Subsidising the GIC

Singapore needs to relook and adjust its economic model because what we have neither sustainable nor conducive for future growth.  I took data from here Singapore Average Monthly Wages from 1989-2017, Labour, Employment, Wages and Productivity and Singapore Statistics: Employment and Labour.

Assuming an average wage from the period of 1980 to 2010, a period of 30 years, which is one generation.  And assuming a CPF contribution of 4%, instead of 2.5% because I am assuming that, like most Singaporeans, the Ordinary Account is used for housing, leaving the Special Account.  Thus, I am being conservative here, and assuming a best-case scenario, disregarding a weighted average.  This means the average Singaporean worker earned just over $800,000 in wages, and contributed just over $270,000 in CPF.  With the accumulated interest on the CPF, that is a total just shy of $500,000.

In this scenario, the CPF functions as a forced savings mechanism.  Even at 4%, it does not keep pace with inflation, meaning that the average Singaporean, keeping his money in the CPF, is actually making a loss in the long-term.

The accumulated funds in the CPF, the CPF monies, are invested by the CPF Board in Special Singapore Government Securities, SSGS11, that are issued and guaranteed by the Singapore Government.  As per Government Investment Corporation of Singapore FAQ, GIC, along with MAS, manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government which CPF board has invested in with the CPF monies.  So, while the CPF monies are not directly transferred to GIC for management, one of the sources of funds that goes into the government's assets managed by GIC is the proceeds from SSGS.  The coupon rate of this is between 2 to 3%.  I am doubtful that all our CPF is invested in these bonds; the numbers, even assuming 2.5%, do not add up.  There is a lot of secrecy here, much of it for good reason, but I believe it is safe to assume that all our CPF monies are invested through GIC.

Now, I have no doubt that GIC is competently run.  The average long-term investment has a return of between 6.5 to 8% cumulative.  If we take it at about 7%, converting the GIC reported numbers from USD to SGD, the average Singaporean would have earned about $800,000.  That is $300,000 more than what he saved in that period through the CPF.  So, all these average Singaporeans are now in deficit of $300,000.  They saved $500,000 in that 30-year period, and GIC invested that money and earned $800,000 from each of them.  If we take it as “management fees” for accumulating and investing that money on behalf of us, that is 37.5%.  Hedge funds do not charge that.

A system has been created here where the average Singapore worker is effectively subsidising government investments.  The worker is the commodity, a source of cheap capital.  This structure is inefficient.  The problem with this cheap capital is that it is not cheap in the long-term.  A lot of money has been locked away in a lower yield investment that did not keep up with inflation, impoverishing a generation.  Over time, these funds have been siphoned up, creating a wealth gap.  Perhaps it is time to consider scrapping the CPF as we know it, and allowing Singaporeans to be direct shareholders of the GIC.  This would effectively remove one layer of management cost, put more liquidity into the system, and create greater flexibility in how Singaporeans manage their money.  If the government expects us to trust them, they should also trust us.

Singapore’s Public Debt - Asking the Right Question

Public debt is defined as the debt that the government owes.  As of end 2016, our public debt is approximately 105% of GDP.  A significant portion of that public debt issued by the Central Provident Fund, guaranteed by the Singapore government.  The question that should be asked, however, is not who holds the debt, which is the question most people ask.  Even if almost 30% is owed to CPF, CPF is a captive investor and still part of the government.  The question that should be asked is what happened to the money that was borrowed?

Public debt issued results in funds available that must now be spent or invested.  That money has to go somewhere.  We know that since 1990, the government realised cash flow from increasing borrowing to about $250 billion.  This is in addition to a public surplus of $260 billion.  Between 1990 to 2010, this additional public debt and surplus was about 16% of GDP.  The interest on this is also revenue, and we have not even factored that in.  So how much are we talking about?  This is, at least, half a trillion Singapore Dollars.  As per Singapore GDP Data, our GDP was worth USD 292.74 billion in 2015.  That is still less than half a trillion Singapore Dollars.

