This is the first of a 7-part series on how to beat inflation in Singapore or just about anywhere else for that matter. As inflation takes off and goes exponential worldwide, individuals and investors alike will need to develop personal strategies to cope with and to fight this insidious enemy that is inflation, which reduces the purchasing power of the money that you have every hour, every minute, and every second of every day.
It does not matter whether you are rich, middle-class, or poor, it is more of a matter of degree. The wealthy will rightly worry about the value of their assets in an inflationary environment. With a high-enough inflation rate, even the rich can get wiped out, if they do nothing to preserve their assets – just take a look at Zimbabwe, where a banana now costs more than what a house used to be.
If you are a middle-class person, congratulations, you are part of the most rapidly disappearing section of the population. If you carry on with life as per normal, then as inflation takes its toll, your lifestyle will be no longer be what it used to be. You will find that things are getting more and more expensive, while your income does not seem to be able to catch up. You will find yourself falling further and further behind. Little luxuries that you used to be able to afford, like, say, dining out regularly at restaurants, or going for a family tour every now and then, will start to slip out of your grasp. You will start to cut back on your expenses, only to find that even that is not enough. You will find that things you need, whether it is food, transport, education, or healthcare, will take up a bigger and bigger chunk of your monthly budget, squeezing out everything else until, it seems, you no longer have room to breathe. This is what inflation can, and will, do to you.
If you are not so well-to-do, it will not get much simpler than this : as inflation takes off, the fight against inflation will literally be a fight for survival. Let’s take food for example. For the middle-class folks in a middle-class society such as America or Singapore, the cost of food typically takes up around 10-15% of the total monthly income. If the cost of food doubles, this ratio goes up to 20-30%. But for the poorer folks, whose food expenses take up one-third to one-half of the total income, with rental and utilities taking up the rest, and with no further room to cut back on expenses, what happens when the cost of food doubles? Life will get very hard, very quickly. You will have to make some extremely hard choices : do you want to eat, or do you want to pay the rent – and what about the utilities?
So as you can see, no matter what economic class you are in, we have the same common enemy : inflation. Here’s my A-Z guide on how we can fight inflation. I hope it helps.
A
Awareness.
If you have landed on this page, whether from a search engine query, or from some other link, you are already aware that you need to do something about this inflation problem. As they say, being aware is half the battle won. Now is the time to fight the other half.
Aggressiveness. Attitude. Ability.
You cannot enter into a fight half-heartedly and expect to emerge victorious. It is the same in the fight against inflation. You must be aggressive. Don’t say things like, “oh, it will go away eventually” or “oh, there’s nothing I can do about it”. You must have the right attitude and believe you can beat this thing. And as for your ability to win this war, it is a function of the resources available to you and the skills that you have. All the best in this regard. Now, let’s get on with it.
B
Buy Nothing. Or Buy Less. At the very least, Buy Wisely.
From time to time, the shopping malls will hold sales. Maybe it’s 10% off, maybe it’s 20% off. But the way I see it, if you don’t buy something, you will save 100%. So before you rush off to buy something, think about it. Do you really need it? Can you save 100%? The next best thing you can do is to buy less. Inflation simply cannot hurt you if you do not buy, and it will hurt less if you buy less. But then again, if you have to buy something, buy wisely. It does not make sense to buy, say, a cheapo pair of shoes if it does not last you even one year. Buy a good pair, and make it last. I wore my previous pair of Clarks shoes for five years and the soles were threatening to spring leaks before I reluctantly parted with it for a new pair.
Barter Trade.
As the price of goods and services go higher and higher with no end in sight, people might find it worthwhile to engage in barter trade, which lies outside of the economic system and its crazy prices. As Wikipedia puts it : Barter crosses over to the spheres of trade with money when economies are suffering from a very unstable currency (as when hyperinflation hits). It could be anything : a daily ride to work for your neighbour’s husband in exchange for her help in doing accounting for your small home business, or fixing your friend’s cousin’s computer in exchange for a couple of anime DVD’s that you’ll have trouble importing yourself because of high shipping costs. As inflation takes off and goes into hyper-inflation, this kind of thing could become more and more common. And now that we have the Internet, as compared to the bad old days, entire barter marketplaces could spring up.
