Sub Prime

What happened (and what is still happening) is simply leverage in reverse, or what people used to call a “run on the bank.” But… I think a great more detail would be helpful for you to understand. Please excuse the intricacies: None of this stuff is very easy to understand the first time you think about it. I’ll try to avoid using any jargon…

For nearly 10 years, as interest rates fell from 1995 to 2005, the mortgage and housing business boomed as more and more capital found its way into housing. With lower rates, more people could afford to buy houses. That was good. Unfortunately, it didn’t take long for some people to figure out that with rates so low, they could buy more than one. Or even nine or 10. As more money made its way into housing, prices for real estate went up – 20% a year for several years in some places. The higher prices created more equity… that could then be used as collateral for still more debt. This is what leads to a bubble.

Banks, hedge funds, and insurance companies were happy to fund the madness because they believed new “financial engineering” could take lower-quality home loans (like the kind with zero down payment) and transform these very risky loans, made at the top of the market, into AAA-rated securities. Let me go into some detail about how this worked.

Wall Street’s biggest banks (Goldman Sachs, Lehman Bros., Bear Stearns) would buy, say, $500 million worth of low-quality mortgages, underwritten by a mortgage broker, like NovaStar Financial. The individual mortgages – thousands of them at a time – were organized by type and geographic location into a new security, called a residential mortgage-backed security (RMBS). Unlike a regular bond, whose coupon is paid by a single corporation and organized by maturity date, RMBS securities were organized into risk levels, or “tranches.” Thousands of homeowners paid the interest and principal for each tranche. Rating agencies (like Moody’s) and other financial analysts, believed these large bundles of mortgages would be safer to own because the obligation was spread among thousands of separate borrowers and organized into different risk categories that, in theory, would protect the buyers. For example, the broker (like NovaStar) that originated the mortgages would be on the hook for any early defaults, which typically only occurred in fraudulently written mortgages. After that risk padding, the next 3%-5% of the defaults would be taken out of the “equity slice” of the RMBS.

The “equity slice” was the riskiest part of the RMBS. It was typically sold at a wide discount to the total value of the loans in this category, meaning that if defaults were less than expected, the buyer of this part of the package could make a capital gain in addition to a very high yield. Even if defaults were average, the buyer would still earn a nice yield. Hedge funds loved this kind of security because the yield on it would cover the interest on the money the fund would borrow to buy it. Hedge funds could make double-digit capital gains annually, cost-free and risk-free… or so they thought. As long as home prices kept rising and interest rates kept falling, almost every RMBS was safe. Even if a buyer got into trouble, he could still sell his home for more than he paid or find a way to restructure the debt. On the way up, from 1995-2005, there were very few defaults. Everyone made money, which attracted still more money into the market.

After the equity tranche, typically one or two more risk levels offered higher yields at a lower-than-AAA rating. After those few, thin slices, the vast majority of the RMBS – usually 92% of the loan package – would be rated AAA. With an AAA rating, banks, brokerage firms, and insurance companies could own these mortgages – even the exotic mortgages with changing interest rates or no down payments. With the magic of financial engineering and by ordering the perceived risk, financial firms from all over the world could fill their balance sheets with higher-yielding mortgage debt that would pass muster with the regulators charged with making sure they held only the safest assets in reserve.

For a long time, this arrangement worked well for everyone. Wall Street’s banks made a fortune packaging these securities. They even added more layers of packaging – creating CDOs (collateralized debt obligation) and ABSs (asset-backed security) – which are like mutual funds that hold RMBS.

Buyers of these securities did well, too. Hedge funds made what looked like risk-free profits in the equity tranche for years and years.

Insurance companies, banks, and brokers were able to earn higher returns on assets by buying RMBS, CDOs, or ABSs instead of Treasury bonds or AAA-rated corporate debt. And because the collateral was considered AAA, financial institutions of all stripes were able to increase the size of their balance sheets by continuing to borrow against their RMBS inventory. This, in turn, supplied still more money to the mortgage market, which kept the mortgage brokers busy. Remember all the TV ads to refinance your mortgage and the teaser rate loans?

The cycle kept going – more mortgage securities, more leverage, more loans, more housing – until one day the marginal borrower blinked. We’ll never know whom or why… but somewhere out there, the “greater fool” failed to close on that next home or condo. Beginning in about the summer of 2005, the momentum began to slow… and then slowly… imperceptibly… it began to shift.

All the things the cycle had going for it from 1995 to 2005 began to turn the other way. Leverage, in reverse, is devastating.

The first sign of trouble was an unexpectedly high default rate in subprime mortgages. Beginning in early 2007, studies of 20-month-old subprime mortgages showed a default rate greater than 5%, much higher than expected. According to Countrywide Mortgage, the default rates on the riskiest loans made in 2005 and 2006 is expected to grow to as high as 20% – a new all-time record. The big jump in subprime defaults led to the first hedge-fund blowups, such as the May 2007 shutdown of Dillon Reed Capital Management, which lost $150 million in subprime investments in the first quarter of 2007.