If we calculate the accumulated realised free cash on the claimed average annual GIC growth of 7% from 1990, we would arrive at just over a trillion Singapore Dollars, more than double the half a trillion Singapore Dollars.  Even a 1% accumulated growth is more than that half a trillion Singapore Dollars.  Properly managed, a 10% ROI is very much achievable, leaving us with $1.5 trillion.

Coming back to that $500 billion, however, people should ask where it is.  Either that money was lost in bad investments, or there are assets under government control that are off public records.  There are no such additional assets under Temasek Holdings or GIC that come close to that valuation.

The line of questioning here is not about fault-finding, or to even suggest any impropriety.  It is about fundamental differences in our philosophy of investment and public spending.  To even have that conversation, we must begin by asking the right questions so that we can have that policy discussion.

How a Gangster Rapper Hustled a Corporation & Became a Billionaire

Beats Electronics LLC is the subsidiary of Apple Inc. that produces audio products.  The company was founded as Beats by Dr. Dre was formally established as a company in 2006.  It was founded by well-known music producer and rapper, Dr. Dre and former Interscope Geffen A&M Records chairman, James Iovine.  Beats Electronics LLC has a US market share of at least 60% for headphones priced over US$100., and an estimated market valuation of US$1.5 billion.

The story of how Beats by Dr. Dre became Beats Electronics LLC is the story of how a gangster from the streets outmanoeuvred two major corporations for market domination.  In short, Dre hustled and succeeded.

The official story on Wikipedia and the company website is that Dr. Dre and Jimmy Iovine thought Apple’s earbuds were inadequate.  They said that if their music was going to be pirated, then people should, at least, listen to it with the best equipment possible.  Allegedly, Dre said to Iovine, “Man, it’s one thing that people steal my music; it’s another thing to destroy the feeling of what I’ve worked on.”  This is the publicity spiel.

The story of the rise of Beats Electronics LLC is the story of the demise of Monster Cable.  Monster Cable was founded by Noel Lee in the late 1970s, and made its name in overpriced cables and litigation.  The company was a corporate bully.  Monster sued everybody that had “Monster” in its name.  According to the US Patent and Trademark Office and court records, Monster Cable has gone after a mini-golf course, a thrift shop, a used clothes shop, Walt Disney Co. and Pixar Animation for their film, “Monsters, Inc.,” Bally Gaming International Inc. for its Monster Slots, Hansen Beverage Co. for a Monster Energy drink and even the Chicago Bears, whose nickname is “Monsters of the Midway.”  This aggressive legal strategy did not make them any friends.  And people who have no friends, no matter how big, are vulnerable.

Monster Cable did the actual engineering of the headphones for Beats by Dr. Dre.  Monster Cable had built its market domination more on marketing than product quality.  Its market share was built on the uncertain foundations of brand familiarity.

As an extension of their aggressive litigation strategy, Monster Cable was notorious for claiming patents on basic technological concepts.  An example can be seen in the response from Blue Jeans Cable, from the 28^th March 2008: “Monster Cable recently wrote to us claiming that we had infringed various design patents and trademarks owned by it or by its intellectual property holding company in Bermuda, Monster Cable International, Ltd.  We reviewed the patent and trademark filings submitted by Monster Cable, and found that Monster’s claims were completely frivolous - so frivolous, in fact, that there was something amusingly appropriate about the fact that Monster's letter had arrived in our mailbox on April Fools’ Day.”

In all this, Monster Cable’s products were notoriously no better at doing their jobs than coat hangers, as can be found in this example: Audiophile Deathmatch: Monster Cables vs. a Coat Hanger.  And when there are articles like these, all the litigation in the world is not going to protect the brand.  The cables were copper wires sheathed in plastic.  There is only so much that can be done to make them work better.  The best marketing does not change basic physics.  But that marketing cost was passed on to the consumer, raising the price of a mediocre product exorbitantly.