C
Cash. Currency.
Six words : Get The Hell Out Of Cash. Okay, a bit more on that. Treat cash and currency as what it is – a medium of exchange, nothing more. The way it is being inflated away, cash is certainly not a store of value. Keep just enough of it around for your daily transactions, and maybe a small buffer to tide you over in case of emergency. The exact size of the buffer depends on your comfort level, maybe 3 to 6 months worth of expenses. Try to keep as little cash as you can in your wallet (0% interest), or in your savings account (0.25%), or in fixed deposits (1%+). You could keep some emergency funds in money market funds (1-2%) but that’s it. Look to invest the rest of your money in stuff that will give you higher returns. The race is on. As of Jan 2008, the official Singapore CPI inflation rate is 6.6% – you have to beat at least that. For myself, I am setting a slightly higher standard. I benchmark my investment performance to the M3 money supply growth rate – which can be between 14% to 23% per year.
Consolidate Errands.
When you go off downtown, or go anywhere else which involves transport expenses, it would be wise to consolidate your errands. Try to plan your trips such that you accomplish more than one thing at a time. It will take some planning and good timing to pull off, but you will become a lot more efficient, and save both time and money.
Cooking.
Those of you who cook, or are fortunate enough to have someone cook for you, you know first-hand that it is a lot cheaper to cook than to eat out. Still, there are some ways to cut down expenses further when cooking – for example, try recipes that do not need a long time to heat things up, or to boil and simmer for hours – which uses a lot of gas. Try getting an induction cooker, which runs on electricity and is 90% efficient in terms of energy usage (as in conversion to heat), as compared to the usual gas cookers, which are only about 50% efficient. As gas and electricity prices rise in tandem (80% of Singapore’s electricity comes from natural gas anyway), you will find that this price differential will widen further.
CPI.
CPI stands for Consumer Price Index. It is a weighted average of various prices in a basket of goods and services and it is regularly compiled by the government, and it is what you see being reported in the news media. When they say, for example, inflation in Singapore is at 6.6%, CPI is what is being reported. However, you must take the CPI figure with a grain of salt – perhaps more than a grain. I’m talking about 5-kg bags here. As inflation takes off, the reality of actual street prices and the inflation rate as reported in official CPI figures will begin to diverge more and more. This is because the CPI calculation is a complex process, and is subject to more human interpretation than you might have imagined. Besides, CPI is a political figure. What I mean by that is simply this : there is every incentive amongst the governments of the world to report a lower CPI figure, in order to try to hide the actual rate of inflation. As the real rate of inflation takes off, governments have to come clean eventually regarding their official CPI figures, or they will end up like Zimbabwe’s case, where the government has been reporting 8,000% CPI inflation whereas an independent IMF study has concluded that the actual rate of inflation is closer to 150,000%.
This is the second instalment of a 7-part series on how to beat inflation in Singapore and elsewhere. Take a look at the stack of paper in the photo above. That’s the amount of Zimbabwe dollars in Z$500 bills that is needed to buy the beer in the picture. A million-dollar beer – that’s one of the things that can happen when inflation gets out of control.
Inflation usually used to go out of control in just one country at a time. So, when the Zimbabwe economy went into hyperinflation, some of their people went over to neighboring South Africa – in some cases, to import needed goods for their own use or for sale to their fellow citizens, and in other cases, to flee the hyper-inflationary environment permanently. However, if this current wave of inflation were to take off and go exponential globally, there could be very few if any places left to hide. So, what can you do? Onward to the guide.
D
Dividends.
Dividends are coming back into fashion, and it is no wonder – in the uncertain and volatile world of stock markets during the unfolding credit crisis, investors want to be compensated for risking their money out in the markets. The price of a stock may change every moment of every trading day, but a dividend payout, once it arrives in your account, is real money. The better companies with higher dividend yields can actually keep you on par with the rate of inflation, and if coupled with stock price appreciation, could even put you ahead. As for which companies, here’s a tip I’ve already mentioned earlier – Canadian energy income trusts : with their 12-15% dividend yields and linkage to crude oil prices, this particular asset class makes a pretty good inflation hedge.
Drinks.
