Business Times - 26 Aug 2009
(HONG KONG) Celebrity chef Jamie Oliver is planning to launch 30 Italian family-style restaurants in Asia, with the first one set to open its doors to his gastronomic followers in Hong Kong early next year.
The move marks the first step in taking his chain Jamie's Italian - which now has five eateries in England - outside his hometown, to a region which takes pride in its rich diversity of international cuisine and where the economy is picking up faster than anywhere else in the world.
'Why Asia? Of all the markets, it has by far the fastest-growing economy,' said Edward Pinshow, president of Tranic Franchising, which formed a venture with Jamie's Italian International for the Asia expansion. 'The Chinese have become extremely fond of Italian food. In Japan, Jamie's become a household name,' he said yesterday.
Mr Pinshow told AFP that the first stage of the expansion was to open six restaurants in Hong Kong and Singapore, for which he is now raising about US$200 million.
They plan to roll out another 24 eateries in other parts of the region over the next five years, with China, Japan, Taiwan and Korea among the most likely candidates for location.
Mr Pinshow said they are now working hard to get their first restaurant - a 5,000 sq ft, 180-seat venue in Hong Kong - ready for opening in the second quarter of next year.
He said the menu would offer a full-course meal with antipasti, main dish, dessert, plus a glass of Italian wine, for an average of HK$300 (S$55.70) per head\. \-- AFP
Wednesday, September 2, 2009
Hedge your equities portfolio
Business Times - 26 Aug 2009
The six-month stock rally looks likely to continue but the risks have risen sharply along with prices, writes LIM SAY BOON
INVESTORS who have yet to hedge their equities positions - something that is always important to do for long-term portfolios - should look into this pretty quickly. On balance, the stock rally of the past six months should continue. But the risks have risen sharply along with prices.
The recent 20 per cent correction in stock prices on the Shanghai stock exchange might not have marked the end of the rally. But it is a warning shot. More than that, it was probably also a glimpse into the future - at how the cyclical rebound in the equities markets could end.
This has not been a high-quality rally. The underlying recovery in the global economy has been driven by inventory restocking and government fiscal and monetary stimulus. Meanwhile, the markets for risky assets - stocks, corporate debt, and commodities - have been helped along by a huge amount of liquidity sitting on the sidelines, in bank deposits and money market funds. The 'frightened money' appears to have started re-entering the market, with bets in favour of government intervention trumping deflation (see Chart 1).
But what happens after the 'mechanical' business of inventory restocking runs its course? The US consumer has been weakened by a one-third decline in the average home price and frightened by employment approaching 10 per cent. There must be serious questions over the ability of the US consumer to sustain the economic recovery beyond inventory restocking.
And even more importantly, as the panic of the past two weeks over Chinese stocks has shown, this is a monetary stimulus-dependent rally. On speculation that the Chinese government might start pulling back money supply and credit growth, the Shanghai stock market collapsed. This is not surprising given the correlation between money supply growth and the performance of the Shanghai Composite Index (see Chart 2).
But this is not just a Chinese market phenomenon. Monetary stimulus - cheap money and plenty of it - has been crucial in sustaining the 'wassail on Wall Street' (and elsewhere). The markets understand this. So they are closely scrutinising almost every word from central bankers around the world for hints of imminent 'exit'.
Events of the past 12 months have been tagged 'the Great Recession meets the Great Government Intervention'. On many measures, the 'Great Government Intervention' has prevailed. The global economy is already in recovery. Economies from Germany to Japan to Singapore are out of recession. The US is likely to be confirmed in coming months as having emerged from recession in Q3 2009.
Asset price performance
Going forward, three factors will be crucial to the future of the ongoing recovery in risky asset prices. The first relates to the strength of the cyclical rebound in the global economy. The second is about growth drivers beyond inventory restocking. And the third relates to the eventual unwinding of government stimulus.
There is a serious risk of disappointment in the strength of the economic rebound in coming months. To date, the economic data has been weighted in favour of performances beating market consensus. The equities bulls appear to be betting on the continuation of better-than-expected data.
That is, they are counting on a sharp rebound following the deep decline of the past 18 months. They are betting on the mechanical process of recovery from sharp inventory destocking, further supported by aggressive government stimulus.
However, recoveries from recessions associated with financial crises have tended to be weaker than those from simple 'cyclical recessions'.
Meanwhile, in the US, unemployment is approaching 10 per cent, house prices are down by an average of around 33 per cent, and the US household savings rate had surged from almost zero savings to around 6.2 per cent of disposable income at its recent high (before pulling back more recently to 4.6 per cent). If this marks a 'new frugality' among US consumers, the global economy is going to struggle to find new drivers for growth.
And if governments start withdrawing fiscal and monetary stimulus while the world is still fumbling around for a new growth paradigm, that would almost certainly trigger a sharp correction in the rally in stocks, corporate bonds, commodities, and commodity currencies. At this stage of the recovery, the stimulus is the party 'punchbowl'. Take that away and the party ends.
On balance, central bankers are likely to be very circumspect about withdrawing stimulus. In the US, looking back some 40 years, the Federal Reserve has never raised its policy rate until the decline in the unemployment rate has been unambiguously entrenched.
That has meant a lag of months, even a year, after the peaking of unemployment. In China, there has been a tendency by the Chinese government over recent cycles to pull in money supply growth only during peaks or close to peaks of industrial production and export growth.
Currently, US unemployment has only just shown very early signs of peaking. Meanwhile, in China, exports are still in deep year-on-year contraction. And with prices in deflation, there is little incentive at this stage for the Chinese government to reverse course on monetary policy.
So money is likely to continue to be plentiful and cheap. Low interest rates are likely to continue forcing investors into the risky asset markets in search of higher returns. And late-comers to the rally could push the markets into an overshoot of fundamentals.
For example, the Shanghai Composite prior to the recent correction was trading at 3.8 times book value. And even with the correction, it is still trading at around 3.6 times book. Eventually, when earnings growth kicks back in, the focus will turn to price-earnings valuations and high returns on equity will eventually justify the high price-to-book valuations. But this has not happened yet - hence the 'overshoot' of fundamentals.
Prices for risky assets are likely to push higher, notwithstanding all the unresolved fundamental problems. But the easy money has been made. Prepare for a rougher ride from here. Volatility - measured by the S&P 500 volatility index VIX - recently hit a low of around 23 per cent. It is still trading around 25 per cent, a far cry from its crisis peak of 90 per cent. Volatility is cheap. Investors should consider buying a proxy for VIX (see Chart 3).
The less aggressive investor might want to start taking profits off the table while continuing to ride this liquidity rally. They might put those profits into VIX to hedge their equities portfolios. They might also want to consider low correlation plays such as gold.
Lim Say Boon is the chief investment strategist for Standard Chartered Group Wealth Management and Standard Chartered Private Bank
The six-month stock rally looks likely to continue but the risks have risen sharply along with prices, writes LIM SAY BOON
INVESTORS who have yet to hedge their equities positions - something that is always important to do for long-term portfolios - should look into this pretty quickly. On balance, the stock rally of the past six months should continue. But the risks have risen sharply along with prices.
