The June 13 Incident

It is entirely possible that the world economic crisis and the US Sub-prime mortgage fiasco in 2008 may have been foreshadowed by what I’d like to call the June 13 incident in 2007, specifically, what happened after that day. On that day, the interest-rate spread (the difference between the interest rates of two different investments) between the main junk-bond index (a.k.a. the dross standard) and the ten-year US Treasury Bond (a.k.a. the Gold Standard) shrank to just 2.4 (2.4%) percentage points ( 7.7% (junk bond) – 5.3% (Treasury Bond) = 2.4%). What does this basically mean?

Well, junk-bonds are considered far riskier investments than treasury bonds, so logically, since we are assuming more risk, we should expect higher ROIs (return on investments). Such a low interest-rate spread between these two meant that investors were in fact overpaying for riskier investments.

After the June 13 incident, many investors around the world suddenly woke up to the reality of the financial situation after the many dream years of strong global economic growth since 2003. Since the June 13 incident, investors have demanded higher returns for riskier investments and some even retreated back to US treasury bonds even though the interest rate was dropped to 5.2% and other blue-chip corporate bonds.

Many commercial banks in the US, caught off guard by this sudden shift in investor behavior, saw their risky sub-prime mortgages bond values plummet into the abyss as investors did not want to buy them anymore, causing them to lose billions of dollars. In a desperate measure to remedy the situation, the banks were suddenly less keen to lend money to people at low interest rates as compared to before, in order to prevent their balance sheets from collapsing further. This means that it is now much harder for businesses and consumers in the US to get loans since the ‘cost’ of capital is now much higher than previously.

The interest-rate spread has been growing ever since the June 13 incident. As of April 2007, the spread was about seven percentage points (7%). Since the world’s economic engine for the past few years was largely fueled by the American consumer spending beyond their means on cheap credit; economic growth now could be presumed to be much slower as American consumers begin to spend within their means.

How exactly did we get ourselves into this mess? Well, ironically, one of the major factors is world economic growth. After the gloomy days of September 11, 2001, the world economy rebounded from 2003 onwards and entered a period of booming economic growth.

The economies of China, India and Asia, which are more savings-oriented than the West, provided a flush of cash to world financial systems, making capital cheap and plentiful.

Now, usually, economic growth is a good thing, but not when it is coupled with easy money. Investors figured that with capital so cheap and abundant, and asset prices ever increasing, they could not lose! A good example is the sub-prime mortgage fiasco in the US, where people were loaning money to buy homes that they really couldn’t afford, but thought that they could due to ever increasing property prices in the US, which actually turned out to be a bubble. Cheap money also gave consumers the illusion that they were richer, so they borrowed more to fund their more lavish lifestyles.

Of course, such a situation cannot last very long, so after the June 13 incident, many investors around the world came to their senses. The result is that we are now potentially in the midst of another global economic crisis. The important lesson that we can gather from here is to watch for interest-rate spreads in the future, as an indicator for the value of ‘capital’ and as a possible sign of a looming economic crisis.

SCORE one for Sarawak!

Sarawak Corridor of Renewable Energy (SCORE) is one of the many regional development corridors in Malaysia, and is being pioneered currently by the Sarawakian government, specifically by the newly created RECODA (Regional Corridor Development Authority). As a Sarawakian myself, I cannot help but feel proud that this plan aims to bring my beloved state into an industrialized and first-world style state by 2030.

The core industries that are prioritized for development are as follows:

1. Oil-based industry
2. Aluminium industry
3. Timber-based industry
   
4. Steel industry
5. Palm-oil industry
6. Tourism industry
7. Livestock industry
8. Aquaculture industry
9. Marine Engineering industry
10. Glass-manufacturing industry

The 3 main advantages cited for SCORE's success are the availability of large swathes of land for development ( Sarawak being the largest state in Malaysia, covering about 40% of Malaysia's total land area), cheap and abundant hydro, coal-based and natural gas-based energy sources, and Sarawak's strategic location between the economic behemoths of North Asia ( including China) and India, as well as Australia to the south.

SCORE's area of development is focused upon Sarawak's central region, itself divided into three main areas, north, central and south. These areas have been designated as 'growth nodes' and are as follows:

• Similajau - Heavy Industry Centre (Northern Node)
• Mukah - Smart City and Central Nerve Centre (Central Node)
• Tanjung Manis - Industrial Port City (Southern Node)
  

I sincerely hope that this plan will eventually work out and bring much needed development and prosperity to Sarawak. Some people may be pessimistic of the prospects, even the plausibility, of such a grand scale project, but as with all great undertakings, the first step is to believe in the lie, the so called 'vision', and only then, after much determination and hardwork, will the 'vision' eventually materialize itself into reality. I call upon all Sarawakians, as their patriotic duty, to wholly and fully support this plan that it may come to fruition and pave the way for a glorious future for Sarawak and it's people.