Drinks can be a killer on your budget. They can cost from one-third to half the cost of your actual meal or perhaps even more, especially if you order a fancy cocktail at a restaurant. So, one could do without a drink for the usual office lunch at a coffeeshop, which I’ve noticed more people around me doing anyway nowadays – and mind you, these are mostly IT professionals and R&D engineers that you could find around the place where I work. And if you were to go to a restaurant, you could try asking for a glass of ice water – but be sure to first check if they charge for water – some of them do, and the price being charged for plain or mineral water can be an absolute rip-off. As for alcoholic drinks, personally I don’t indulge – but if you do, keep in mind the million-dollar beer coming down the road, and note that we have started on our way there already.
E
Electricity.
Electricity prices are going up, and you don’t really need me to tell you that. What you can do is to conserve as much as you can, and if you do need to change appliances, buy the most efficient replacement that you can. Here’s my before and after story : before energy conservation measures, my household was burning up 700KWh per month, and now, we are regularly clocking in at 450KWh per month or less. Here’s what we did : we disposed of a second refrigerator, changed from an “always-on” electric air-pot to a thermos flask for our hot water, got a more efficient clothes dryer when the old one spoilt, changed the living room TV and the computer monitors from CRT’s to LCD panels, and very importantly, turned off electric appliances at the wall socket instead of leaving them in standby mode. We have not turned on the aircon for years, and we use fans exclusively. If the night is slightly cooler, we turn off the fans as well.
ERP.
This is mostly a unique Singapore phenomenon, though it is being copied or emulated by other cities in other countries as well : Electronic Road Pricing. The idea is that motorists get charged whenever they enter certain regions during busy hours, such as the entire downtown area during the entire morning and evening periods (and beyond), or the shopping belt during most of the day. What can one do? Avoid working in the city area, perhaps. Or at least try not to drive there – take public transport, bus or train. The season parking charges are getting prohibitive anyway – last I heard, they were rising to $200, $300 per month and beyond. I keenly await the first $1000 season parking lot. As for shopping and running errands, try planning these for Sundays where they give the drivers a respite from the charges. Be sure to get up earlier though, especially if you use the CTE expressway – it virtually becomes a parking lot from around mid-morning onwards. There is also a “blank period” between 10.00am to 12.00 pm on weekdays where there is no ERP charged in the city area. You can try to run your errands during this period. When I used to work in the city, I staggered my working hours to arrive after 10.00am and to stop work after 7.00pm, instead of the usual 9 to 6, making full use of the flexi-hour policy. It may not apply to all jobs or even most jobs, but if you are in a position to do this, just do it.
Education.
Education is another big worry when people talk about inflation. It pains me to see people trying to plan for their children’s education costs for the next, what, 10, 15 or 20 years when inflation or perhaps even hyperinflation will wipe out the effort. It pains me to try to plan for my own children’s education knowing that if I do not succeed in fighting this inflation thing, I can get wiped out too. One thing I can tell you for sure – forget about those endowment plans that insurance companies try to sell to you. A while back, I briefly looked through the prospectus for one of these – it said, in language that could best be described as tentative, that I *may* get 4% annualized returns at the end of the endowment term. But, I pointed out to my friend, who was an aspiring financial planner and attempting to sell me that plan, isn’t college education inflation currently running at 6% annually? If I were to put money into this plan, I will be losing 2%, or quite likely even more, as inflation takes off. She had no answer to that one. My advice : plan for your own education needs yourself, do not rely on insurance companies, and wage your own war against inflation.
F
Food.
The rising cost of food is another big worry. So what can you do? Stop eating? Not really. There are a few things to be done here – less dining out, no fancy restaurants or upscale places like that, more cooking at home or at the very least eating at cheaper places. At the supermarkets, the government of Singapore wants you to buy house brands – that’s one way, but keep in mind that you get what you pay for. I find that house brands work best for the really basic commodities like rice and sugar. I am usually a little disappointed with the other house-branded products where they cut corners in the product specifications or quality of materials. But if you have no choice, then you have no choice. House brands it is. And stay at home and cook. Don’t eat out at all if you can help it, or as little as you can help it. Yes, that’s a recipe for economic disaster for the food & beverage industry if everyone adopts this attitude, but hey, you are watching out for yourself here, and who’s watching out for you? Just do it.