The recent 20 per cent correction in stock prices on the Shanghai stock exchange might not have marked the end of the rally. But it is a warning shot. More than that, it was probably also a glimpse into the future - at how the cyclical rebound in the equities markets could end.
This has not been a high-quality rally. The underlying recovery in the global economy has been driven by inventory restocking and government fiscal and monetary stimulus. Meanwhile, the markets for risky assets - stocks, corporate debt, and commodities - have been helped along by a huge amount of liquidity sitting on the sidelines, in bank deposits and money market funds. The 'frightened money' appears to have started re-entering the market, with bets in favour of government intervention trumping deflation (see Chart 1).
But what happens after the 'mechanical' business of inventory restocking runs its course? The US consumer has been weakened by a one-third decline in the average home price and frightened by employment approaching 10 per cent. There must be serious questions over the ability of the US consumer to sustain the economic recovery beyond inventory restocking.
And even more importantly, as the panic of the past two weeks over Chinese stocks has shown, this is a monetary stimulus-dependent rally. On speculation that the Chinese government might start pulling back money supply and credit growth, the Shanghai stock market collapsed. This is not surprising given the correlation between money supply growth and the performance of the Shanghai Composite Index (see Chart 2).
But this is not just a Chinese market phenomenon. Monetary stimulus - cheap money and plenty of it - has been crucial in sustaining the 'wassail on Wall Street' (and elsewhere). The markets understand this. So they are closely scrutinising almost every word from central bankers around the world for hints of imminent 'exit'.
Events of the past 12 months have been tagged 'the Great Recession meets the Great Government Intervention'. On many measures, the 'Great Government Intervention' has prevailed. The global economy is already in recovery. Economies from Germany to Japan to Singapore are out of recession. The US is likely to be confirmed in coming months as having emerged from recession in Q3 2009.
Asset price performance
Going forward, three factors will be crucial to the future of the ongoing recovery in risky asset prices. The first relates to the strength of the cyclical rebound in the global economy. The second is about growth drivers beyond inventory restocking. And the third relates to the eventual unwinding of government stimulus.
There is a serious risk of disappointment in the strength of the economic rebound in coming months. To date, the economic data has been weighted in favour of performances beating market consensus. The equities bulls appear to be betting on the continuation of better-than-expected data.
That is, they are counting on a sharp rebound following the deep decline of the past 18 months. They are betting on the mechanical process of recovery from sharp inventory destocking, further supported by aggressive government stimulus.
However, recoveries from recessions associated with financial crises have tended to be weaker than those from simple 'cyclical recessions'.
Meanwhile, in the US, unemployment is approaching 10 per cent, house prices are down by an average of around 33 per cent, and the US household savings rate had surged from almost zero savings to around 6.2 per cent of disposable income at its recent high (before pulling back more recently to 4.6 per cent). If this marks a 'new frugality' among US consumers, the global economy is going to struggle to find new drivers for growth.
And if governments start withdrawing fiscal and monetary stimulus while the world is still fumbling around for a new growth paradigm, that would almost certainly trigger a sharp correction in the rally in stocks, corporate bonds, commodities, and commodity currencies. At this stage of the recovery, the stimulus is the party 'punchbowl'. Take that away and the party ends.
On balance, central bankers are likely to be very circumspect about withdrawing stimulus. In the US, looking back some 40 years, the Federal Reserve has never raised its policy rate until the decline in the unemployment rate has been unambiguously entrenched.
That has meant a lag of months, even a year, after the peaking of unemployment. In China, there has been a tendency by the Chinese government over recent cycles to pull in money supply growth only during peaks or close to peaks of industrial production and export growth.
Currently, US unemployment has only just shown very early signs of peaking. Meanwhile, in China, exports are still in deep year-on-year contraction. And with prices in deflation, there is little incentive at this stage for the Chinese government to reverse course on monetary policy.
So money is likely to continue to be plentiful and cheap. Low interest rates are likely to continue forcing investors into the risky asset markets in search of higher returns. And late-comers to the rally could push the markets into an overshoot of fundamentals.
For example, the Shanghai Composite prior to the recent correction was trading at 3.8 times book value. And even with the correction, it is still trading at around 3.6 times book. Eventually, when earnings growth kicks back in, the focus will turn to price-earnings valuations and high returns on equity will eventually justify the high price-to-book valuations. But this has not happened yet - hence the 'overshoot' of fundamentals.
Prices for risky assets are likely to push higher, notwithstanding all the unresolved fundamental problems. But the easy money has been made. Prepare for a rougher ride from here. Volatility - measured by the S&P 500 volatility index VIX - recently hit a low of around 23 per cent. It is still trading around 25 per cent, a far cry from its crisis peak of 90 per cent. Volatility is cheap. Investors should consider buying a proxy for VIX (see Chart 3).
The less aggressive investor might want to start taking profits off the table while continuing to ride this liquidity rally. They might put those profits into VIX to hedge their equities portfolios. They might also want to consider low correlation plays such as gold.
Lim Say Boon is the chief investment strategist for Standard Chartered Group Wealth Management and Standard Chartered Private Bank
Should shareholders own companies?
Business Times - 02 Sep 2009
BREAKINGVIEWS.COM
By EDWARD HADAS
SHAREHOLDERS own companies. That is what the law says, but when it comes to big listed corporations, most of these owners don't take much care over their property. Lord Myners, the UK City minister, is the latest to complain about this cavalier approach.
Mr Myners' previous suggestions for reform - selling votes, and offering extra votes to long-term holders - don't address the main problem: Most shareholders these days can't or won't think like owners. But his latest proposal - to have more non-voting shares for apathetic investors - is a sensible acknowledgement of the reality that most equity investors make bad owners.
Small private investors generally don't know enough about business and finance. The professional portfolio investor looks only a year or two ahead, and the constant struggle to outperform peers leaves almost no time to worry about individual holdings. Pure traders rarely look more than a few weeks ahead. Even activist investors are often just looking for a quick turn.
Ideally, equity investors might somehow be prodded to take a more active and long-term interest in management. But it is hard to see how that can happen without draconian changes in capital markets: Ending the cult of relative performance and imposing multi-year minimum holding periods.
But something less radical could work even better. Why not admit that absentee equity investors of large publicly traded companies shouldn't generally be treated as owners in the first place? That seems to be the thinking underpinning Mr Myners' idea that many shareholders could choose to disenfranchise themselves by investing in B-shares.
The attribution of ownership to common shares is something of a historical accident. It can still work well for small companies run by their controlling shareholders. But for big companies, common shares are best seen as one of many types of capital. Bondholders and lending banks provide other types of financial capital. Workers bring human capital. Governments and communities offer social capital. There is no good reason to give equity holders absolute priority over all the other capital providers, in the broad sense of the term.
The responsibilities of ownership are best handed to management. Top managers often say that 'shareholder value' is their only or their ultimate concern. That may be true in some theoretical sense - especially if they are talking about shareholder value a generation or two from now. But in practice, the managers spend most of their time trying to serve and balance the needs and desires of many constituencies.