Books for Aspiring Malaysian Capitalists

Often times when we go to the local bookshops, we find that one of the largest sections there is the investment and wealth-related section. Too often though, these bookshops stock capitalistic-themed books which are not at all relevant to the Malaysian market, usually catering to the US market or the UK. I have, however, come across some books which I have found very useful and extremely relevant to the Malaysian market for those aspiring Malaysian capitalists out there.

Books to consider for Real Estate Investment

This book I predict, will become a classic in Malaysia, as it is one of the most comprehensive and systematic guides to beginning real estate investment I have ever come across in Malaysia. In 'How to become a Property Millionaire', Azizi Ali shares his own experience in real estate investing in this book and I like it because it makes a lot of sense and he doesn't try to be too fancy; although, his language can be a bit off sometimes and some of his humour can be a little awkward since this is one of the first books he wrote, but nothing too serious. The best part of this book is that he has devised a systematic and objective way of evaluating a property for investment and has developed a system for tenant management. Be aware though, that this book is actually an updated version of his older book called 'How to become a millionaire landlord' which is essentially the same except for the colour and some added chapters.

After you're done with Azizi Ali's book, it is a good idea to read these two books by local author Renesial Leong, 'Your Tenant, Your Jewels' and 'Property Jewels', which both deals with content relating to their respective titles. I would categorize her books as more for the intermediate property investor as she talks about investing in the many different types of properties available in Malaysian, such as land, factories, shophouses etc, in comparison to only landed residential property in Azizi Ali's book. She has also come up with many ideas and suggestions which can help you during your property investment ventures. However, her books, I feel, does not give you as solid a foundation as Azizi Ali's book, but it does help to complement and supplement the latter's book.

In Stock Market Investing, I like to divide it into two main categories; fundamental investing and technical investing. Fundamental investing, which is favored by investor Warren Buffet, is investing in a company's stock based on the company's actual performance, irrespective of it's stock price. Usually this will involve analyzing a company's annual report for the past few years to see if the company is consistent and profitable and then buying the company's stock when it is selling at a discount. On the other hand, technical investing, which is favored by hedge fund investor George Soros, is investing in a company's stock without regard for the company's underlying performance but by looking at the trend and history of a company's stock price movement. This technique is usually much more difficult to do than fundamental investing but can be a way to let you earn from stocks relatively quickly. Usually, this technique involves considering the odds of something happening which could either make the stock price move up or down.

Here I will recommend some books written by local authors dealing with the two different categories of stock market investment.

Books to consider for Stock Market Investing

Books on Fundamental Investing

Written by local author Ho Kok Mun, the books 'How to make money from your stock investment even in a falling market' and 'Essential Stock Investment strategies to make money even in a falling stock market' ( yeah, I thought his book titles were long winded too ) are a good way to start learning about the techniques involved in fundamental investing. I would advise to start with his first book, the 'How to...' one, because in it he goes through the techniques and formulas you will need to analyze a company's annual report. Once you're done with that book, you can graduate towards his second book, the 'Essential Stock..' one . In this book, he goes into the more subjective part of fundamental investing, where he advises you on how to look beyond just a company's annual report and to see the bigger picture, such as how popular are the company's products in society and is the management of the company good etc.

Book on Technical Investing

Although you might see Azizi Ali's name written on this guy's book, he did not really contribute to the content of the book except for praising the author and sharing a little bit of his experience. I also have to admit that the author, Bill Wermine isn't really a local author, he is from the US ( if I'm not mistaken ), however he does claims to have been investing in the Malaysian market for over a decade and his advice is sound. In this book, 'How you can get rich Swing Trading' he teaches you some basic techniques you could use to start on your journey of technical investing. His book provides you with the knowledge you will need to analyze candle stick charts ( a popular kind of chart for analyzing stock price movement ) and provides a few good examples. Although he advises you to create a system for your investing, he doesn't really go into much detail and prefers that you develop your own system, which would involve a lot of trial and error. The candle stick charting software that he recommends in his book, I feel, is quite redundant and expensive; and if I'm not mistaken, as long as you have a registered account with any local brokerage companies ( now known as 'Investment Banks' for some reason ), you can download charting software from their website or use a web-based version of it from them. Thus far I am using OSK's brokerage service, and I find their system to be adequate. Some advice from my own personal experience with technical investing; first, start with a capital of at least RM10k to avoid your profits to be erroded and your losses to be amplified; by having to pay brokerage fees, and second, make sure you don't misread your charts!!!

There you go. These are the books that any aspiring Malaysian capitalist should read and I can attest that I have read each of these books myself. Of course, these books won't turn you into a Donald Trump or Warren Buffet overnight, I admit, I myself am still learning too, but it will provide you with some solid grounding you will need when you start investing in the future.

Become a "Goldmember"

The title occurred to me when I recently re-watched the 3rd installment in the comedic movie series of Austin Powers. Public Bank has just recently announced their Gold Investment Account which allows you to own gold outright in an affordable manner with convenience and minimal hassle.

Although I would normally advocate anyone to invest at least some part of their wealth in gold as a good hedge against inflation, with gold prices hovering some where at about US$1000 per troy ounce these days, I think we should probably wait for prices to come down to more reasonable levels first.