Warning: Elections can be hazardous to your brain

If you've been following the elections, be careful. Watching it can be mentally hazardous and intellectually degrading.

Personality attacks and misleading comments. That's what we've been seeing most ot the time when watching Indonesia's election campaigns. JK taking out SBY for being lame, Boediono attacking JK as a businessman with hidden agendas, etc. A few days ago, SBY's campaign team leader even shouted racist comments to a JK team member on TV. Now that's a show of sportsmanship.

I noticed as well that the presidential/VP candidates' takes on things are most of the time very entertaining. Take this para from detik.com for example, quoting VP candidate Prabowo Subianto:

"Seharusnya pertumbuhan ekonomi kita dua digit dan itu bisa dicapai dari surplus perdagangan yang rata-rata mencapai 27 miliar US Dollar per tahun. Jadi selama 11 tahun terakhir ini, mestinya cadangan devisa kita mencapai lebih dari 300 miliar Dollar"

Those statements are misleading at best. Surely being the wealthiest VP candidate, Mr. Prabowo can hire a good economist to tell him that economic growth is measured in real and not nominal terms. Secondly sir, $27billion is the trade surplus, not the current account... meaning from that 27 billion, 13 must be used to pay for freight costs and insurance to carry the load. And another 10 billion is money that doesn't belong to us in the first place (because many of the exporting firms owned by foreigners).

Enough about Neolibs!
Perhaps the biggest joke in this whole election is the way candidates try to villanize each other as neo-liberalists or "neolibs". More often than not, the Neolib issue becomes a smoke-screen to cover-up incompetencies on analysing real-world problems. Take this quote from Megawati, who is reportedly the Presidential candidate who scored highest in last month's presidential IQ test:

"Kejadian yang dialami oleh Prita merupakan bukti kasat mata, dampak dari neoliberalisme, di mana kekuatan pasar bebas dengan lembaga-lembaga multinasionalnya dapat dengan mudah menggunakan hukum seperti UU 11/2008 tentang Informasi Transaksi Elektronik (ITE)," sebut Mega dalam keterangan tertulis yang dibagikan di Kantor Kampanye Nasional Mega-Prabowo di Jakarta, Inilah.com Rabu (3/6).

Ibu, the Prita case happened because of a corrupt judicial system and has nothing to do with the free market. In my opinion, comments like these represent blunt attempts to stupify the public and divert attention away from substantive issues.

The farmers, tukang ojeks, and most people in the kampungs have no idea what neoliberalism means. The Mega and JK teams (who brought this jargon to the fore in the first place) are doing a good job in duping the electorate by associating everyone who aren't on their boats as these evil, cold-hearted, exploitative, capitalist people called "Neolibs". JK went even further today by apparently generalising capital market economists (an honest profession) as neolibs:

"Ciri-cirinya orang neolib itu yang selalu bicara itu. Sedikit-sedikit pasar modal sedikit-sedikit bicara soal pasar, dan bicara soal indeks," tutur JK di hadapan ratusan pendukung saat pelantikan tim pemenangan JK-Wiranto di Gedung DPD Partai Golkar Sulteng, Jl Moh Yamin Palu, Sulteng, detik.com Jumat (5/6/2009).

Comments such as this do nothing but generate confusion, if not incite hatred. Thanks JK for widening the divide between the people in the kampungs and us in the city (i.e. capital market)... now they think we're evil.

These guys want to be president but don't seem to know what the country really needs. Sir/Ma'am, Indonesia needs a leader that unites, not divides. We need a leader that educates, not misleads. If you don't intend to be that person, then really you aren't worth a single vote.



Disclaimer: The views and writings posted in this site is provided as general information only. They are solely the opinions of the author and do not represent the opinions of firms affiliated with the author.

Gold: Is it too late to enter?

I've been bullish on gold since September of last year and have started accumulating the commodity ever since for my personal portfolio. My reasoning was simple: governments around the world are printing money like mad, so the best place to be is in hard assets instead of IOUs.

But the recent surge in gold prices has been too absurd for my liking. The metal has jumped to nearly $1000 per ounce, or up 20% from several months ago. In rupiah terms the magnitude's greater. I bought the metal at Rp300K per gram in December; now it costs 380K, up 27%!