Since Dillon Reed Capital, dozens of more funds have blown up as the “equity slice” in mortgage securities collapsed. Remember, these equity tranches were supposed to be the “speed bumps” that protected the rest of the buyers. With the safety net of the equity tranche removed, these huge securities will have to be downgraded by the rating agencies. For example, on July 10, Moody’s and Standard and Poor’s downgraded $12 billion of subprime-backed securities. On August 7, the same agencies warned that another $1 billion of “Alt-A” mortgage securities would also likely be downgraded.

Now… these downgrades and hedge-fund liquidations have hugely important consequences. Why? Because as hedge funds have to liquidate, they must sell their RMBSs, CDOs, and ABSs. This pushes prices for these securities down, which results in margin calls on other hedge funds that own the same troubled instruments. That, in turn, pushes them to sell, too.

Very quickly the “liquidity” – the amount of willing buyers for these types of mortgage-backed securities – disappeared. There are literally no bids for much of this paper. That’s why the subprime mortgage brokers – the Novastars and Fremonts – went out of business so quickly. Not only did they take a huge hit paying off the early defaults of their 2005 and 2006 mortgages, but the loans they held on their books were marked down, with no buyers available and their creditors demanded greater margin cover on their lines of credit… poof… The assets they owned were marked down, they couldn’t be readily sold, and they had no access to additional capital.

The failure of the subprime-mortgage structure – which started with higher-than-expected defaults, led to hedge-fund wipeouts and then to mortgage broker bankruptcies – might have been contained to only the subprime segment of the market. That’s why we jumped in during late spring and recommended the higher-quality mortgage firms, such as Thornburg and American Home. We believed that the higher quality of these firms’ underwriting would prevent a similar run on the bank.

But… the risk spread because of the financial engineering.

With Wall Street wrapping together thousands of mortgages from different underwriters, it’s likely that hundreds of financial institutions around the world have traces of bad subprime and Alt-A mortgage debt on their books. Parts of these CDOs were rated AAA. Almost any financial institution could own them – especially hedge funds. Hedge fund investors quickly figured this out – and asked for their money back.

And so, in July, liquidity fears began to creep through the entire mortgage complex. Not because the mortgages themselves were all bad or even because the mortgage securities were all bad – but because all the market players knew a wave of selling, led by hedge funds, was on the way. Nobody wants to be the first buyer when they know thousands of sellers are lined up behind them.

The market “locked up.” Nobody would buy mortgage bonds. And everyone needed to sell. Suddenly even Wall Street’s biggest banks – the very firms that created these mortgage securities – were suffering huge losses, as the bonds kept getting marked down as hedge funds and other leveraged speculators had to sell into a panicked market. In this liquidation, even solid firms, like American Home and Thornburg, were trapped owning new mortgages they couldn’t sell to Wall Street. Meanwhile their banks, worried about the collapsing prices of mortgages, demanded greater collateral.

It’s a classic “run on the bank,” except today the function of the traditional bank has been spread out among several institutions: mortgage brokers, Wall Street security firms, hedge-fund investors, and banks. The real problem is that the long-dated liabilities (a 30-year mortgage) were matched not by reliable depositors, but by fly-by-night hedge funds, which were themselves highly leveraged and subject to redemptions.

That’s why even as the top executives in these firms believed their mortgages were safe and sound, they can’t get the funding they need to hold onto them through the crisis. As Keynes predicted, the lives of every higher-leveraged financial institution is precarious: “The market can be irrational longer than you can remain solvent.”

The hedge funds have no solution. Redemptions will force them to sell. They’ll continue to pressure the market, resulting in huge losses. Hundreds of funds will likely be liquidated.

Wall Street’s investment firms, if they can find additional capital to meet margin calls, might weather the storm… depending on how far it spreads. We saw a move in this direction yesterday when Goldman announced $3 billion in additional funding for its big hedge funds.

For most mortgage brokers, the party is over – goodnight. Something like 90% of them will be out of business by the end of the year.

The only chance they have to survive is very conservative underwriting (which might result in a premium for their mortgage securities) and lots of additional funding. Delta Financial, for example, is renowned for its very conservative underwriting, which requires a substantial (20%) downpayment. The company raised $70 million last week from two investors (one of which is our friend, Mohnish Pabrai) to hang on to its $5.6 billion in on-balance-sheet mortgages. The stock is up 14.5% on the news today. Will it be enough capital? It’s very hard to say. It depends on whether or not the company is able to sell some of its mortgages to raise cash. It depends on whether or not it is downgraded further and the firm receives additional margin calls.

I wouldn’t be surprised to see Thornburg take a similar step – raising funds from existing shareholders. But, for now, Wall Street remains very skeptical the firm will survive. Its shares are down another 46% today.

As analysts, what we got wrong was how far the crisis would spread. We thought by buying the most respected firms with the best underwriting, we could avoid the subprime train wreck. What we didn’t know was how far the subprime sludge had been spread via mortgage securities. The insiders at these firms made the same mistake. They assumed by operating conservatively their businesses would retain a premium price on their mortgage and better access to capital. But in a panic, the baby is often thrown out with the bathwater.

And… we have to consider one more thing. Nobody knows right now how far the crisis will spread. It could certainly get worse. As these mortgage bonds are downgraded, the financial institutions that own them must raise more cash in order to meet liquidity regulations. To hold AAA-rated paper, banks, and other financial institutions need only to maintain $0.56 in capital for each $100 of paper. But as the paper is downgraded, the amount of capital they’re required to hold goes up, exponentially. At a BBB rating, financial institutions must hold $4.80 of capital. At BBB-, they must hold $8 of capital per $100 of asset-backed securities. Thus, as the crisis worsens, the demand for capital from these firms could grow substantially.