Thus, Monster Cables had painted themselves into a corner and needed Beats by Dr. Dre more than the latter needed it.  Monster Cables thought that the hype of a celebrity endorsement and the promise of further celebrity endorsements by contacts in the entertainment industry would overcome the negative image it was beginning to develop.  Unfortunately for Monster Cables, Dre and Iovine know exactly who held the cards here.  I would not be surprised that these two had identified this weakness and played Monster Cables from the beginning.

The Beats headphones were terrible.  To quote a passage in How Dr. Dre’s Headphones Company Became a Billion-Dollar Business, Burt Helm wrote that Iovine said, “We got dumped on by audiophiles on Day One.”  He continued, “We wanted to recreate that excitement of being in the studio.  That’s why people listen.”

The story here is a that Beats headphones “were not tuned evenly, like the usual high-end headphones.  They were tuned to make the music sound more dramatic.”  “More dramatic” is an euphemism for “they cranked up the bass.”

It was a rubbish product, but consumers fell for the hype, and from its launch in 2008, the company grew exponentially.  In 2010, Taiwanese consumer electronics manufacturer, HTC, bought out Beats by Dr. Dre for USS309 million.  This buy out is noteworthy because, under its terms, Dre and Iovine eventually actually gained executive control of the company from Monster Cables: After HTC Sale, Dr. Dre & Jimmy Iovine Gain Control of Beats Headphones.

By the 23^rd July 2012, HTC sold half its position to Dre and Iovine, allowing them to control 75% of Beats by Dr. Dre, leaving HTC with the remaining 25%.  Not only that, HTC revealed that it had lent Beats by Dr. Dre US$225 million.  In effect, Dre and Iovine bought those shares from HTC with money they borrowed from HTC through Beats by Dr. Dre, and then loaded the liability on the company they now controlled.

With HTC, themselves a manufacturer, invested into Beats by Dr. Dre with a combined stake of almost half a billion in both equity and debt, Monster Cables were no longer needed.  Monster were understandably unhappy with this and agitated for a better return on their investment – greater market visibility and a substantial payout.  In response, Beats by Dr. Dre ended their partnership with Monster Cables: Monster Will No Longer Make Beats Headphones.

On the surface, it looked counterintuitive, but it was a calculated move.  Monster Cables did not own the rights to a single drawing, idea or even the diagrams for the plastic parts: The Exclusive Inside Story of How Monster Lost the World.  From the very beginning, Monster Cables were outmatched.  When Kevin Lee, son of founder, Noel Lee, went to Los Angeles to negotiate, he had only a bachelor’s degree, no business experience outside of working for his father and no legal support.  He went into a meeting alone, against two men and an entire corporate team.  And in their desperation to enter a new market before their old one collapsed, got into a partnership where they built a business for a rival for free and never realised it until it was too late.

A few months later, Dre and Iovine took advantage of HTC’s financial struggles and bought the remaining 25% from them for US150 million.  Considering the market share and the actual value of Beats by Dr. Dre, this was a bargain.  Dre and Iovine had full control of the company now, which was the next part of the plan.

Ending the agreement with Monster Cables cost them hundreds of millions, and they did not take it kindly.  Considering their litigation history, they predictably tried to sue.  Before the case could go to court, in January 2014, Beats by Dr. Dre revealed its streaming music service.  This was the business they actually set out to build, instead of questionable headphones.  It was a hit with critics, and its success brought a bigger fish to the table: Apple.  Before June 2014, Apple agreed to buy Beats by Dr. Dre for US$3.2 billion, making Dre and Iovine billionaires, and changing the company name to Beats Electronics LLC.

Monster Cables filed a suit, claiming, among other things, that Beats by Dr. Dre stole proprietary headphone technology, that Beats by Dr. Dre unilaterally ending their partnership was illegal, and that Monster Cables were entitled to a portion of the billion-dollar Apple deal.