Although I did get to buy a modest amount of the commodity when it was cheap, a part of me is still regretful (the greedy part): "Why didn't I buy more??"

I got some money at hand now, but I don't think I'll let my greed take over... as tempting as it is.

Indeed with the world set for possibly a multi-year recession, I still think gold is the place to be. But if there's one thing we should have learnt by now (having gone through BUMI in 2008), is that things that come up fast usually come down faster!

So I'll try my best to let common sense guide my investment decisions for now. I'll probably wait for a 10 or 15% pull-back before jumping in.

Obama: too good to be true?

As hard as I try, I can't help but notice all the people around the world celebrating the inauguration of Obama.

Many are pinning high hopes on him as a figure which could change America and bring about a better world. Fears of a 'clash of civilizations' which was rampant in the Bush era, have suddenly died down.

But is Obama really such a dream come true?

In my opinion, it seems like many in the international community has forgetten about who voted for Obama in the first place: the Americans. He works for America; not Kenya, not Japan, and as sure as hell not Indonesia.

Bush was an atrocious man: he started wars around the world (one on a false pretense), revived the arms race with russia, and outright condoned the genocide in gaza. But it's not fair to say that all of that was purely his fault.

It is America that's hungry for oil, power, and global domination. It is also America that has powerful Israeli lobbyist groups who are--let's face it--not very fond of Arabs.

This is why it makes sense to retain some degree of skepticism on this Obama. Think of it this way: a gas-guzzler will cause discomfort to others, regardless of whoever's driving it (be it a black man or a trigger-happy texas cowboy). Changing the driver won't change the car. Just like changing the President won't change the country.

To be fair, we should give him some credit for closing Guantanamo on the first day in office. But the man hasn't said a word about the Gaza war crimes, even as Aljazeera shows footage of chemical weapons being used against civilian populations!

I hope I'm wrong, but I doubt Obama will be the figure the world is expecting him to be.

The truth about unit-linked insurance products

My wife and I was recently offered a number of unit-linked insurance products; i.e. products that combine savings with insurance. They go like this: If I die before a certain age, my family will get a lump-sum of money; but if I survive past that age, I'll be able to recollect my premiums which have grown in size (as if I had been saving for all that time).

The key question that popped into my mind was: should i buy this or invest by myself in the stock market instead? I did some analysis and came up with several conclusions. So I thought they would be worth sharing.

The first thing my broker gave me was a spreadsheet indicating the expected amount of cash pay-offs for the next 30-years or so. This is where my first objection starts: The expected cash benefits given in the "illustration" from the brokers appear too optimistic. It assumes a very high return on investment (e.g. 70%, 50%, etc.) in the first five years of participation.

In my view, even if the insurance company invests all its funds in the stock market (and they don't), the average return on investment should be around 12 - 15% per year i.e. the rate of nominal GDP growth. Projecting exorbitant returns consecutively, with no reversals in subsequent years, is unwise if not fraudulent. So be sure to discount the cash pay-offs that's illustrated by the broker. You're likely to get far less than the number they're tantalizing you with.

The second thing you need to know about unit linked products is that they beat investing on your own only if you die young! By my calculation, the insurance product i was offered paid-off better than investing on my own if I were to die at age 48 (I'm now 30). If I were to die at a later age (the life expectancy of Jakartans is I think around 65), the insurance product would have made me worse off than investing by myself.

I know we have no way to ascertain our time of death; but if you think you're not at high risk of dying young, do consider investing on your own in the stock market or mutual funds instead.

Thirdly, don't overlook the "real value" of the pay-offs that they're giving you. My insurance broker boasted of me getting Rp 2.1 billion of rupiahs at retirement age; but what will that amount be able to get me?

When you deflate that figure with inflation, billions suddenly don't look that attractive anymore. For example if inflation averages 7% per annum, Rp2.1 billion in 2033 would be equivalent to only Rp360 million today. That is roughly the price of an entry-level Honda Accord. And that's the optimistic scenario. If Indonesia experiences another crisis and inflation averages 9% (which I think is very possible), the figure goes down to Rp220 million... which is not even enough to buy a Ford Focus or Mazda3!