We can’t know what will happen. And, as we can’t know, we must stand aside when our trailing stop losses are hit. As I wrote, back in early July, about American Home Mortgage:

Speculation on Wall Street is that “Alt-A” debt will be downgraded next. Most of the loans held by American Home Mortgage are considered “Alt-A” because they have adjustable rates. Even with the high credit scores of the company’s borrowers, if rating agencies downgrade the bonds it holds, the company’s solvency will certainly come into doubt. Whether this happens or not is a moot point for us: Our speculation hasn’t panned out. We should have realized it sooner… but in a few more weeks we might be very glad we got out while we could.

US shares at start of bear market phase: Dr Doom

Key indexes may drop more than 30%, analyst Marc Faber warns

NEW YORK – STOCKS in the United States are at the beginning of a bear market in which benchmark indexes may fall more than 30 per cent, investor Marc Faber said.
Dr Faber, managing director of Marc Faber Ltd and publisher of the Gloom, Boom & Doom Report, said losses in mortgage-backed bonds are not ‘contained or easily solvable’ with interest rate cuts by the Federal Reserve.

He predicted in an interview last Friday that the Dow Jones Industrial Average will drop below 12,000.

Dr Faber, nicknamed Dr Doom for his less-than-rosy forecasts, said investors conditioned to buy stocks on dips helped push the indexes to records after sell-offs in February and June.

Emerging markets are particularly vulnerable because investors have bought into them heavily, he said.

The Morgan Stanley Capital International Emerging Markets Index has dropped 10 per cent since climbing to a record on July 23, cutting its gain for the year to 15 per cent.

Other investors said stocks will rebound because of profit growth.

Second-quarter earnings for members of the Standard & Poor’s (S&P) 500 Index have climbed an average 10.9 per cent among 452 companies that reported results, according to Bloomberg data.

‘We are still very positive on the equities market,’ said Mr Brian Stine, who helps oversee US$29 billion (S$43.7 billion) as an investment strategist at Allegiant Asset Management in Cleveland.

‘The fundamentals haven’t changed. Global growth should translate into earnings and higher stock prices.’

The S&P 500 added 1.4 per cent to 1,453.64 last week.

The Fed last week added US$62 billion in temporary funds to the banking system, amid an increase in demand for cash from banks roiled by US sub-prime loan losses.

Traders are speculating that the Fed will cut interest rates at an emergency meeting as soon as next week, according to Merrill Lynch.

‘I’m very critical of central banks,’ Dr Faber said in an interview from Vancouver. ‘They may bail out the system but there will be a cost and the cost will be inflation.’

He told investors to bail out of US stocks a week before the 1987 Black Monday crash, according to his website. He predicted correctly in May 2005 that stocks would make little headway that year, with the S&P 500 eventually gaining just 3 per cent. He also told investors to buy gold in 2001, before it more than doubled.

On March 29, Dr Faber said the emergence of home loan concerns meant the stock market was unlikely to benefit from the conditions that had supported its rally since June last year.

The S&P 500 climbed 10 per cent between then and July 19, when it reached a record, and has fallen 7.1 per cent since then.

BLOOMBERG NEWS

Meaning

“Life is without meaning. You bring the meaning to it. The meaning of life is whatever you ascribe it to be. Being alive is the meaning.”

– Joseph Campbell

Practical housekeeping rules for a healthy financial regimen

Keep good records. When you make a new investment, set up a folder for it. If it is not apparent from the normal paperwork you get, add a sheet that includes all the basic information about the investment, as well as phone numbers where you or your executor can reach someone who can provide more information. Save periodic financial reports.

Keep a file for heirs or your executor. At the minimum, this should include a letter to your spouse or children that tells them where to find or ascertain your investments, insurance policies, will, power of attorney, and so on.

In your file, include a list of people who will be key in handling your affairs after your death or if you are disabled. Provide information about your insurance policies. Put together a list of your investments with their current values, as well as a list detailing the sources of your income now and your survivors’ income sources and amounts.

Rent a safe deposit box at a bank. Think about what would happen if your house burnt down or you lost all of your information in a catastrophe of some kind. Use a safe deposit box to keep original copies of your most vital documents and a backup copy of key computer files.

Review your investment status at least once a year. Calculate the ratio of your fixed income to your equity investments, and rebalance this ratio if necessary in accordance with parameters that you have established.

Always live within your means. It is impossible to stress this too much. If you are still working and you are not saving, you are living beyond your means. If you are retired and you are drawing money too fast from your investments, you are living beyond your means.

Pay attention to your health. Exercising, maintaining a good diet, and taking care of your ears, eyes and teeth not only save you money, they keep you feeling young and active. Even then, the most important kind of insurance for you is likely to be a good medical policy.

Excerpted from Henry Hebeler’s Getting Started In A Financially Secure Retirement, published by John Wiley & Sons.