For those of you with spare cash to invest, take a look at the agricultual commodities and agiculture-related companies. There’s your hedge against food price inflation. There are quite a few ways to play this, you could do either a pure play via futures trading, or via the agricultural ETF’s such as MOO, RJA or DBA, or you could buy stocks in the companies that are involved in one way or another. It’s rather similar to investing in crude oil – go upstream. As high upstream as you can.
G
Gold.
Gold is the ultimate inflation hedge. And 6000 years of human history have proven gold to be the money of choice, both as a medium of exchange and as a store of value. Whenever there are wars, crises, or upheavals of one kind or another, humankind has always sought the safety of gold. Governments may come and go, entire civilizations may come and go, but the gold that is left behind remains as unchanging and as valuable as it always has been. Think about it : every single form of paper, or fiat currency, ever invented, has collapsed to zero or nearly so. Always. The “mighty US dollar”? It has already lost over 95% of its purchasing power over the past decades. And it’s on its way to losing the remaining 5%. It is the same story with every other currency around the world. They are all going down together. Some might be going down slightly slower or faster than the rest, but, as governments continue to print money and and financial institutions continue to create credit out of thin air, they are all going down. It is the proverbial race to the bottom.
In order to avoid the fate of your currency going to zero with all the others in the inflationary spiral that is coming, buy gold. As much as you can afford, in whatever form you like. And not buy in order to trade in and out, but buy and hold it and keep it. That last point is something I really want you to know. I tried trading in and out of the gold ETF earlier – I made 40%. Not bad. But my physical gold, which I don’t trade, which I just sat and sat on? It is up way over 80%. And as the gold price hits $1000 per ounce and vaults over the $1000 level, remember one thing : it is not the gold that is going up in price. It is the dollar that is going down in value. So buy gold and hold on to it.
Burning dollars. While this may largely be a metaphorical image at the point of writing for most, people did burn money for real during the German Weimar republic hyperinflation. At the time, it was actually cheaper to burn the paper money itself than to use the money to buy wood or fuel for the stoves.
Inflation drives people to do things that they might not ordinarily do – such as barter trade (as mentioned earlier), hoarding things like food and fuel, and, yup, burning paper money. These usually take place towards the middle to the end of a hyperinflationary cycle. So where are we now in this particular cycle? We are near the end of the beginning, as people worldwide are starting to wake up to the threat of rising inflation, and savvy investors, including fund managers of small private investment funds and gigantic pension funds alike, have already started to position themselves accordingly. It is becoming a political issue in many places, as witnessed in China and even in otherwise “politically-quiet” Singapore, where an unprecedented public march was held by the SDP opposition party to protest against price inflation.
Well, you need not necessarily go out into the streets to protest against inflation. If you feel like it, nobody’s going to stop you (except the police who, of course, are just doing their job). Here is Part 3 of a more practical guide on how to beat inflation in Singapore (and elsewhere) :
H
Housing.
Real estate, or property, used to be a pretty good inflation hedge. Which partly explains why so many people, particularly Asians, are fixated on acquiring a piece of property or two. After all, so goes the conventional wisdom, it’s not so easy to make land, is it? That was then. Now, you have to consider the housing bubble bursting, the mortgage / credit / subprime / CDO / MBS / SIV crisis (or whatever this whole collapsing pyramid of financial weapons of mass destruction is called nowadays). There *are* some places where you could possibly get a good deal on housing, perhaps a rental property in a good location, but for the most part, seeing how the looming recession could affect the rental market, not only in Singapore, but also elsewhere, I would recommend going neutral (staying in your present home) or short the housing market (selling, taking profit, moving to a cheaper location, downgrading). Besides, you wouldn’t really want to be involved with the previous bubble, do you? Where you really want to be is the next bubble, and that is most certainly not going to be the object of the previous bubble.
Hoarding.
