the FTSE100, on average (less a fairly small annual charge).

Internationally, ETFs have been available to the public for a few years, and you can purchase ETF shares corresponding to almost any major stockmarket index: America, Europe (or individual countries in Europe), Asia (or individual countries in Asia), …

Unlike a mutual fund, ETFs don’t have an upfront charge to buy in units of the fund; nor an exit charge; and typically, ongoing annual charges are tiny - 0.4% per year being easily achievable on most major indices.

So why do I bring this up today? Well, for about a year I’ve been trying to find a way to invest in ETFs from Taiwan, so that my Taiwanese friends can enjoy the almost magical returns of passive, long-term-buy-and-hold index investing.

To date, I’ve only found ‘fake’ ETFs available through some Taiwanese banks - where “ETF” has been included as part of the name of a traditional mutual fund, to try to make it sound trendy, new and fashionable. These ‘ETFs’ aren’t worth spitting on; they’re not tradable like real ETFs; there’s often no real attempt to actually replicate a well-known index; they have high annual charges; and remarkably, they typically have costly entry and exit charges.

However, the Financial times reported today that the Taiwan Stock Exchange is to list more than a dozen real ETFs mirroring the indices of countries all across the world.

This is great news if you’re living in Taiwan, and especially if you’re limited to investing in Taiwan. These ETFs will offer an ‘easy to get in, easy to get out’ way of investing in index trackers, and at low cost - no upfront costs besides a small share dealing charge, and a tiny annual management fee.

For anyone who just wants to invest in international stockmarkets, but doesn’t want to learn about shares or funds or fund managers, this is a great choice. Also, there’s bucketloads of evidence that passive index trackers outperform traditional actively managed mutual funds, after charges are taken into consideration, so this is really a superbly effective way to invest spare money.

Anyway, please don’t take my word for any of this - this is a blog post, after all, not financial advice. Still, I’d recommend to anyone with some spare dosh, currently living in Taiwan, that it would be well worth your time to learn a little bit about ETFs.

41292387 (match all the digits for the grand prize of $2 million NTD).

32971009 (prizes for matching 3 or more digits starting at the right hand side).

39376966 (prizes for matching 3 or more digits starting at the right hand side).

50336841 (prizes for matching 3 or more digits starting at the right hand side).

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…

NNT is one of the few authors in Finance I take seriously; the others being Warren Buffett, and Benjamin Graham. His books, ‘Fooled by Randomness’ and ‘The Black Swan’, are must-haves for any serious finance nut. Besides his theoretical savvy, NNT is a damned funny read, as you’ll see in this article.

I admire his guts. Remember, he is up against the entirety of financial academia as well as the bulk of the finance industry - stating out loud that the most basic theories in Finance are flat out wrong. Fortunately for him, he happens to be right.

Furthermore, he is in very good company. Anyone who has read ‘the superinvestors of Graham and Doddsville‘ will have become well aware that the core theories of finance are based on utterly absurd premises.

Here’s a sneak preview… enough to whet your appetite.

Last August, The Wall Street Journal published a statement by one Matthew Rothman, financial economist, expressing his surprise that financial markets experienced a string of events that “would happen once in 10,000 years”.

A portrait of Mr Rothman accompanying the article reveals that he is considerably younger than 10,000 years; it is therefore fair to assume he is not drawing his inference from his own empirical experience but from some theoretical model that produces the risk of rare events, or what he perceives to be rare events. (NNT, FT.com)

Click here for more.

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.

Fruit and vegetables: subjectively, seem to be about 10% more expensive.
Yoghurt drinks: up 20%.
Bus travel: From $15, to $18 - and given the hassle of carrying lots of $1 coins, that’s arguably an increase to $20! That’s 33%!
Baked items: Noticably more pricey, around 10%.
Electricity bill: Through the roof (even though the electricity has been turned off!).

So far, I’ve only been in a couple of small shops - and I am not looking forward to my weekly spend at the supermarket if this pattern of price increases holds up. Thankfully, my rent has stayed the same this year, which is nice as it represents a big part of my spending.

Of course, economists might look at this and scoff - what about the many items that didn’t go up in price, which I didn’t mention - cans of ‘Vitali’, for example? What about the expensive items that take up a lot of people’s money, like flat-screen TVs, that usually go down in price over time?