Chris Lake feat Emma Hewitt – Carry Me Away

Down, the water holds me down, it’s like I have no weight
And now, I’m floating with the tide, the sun is on my face
And I hear you talking. I hear you speak, someone’s talking, saying something
But I’m on my own, there’s nothing left to say, it carries me away

And you call out, I can’t hear you, I can’t feel you, no I can’t feel nothing
And you call out, I can’t hear you, no I can’t hear nothing
And you all look the same now
You all look the same now

Now, there’s nothing that I want, to take me from this place
I’m drifting further with the tide that carries me away
And you call out, I can’t hear you, I can’t feel you, no I can’t feel nothing
And you all look the same now
You all look the same now

I know you’re trying hard to reach me
You’ll always feel the cold without me
I know you’re trying hard to reach me
You’ll always feel the cold without me
I know you’re trying hard

Laws

Asimov’s Three Laws of Robotics
First law: A robot may not, through its actions or inactions, allow a human to come to harm.
Second law: A robot must obey any order given to it, unless in contradiction of the First Law.
Third law: A robot must protect its own existence, unless in contradiction of the First or Second Law.

Barnum’s Law — You’ll never go broke underestimating the intelligence of the American public.
Named for P. T. Barnum, close to H. L. Mencken quotation.

Benford’s Law of Controversy — Passion is inversely proportional to the amount of real information available.

Bernard’s Law – When the people own the money, they control the government. When the government owns the money, it controls the people.
Coined by Bernard von NotHaus, monetary architect of the Liberty Dollar.

Brooks’s Law — Adding manpower to a late software project makes it later.
Named after Fred Brooks — author of the well known tome on project management, The Mythical Man-Month.

Callahan’s Law — Shared pain is lessened; shared joy, increased — thus do we refute entropy.
Coined by Mike Callahan in Spider Robinson’s Callahan’s Series.

Clarke’s Three Laws. Formulated by Arthur C. Clarke.
o First law: When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.
o Second law: The only way of discovering the limits of the possible is to venture a little ways past them into the impossible.
o Third law: Any sufficiently advanced technology is indistinguishable from magic.

Dilbert Principle — The most ineffective workers are systematically moved to the place where they can do the least damage: management.
Coined by Scott Adams, author of the comic strip Dilbert.

Duverger’s Law — Winner-take-all electoral systems tend to create a two party system, while proportional representation tends to create a multiple party system.
Named after Maurice Duverger.

Finagle’s Law — Anything that can go wrong, will — at the worst possible moment.

Fudd’s First Law of Opposition — If you push something hard enough, it will fall over.
Posited by the Firesign Theatre in “I Think We’re All Bozos on This Bus (1971)”.

Goodhart’s Law — Once an indicator or other surrogate measure is made a target for the purpose of policy, then it will lose the information content that would qualify it to play such a role.
Coined by economist Charles Goodhart.

Gresham’s Law — Bad money drives good money out of circulation.
Coined in 1858 by British economist Henry Dunning Macleod, and named for Sir Thomas Gresham (1519–1579). Earlier stated by others, including Nicolaus Copernicus.

Hanlon’s Razor — Never attribute to malice that which can be adequately explained by stupidity.
Named after Robert J. Hanlon, although there is some debate.

Harshaw’s Law — Daughters can use up ten percent more than a man can make in any normal occupation, regardless of the amount.
Coined by Jubal Harshaw in Robert A. Heinlein’s Stranger in a Strange Land.

Herblock’s Law – If you like it, they will stop making it.

Hotelling’s Law — Under some conditions, it is rational for competitors to make their products as nearly identical as possible. Named after Harold Hotelling.

Hutber’s Law — Improvement means deterioration.
Coined by financial journalist Patrick Hutber.

Kerckhoffs’ Principle — In cryptography, a system should be secure even if everything about the system, except for a small piece of information — the key — is public knowledge.
Stated by Auguste Kerckhoffs in the 19th century.

Keynes’s Law — Demand creates its own supply.
Attributed to economist John Maynard Keynes, and contrasted to Say’s law.

Kuta’s Revelation — All forms of religion are based on faith in faith itself as a self-administered psychological placebo.
From the Selfbook (2007).

Ko?akowski’s Law — For any given doctrine that one wants to believe, there is never a shortage of arguments by which to support it.
Polish philosopher Leszek Ko?akowski

Linus’s Law — Given enough eyeballs, all bugs are shallow.
Named for Linus Torvalds, initiator of the kernel of the GNU/Linux operating system.

Littlewood’s Law — Individuals can expect miracles to happen to them at the rate of about one per month.
Coined by Professor John Edensor Littlewood.

Locard’s Exchange Principle — With contact between two items, there will be an exchange
Premise of forensics named after Edmond Locard

Metcalfe’s Law — In network theory, the value of a system grows as approximately the square of the number of users of the system.
Framed by Robert Metcalfe.

Moore’s Law — The complexity of an integrated circuit will double in about 24 months.
Stated in 1965, though not as a law, by Gordon E. Moore, later a co-founder of Intel.

Morton’s Fork — A person who lives in luxury and has clearly spent a lot of money must obviously have sufficient income to pay as tax. Alternatively, a person who lives frugally and shows no sign of being wealthy must have substantial savings and can therefore afford to pay it as tax.
Named after John Morton, tax collector for King Henry VII of England.

Murphy’s Law — If anything can go wrong, it will. Alternately, If it can happen, it will happen.
Ascribed to Major Edward A. Murphy, Jr.