Many brokers aren't forthcoming about this inflation aspect. There are probably many ordinary people out there (non-economists) that dream of being able to buy a mansion with the billions they supposedly will receive at retirement age. They've been duped big time. And they'll find out the hard way that a billion rupiahs in 2033 will only go as far as a Toyota Avanza!

So with no disrespect for the many honest and hard-working insurance brokers out there, do give thorough consideration before purchasing your unit-linked insurance product. Not everyone needs it; i.e. it may or may not be right for you.

Are commodities really dead?

As counterparty risk runs high, could global liquidity again flock back to commodities?

A safe haven is what every investor is seeking in turbulent times like this. Following the recent collapse of prominent financial institutions in the US, investors have been shunning away from global equity & bond markets while apparently heading into US treasury securities—in a move commonly known as “flight to quality”.

So while equity markets around the world plunge by a whopping 10 - 30 percent, and sovereign bonds such as the Indonesian 10-year note drop 5 percent in value, by mid-September the price on benchmark 10-year US-treasury bonds surged by over 4 percent from a month earlier. This is an extraordinary gain for a security widely perceived as “safe”.

In this era of uncertainty, the world is indeed hard to predict—if not outright irrational. It is very ironic that investors are now flying towards securities issued by the government of a country whereby its people have been enormously accumulating debt from the rest of the world over the last 16 years.

Many seem to have forgotten that even as recently as last year, the world was annually lending cash to Uncle Sam by a magnitude of 7 percent of his income… in part to allow him to spend more on overpriced houses and gas-guzzling sports utility vehicles.

The world’s current woes can be explained using many difficult jargons: trade deficits, sub-prime mortgages, structured investment vehicles, etc. But at the end of the day it all comes down to something very simple: some people borrowed a lot of money and now can’t pay it back.

So the folks that have been lending the money—such as the many of us in Asia and the rest of the world—share some of the brunt. They are finding out the hard way that the IOUs (as in I owe you) that the Americans have been giving in return aren’t really that worthy.

The recent bail-out of AIG, the American insurance giant, by the US central bank was a relief for many market participants. But on the day after, the US government issued some $100 billion dollars worth of US-Treasury securities to the market in a bid to reinvigorate the central bank’s balance sheet. In essence this means that the US government is prepared to replace the worthless IOUs of the private sector with its own IOUs.

So what lies ahead of us? The amount of toxic debt or so called ‘level 3 assets’ held by many US banks reportedly exceed their capital base by far. The survivability of many elements of the US financial sector is put into question. And judging by the way things have been going, more bail-outs could be forthcoming, eventually leading to the US government issuing more debt (i.e. treasury bills, notes and bonds).

This is certainly no reason for US Treasurys securities to rally. They are after all merely promises to pay a stated amount. What investors should be clinging-to in turbulent times are not promises, but something more tangible. This is where commodities may come in.

Of course given the anticipated slow-down of the global economy, real demand for many hard commodities such as oil and metals should ease. But commodity prices have come down a long way from their historical highs several months ago, and gold looks like an interesting proposition as a safe haven. After all, the metal has been renowned as a store of value for as long as anybody could remember.

Just recently the US indicated plans to create a new institution to assume troubled assets held by US financial companies, in a move likely to be parallel to the formation of Indonesia ’s IBRA (Indonesian Bank Restructuring Agency) nearly a decade ago. Many may soon realize it’s just a matter of time before Henry Paulson, the US Treasury Secretary, starts flooding the market with treasury securities. Likewise it could be just a matter of time before investors look for a new safe haven... and commodity prices become re-energized.

A return to the stone-age?

Those who think fuel subsidies should be maintained at all costs should prepare to return to the stone-age.

With the parliamentary inquiry on fuel prices forthcoming, many are still debating whether the government really should have raised fuel prices back in May.

A member of parliament was recently quoted as saying: “Di Rusia harga BBM setara dengan Rp9.000-an tetapi pendapatan per kapita warganya rata-rata sudah mencapai 9.000 dolar AS, demikian pula Azarbaijan harga BBM di sana setara dengan Rp9.000-an dengan pendapatan penduduk sekitar 4.000 dolar AS. Lha kita rata-rata perkapita masih dalam kisaran 2.000 dolar AS,” (Taken from Pos Kota, 29 Juni 2008).