The first point would be fair - we tend to notice changes more than things staying the same, and it is easy to build a skewed view of reality for this reason. But in regard to the second point: well, I wouldn’t really care if cars or flat-screen TVs came down 10% in price in the last 2 weeks - and I doubt very much that they did. Generally, I don’t make many discretionary purchases*, so my ‘personal price inflation’ is probably more like that of a old person - just the basics, thanks!

It seems though that on this occasion, the economists would probably agree that a bit of slightly higher inflation is appearing. The Taipei Times reported today that inflation jumped this month.

And from the China Post:

And that’s just in one month! Some of the other measures of inflation show it to be rocketing up fast for manufacturers as well as consumers:

Scary. Typical bank interest rates at around 2-2.5%; broad annual inflation** at up to 6.25%, and with a 1-month jump of anything up to 5% depending on what you’re buying. Watch your spending carefully, because there’s a very real chance your wage rise this year won’t come close to covering the increase in the cost of living.

Links: Michael Turton has recently written about Taiwanese food prices, here.

* discretionary purchase = ‘things you want / things you choose to buy’.
* non-discretionary purchase = ‘things you need / things you have no choice about buying’.
** I recommend being a bit wary of all government inflation figures - not just Taiwan’s! I believe they will be understated by their design, since it is in most government’s interests to report low inflation rather than high inflation. I instead suggest estimating your own personal inflation using a standardised ’shopping basket’.

More Asian economics over at toshou…

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.

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.

18220444 (prizes for matching 3 or more digits starting at the right hand side).

26888640 (prizes for matching 3 or more digits starting at the right hand side).

37661297 (prizes for matching 3 or more digits starting at the right hand side).

1) Recently, a consortium of banks (Fortis, Santander, and RBS) offered £48 billion to buy ABN Amro.

2) According to the words of RBS’s CEO, Fred Goodwin: RBS has a 38% share of that transaction. In other words, £18.24bn.

3) However, that 38% included a bank within ABN Amro, called La Salle. La Salle has just been sold seperately for £11.5bn.

4) That leaves RBS paying for £6.74bn (18.24bn-11.5bn) for its share of the remaining parts of ABN AMRO, assuming that the business splitup is the same.

5) When RBS first expressed an interest in bidding for ABN Amro, its share price was £6.66.

6) However, RBS’s share price became £5.71 today (and was £5.76 at close of market).

7) RBS has 9,456,444,000 shares outstanding.

8) (6.66-5.71)*9,456,444,000 = almost exactly £9bn.

9) In other words, the market has ‘written off’ £9bn from the equity of RBS as a result of an offer made of £6.76bn, net.

10) Therefore, assuming the remainder of RBS not involved in this transaction is still worth what it was before, new buyers of RBS shares are effectively paying their fraction of -£2.26bn for ABN Amro. So, as a new buyer of RBS you are obtaining your ABN Amro shares for “Cheaper-Than-Free!”.

11) But wait. It gets better.

12) The consortium (Fortis, Santander, RBS) recently altered the offer being made, so that a greater proportion would be paid in cash. I’m going to change to Euros here, for simplicity’s sake.

13) The offer as it currently stands consists of 35.6 Euros (cash) and 0.296 RBS shares, being paid per ABN AMRO share.

14) At the close of market today, ABN’s share price was 35.29 Euros.

15) That means, RBS’s shares are being valued at ‘Cheaper-Than-Free!” too. By buying an ABN AMRO share, you get your money back, plus 0.31 Euros, plus 0.296 RBS shares.

16) The horrifying conclusion.

a. ABN Amro’s shares are being valued at ‘less than nothing’.
b. RBS’s shares are being valued at ‘less than nothing’.
c. If an acquirer whose equity is valued at less than nothing, buys a company whose equity is also valued at less than nothing - is the acquirer’s equity diluted? Or does a black hole open up in the space time continuum and swallow us all?

Further notes

(point 4/9) It turns out, in the revised bid, RBS actually altered the net portion of ABN it wishes to have (in its revised bid) to around £10bn. But still, the market is apparently assuming that the entirety of this investment by RBS will just disappear into thin air… though it’s not quite as bad as I made out in the above argument - yet.

(point 15) Demully (a writer on various UK financial forums) suggests that because there are two bids in the running for ABN, the market price for ABN implies shareholders will pick a lower bid rather than the one from RBS; and also it reflects a risk premium, in that the bid might not go ahead at all. That’s a fair point. However, to my mind, the size of the premium seems… collossal… given that the RBS bid is actually formalised.