Murphy’s Law (alternate) — If there are two ways to do something, and one of them will result in a disaster, an untrained individual will invariably choose the wrong way.
Also ascribed to Major Edward A. Murphy, Jr.

Ockham’s Razor — Explanations should never multiply assumptions without necessity. When two explanations are offered for a phenomenon, the simplest full explanation is preferable.
Named after William of Ockham. Also known as Occam’s Razor: Entia non sunt multiplicanda praeter necessitatem.

Orgel’s Rules. Formulated by evolutionary biologist Leslie Orgel.
o First rule: Whenever a spontaneous process is too slow or too inefficient a protein will evolve to speed it up or make it more efficient.
o Second rule: Evolution is cleverer than you are.

Pareto Principle — For many phenomena, 80% of consequences stem from 20% of the causes.
Named after Italian economist Vilfredo Pareto, but framed by management thinker Joseph M. Juran.

Parkinson’s Law — Work expands so as to fill the time available for its completion.
Coined by C. Northcote Parkinson.

Technician’s Corollary — No matter how big the data storage medium, it will soon be filled.

Peter Principle — In a hierarchy, every employee tends to rise to his level of incompetence.
Coined by Laurence J. Peter.

Pittendreigh’s Law of Planetary Motion — The perception of time passing more quickly has nothing to do with the fact of my own aging process. It’s the fault of the Solar System! The Earth is simply moving around the sun faster every year.

Putt’s Law — Technology is dominated by two types of people: those who understand what they do not manage, and those who manage what they do not understand.
Coined by Archibald Putt.

Reed’s Law — The utility of large networks, particularly social networks, scales exponentially with the size of the network. Named after David P. Reed.

Reilly’s Law — People generally patronize the largest mall in the area.

Rock’s Law — The cost of a semiconductor chip fabrication plant doubles every four years.
Named after Arthur Rock.

Say’s Law — Demand cannot exist without supply.
Often stated as Supply creates its own demand. Attributed to economist Jean-Baptiste Say and contrasted to Keynes’s Law.

Stigler’s Law of Eponymy — No scientific discovery, not even Stigler’s law, is named after its original discoverer.

Strathmann’s Law of Program Management – Nothing is so easy as the job you imagine someone else doing.

Sturgeon’s Law — Nothing is always absolutely so.
Derived from a quote by science fiction author Theodore Sturgeon.

Wirth’s law — Software gets slower faster than hardware gets faster.

Zipf’s Law — For many different kinds of things, their frequency is observed to be approximately inversely proportional to their rank order.
Named after George Kingsley Zipf.

Financial adviser's advice on investing: Don't wait

Sunday Times: July 22, 2007
ME & MY MONEY
Financial adviser’s advice on investing: Don’t wait
He invests all his earnings, keeping only six months of emergency cash
By Lorna Tan

MR CHONG, WHO HAS ALREADY MADE ENOUGH TO RETIRE, almost did not start the financial advisory firm he co-founded as it was just after the Sept 11 attacks and the then-banker was sitting pretty on several, more secure career opportunities. — PHOTO: MAY LIN LE GOFF

INERTIA is an investor’s worst enemy. It means time wasted and money forgone.
Straightforward advice and hard to argue with, especially as it comes from Mr Joseph Chong, 45, the founder and chief executive of financial advisory firm New Independent.

‘Every year that you delay saving and investing, it becomes worse and worse,’ he says.

He practises what he preaches and ensures that everything he earns is invested, except for three to six months of emergency cash.

He also advises that people should start learning about investing as soon as they start saving. ‘If you don’t do that, the tuition fee becomes a lot heavier. The mistakes made earlier are cheaper.’

As a child, he showed signs of entrepreneurship when he bred fighting fish and sold them for a profit.

Growing up in a family where money was tight, Mr Chong recalls how he was always scrounging around for scholarships. The St Joseph’s Institution student was on one scholarship after another from Secondary 2 until he finished his master’s degree in Germany.

A former Public Service Commission scholarship holder, he worked at the Ministry of Defence for eight years before joining the banking industry.

New Independent was set up in December 2001 with $400,000. It broke even after two years and is enjoying annual revenue growth of 30 per cent. It takes care of wealth management for high net-worth individuals.

He is married with an eight-year-old daughter. His wife, 42, was an investment banker who retired two years ago.

Q What is your approach to money management?

A Sweat at work but sweat one’s assets harder. This is the approach I have adopted since I started work 18 years ago with $2,000 in my bank account. It was already mathematically clear then that just working and saving wouldn’t do it. To be free from the ‘bondage’ of employment, you must invest and compound your money.

Q What financial planning have you done for yourself and your family?

A We have a comprehensive financial plan drafted in accordance with New Independent’s proprietary financial planning system – The NI Concept Plan (a framework which the firm recommends to clients).

Q What about insurance planning?

A This is an integral part of the plan. Generally, except for critical illness cover, all our policies are effectively term insurance plans.

Q When and how did you get interested in investing?

A I can’t quite remember when but I have always been interested in economics, history and mathematics.

Q What’s your investment philosophy?

A I have always believed in the need to diversify globally and across asset classes.

As a survivor of the Asian crisis and the dot.com bust, I am now an even more unrepentant believer. Like a predator on the stalk, an investor has to be patient.