Here, Monster Cables had not considered the consequences of its actions.  It was outplayed, and still refused to accept that it was outplayed.  Apple was brutal.  Monster Cables had its rights to manufacturing Apple’s products revoked: Apple Revokes Monster’s Authority to Make Licensed Accessories.  How bad is this?  Consider this: Apple Revokes Monster's 'Made for iPhone' License Following Beats Lawsuit, where “According to Monster, 900 of its more than 4,000 products produced since 2008 have been made under the MFi program, and the company has paid out more than $12 million in licensing fees since that date.  Monster lawyer David Tognotti says the move is excessive and ‘shows a side of Apple that consumers don’t see very often.’

David Tognotti, the man who justified Monster Cable’s litigation excesses against smaller businesses, finally said, “Apple can be a bully.”

On the 30^th August 2016, not only did Monster Cables lose its suit against Beats Electronics, Beats Electronics countersued for legal costs.  And this is how a hustle works on a massive scale.

Investment Opportunity: Indonesian Beef Programme

The following is an investment opportunity.  This is an outline of the Trade Catalyst Special Purpose Vehicle (SPV) specifically for the purpose of investing in the Consortium to fund the supply of beef and cattle products to Indonesia.  Our client is in the business of food security for nation states and independent political entities.

To date, over USD 100 million has already been raised from financial institutions and private investors.  ARK Nusantara Pte. Ltd is looking to raise a further USD 5 million through private placement and is offering up to 10% ROI per annum, and are issuing medium term notes (MTN) for a 5-year period.  This means, that in addition to the ROI per annum, the investor gets the principle back at the end of the period.  The company through which the system is run, PT Surveyor International, is rated by Dun & Bradstreet at 5A2.

In the current market, it is almost impossible to find a similar investment with that level of returns that is genuine.  In this case, the buyer is the Indonesian government, through her vehicles for their domestic market, and the suppliers are backed by instruments of the Australian government.  The cattle are fully insured by Lloyds, meaning that even in the unlikely event of loss of a shipment due to force majeure or disease, the investor is still paid a return.

Since the buyer is the Indonesian government itself, there are no tariffs and all imports are cost plus, meaning that the investor is not exposed to market fluctuations.  This ensures that there will always be a profit for every shipment.

For serious, large investment clients, MTN can be issued in alternative currencies to the US Dollar to mitigate against currency exposure.

Serious investors may email me at terence.nunis@gmail.com for the brochure and further enquiries.

Getting What You Really Want by Asking for More

There is a method to any form of negotiation that any woman bargaining for a trinket knows.  A study called “Reciprocal Concessions Procedure for Inducing Compliance: The Door-in-the-Face Technique,” explored the idea of mutual reciprocal concessions, or give and take in negotiations.  Previous studies had shown that the idea of making an initial firm offer and holding to it was not an effective way to negotiate.  The best way is to start higher and allow the other side to negotiate it down to an equitable level.  This is sometimes known as the door in the face approach.

How does it work?  You begin by making a request that you know the other side will not accede to.  And then you come back with what you really wanted in the first place.  The idea behind this is that the person will feel bad for refusing your first request, so when you ask for something lesser, they feel obliged to give in.  People want to appear to be reasonable, and this allows them to do so, but at your benefit.  This works as long as the same person is the one who asked both the greater and the lesser concession.  And that is why, in a negotiating team, there should be only one person making the demands.  This invariably works when there is some sort of relationship where both sides are ready to deal.

This system is used in a gradated scale in the course of the negotiation process, and as the other side denies larger requests, they will increasingly agree to lesser ones, and will eventually offer their own concessions.  This way, both parties leave the negotiating table believing they have achieved something, while at the same time, ensuring that they got what they really wanted.

It is important to end negotiations on an amicable note because this is the beginning of a business relationship.  There is no gain to approaching this as a zero-sum relationship, since this engenders resentment and latent hostility, and this might complicate future negotiations.

The Benjamin Franklin Effect

The Benjamin Franklin effect is a proposed psychological phenomenon, a form of cognitive dissonance, whereby a person who has performed a favour for someone is likelier to perform another favour for that person than they would be if they had received a favour from that person.  