Shareholders are certainly one of them, and should be more important than, say, former workers. But equity investors typically focus on strong quarterly earnings and pleasing patter. Those are usually less important than such other management - or rather ownership - responsibilities as big investment decisions, keeping key workers on board, meeting environmental regulations and ensuring that there is enough cash to keep up with debt payments.
Managers overall do a good job in working for all capital providers. They are certainly better placed to run companies day-to-day and quarter-to-quarter than any outsiders, including the so-called owners. Even when it comes to company-shaping decisions - major investments, acquisitions or being acquired - managers are better placed than anyone else.
As long as markets are liquid, most shareholders will prefer to sell than to try to change companies. That's probably a sensible use of their time, since it's hard to believe these outsiders could add much value to corporate decision-making, even if they tried.
If you want someone to oversee the managers, it should not be the shareholders but the board of directors. Board members aren't generally as short-term in their thinking as the shareholders who usually rubber-stamp their election. A well-chosen board can offer managers outside perspective, relevant experience and even ethical guidance. True, few boards are good at standing up to domineering chief executives. But that's the nature of collaborative enterprises. No system of corporate governance will ever be perfect.
Mr Myners' notion of creating voting and non-voting shares could help address one of the main weaknesses of the current system: That it is too hard to change incompetent boards. If only half the shares carried votes and the prices of voting and non-voting shares were not much different, it would take roughly half as much money to influence corporate direction. That lower threshold could reduce complacency.
In any case, corporate reformers should leave indifferent shareholders alone. For anyone who is serious about improving the oversight of companies - and protecting the long-term interests of shareholders - the board of directors should be the first port of call.
BREAKINGVIEWS.COM
By EDWARD HADAS
SHAREHOLDERS own companies. That is what the law says, but when it comes to big listed corporations, most of these owners don't take much care over their property. Lord Myners, the UK City minister, is the latest to complain about this cavalier approach.
Mr Myners' previous suggestions for reform - selling votes, and offering extra votes to long-term holders - don't address the main problem: Most shareholders these days can't or won't think like owners. But his latest proposal - to have more non-voting shares for apathetic investors - is a sensible acknowledgement of the reality that most equity investors make bad owners.
Small private investors generally don't know enough about business and finance. The professional portfolio investor looks only a year or two ahead, and the constant struggle to outperform peers leaves almost no time to worry about individual holdings. Pure traders rarely look more than a few weeks ahead. Even activist investors are often just looking for a quick turn.
Ideally, equity investors might somehow be prodded to take a more active and long-term interest in management. But it is hard to see how that can happen without draconian changes in capital markets: Ending the cult of relative performance and imposing multi-year minimum holding periods.
But something less radical could work even better. Why not admit that absentee equity investors of large publicly traded companies shouldn't generally be treated as owners in the first place? That seems to be the thinking underpinning Mr Myners' idea that many shareholders could choose to disenfranchise themselves by investing in B-shares.
The attribution of ownership to common shares is something of a historical accident. It can still work well for small companies run by their controlling shareholders. But for big companies, common shares are best seen as one of many types of capital. Bondholders and lending banks provide other types of financial capital. Workers bring human capital. Governments and communities offer social capital. There is no good reason to give equity holders absolute priority over all the other capital providers, in the broad sense of the term.
The responsibilities of ownership are best handed to management. Top managers often say that 'shareholder value' is their only or their ultimate concern. That may be true in some theoretical sense - especially if they are talking about shareholder value a generation or two from now. But in practice, the managers spend most of their time trying to serve and balance the needs and desires of many constituencies.
Shareholders are certainly one of them, and should be more important than, say, former workers. But equity investors typically focus on strong quarterly earnings and pleasing patter. Those are usually less important than such other management - or rather ownership - responsibilities as big investment decisions, keeping key workers on board, meeting environmental regulations and ensuring that there is enough cash to keep up with debt payments.
Managers overall do a good job in working for all capital providers. They are certainly better placed to run companies day-to-day and quarter-to-quarter than any outsiders, including the so-called owners. Even when it comes to company-shaping decisions - major investments, acquisitions or being acquired - managers are better placed than anyone else.
As long as markets are liquid, most shareholders will prefer to sell than to try to change companies. That's probably a sensible use of their time, since it's hard to believe these outsiders could add much value to corporate decision-making, even if they tried.
If you want someone to oversee the managers, it should not be the shareholders but the board of directors. Board members aren't generally as short-term in their thinking as the shareholders who usually rubber-stamp their election. A well-chosen board can offer managers outside perspective, relevant experience and even ethical guidance. True, few boards are good at standing up to domineering chief executives. But that's the nature of collaborative enterprises. No system of corporate governance will ever be perfect.
Mr Myners' notion of creating voting and non-voting shares could help address one of the main weaknesses of the current system: That it is too hard to change incompetent boards. If only half the shares carried votes and the prices of voting and non-voting shares were not much different, it would take roughly half as much money to influence corporate direction. That lower threshold could reduce complacency.
In any case, corporate reformers should leave indifferent shareholders alone. For anyone who is serious about improving the oversight of companies - and protecting the long-term interests of shareholders - the board of directors should be the first port of call.
A comfortable, not lavish, retirement
Business Times - 02 Sep 2009
Surviving retirement without a big pension that never runs out isn't easy, but it's possible with sensible tweaking along the way
By RON LIEBER
WHEN you retire, you'll probably want to visit your grandchildren more than once each year. Perhaps you'll aim to give money each month to charity or your religious congregation.
The amount you have saved will clearly matter a great deal in whether you can do these things. But so will your portfolio withdrawal rate - the percentage of your assets that you take out each year to pay your expenses. You want it to be high enough to afford fun and generosity but low enough that you have little risk of running out of money.
Until a few years ago, the standard advice was that 4 or 4.5 per cent was about the best you could do. So if you had US$500,000 in savings, 4 per cent would give you about US$20,000 in your first year of retirement to augment Social Security and any other income. Then, you could give yourself a raise each year based on inflation. At 3 per cent inflation, you'd end up with US$20,600 in the second year of retirement and so on from there.
More recently, however, several studies have suggested that withdrawing 5 or even 6 per cent was possible - and still prudent. Retirees rejoiced.
And then the stock market fell to pieces. In the wake of the carnage, people who hope to retire anytime soon will probably be starting with a kitty smaller than they had expected just a few years ago. So an extra percentage point on the withdrawal rate matters even more than it might have in 2007. It could be the difference between travelling to see family or not, or it could determine when you get to retire in the first place.
But could it also lead you on a path towards ruin? This week, I went back to two of the researchers who had come up with the more generous formulas to see whether they're sticking by them. Not only are they staying the course, but one is telling his clients that they can take out as much as 6 per cent of their money during the next year. How can they justify something like this after the year we've just had?
Setting a rate
Here's one big reason to be suspicious about applying that same 4.5 per cent withdrawal rate to all people, no matter when they retire: Should a person who had the bad luck to retire in March 2009, at the stock market's recent bottom, spend 4.5 per cent of, say, US$350,000, or could they spend a bit more? After all, people who retired a year or two earlier with the same portfolio, before the bulk of the stock market's decline, might have started with 4.5 per cent of US$550,000 (and taken inflation-adjusted raises each year from that initial amount until they died).