I am quite happy to grind out 10 to 12 per cent annually on my globally diversified portfolio while watching for an opportunity to exploit extraordinary value opportunities. My overall portfolio generates about 25 per cent returns annually.

Q What has been a bad investment?

A It was a silly foray into club memberships in Batam. I wrote off the entire initial $12,000.

Q Your best investment to date?

A My best portfolio call was a play on falling interest rates in Singapore as the Asian crisis abated in 1998. A $35,000 basket of property securities tripled to $110,000 in eight weeks. That’s a rate of return not to be repeated in a lifetime.

Q Any other investments?

A I have a 2,300 sq ft investment property on Nathan Road that was acquired in 1998 for $1.61 million.

Q Why did you decide to become your own boss?

A Being my own boss was never a goal that I strove for. It is often a necessary evil in pursuing an idea or a passion.

Over and above risking my own capital, my partner and I cut our pay by 90 per cent initially to conserve cash.

It was especially tempting for us not to start. The terrorist attacks of Sept 11, 2001 had just happened. We had other more secure career opportunities dangling before us and we had young families to take care of.

But we saw what happened in Britain when Mrs Margaret Thatcher created the independent financial advisers industry in the late 1980s and we were convinced we could succeed.

Q Money-wise, what were your growing-up years like?

A I grew up with three sisters. My father was a civil servant and my mother a housewife. The tight money meant there was no budget for holidays.

Q Any retirement plans?

A I am very fortunate that financially I now have the option of retirement. But it is highly unlikely that I will be exercising it any time soon.

I hope to continue for another 25 years until I am 70 if my health permits, because I enjoy the challenge of what I am doing.

Q And your home is.. ?

A Home is a 1,324 sq ft condominium along River Valley Road bought for $1.08 million in 1998.

Q And your car is ..?

A A Toyota Altis.

Haruki Murakami: On seeing the 100% perfect girl one beautiful April morning

One beautiful April morning, on a narrow side street in Tokyo’s fashionable Harujuku neighborhood, I walked past the 100% perfect girl.

Tell you the truth, she’s not that good-looking. She doesn’t stand out in any way. Her clothes are nothing special. The back of her hair is still bent out of shape from sleep. She isn’t young, either – must be near thirty, not even close to a “girl,” properly speaking. But still, I know from fifty yards away: She’s the 100% perfect girl for me. The moment I see her, there’s a rumbling in my chest, and my mouth is as dry as a desert.

Maybe you have your own particular favorite type of girl – one with slim ankles, say, or big eyes, or graceful fingers, or you’re drawn for no good reason to girls who take their time with every meal. I have my own preferences, of course. Sometimes in a restaurant I’ll catch myself staring at the girl at the next table to mine because I like the shape of her nose.

But no one can insist that his 100% perfect girl correspond to some preconceived type. Much as I like noses, I can’t recall the shape of hers – or even if she had one. All I can remember for sure is that she was no great beauty. It’s weird.

“Yesterday on the street I passed the 100% girl,” I tell someone.

“Yeah?” he says. “Good-looking?”

“Not really.”

“Your favorite type, then?”

“I don’t know. I can’t seem to remember anything about her – the shape of her eyes or the size of her breasts.”

“Strange.”

“Yeah. Strange.”

“So anyhow,” he says, already bored, “what did you do? Talk to her? Follow her?”

“Nah. Just passed her on the street.”

She’s walking east to west, and I west to east. It’s a really nice April morning.

Wish I could talk to her. Half an hour would be plenty: just ask her about herself, tell her about myself, and – what I’d really like to do – explain to her the complexities of fate that have led to our passing each other on a side street in Harajuku on a beautiful April morning in 1981. This was something sure to be crammed full of warm secrets, like an antique clock build when peace filled the world.

After talking, we’d have lunch somewhere, maybe see a Woody Allen movie, stop by a hotel bar for cocktails. With any kind of luck, we might end up in bed.

Potentiality knocks on the door of my heart.

Now the distance between us has narrowed to fifteen yards.

How can I approach her? What should I say?

“Good morning, miss. Do you think you could spare half an hour for a little conversation?”

Ridiculous. I’d sound like an insurance salesman.

“Pardon me, but would you happen to know if there is an all-night cleaners in the neighborhood?”

No, this is just as ridiculous. I’m not carrying any laundry, for one thing. Who’s going to buy a line like that?

Maybe the simple truth would do. “Good morning. You are the 100% perfect girl for me.”

No, she wouldn’t believe it. Or even if she did, she might not want to talk to me. Sorry, she could say, I might be the 100% perfect girl for you, but you’re not the 100% boy for me. It could happen. And if I found myself in that situation, I’d probably go to pieces. I’d never recover from the shock. I’m thirty-two, and that’s what growing older is all about.

We pass in front of a flower shop. A small, warm air mass touches my skin. The asphalt is damp, and I catch the scent of roses. I can’t bring myself to speak to her. She wears a white sweater, and in her right hand she holds a crisp white envelope lacking only a stamp. So: She’s written somebody a letter, maybe spent the whole night writing, to judge from the sleepy look in her eyes. The envelope could contain every secret she’s ever had.

I take a few more strides and turn: She’s lost in the crowd.