This effect is named after Benjamin Franklin, who is quoted in his autobiography, “He that has once done you a kindness will be more ready to do you another, than he whom you yourself have obliged.”  This is explained with an example in Benjamin Franklin’s autobiography regarding the animosity of a rival legislator when they both served in the Pennsylvania legislature in the 18^th century. He wrote, “Having heard that he had in his library a certain very scarce and curious book, I wrote a note to him, expressing my desire of perusing that book, and requesting he would do me the favour of lending it to me for a few days.  He sent it immediately, and I returned it in about a week with another note, expressing strongly my sense of the favour.  When we next met in the House, he spoke to me (which he had never done before), and with great civility; and he ever after manifested a readiness to serve me on all occasions, so that we became great friends, and our friendship continued to his death.”

Cognitive dissonance theory states that people change their attitudes or behaviour to resolve dissonance between their thoughts, attitudes, and actions.  In this case, the dissonance is between the subject’s negative attitudes to the other person and the knowledge that they did that person a favour.  They rationalise that since they did him a favour, they must like him and adjust their attitude accordingly.

The effect when you do a favour for someone who dislikes you is that they feel beholden to you for that kindness.  The ego is manifest, and it increases their dislike due to this “burden” it places upon them.

In terms of marketing and closing a deal, this can be done as simply as asking to borrow the other part’s pen to write out something for his.  They have done you a small, insignificant favour, but it makes them feel good about themselves and they “like” you.  The client is thus more likely to be favourable.  This is also a useful tool for resolving tension.

Market Crashes are Often Planned

Market crashes, the collapse of commodities prices and their sudden rise; they are not accidental.  They are planned, often to advance a specific geopolitical agenda.  An example would be the record low oil prices.  Antagonists of the United States who are dependent on the energy sector and need the funds to grow their economy are Russia, Iran and Venezuela.  They have all been adversely affected.  This is not some conspiracy theory.  The evidence, the testimony, is there for those who know where to look and have the wherewithal to wade through hundreds of pages of dry reports.

There is a very interesting report called Examining Financial Holdings Companies: Should Banks Control Power Plants, Warehouses & Oil Refineries.  It began when Senator Sherrod Brown, the chair of the Senate Banking Subcommittee on Financial Institutions & Consumer Protection, opened a hearing to probe into the connectedness of major Wall Street banks to the holding of physical oil assets in July 2013.  This pertained to the ability of these companies to manipulate oil prices.  And we have not considered other commodities.  The findings of the hearing were damning.  This prompted an investigation by the Senate’s Permanent Subcommittee on Investigations, which was published as “Wall Street Bank Involvement with Physical Commodities.”

Highlighting only Morgan Stanley as an example, the report stated, “One of Morgan Stanley’s primary physical oil activities was to store vast quantities of oil in facilities located within the United States and abroad.  According to Morgan Stanley, in the New York-New Jersey-Connecticut area alone, by 2011, it had leases on oil storage facilities with a total capacity of 8.2 million barrels, increasing to 9.1 million barrels in 2012, and then decreasing to 7.7 million barrels in 2013.  Morgan Stanley also had storage facilities in Europe and Asia.  According to the Federal Reserve, by 2012, Morgan Stanley held ‘operating leases on over 100 oil storage tank fields with 58 million barrels of storage capacity globally.’”  With more than 68 million barrels of storage capacity, and their control of financial derivatives, it is inconceivable that there is no market manipulation.

We have not fully quantified the actual holdings of major Wall Street banks.  Likely, the numbers would be staggering.  They are in a position to significantly affect global prices on an unprecedented scale, using supply and demand levers, derivatives and other bank instruments to control fund movements.  They control the physical commodity, the logistics, the physical funds and the financial instruments that dictate the movement and availability of funds.

And yet, this report has not been mentioned in any major news source.  This despite the report stating, “Due to their physical commodity activities, Goldman, JPMorgan, and Morgan Stanley incurred increased financial, operational, and catastrophic event risks, faced accusations of unfair trading advantages, conflicts of interest, and market manipulation, and intensified problems with being too big to manage or regulate, introducing new systemic risks into the U.S. financial system.”