That argument is totally rubbish. Keep it simple: what makes fossil fuel any different than a car or an LCD TV? I own a Honda because I can’t afford a BMW. I don’t go to the government asking for subsidies to buy BMWs. The same logic goes for fossil fuel which now has become a luxury commodity: If the majority of Indonesians can no longer afford to use fossil fuel for cooking, then they should switch to burning charcoal!

Last week’s crash of an Indonesian military plane serves as a reminder of how impotent governments can be when they cut down on spending to allow for burgeoning fuel subsidies. Which brings us back to the question: Can the government allow fuel subsidies to grow indefinitely if they wanted to? Let’s take a look.

Based on the 2008 APBN-P, Finance Minister Sri Mulyani has Rp990 trillion to disburse this year. Say that she abides to parliament and says “I will maintain fuel prices at all costs!” But to appease bond investors and prevent capital outflow, she puts a cap on the budget deficit. This means she has to cut down on discretionary spending whenever fuel subsidies swell along with rising oil prices. How far can she go?

Well, to maintain the existence of the government itself, there are several expenditures that she can’t cut down:

- Civil Servant Salaries: Rp130tn.

- Interest Payments: Rp95tn (cut this and you’ll end up with a whole new mess).

- Transfer to regional governments: Rp292tn (cut this and provinces will start to rebel).

All that spending sums up to around Rp515tn. This means the minister has around Rp475tn left to slash if oil prices keep rising. Quite a lot, eh? Not really… some Rp125tn is already set to be used for fuel subsidies and Rp60tn for electricity subsidies, so this means she actually has only Rp290tn to spare. How long will this last? For the sake of simplicity and being conservative, we assume that every dollar per barrel rise in oil prices would worsen the deficit by around Rp1tn. So what would happen if Indonesian crude prices reach $150/barrel (WTI = $160/barrel)?

Make way for cutting down some Rp55tn or roughly 20% of available discretionary spending. What should go? Say we cut defense and security spending again in half and save Rp15tn. Prepare for more army planes falling out of the sky and violent demonstrations to be left without guard.

Violent students and professional demonstrators can proceed freely on their rampage of destruction… as the police have no budget to dispatch officers. Across the seas, the police and navy would also have no money for patrols. Pirates will roam freely in the Malaka straits, creating a Somalia-like heaven for hijackings. But don’t worry, we still have Malaysia to come to the rescue… but maybe at the expense of letting go another Island .

Wait, we still need Rp40tn more. Let’s cut education and health spending by one quarter, we’ll save a good Rp20tn. Public schools will start charging higher tuition, drop-outs will increase and enrollments will decline. But that shouldn’t matter much, children will be dying anyway as the Posyandus close and there are no more cheap vaccines available. Prepare to see increased prevalence of medieval era diseases such as polio, tuberculosis, malaria and many other nasty stuff.

We’re still Rp20tn short. Let’s tell the department of public works to cut down their budget by as much. No more construction and maintenance for roads and irrigations. National roads will be in dire straits, so the time needed to carry logistics between provinces will double as trucks get rammed into potholes. Supplies to remote markets will be disrupted and inflation will blow sky high. Meanwhile lack of maintenance on irrigation would lead to more frequent crop failures, precipitating a surge in food prices and widespread hunger.

If you think all that isn’t bad enough, try: ICP = $200/barrel (WTI =$210/barrel).

All this probably won’t happen in 2008 because we’re already half way through the year. But it could easily happen next year if the status quo on fuel prices remains. The higher oil prices surge, the farther we’re thrown back to the stone age. Therefore, subsidized fuel prices must be allowed to float.

Our respected members of parliament should realize this and stop exploiting the fuel price hike issue for self-righteous political gains. Both the technocrats and politicians are dancing on thin ice. Sooner or later they will have to draw the line, and that line should’ve been drawn long ago.

Me on global bonds

This is a cap from my interview last week at Metro TV. Talked about the government's latest global bond issuance.

In a nutshell: It wasn't the best time to issue a US$ bond, but at least it served to diversify the government's financing sources, as well as help relieve oversupply concerns in the domestic bond market. If the government wants bond yields to come down, it must first deal with the fuel subsidy issue.