(generally) It’s actually unfair to say that all of the fall in RBS’s price can be attributed to the bid they have made for ABN Amro. There has been a mild fall in the market lately; however, comparing against one of RBS’s peers - say, HSBC - we can see that RBS’s share price has changed in a unique and significant way since the bid was announced.

Thanks to demully for some of the above.

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.

As I did so, a woman in a very smart black suit (who had been standing near the door) walked over and asked to see my ID. “Blimey”, I thought, “They must have a bunch of laowei crooks bringing in their fake giant bags of NT$1’s and trying to nick all the $500’s”. Assuming it was the manager - and with these words, I’m sure Taiwan veterans are already beginning to grimace - I proceeded to try to dig out my bank card and ID card.

“Ello ello ello, wot’s all this then?” remarked the approaching security guard - in Mandarin, admittedly, and perhaps using a somewhat more local idiom. He then turned to me, and exclaimed “ka de!”.

“Ka de?”, I inquisitively inquired.

“Ka de!!!”, he strained, gesturing towards the woman.

Crikey - 3 exclamation marks! He must really want me to show ID to this manager!

But then, the more I tried to find my card, the more upset he became. At which point it occured to me that this woman was in fact not a manager at all, but rather an unscrupulous debt salesperson who was attempting to pinch my name, date of birth and address from my ARC card. The security guy was trying to say “credit card” in English to warn me of the reality of the situation. The woman, of course, was not amused. So this bud’s for you, Mr Credit-Card-Fraud-Preventing-Bank-Security-Dude.

Anyhoo, “ello ello ello, wot’s all this blogpost about then?”. Well, it turns out Taiwan has just passed a new law that lets you borrow 12 million Taiwanese dollars of unsecured debt (credit cards) and then only pay 20% of it back. All you need to do is: get the card, blow the money on beer and betelnuts and … err… more beer, lose your job, and then providing you can cry like a girl in front of a judge for an hour, you’re sorted!

You may have your debt cancelled; more likely, your debt payments will be delayed 8 years. However, if you’ve just burnt through 12 million dollars of booze and betel nuts then frankly, being alive in 8 years time is probably not on the cards anyway - excuse the pun.

Get your free debt while you can, I suppose. And if somehow you can’t find a cardmonkey who’ll set you up with your new plastic, then wander into the nearest branch of any major bank in Taiwan with your ARC card and pretend to be a saver. A credit ghoul is already patiently waiting there, ready to sign your soul away.

Mussst… havvve…. ARC!!!

p.s. Don’t actually do this. It would be completely illegal, and what’s more, it would be lame. Your actions are your own responsibility. Picture is copyright of “Wizards of the coast”. Yada Yada Yada.

“The yield or interest rate on 10-year U.S. bonds closed at 5.126 per cent, up 0.16 of a percentage point on the day and half a point over a month.” - that is one heck of a move! (thestar.com)

What is happening? Here is one guess.

1. The US owes lots of money to Japan and China. They hold this debt mostly in the form of ‘long term fixed rate treasury bonds’ - in other words, a piece of paper saying the US government will pay out a regular stream of interest on what they owe.
   
2. However, the US appears to be experiencing higher than expected levels of inflation - mainly because there is stacks of new money being added into circulation by the banks. So it looks like the US will probably have to pay better interest rates in future to balance the ‘devaluing’ caused by inflation and an excess of dollars; and to try and limit the willingness of consumers to borrow cash.
   
3. This makes people think, ‘aha - maybe my fixed rate of interest on these treasury bonds isn’t so good then. Maybe I’ll just sell some.”
   
4. Therefore, the price of treasury bonds goes down, as the supply of them (the number of people selling them) goes up.
   
5. But, if you were China or Japan, and you had billions of these things, what would you want to do if you believed the price of them was going to go down? You’d want to get rid of the blasted things, sharpish, and swap them for something else that might keep its value better.
   
6. It *may* be that what we are seeing right now is the ‘US treasury debt’ system beginning to unwind. That is, China/Japan trying to get out of their positions. Further evidence for this can be found in the colossal investment into foreign equities that the PRC government is currently undertaking.
   
7. There’s something of a feedback loop - the more governments sell US treasuries, the more other countries will want to get out of them too!
   
8. This is all well known, of course. The interesting thing is that it hasn’t happened yet. Like a group of poker players trying to bluff each other, everyone has kept playing the game. But perhaps we are now reaching the end of the game.