It didn't seem right to Michael E Kitces, a financial planner and director of research at Pinnacle Advisory Group in Columbia, Maryland. He said he was uncomfortable with all the decisions made based on 'the day you happen to come into my office and the balance on that day'. In fact, he started looking into this before the market collapsed, and his research ended up suiting the conditions of the last year perfectly. He tried to figure out whether one could estimate how much better or worse stockmarket returns might be in the years after big declines - and whether the answer might allow for a more generous initial withdrawal rate.
What he concluded was that the overall market's price-earnings ratio - taking the current price for the Standard & Poor's 500-stock index divided by the average inflation-adjusted earnings for the past 10 years before the date of withdrawal - was predictive enough to produce guidelines. Then he came up with the following suggestions for a portfolio of 60 per cent stocks and 40 per cent bonds meant to last through 30 years of retirement.
If the ratio was above 20, indicating that stocks were overvalued, then a 4.5 per cent withdrawal rate was prudent given that the stock market was likely to fall. But if it was between 12 and 20 (the historical median is roughly 15.5), a 5 per cent rate was safe, tested against every historical period for which data was available. And if it was under 12 - a level it almost got to earlier this year - a rate of 5.5 per cent would work.
The most recent figure was 17.67, which suggests a 5 per cent withdrawal rate for current retirees. It had been above 20 until last October.
Mr Kitces gets his ratios from a set of data that Yale professor Robert Shiller creates and stores on Yale's website, at http:bit.ly/3gexz.
Making adjustments
Jonathan Guyton, a financial planner with Cornerstone Wealth Advisors in Edina, Minnesota, looked at the 4.5 per cent baseline and asked a different question: Couldn't it be a whole lot higher if a client was willing to forgo the annual inflation raise when conditions called for a bit of thrift? And if so, under what conditions would that happen - and would people be willing to, in effect, cut their own retirement paycheck?
It didn't take Mr Guyton long to find out. Two studies he worked on in 2004 and 2006 led him to the following conclusions about a portfolio meant to last 40 years: Using Mr Kitces' research to establish a baseline initial withdrawal rate of up to 5.5 per cent (or 5 per cent given valuations at the moment), the initial withdrawal rate could rise another whole percentage point, to 6.5 per cent, if at least 65 per cent of the money was in a variety of stocks, as long as the owner followed a few rules.
First, if the portfolio lost money in any given year, there would be no raise at all for inflation. And if the size of the withdrawal, in dollars, in any year amounted to an actual percentage rate of the remaining portfolio that was at least 20 per cent more than the initial withdrawal rate, retirees would have to take a 10 per cent cut in their annual allowance that year. Then, the increase for inflation would build on that new base the following year.
While Mr Guyton also put a 'prosperity' rule into place that allowed for a 10 per cent increase in particularly good years, 2008 tested his 'capital preservation' rule first. So he cut his clients' withdrawals by 10 per cent.
How did they take it? 'Many of them said, 'really, that's all?' ' he recalled. 'Keep in mind how dire things seemed.' Others blanched, noting that they had played by the rules and didn't cause the financial crisis. But they came around when Mr Guyton gave them a good talking to. 'For us to maintain the same degree of long-term financial security for you that you said you wanted, this is what you need to do,' he told them. 'It's a system. And the great thing about a policy is that it leaves no doubt about what you are supposed to do.' Another cut of 10 per cent might severely hurt their purchasing power, but the stock market's performance since March suggests that it won't be necessary in the coming months.
The real world
The actual execution of these strategies requires a bit more work.
You need to figure out what stocks and bonds should make up your investments in the first place, for instance, and how best to minimise taxes when you sell each year.
All this together seems complicated enough to suggest to a cynic that it's just a ruse to keep a client coming back each year for costly check-ups. That said, surviving retirement without a big pension that never runs out isn't easy, and paying a bit of money each year in exchange for help in prudently raising your withdrawal rate by 20 per cent does not strike me as completely insane.
Retirees also have to wonder whether the market will behave in the future as it has in the past. Or whether retirees can realistically stick to a strict budget.
'Even if you tell me that spending fluctuates a bit here and there, we still have to start somewhere,' said Mr Kitces. 'What on earth is your alternative? Are you not going to give any spending recommendations whatsoever?'
Mr Guyton solves this issue for clients who can afford it by carving out a separate discretionary fund. Retirees can spend that money on anything, but once it's gone, it's gone - unless they manage to replenish it out of their regular annual withdrawal.
There are still plenty of retirees and advisers who will balk at what appears to be outsize aggressiveness, whatever the studies indicate. To them, Mr Guyton suggests an entirely different consideration.
'The only problem is you run out of money? I don't buy that,' he said. 'For a lot of people who lock in on a 4 per cent figure, it's a formula for regret. They get 15 years in and look back at all of the things they didn't do. And now their health is gone.' - NYT
Surviving retirement without a big pension that never runs out isn't easy, but it's possible with sensible tweaking along the way
By RON LIEBER
WHEN you retire, you'll probably want to visit your grandchildren more than once each year. Perhaps you'll aim to give money each month to charity or your religious congregation.
The amount you have saved will clearly matter a great deal in whether you can do these things. But so will your portfolio withdrawal rate - the percentage of your assets that you take out each year to pay your expenses. You want it to be high enough to afford fun and generosity but low enough that you have little risk of running out of money.
Until a few years ago, the standard advice was that 4 or 4.5 per cent was about the best you could do. So if you had US$500,000 in savings, 4 per cent would give you about US$20,000 in your first year of retirement to augment Social Security and any other income. Then, you could give yourself a raise each year based on inflation. At 3 per cent inflation, you'd end up with US$20,600 in the second year of retirement and so on from there.
More recently, however, several studies have suggested that withdrawing 5 or even 6 per cent was possible - and still prudent. Retirees rejoiced.
And then the stock market fell to pieces. In the wake of the carnage, people who hope to retire anytime soon will probably be starting with a kitty smaller than they had expected just a few years ago. So an extra percentage point on the withdrawal rate matters even more than it might have in 2007. It could be the difference between travelling to see family or not, or it could determine when you get to retire in the first place.
But could it also lead you on a path towards ruin? This week, I went back to two of the researchers who had come up with the more generous formulas to see whether they're sticking by them. Not only are they staying the course, but one is telling his clients that they can take out as much as 6 per cent of their money during the next year. How can they justify something like this after the year we've just had?
Setting a rate
Here's one big reason to be suspicious about applying that same 4.5 per cent withdrawal rate to all people, no matter when they retire: Should a person who had the bad luck to retire in March 2009, at the stock market's recent bottom, spend 4.5 per cent of, say, US$350,000, or could they spend a bit more? After all, people who retired a year or two earlier with the same portfolio, before the bulk of the stock market's decline, might have started with 4.5 per cent of US$550,000 (and taken inflation-adjusted raises each year from that initial amount until they died).