Hoarding is a strategy to deal with two issues that occur during periods of extreme inflation : soaring price increases and outright shortages. But the word “hoarding” has such a negative stigma associated with it, that we could perhaps call it setting up a strategic stockpile. You don’t necessarily have to adopt a survivalist attitude – that might be called for later on, who knows. But you can always start “lite” – basic things like food (rice, biscuits, canned food, cooking oil), water (have some bottles of mineral, or better, distilled water, which you rotate through), and fuel (if you have a car, top it up to full when it goes below the half-tank level, so you don’t need to join the long queues when something does happen). If you adhere to this consistently, you will be better prepared for many emergency situations in addition to hyper-inflation.
Hybrid cars.
Over the past few years, hybrid-electric cars have been alternately championed and panned. They have been praised for having low emissions and improved fuel consumption but were then criticized for being more expensive and not having high enough mileage to offset the extra cost. Some calculations pegged the payback period as long as 10 years. I guess they forgot to take into account the exponential nature of rising oil prices and the subsequent impact at the pump. The next generation of lithium-ion powered hybrid cars will help to address the cost issue since lithium battery chemistry is cheaper, lighter and more powerful than the Ni-MH being used in most hybrids nowadays (nickel being very, very expensive). The Chevrolet Volt, powered by an advanced A123Systems nanotech lithium-ion battery, will be one of the first of the next-generation hybrids. If you have to get a car in the medium-term, get one of these next-gen hybrids if you can. If humankind has enough time for even a partial fleet change, these will make a difference in the twin fights against rising petrol prices and global climate change. As for hydrogen cars, I’m much less sure about these for the mid-term. If, and that is a very big if, we have enough time to switch to these, such as the Honda FCX Clarity, it would be great. But I suspect that we would have come to one of two conclusions long before widespread adoption of hydrogen fuel-cell technology : a. we have somehow managed to solve our problems of energy, climate change, overpopulation and financial crises, or b. we have managed to hyperinflate beyond belief, collapse our global economy and eventually let nature take its course on population and climate.
I
Insurance.
Avoid insurance policies that lock you into multi-year or even multi-decade periods, and then give you returns that hardly give you much of a fighting chance against the rate of inflation. The problem is that most of these insurance policies, whether whole-life (living) policies or endowment plans, tend to invest most of their money in local government bonds. In times of low inflation rates, these insurance plans make some sense with government bonds returning yields of say 3%, 4% or thereabouts. But times are different now. Actual inflation rates are far outstripping the yields of government bonds. Taking a look at Fundsupermart’s SGS bond yield tables, we see that the effective yield of a Singapore government bond maturing in 14 years’ time is about 2.85%. Now compare that to the latest Singapore CPI inflation rate of 6.6% per year. Most local insurance products will invest in local government bonds. In other words – you lose. Plain and simple. It is a similar story for our American friends : ten-year Treasury yields are below official CPI inflation rates.
So what should one do? Here’s the acronym for what one should do : BTAITR. Buy Term And Invest The Rest. Buy term insurance which gives you high coverage for a low price, and invest the rest of your money in investments with higher yield and higher performance. It might be worthwhile to hold on to one whole-life policy with a modest premium amount for the critical illness coverage, and one or two plans that cover healthcare costs such as hospitalizations, but that’s about it. Don’t waste your money on lock-in products. Especially those that masquerade as “enhanced savings accounts”. They have been selling more of these lately. Beware of them.
J
Jobs.
What kinds of jobs will help you beat inflation? This one’s easy – that would be CEO’s, top lawyers, bankers, and those government ministers whose salaries are pegged to them. The people holding these jobs can look forward to, say, 33% pay rises, which puts them in a very good position to cope with rising costs of living. Well, not that they were in any sort of shabby position in the first place.
Okay, but what about the rest of us? I could look at this roughly the way that the S&P 500 stock sectors are sub-divided. With a looming economic slowdown, you might probably want to avoid jobs in the consumer discretionary industry which would be most sensitive to pullbacks in consumer spending. For obvious reasons, such as the subprime / credit / CDO / etc. financial meltdown going on, you might want to avoid looking for a job in the financial industry (unless you are a top banker but maybe not even then – just ask the top people at $2 Bear Stearns, for example). You’d want to be in companies which are able to pass on increased costs to the consumer, or that are protected in one way or another from rising costs. You could try consumer staples, or healthcare, or materials (which includes commodities – I hear that good geologists and petroleum engineers practically get to write their own pay cheques nowadays). You could try the government (which is the cause of inflation in the first place and is quite good at matching their own pay to compensate) or the military (which doesn’t cause inflation per se, but is also very good at the latter). Call me biased, but I do have a vested interest in the last three sectors above.