In January 2014, Norman Bay, director of the Office of Enforcement, the Federal Energy Regulatory Commission, testified before the Committee on Banking & Financial Institutions & Consumer Protection Subcommittee, “A fundamental point necessary to understanding many of our manipulation cases is that financial and physical energy markets are interrelated: physical natural gas or electric transactions can help set energy prices on which financial products are based, so that a manipulator can use physical trades (or other energy transactions that affect physical prices) to move prices in a way that benefits his overall financial position.  One useful way of looking at manipulation is that the physical transaction is a ‘tool’ that is 5 used to ‘target’ a physical price.  For example, the physical tool could be a physical power flow scheduled in a day ahead electricity market at a particular ‘node’ and the target could be the day ahead price established by the market operator for that node.  Or the physical tool could be a purchase of natural gas at a trading point located near a pipeline, and the target could be a published index price corresponding to that trading point.  The purpose of using the tool to target a physical price is to raise or lower that price in a way that will increase the value of a ‘benefitting position’ (like a Financial Transmission Right or FTR product in energy markets, a swap, a futures contract, or other derivative).”

And this is extended to other major commodities as well.  The Senate Subcommittee report noted right at the beginning, “Goldman Sachs, in its own words, now engages in the production, storage, transportation, marketing, and trading of numerous commodities, including crude oil products, natural gas, electric power, agricultural products, metals, minerals, including uranium, emission credits, coal, freight, liquefied natural gas, and related products.  This expansion of our financial system into traditional areas of commerce has been accompanied by a host of anticompetitive activities, speculation in oil and gas markets, inflated prices for aluminium and, we learned, potentially copper and other metals, and energy manipulation.”

For specific examples of market manipulation, I suggest reading Testimony of Norman C. Bay Director, Office of Enforcement Federal Energy Regulatory Commission before the Committee on Banking, Financial Institutions & Consumer Protection Subcommittee, United States Senate, 15th January 2014.

Aside from market manipulation, there is another risk factor that most people would not be aware of.  As the Senate subcommittee report stated, “This traditional economic efficiency-based argument, however, misses or ignores a crucial fact--namely, that running a physical commodities business also diversifies the sources and spectrum of risk to which FHCs become exposed as a result.  Let us imagine, for example, that an accident or explosion on board an oil tanker owned and operated by one of Morgan Stanley's subsidiaries causes a large oil spill in an environmentally fragile area of the ocean.  As the shocking news of the disaster spreads, it may lead Morgan Stanley's counterparties in the financial markets to worry about the firm's financial strength and creditworthiness.  Because the full extent of Morgan Stanley's clean-up costs and legal liabilities would be difficult to estimate upfront, it would be reasonable for the firm's counterparties to seek to reduce their financial exposure to it.  In effect, it could trigger a run on the firm's assets and bring Morgan Stanley to the verge of liquidity crisis or collapse.

But there is more.  What would make this hypothetical oil spill particularly salient is a shocking revelation that the ultimate owner of the disaster-causing oil tanker was not ExxonMobil or Chevron, but Morgan Stanley, a major U.S. banking organisation not commonly associated with the oil business.  That revelation, in and of itself, could create a far broader controversy that would inevitably invite additional public scrutiny of the commodity dealings of Goldman, JPMC, and other Wall Street firms.  Thus, in effect, an industrial accident could potentially cause a major systemic disturbance in the financial markets.  These hidden contagion channels make our current notion of interconnectedness in financial markets seem rather quaint by comparison. FHCs’ expansion into the oil, gas, and other physical commodity businesses introduces a whole new level of interconnections and vulnerabilities into the already fragile financial system.”

In summary, all it takes is that one major disaster, that one shock that is not planned, that would make those who are aware nervous, leading them to take a position to limit their exposure to the bank affected.  This sudden tightening in credit would have a tremendous cascading effect that would bring down the bank affected, the banks and financial institutions exposed to the bank affected, and by extension, most of the US economy, followed by the rest of the world.  This is the scale of that house of cards.