It didn't seem right to Michael E Kitces, a financial planner and director of research at Pinnacle Advisory Group in Columbia, Maryland. He said he was uncomfortable with all the decisions made based on 'the day you happen to come into my office and the balance on that day'. In fact, he started looking into this before the market collapsed, and his research ended up suiting the conditions of the last year perfectly. He tried to figure out whether one could estimate how much better or worse stockmarket returns might be in the years after big declines - and whether the answer might allow for a more generous initial withdrawal rate.
What he concluded was that the overall market's price-earnings ratio - taking the current price for the Standard & Poor's 500-stock index divided by the average inflation-adjusted earnings for the past 10 years before the date of withdrawal - was predictive enough to produce guidelines. Then he came up with the following suggestions for a portfolio of 60 per cent stocks and 40 per cent bonds meant to last through 30 years of retirement.
If the ratio was above 20, indicating that stocks were overvalued, then a 4.5 per cent withdrawal rate was prudent given that the stock market was likely to fall. But if it was between 12 and 20 (the historical median is roughly 15.5), a 5 per cent rate was safe, tested against every historical period for which data was available. And if it was under 12 - a level it almost got to earlier this year - a rate of 5.5 per cent would work.
The most recent figure was 17.67, which suggests a 5 per cent withdrawal rate for current retirees. It had been above 20 until last October.
Mr Kitces gets his ratios from a set of data that Yale professor Robert Shiller creates and stores on Yale's website, at http:bit.ly/3gexz.
Making adjustments
Jonathan Guyton, a financial planner with Cornerstone Wealth Advisors in Edina, Minnesota, looked at the 4.5 per cent baseline and asked a different question: Couldn't it be a whole lot higher if a client was willing to forgo the annual inflation raise when conditions called for a bit of thrift? And if so, under what conditions would that happen - and would people be willing to, in effect, cut their own retirement paycheck?
It didn't take Mr Guyton long to find out. Two studies he worked on in 2004 and 2006 led him to the following conclusions about a portfolio meant to last 40 years: Using Mr Kitces' research to establish a baseline initial withdrawal rate of up to 5.5 per cent (or 5 per cent given valuations at the moment), the initial withdrawal rate could rise another whole percentage point, to 6.5 per cent, if at least 65 per cent of the money was in a variety of stocks, as long as the owner followed a few rules.
First, if the portfolio lost money in any given year, there would be no raise at all for inflation. And if the size of the withdrawal, in dollars, in any year amounted to an actual percentage rate of the remaining portfolio that was at least 20 per cent more than the initial withdrawal rate, retirees would have to take a 10 per cent cut in their annual allowance that year. Then, the increase for inflation would build on that new base the following year.
While Mr Guyton also put a 'prosperity' rule into place that allowed for a 10 per cent increase in particularly good years, 2008 tested his 'capital preservation' rule first. So he cut his clients' withdrawals by 10 per cent.
How did they take it? 'Many of them said, 'really, that's all?' ' he recalled. 'Keep in mind how dire things seemed.' Others blanched, noting that they had played by the rules and didn't cause the financial crisis. But they came around when Mr Guyton gave them a good talking to. 'For us to maintain the same degree of long-term financial security for you that you said you wanted, this is what you need to do,' he told them. 'It's a system. And the great thing about a policy is that it leaves no doubt about what you are supposed to do.' Another cut of 10 per cent might severely hurt their purchasing power, but the stock market's performance since March suggests that it won't be necessary in the coming months.
The real world
The actual execution of these strategies requires a bit more work.
You need to figure out what stocks and bonds should make up your investments in the first place, for instance, and how best to minimise taxes when you sell each year.
All this together seems complicated enough to suggest to a cynic that it's just a ruse to keep a client coming back each year for costly check-ups. That said, surviving retirement without a big pension that never runs out isn't easy, and paying a bit of money each year in exchange for help in prudently raising your withdrawal rate by 20 per cent does not strike me as completely insane.
Retirees also have to wonder whether the market will behave in the future as it has in the past. Or whether retirees can realistically stick to a strict budget.
'Even if you tell me that spending fluctuates a bit here and there, we still have to start somewhere,' said Mr Kitces. 'What on earth is your alternative? Are you not going to give any spending recommendations whatsoever?'
Mr Guyton solves this issue for clients who can afford it by carving out a separate discretionary fund. Retirees can spend that money on anything, but once it's gone, it's gone - unless they manage to replenish it out of their regular annual withdrawal.
There are still plenty of retirees and advisers who will balk at what appears to be outsize aggressiveness, whatever the studies indicate. To them, Mr Guyton suggests an entirely different consideration.
'The only problem is you run out of money? I don't buy that,' he said. 'For a lot of people who lock in on a 4 per cent figure, it's a formula for regret. They get 15 years in and look back at all of the things they didn't do. And now their health is gone.' - NYT
Navigating the global credit crisis
Business Times - 02 Sep 2009
MONEY MATTERS
Coming months are likely to show not only recovery but, in the case of US, accelerating recovery investors have been hoping for
By NORMAN VILLAMIN
INVESTORS can learn a lot from history. Looking back at the first quarter of 2009, many investors, fretting about the woeful state of the global economy, failed to focus on the things that matter - valuation and the rapid acceleration of global policy momentum. As it turned out, the combination of these factors created the backdrop for the sharp rally in global equities over the past six months.
Looking forward now from the heights that global equity prices have achieved, it is understandable that investors are getting increasingly wary. Admittedly, the valuation case has weakened with the rallies to date. But global policy effectiveness has not waned. Rather, it has begun to shift from the Chinese-led successes of the first half of 2009 to a broader, global story, with US policy achievements, in particular, emerging recently. This leaves the prospect, we believe, for another leg in the global rally in equities that began in March 2009.
Continued momentum in US economic and earnings data in coming weeks, underpinned by US policy momentum of the second quarter, is expected to drive this leg of the rally. Year-to-date, economic recovery momentum has been key to identifying relative outperformers globally. With emerging markets recovering from the 'Great Recession' more quickly than developed markets, economic momentum reflected in data releases has been a focus of market attention in the current rally. Recall, early in the year, news of the US and Chinese economic policy changes that helped set the stage for a bottoming in global markets. With Chinese stimulus coming sooner and more aggressively, unsurprisingly, the MSCI China rose 35 per cent in the first half of 2009, compared with a meagre 5 per cent for MSCI World.
With Chinese policy now stabilising, as Beijing tries to contain rapid year-to-date loan growth, US growth momentum is beginning to benefit from Washington's stimulus efforts of the late-first quarter of 2009. Their effectiveness was most recently seen in the July 2009 expansion of the Institute of Supply Management's New Orders Index, which historically has provided a three to six-month lead to turns in the US economy. Indeed, the most recent reading suggests that investors' concerns about job growth in the United States may begin to be addressed in coming months (see chart), providing further economic support to the earnings drivers that may emerge come October this year.