Join (or form) a club, group or organization.
Why fight the inflation monster all by yourself? It’s time to go get help, backup, and fresh ideas. Join a club or group or organization that talks about these things, or even better, acts on them. Together with a friend, I am co-founder of Contravestors Asset Management, a private investment club and investment fund. It helps to have people at your side fighting the same battle. For more ideas, there are online forums such as goldclubasia.com for the Asian (particularly Singapore) gold investor, and there is peakoil.com to talk to other people who are very knowledgeable about peak oil, the energy industry, and energy-related investments. These are a couple of examples – there are many more sites out there : pick some that match your style. Fight the good fight, but you don’t need to fight all alone.
K
King.
You know what people say : cash is king. Or is it? Try putting your money in a savings account or fixed deposit at 1% or less, and see what happens to your money 20 years later – you might be lucky to be able to buy a banana with it. Cash is not always king. Cash is prone to being inflated away to nothingness. The history of cash, or fiat money, is a tale of collapses, with values going down to zero. On the other hand, gold is a much better king, and it always has been. The price of gold might go up and down, but it never goes to zero. And the chances are good that, in dollar terms, the price of gold is going to have more zeroes added at the end. Buy gold and hold on to it.
You are looking at a bunch of Zimbabwe $500,000 banknotes. These were announced in Dec 2007. You may be aware that there has been rampant hyperinflation going on in that country. These banknotes are now useless, but do you know just how useless? The Zimbabwe government has introduced $500 million notes, and at the point of writing, one of those $500 million Zimbabwe dollar notes buys around 2 loaves of bread.
Inflation is for real. If the central banks of the world are not careful with the printing presses, we will be moving down the hyperinflationary path blazed by Zimbabwe. And Yugoslavia before that. And then Argentina. The history of the world is littered with the corpses of failed fiat currencies destroyed by hyperinflation.
Inflation is taking off and going exponential. Everywhere. Hence, part 4 of this ABC guide to fighting inflation continues with more practical tips on how to beat inflation in Singapore, or just about anywhere else for that matter.
L
Liabilities. Loans.
What’s the link between debt and inflation? In an inflationary environment, existing debt tends to get inflated away. This is because, all else being equal, as you are paying off your debt (whether it’s a home loan, car loan, credit card debt or whatever), you are paying it off in increasingly worthless dollars. Actually, as in most other cases in real life, all else is not equal. The reason is interest rates. That’s the trillion-dollar wild card. Don’t think that lenders will stand idly by and let you continue to pay off your debt with increasingly inflated dollars for the remaining, say 10 or 20 years of your mortgage loan. Sure, you can keep refinancing but at some point the lenders are going to demand increasing interest rates to compensate them for the erosion of their asset base (i.e. your loans) via inflation.
Hence, while inflation does reduce the apparent value of your payments, it is still a good idea to get out of debt in all its forms. Avoid debt if you can, and try to pay it down if you already are in it.
The central banks may have unlimited powers to print money and they may control the short end of the interest rate curve, but the long end of that curve, where the longer-term bonds and longer-term loans are being created, is mostly controlled by the markets. A bank is not a charity, unlike the way some central banks have been acting. You shouldn’t make plans on interest rates being low forever – if you do, at some point you may have a rather unpleasant surprise.
There is a possible exception (isn’t there always?). If you have a long-term, fixed-rate loan, and you have good reason to believe that this fixed rate will remain throughout the term of your loan, by all means take your time to pay it down, and use the spare capacity you have to invest wisely. A couple of examples include 30-year HDB home loans at 2.6% and 7-year or 10-year car loans for which the exact rates are known and fixed at the point of purchase.
Lighting.
Lighting is often overlooked but it is an important way to help to reduce your electricity bill, which if you have been paying attention, has probably been going up recently, driven by the forces of inflation. Use energy-saving, fluorescent-based lighting, particularly compact fluorescent lamps (CFL’s) whenever you can. Throw away old incandescent bulbs and never buy these again. The traditional bulb is becoming an endangered species anyway. Do remember to recycle those CFL’s though, they contain mercury which should not be haphazardly released into the environment.