Now, of course, I know exactly what I should have said to her. It would have been a long speech, though, far too long for me to have delivered it properly. The ideas I come up with are never very practical.

Oh, well. It would have started “Once upon a time” and ended “A sad story, don’t you think?”

Once upon a time, there lived a boy and a girl. The boy was eighteen and the girl sixteen. He was not unusually handsome, and she was not especially beautiful. They were just an ordinary lonely boy and an ordinary lonely girl, like all the others. But they believed with their whole hearts that somewhere in the world there lived the 100% perfect boy and the 100% perfect girl for them. Yes, they believed in a miracle. And that miracle actually happened.

One day the two came upon each other on the corner of a street.

“This is amazing,” he said. “I’ve been looking for you all my life. You may not believe this, but you’re the 100% perfect girl for me.”

“And you,” she said to him, “are the 100% perfect boy for me, exactly as I’d pictured you in every detail. It’s like a dream.”

They sat on a park bench, held hands, and told each other their stories hour after hour. They were not lonely anymore. They had found and been found by their 100% perfect other. What a wonderful thing it is to find and be found by your 100% perfect other. It’s a miracle, a cosmic miracle.

As they sat and talked, however, a tiny, tiny sliver of doubt took root in their hearts: Was it really all right for one’s dreams to come true so easily?

And so, when there came a momentary lull in their conversation, the boy said to the girl, “Let’s test ourselves – just once. If we really are each other’s 100% perfect lovers, then sometime, somewhere, we will meet again without fail. And when that happens, and we know that we are the 100% perfect ones, we’ll marry then and there. What do you think?”

“Yes,” she said, “that is exactly what we should do.”

And so they parted, she to the east, and he to the west.

The test they had agreed upon, however, was utterly unnecessary. They should never have undertaken it, because they really and truly were each other’s 100% perfect lovers, and it was a miracle that they had ever met. But it was impossible for them to know this, young as they were. The cold, indifferent waves of fate proceeded to toss them unmercifully.

One winter, both the boy and the girl came down with the season’s terrible inluenza, and after drifting for weeks between life and death they lost all memory of their earlier years. When they awoke, their heads were as empty as the young D. H. Lawrence’s piggy bank.

They were two bright, determined young people, however, and through their unremitting efforts they were able to acquire once again the knowledge and feeling that qualified them to return as full-fledged members of society. Heaven be praised, they became truly upstanding citizens who knew how to transfer from one subway line to another, who were fully capable of sending a special-delivery letter at the post office. Indeed, they even experienced love again, sometimes as much as 75% or even 85% love.

Time passed with shocking swiftness, and soon the boy was thirty-two, the girl thirty.

One beautiful April morning, in search of a cup of coffee to start the day, the boy was walking from west to east, while the girl, intending to send a special-delivery letter, was walking from east to west, but along the same narrow street in the Harajuku neighborhood of Tokyo. They passed each other in the very center of the street. The faintest gleam of their lost memories glimmered for the briefest moment in their hearts. Each felt a rumbling in their chest. And they knew:

She is the 100% perfect girl for me.

He is the 100% perfect boy for me.

But the glow of their memories was far too weak, and their thoughts no longer had the clarity of fouteen years earlier. Without a word, they passed each other, disappearing into the crowd. Forever.

A sad story, don’t you think?

Yes, that’s it, that is what I should have said to her.

Top Tips for dealing with In-house Lawyers

Australia – If you work with Australians, don’t worry; you don’t need to know anything about the law – but you must know about the sports results.

US – You have to be ready every hour of the day. They don’t know about time difference – they’ll call you at 3 or 4 am in the morning – they just don’t care about time.

Hong Kong – They have no time. No time for breakfast, no time for lunch, no time for sex. No time.

Singapore – You need to know the best chicken rice restaurant in the area – if you know the best restaurant, then they love you.

China – You have to drink. You have to drink more than them and more than you clients in order to get your job – its very hard I can tell you.

Paul Starr, Mallesons Stephen Jacques
Asian Legal Business, Issue 7.6

Energy agency warns of global oil shortage

LONDON – THE world economy faces a tight oil market in the next five years. This is due to a combination of accelerating consumption and output falls in mature areas, such as the North Sea, and long delays in new production projects.

The warning yesterday by the International Energy Agency (IEA), the energy watchdog, comes as oil prices surge above US$76 a barrel, to within US$2.50 a barrel of last summer’s all-time high of US$78.65.

The IEA said in its Medium Term Oil Market Repot that ‘oil looks extremely tight in five years’ time’ and there are ‘prospects of even tighter natural gas markets at the turn of the decade’.

The IEA forecast that demand will grow at an annual rate of 1.9 per cent during the next five years, to reach 95.8 million barrels per day (bpd) in 2012. China and other emerging countries will lead the increase in consumption.

The new forecast sees oil production growth in the next five years outside the Organisation of Petroleum Exporting Countries (Opec) at 1 per cent, roughly half the rate of demand growth projections.

The widening gap between demand and non-Opec supply will force Opec, the oil cartel which controls about 40 per cent of global oil output, to sharply increase its production between this year and 2012.

The IEA estimates Opec would have to supply about 36.2 million bpd in five years, up from today’s 31.3 million bpd. That would reduce the cartel’s spare capacity to 1.6 per cent of global demand, down from 2 per cent this year.