Looking a bit further ahead, the US third-quarter earnings season likewise looks set to provide support to the market in coming weeks. Indeed, during the rally since March, the US earnings season - the first six weeks of each quarter - was a key driver for market performance. Recall, as the first-quarter earnings season got under way in April, world equities, represented by MSCI World, rallied 18 per cent before stalling in mid-May as the earnings season came to a close. Similarly, as the second-quarter earnings season got under way in July 2009, world equities rallied another 12 per cent up to mid-August, as the season came to a close again. In total, on a compounded basis, the earnings-season rallies accounted for almost two-thirds of the 52 per cent rise in global equities up to Aug 21. With another earnings season quickly coming upon us in October, Tobias Levkovich, Citi's US equity strategist, notes that upward revisions to earnings expectations could continue into the northern autumn, potentially providing a catalyst for the next leg of the rally we have seen since March.
The resumption of US economic growth momentum and positive prospects for US earnings surprises in the third quarter suggest he global economic recovery is starting to transition from one with China as the sole driver to a more balanced US-China model. Indeed, since mid-year, this transition in policy and data has resulted in US equities outperforming their Chinese counterparts, with MSCI US rising 11.5 per cent up to Aug 21, exceeding the 5.7 per cent increase in MSCI China over the same period.
Therefore, although we can appreciate the caution investors are expressing, given that valuations are no longer cheap, expected news flow leads us to believe that caution will not be rewarded by the markets in the coming months. Rather, we encourage investors to manage their risk by managing their exposure within global equities. We expect that Asian equities, even after a near-50 per cent rally year-to-date, as indicated by MSCI Asia ex-Japan, may participate in this next leg. However, unlike the first half of 2009, where they trumped the flattish 5 per cent performance of global equities, we don't believe that they will necessarily lead regional performances as they did in the first semester.
Rather, investors who ignored US equities early in the year may wish to reconsider opportunities provided by this market. However, they should keep in mind that while recovery looks entrenched, the US recovery is expected to come in sub-trend, with GDP growth in the recovery phase falling short of previous cycle peaks. With this in mind, investors may seek to focus on opportunities that continue to under-price even the modest economic recovery we expect.
In this regard, we see opportunities in US and global energy services companies. While global crude prices have rallied from near-production cost at the beginning of the year to above US$70 a barrel recently, Citi analysts are still able to identify stocks where down-cycle price-to-book value multiples remain in place. As a result, even though global book valuations are expected to recover at only a moderate pace, the prospect for price-to-book value multiple expansion leaves an attractive risk-reward outlook for investors looking ahead.
Despite our optimism through to year-end, we must admit that the global recovery story must be strengthened further to sustain the rally into the new year. China, already grappling with rapid loan growth, must moderate its aggressive easing policy of early-2009 and structurally, continue to build its domestic consumer base. As for the US, it needs to transition its economy from a stimulus-led recovery back to a private sector-driven demand story.
On balance, though, while there are certainly concerns on the horizon, news flow over the coming months is expected to show not only recovery but, in the case of the US, accelerating recovery that investors have been hoping for, leaving the balance of risk and reward through year-end still pointed in favour of the reward camp, and creating an opportunity for investors to broaden out their focus from first-half leader emerging markets to include opportunities presented by US markets as well.
The writer is head of investment analysis & advice, wealth management, Asia-Pacific, Citi
MONEY MATTERS
Coming months are likely to show not only recovery but, in the case of US, accelerating recovery investors have been hoping for
By NORMAN VILLAMIN
INVESTORS can learn a lot from history. Looking back at the first quarter of 2009, many investors, fretting about the woeful state of the global economy, failed to focus on the things that matter - valuation and the rapid acceleration of global policy momentum. As it turned out, the combination of these factors created the backdrop for the sharp rally in global equities over the past six months.
Looking forward now from the heights that global equity prices have achieved, it is understandable that investors are getting increasingly wary. Admittedly, the valuation case has weakened with the rallies to date. But global policy effectiveness has not waned. Rather, it has begun to shift from the Chinese-led successes of the first half of 2009 to a broader, global story, with US policy achievements, in particular, emerging recently. This leaves the prospect, we believe, for another leg in the global rally in equities that began in March 2009.
Continued momentum in US economic and earnings data in coming weeks, underpinned by US policy momentum of the second quarter, is expected to drive this leg of the rally. Year-to-date, economic recovery momentum has been key to identifying relative outperformers globally. With emerging markets recovering from the 'Great Recession' more quickly than developed markets, economic momentum reflected in data releases has been a focus of market attention in the current rally. Recall, early in the year, news of the US and Chinese economic policy changes that helped set the stage for a bottoming in global markets. With Chinese stimulus coming sooner and more aggressively, unsurprisingly, the MSCI China rose 35 per cent in the first half of 2009, compared with a meagre 5 per cent for MSCI World.
With Chinese policy now stabilising, as Beijing tries to contain rapid year-to-date loan growth, US growth momentum is beginning to benefit from Washington's stimulus efforts of the late-first quarter of 2009. Their effectiveness was most recently seen in the July 2009 expansion of the Institute of Supply Management's New Orders Index, which historically has provided a three to six-month lead to turns in the US economy. Indeed, the most recent reading suggests that investors' concerns about job growth in the United States may begin to be addressed in coming months (see chart), providing further economic support to the earnings drivers that may emerge come October this year.
Looking a bit further ahead, the US third-quarter earnings season likewise looks set to provide support to the market in coming weeks. Indeed, during the rally since March, the US earnings season - the first six weeks of each quarter - was a key driver for market performance. Recall, as the first-quarter earnings season got under way in April, world equities, represented by MSCI World, rallied 18 per cent before stalling in mid-May as the earnings season came to a close. Similarly, as the second-quarter earnings season got under way in July 2009, world equities rallied another 12 per cent up to mid-August, as the season came to a close again. In total, on a compounded basis, the earnings-season rallies accounted for almost two-thirds of the 52 per cent rise in global equities up to Aug 21. With another earnings season quickly coming upon us in October, Tobias Levkovich, Citi's US equity strategist, notes that upward revisions to earnings expectations could continue into the northern autumn, potentially providing a catalyst for the next leg of the rally we have seen since March.
The resumption of US economic growth momentum and positive prospects for US earnings surprises in the third quarter suggest he global economic recovery is starting to transition from one with China as the sole driver to a more balanced US-China model. Indeed, since mid-year, this transition in policy and data has resulted in US equities outperforming their Chinese counterparts, with MSCI US rising 11.5 per cent up to Aug 21, exceeding the 5.7 per cent increase in MSCI China over the same period.
Therefore, although we can appreciate the caution investors are expressing, given that valuations are no longer cheap, expected news flow leads us to believe that caution will not be rewarded by the markets in the coming months. Rather, we encourage investors to manage their risk by managing their exposure within global equities. We expect that Asian equities, even after a near-50 per cent rally year-to-date, as indicated by MSCI Asia ex-Japan, may participate in this next leg. However, unlike the first half of 2009, where they trumped the flattish 5 per cent performance of global equities, we don't believe that they will necessarily lead regional performances as they did in the first semester.
Rather, investors who ignored US equities early in the year may wish to reconsider opportunities provided by this market. However, they should keep in mind that while recovery looks entrenched, the US recovery is expected to come in sub-trend, with GDP growth in the recovery phase falling short of previous cycle peaks. With this in mind, investors may seek to focus on opportunities that continue to under-price even the modest economic recovery we expect.
In this regard, we see opportunities in US and global energy services companies. While global crude prices have rallied from near-production cost at the beginning of the year to above US$70 a barrel recently, Citi analysts are still able to identify stocks where down-cycle price-to-book value multiples remain in place. As a result, even though global book valuations are expected to recover at only a moderate pace, the prospect for price-to-book value multiple expansion leaves an attractive risk-reward outlook for investors looking ahead.
Despite our optimism through to year-end, we must admit that the global recovery story must be strengthened further to sustain the rally into the new year. China, already grappling with rapid loan growth, must moderate its aggressive easing policy of early-2009 and structurally, continue to build its domestic consumer base. As for the US, it needs to transition its economy from a stimulus-led recovery back to a private sector-driven demand story.
On balance, though, while there are certainly concerns on the horizon, news flow over the coming months is expected to show not only recovery but, in the case of the US, accelerating recovery that investors have been hoping for, leaving the balance of risk and reward through year-end still pointed in favour of the reward camp, and creating an opportunity for investors to broaden out their focus from first-half leader emerging markets to include opportunities presented by US markets as well.
The writer is head of investment analysis & advice, wealth management, Asia-Pacific, Citi
Wednesday, August 26, 2009
Interpreting the Crisis
Business Times, 26 Aug 2009
The events of last September and October exhibited some features of a classic panic
This is the second and final part of an excerpt of the speech by US Federal Reserve chairman Ben Bernanke at the Federal Reserve Bank of Kansas City's Annual Economic Symposium at Jackson Hole, Wyoming on Aug 21.
HOW should we interpret the extraordinary events of the past year, particularly the sharp intensification of the financial crisis in September and October? Certainly, fundamentals played a critical role in triggering those events. As I noted earlier, the economy was already in recession, and it had weakened further over the summer. The continuing dramatic decline in house prices and rising rates of foreclosure raised serious concerns about the values of mortgage-related assets, and thus about large potential losses at financial institutions. More broadly, investors remained distrustful of virtually all forms of private credit, especially structured credit products and other complex or opaque instruments.
At the same time, however, the events of September and October also exhibited some features of a classic panic, of the type described by (British economist and journalist Walter) Bagehot and many others.
A panic is a generalised run by providers of short-term funding to a set of financial institutions, possibly resulting in the failure of one or more of those institutions. The historically most familiar type of panic, which involves runs on banks by retail depositors, has been made largely obsolete by deposit insurance or guarantees and the associated government supervision of banks.
But a panic is possible in any situation in which longer-term, illiquid assets are financed by short-term, liquid liabilities, and in which suppliers of short-term funding either lose confidence in the borrower or become worried that other short-term lenders may lose confidence.
Although, in a certain sense, a panic may be collectively irrational, it may be entirely rational at the individual level, as each market participant has a strong incentive to be among the first to the exit.
Panics arose in multiple contexts last year. For example, many financial institutions, notably including the independent investment banks, financed a portion of their assets through short-term repo agreements. In repo agreements, the asset being financed serves as collateral for the loan, and the maximum amount of the loan is the current assessed value of the collateral less a haircut.
In a crisis, haircuts typically rise as short-term lenders attempt to protect themselves from possible declines in asset prices. But this individually rational behaviour can set off a run-like dynamic: As high haircuts make financing portfolios more difficult, some borrowers may have no option but to sell assets into illiquid markets. These forced sales drive down asset prices, increase volatility, and weaken the financial positions of all holders of similar assets, which in turn increases the risks borne by repo lenders and thus the haircuts they demand.
This unstable dynamic was apparent around the time of the near- failure of Bear Stearns in March 2008, and haircuts rose particularly sharply during the worsening of the crisis in mid-September.
As we saw last fall, when a vicious funding spiral of this sort is at work, falling asset prices and the collapse of lender confidence may create financial contagion, even between firms without significant counterparty relationships. In such an environment, the line between insolvency and illiquidity may be quite blurry.
Panic-like phenomena
Panic-like phenomena occurred in other contexts as well. Structured investment vehicles and other asset-backed programmes that relied heavily on the commercial paper market began to have difficulty rolling over their short-term funding very early in the crisis, forcing them to look to bank sponsors for liquidity or to sell assets.
Following the Lehman collapse, panic gripped the money market mutual funds and the commercial paper market, as I have discussed. More generally, during the crisis, runs of uninsured creditors have created severe funding problems for a number of financial firms. In some cases, runs by creditors were augmented by other types of 'runs' - for example, by prime brokerage customers of investment banks concerned about the funds they held in margin accounts. Overall, the role played by panic helps to explain the remarkably sharp and sudden intensification of the financial crisis last fall, its rapid global spread, and the fact that the abrupt deterioration in financial conditions was largely unforecasted by standard market indicators.
The view that the financial crisis had elements of a classic panic, particularly during its most intense phases, has helped to motivate a number of the Federal Reserve's policy actions.
Mr Bagehot instructed central banks - the only institutions that have the power to increase the aggregate liquidity in the system - to respond to panics by lending freely against sound collateral.
Following that advice, from the beginning of the crisis, the Fed (like other central banks) has provided large amounts of short-term liquidity to financial institutions. As I have discussed, it also provided backstop liquidity support for money market mutual funds and the commercial paper market, and added significant liquidity to the system through purchases of longer-term securities.
To be sure, the provision of liquidity alone can by no means solve the problems of credit risk and credit losses; but it can reduce liquidity premiums, help restore the confidence of investors, and thus promote stability. It is noteworthy that the use of Fed liquidity facilities has declined sharply since the beginning of the year - a clear market signal that liquidity pressures are easing and market conditions are normalising.
What does this perspective on the crisis imply for future policies and regulatory reforms? We have seen during the past two years that the complex interrelationships among credit, market, and funding risks of key players in financial markets can have far-reaching implications, particularly during a general crisis of confidence.
In particular, the experience has underscored that liquidity risk management is as essential as capital adequacy and credit and market risk management, particularly during times of intense financial stress. Both the Basel Committee on Banking Supervision and the US bank regulatory agencies have recently issued guidelines for strengthening liquidity risk management at financial institutions. Among other objectives, liquidity guidelines must take into account the risks that inadequate liquidity planning by major financial firms pose for the broader financial system, and they must ensure that these firms do not become excessively reliant on liquidity support from the central bank.
But liquidity risk management at the level of the firm, no matter how carefully done, can never fully protect against systemic events. In a sufficiently severe panic, funding problems will almost certainly arise and are likely to spread in unexpected ways. Only central banks are well positioned to offset the ensuing sharp decline in liquidity and credit provision by the private sector. They must be prepared to do so.
Systemwide approach
The role of liquidity in systemic events provides yet another reason why, in the future, a more systemwide or macroprudential approach to regulation is needed. The hallmark of a macroprudential approach is its emphasis on the interdependencies among firms and markets that have the potential to undermine the stability of the financial system, including the linkages that arise through short-term funding markets and other counterparty relationships, such as over-the-counter derivatives contracts. A comprehensive regulatory approach must examine those interdependencies as well as the financial conditions of individual firms in isolation.