‘Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, with Opec’s spare capacity declining to minimal levels by 2012.’

FINANCIAL TIMES

Three Reasons why the Value of Gold will rise significantly in 2007


1 Oz. American Eagle Gold Bullion Coin

PRODUCTION DOWN, DEMAND UP.

Every major gold mining country has reported slumping mine production of gold in 2006. As a result of mine strikes, environmental disputes and increasing production costs, global production is continuing to sag and shows no signs of significantly reversing this trend in the near-term. South Africa’s gold-mining output has repeatedly disappointed and this also includes major declines in production in Peru and slumping output in Australia.

“We may see the occasional quarter or monthly production figures that show a spike in production, but the trend is for global production to remain flat to falling in the future,” said research report from Blanchard quoted by Dow Jones in January 2007. “There have been no new world-class discoveries in the last decade, coupled with slashed exploration budgets and industry consolidation.”


1 Oz. Canadian Maple Gold Bullion Coin 99.99% pure

BEATING PLOWSHARES INTO GOLD:
CHINA ENTERS ITS GOLDEN ERA.

Gold ownership for Chinese citizens was legalized in 2004. A system for selling bullion to the largest population in the world is slowly getting off the ground. Once this is established, the effect on gold demand will be staggering. Meanwhile, India, already the world’s largest consumer of gold, is experiencing an 80 percent growth in gold investment following a loosening of trade restrictions.

“Chinese gold consumption is expected to rise 17% this year,” news service Bloomberg quoted China Gold Association chair Cheng Fumin of 2007. “China is the world’s third biggest consumer of the precious metal and is expected to use 350 metric tons this year, up from 300 tons in 2005, owing to an increase in demand for bullion as an investment.”


1 Oz. South African Krugerrand Gold Bullion Coin

CENTRAL BANKS ARE BEGINNING TO DIVERSIFY INTO GOLD.

The effect of central bank policies on the price of gold has always been significant. Today a new era of central bank purchasing is set to begin as the world’s key banks look for diversification of their foreign exchange reserves away from U.S. dollar dominated holdings. The Russian central bank has begun adding gold to reserves, following a commitment to do so in 2006. Other Asian banks are rumored to be planning a similar move. This trend in central bank buying is extremely critical and will have a profound and immediate impact on the gold market in 2007.

“The price of gold will continue to go up and probably very substantially. In the long run, it’s very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.”

— Dr. Marc Faber, January 8th, 2007


NYSE: GOLD

Roksan Kandy L1 MkIII

I bought this 120W British made integrated amplifier yesterday and traded in my Martin M-800 (which was far too powerful for home use and not refined enough for female vocals / jazz).

You really should get your hi-fi in Hong Kong. No 7% GST or 17.5% VAT.

The best just got better.

Good Harvest

Our tendency is to be interested in something that is growing in the garden, not in the bare soil itself. But if you want to have a good harvest, the most important thing is to make the soil rich and cultivate it well.

Shunryu Suzuki

Banking

“OK. If I am being honest with you then, yes, let’s whisper it, but the truth of the matter is that all of us are overpaid. There is nothing magical about what we do. Anybody can do it.”

– Allen Wheat, CEO of Credit Suisse First Boston

Rajah & Tann adds four new lawyers to its stable

This follows on the heels of many high-level moves in the legal industry
By WEE LI-EN
Business Times

FOLLOWING a series of recent high-level movements among law firms, Rajah & Tann (R&T) has strengthened its practice with four new senior additions to its team from a rival firm.

The R&T recruits are leading telecommunications and information technology lawyer Andrew Ong, mergers and acquisitions lawyer Christina Ng, finance and securities lawyer Evelyn Wee and medical science lawyer Lim Wee Han.

R&T has recently been beefing up its practice with high-level additions to its firm. Former High Court judge Sundaresh Menon re-joined the firm last month, along with 12 other lawyers from international law firm Jones Day.

The firm’s four new lawyers are expected to join in the third quarter of the year.

The four are directors of a 32-member board at Drew & Napier (D&N), each with a long career at the firm.

According to D&N’s website, Ms Ng joined D&N in 1990 and heads its Indonesian and Thai desks, and Ms Wee joined D&N in 1989. Mr Lim joined D&N in 1992 and co-heads its medical science practice group.

Mr Ong, who heads the info-communications and technology business group at D&N, said yesterday in a statement: ‘I am extremely privileged to have been a part of Drew & Napier’s renown. After so many delightful years at Drew, I leave behind many good friends and colleagues as well as the fondest memories one could hope for.’

Yesterday, managing director of corporate and conveyancing David Ang said that despite the departures, Drew ‘will grow from strength to strength’.

He said of his departing colleagues: ‘We fully understand their plans to pursue their careers elsewhere. We will remain friends.’

D&N has itself just admitted four lawyers to its board from within the firm and is poised for further growth.

The new lawyers are Cheryl Tan, Adrian Tan, Kelvin Tan and Valerie Kwok.

There have been many high-level movements in the legal industry recently. It was reported last month that top criminal lawyer Subhas Anandan is leaving Harry Elias Partnership (HEP) for KhattarWong while Singapore’s first specialist judge Tan Chee Meng and co-managing partner of HEP is also leaving the firm for personal reasons.