Since we last met here, the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.
As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year, monetary, fiscal and financial policies around the world have been aggressive and complementary.
Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.
Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years.
I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress towards both those objectives.
When the pursuit of prosperity crosses borders
Business Times - 26 Aug 2009
THERE will be no end to people pursuing two main things: wealth and prosperity. These are pursued by Singapore too. One of Singapore main achievements is economic.
The socio-economic status of the city state with a population of almost four million is on par with that of the world's richest countries. Following its separation from Malaysia that saddened Lee Kuan Yew, the country nursed the ambition of becoming a manufacturing hub, and subsequently became a centre for the service sector.
Processing of permits, service and prowess in attracting investors and tourists largely guide them in their every policy and action. Education is promoted - in fact, subsidies are granted to churn out intelligent and skilled citizens. Nationalism and self-defence are other aspects that get enhanced too, including national service and campaigns aimed at inculcating national pride. It has among the most sophisticated weapons in the region. Singapore is one of the respected countries that could not be ignored in terms of military might.
Like it or not, Singapore is in fact one of the countries that Indonesia depends on while Indonesians enjoy visiting it. Indonesians make up the largest number of international visitors to Singapore. When they make trips to various parts of the world, most Indonesians fly Singapore Airlines.
Singapore is also the transit point for imports, exports and other socioeconomic activities. It is also the business capital and hub for the region which includes Indonesia.
The problem that crops up is that Singapore's comprehensive and clear policy attaches importance to its own interest. This is only logical, and all countries do likewise. No matter how harsh the criticism and strong the hatred towards Singapore, it enjoys sovereignty.
However, if its policy overlaps with another country's, problems at times break out. Apart from Malaysia, Indonesia becomes the 'victim' here.
Singapore's arguments are also strong with its anticipatory, visionary and tactical policy, if not to say rather 'cunning'. Which country is not tactical or, say, 'cunning' when it concerns international relations?
In this context of being cunning, Indonesia needs to understand, and do the same. However, Indonesia is clearly way behind and loses out here.
This may be noticed, for instance, when Indonesia wishes to get its corrupt citizens 'hiding' in Singapore extradited. To conclude an extradition treaty, Singapore wants it to be complemented with a Defence Cooperation Agreement (DCA) which essentially allows it to conduct military training in Indonesian territory with a relatively free hand.
It is here that problems arise, because it involves sovereignty. In other words, the extradition treaty must be complemented with the DCA. The oddity lies with the Indonesian side. And, after a process that was not made known to the public, the extradition treaty and DCA were inked in Bali.
Subsequently, there were protests in parliament that declined to ratify the agreements. What did Singapore have to say? 'After the agreements were signed, came the objections. In fact, after the signing, we partied and even had karaoke,' said Singapore Foreign Minister George Yeo.
Blame game
The agreements stalled, with Singapore putting the 'blame' more on Indonesia. However, Singapore Prime Minister Lee Hsien Loong said: 'Singapore made a new proposal for the agreements to be restored.' However, Singapore insists on treating the extradition treaty and DCA as a package. 'However, Indonesia chose to stand firm to this issue,' said Mr Lee.
Apparently, the ball is now in Indonesia's court. And the question is how could Indonesia be unaware of what was happening? How could Indonesia, or at least a handful of people, go through a process that ended with the extradition treaty and DCA? Does the old position still surface, ie whatever the government does is bound to have been approved by the People's Representative Council (DPR)? In drawing up the extradition treaty, which was most probably based on international law, must a certain degree of Indonesia's territorial 'sovereignty' be sacrificed?
The conclusion is: We are not ready and do not understand Singapore's tactical and comprehensive strategy.
The above editorial was published in Indonesia's Kompas on Aug 14
THERE will be no end to people pursuing two main things: wealth and prosperity. These are pursued by Singapore too. One of Singapore main achievements is economic.
The socio-economic status of the city state with a population of almost four million is on par with that of the world's richest countries. Following its separation from Malaysia that saddened Lee Kuan Yew, the country nursed the ambition of becoming a manufacturing hub, and subsequently became a centre for the service sector.
Processing of permits, service and prowess in attracting investors and tourists largely guide them in their every policy and action. Education is promoted - in fact, subsidies are granted to churn out intelligent and skilled citizens. Nationalism and self-defence are other aspects that get enhanced too, including national service and campaigns aimed at inculcating national pride. It has among the most sophisticated weapons in the region. Singapore is one of the respected countries that could not be ignored in terms of military might.
Like it or not, Singapore is in fact one of the countries that Indonesia depends on while Indonesians enjoy visiting it. Indonesians make up the largest number of international visitors to Singapore. When they make trips to various parts of the world, most Indonesians fly Singapore Airlines.
Singapore is also the transit point for imports, exports and other socioeconomic activities. It is also the business capital and hub for the region which includes Indonesia.
The problem that crops up is that Singapore's comprehensive and clear policy attaches importance to its own interest. This is only logical, and all countries do likewise. No matter how harsh the criticism and strong the hatred towards Singapore, it enjoys sovereignty.
However, if its policy overlaps with another country's, problems at times break out. Apart from Malaysia, Indonesia becomes the 'victim' here.
Singapore's arguments are also strong with its anticipatory, visionary and tactical policy, if not to say rather 'cunning'. Which country is not tactical or, say, 'cunning' when it concerns international relations?
In this context of being cunning, Indonesia needs to understand, and do the same. However, Indonesia is clearly way behind and loses out here.
This may be noticed, for instance, when Indonesia wishes to get its corrupt citizens 'hiding' in Singapore extradited. To conclude an extradition treaty, Singapore wants it to be complemented with a Defence Cooperation Agreement (DCA) which essentially allows it to conduct military training in Indonesian territory with a relatively free hand.
It is here that problems arise, because it involves sovereignty. In other words, the extradition treaty must be complemented with the DCA. The oddity lies with the Indonesian side. And, after a process that was not made known to the public, the extradition treaty and DCA were inked in Bali.
Subsequently, there were protests in parliament that declined to ratify the agreements. What did Singapore have to say? 'After the agreements were signed, came the objections. In fact, after the signing, we partied and even had karaoke,' said Singapore Foreign Minister George Yeo.
Blame game
The agreements stalled, with Singapore putting the 'blame' more on Indonesia. However, Singapore Prime Minister Lee Hsien Loong said: 'Singapore made a new proposal for the agreements to be restored.' However, Singapore insists on treating the extradition treaty and DCA as a package. 'However, Indonesia chose to stand firm to this issue,' said Mr Lee.
Apparently, the ball is now in Indonesia's court. And the question is how could Indonesia be unaware of what was happening? How could Indonesia, or at least a handful of people, go through a process that ended with the extradition treaty and DCA? Does the old position still surface, ie whatever the government does is bound to have been approved by the People's Representative Council (DPR)? In drawing up the extradition treaty, which was most probably based on international law, must a certain degree of Indonesia's territorial 'sovereignty' be sacrificed?
The conclusion is: We are not ready and do not understand Singapore's tactical and comprehensive strategy.
The above editorial was published in Indonesia's Kompas on Aug 14
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