LED lighting is still comparatively expensive at the point of writing but as with most technology, with increased production and economies of scale, prices are expected to come down and at that point they may start to become a worthy competitor to CFL’s.
LCD displays.
If you are still holding on to CRT TV’s or CRT monitors, consider recycling them to switch to LCD TV’s and LCD monitors. LCD panels use about half the energy required to power equivalent CRT displays of a similar size. But therein lies the caveat – if you thought you were going to save some energy and you are upgrading from say a 21″ CRT to a 42″ LCD, you’d be about right back where you started. Perhaps even worse off. Full HD displays (1920×1080) also consume more power than partial HD displays (1366×768) of the same size – for some models it could be actually almost double. Remember that there is a price to pay for all the extra pixels and extra brightness.
So if you are going to upgrade, do so prudently. Case in point – I could have afforded a 40″, 42″ or 46″ LCD TV but instead I chose to switch from a 29″ Sony CRT TV to a 37″ Samsung LCD TV. And partial HD at that. I could have chosen to switch from 17″ CRT monitors to 22″ or 24″ LCD monitors but instead I chose to buy 17″ and 19″ models. All for the sake of reducing power consumption. It’s something most people overlook when drooling at the latest and largest display panels, but it’s something you should keep in mind. Always check the power consumption before you buy. Compare, compare and compare some more.
M
Multiple sources of income.
One unfortunate aspect of escalating inflation is that in general people have to work harder in order to make ends meet, or in fact just to maintain their current standard of living. The ongoing advice out there generally talks about substitution – that is, to substitute what you currently buy for cheaper and perhaps less desirable or reliable products. That might be a coping strategy but it is in fact trading in for a lower standard of living.
So the question should be, what can people do in order to maintain their current standard of living? One could work harder – but that is both a questionable strategy and a recipe for karoshi. One could have another member of the household join the workforce, but many women are already in the workforce (also, read “The Two-Income Trap” by Elizabeth Warren). One could take up a second or even a third job (which some are doing), but then again, it’s a one-way karoshi ticket.
One way out of this conundrum is multiple sources of income. Don’t roll your eyes yet – I am not talking about those questionable tactics such as MLM’s or pyramid selling or whatnot that unscrupulous businessmen have foisted on the people over the years. I’m talking about legitimate channels. And not just multiple sources of income but hopefully passive or at least semi-passive ones.
What might these legitimate passive incomes be? It could be a rental property (or two). But if you have the capital to play real-life Monopoly (“buy 4 houses and trade them in for a hotel”), you wouldn’t have that much to worry about in this department, would you. By all means, buy a house or apartment or condo and rent it out, but beware the housing bubble bust, beware rising interest rates, and beware the looming recession (there will be less renters and lower rental rates in a recessionary environment, obviously).
Besides property, you could also go for dividend-paying stocks (see Part 2 of this guide). Myself, as I mentioned earlier, I am getting several hundred dollars a month from energy income trusts yielding 10% to 12% per year – they’re obvously not for everybody though (and this post explains why).
You could try to start a small business. But be aware that the statistics are not on your side – something like 90% of all small businesses fail eventually. Unless you prove to be a really great entrepreneur or something, don’t bet all your capital on starting a business. Don’t bet the whole house – which many people apparently literally have.
Another way might be trying to use the Internet to make money in some way. You could start with something small and relatively risk-free, like putting up ads on an existing blog or website that you already run (I did, and I got my first Google Adsense cheque recently, and I’m on my way to getting the second one). Besides ads, you could also try setting up an online store or you could try your hand trading items on eBay, buying low and hopefully selling for a profit. Other people sell virtual items they obtained in virtual worlds – massive online gaming and the like. These sound a lot more active than putting up ads and in fact they are. If you work at these, they just might turn out to be more of full-time jobs, and some people have been pretty successful there.
Talking about trading, you might also try trading the markets on your own. This is not exactly passive either – in fact it is as active as you can get. Trading in the markets nowadays is more like a contact sport compared to sitting there passively collecting monthly dividends. The odds are long – you’ll be up against not only fellow traders who are likely to be more experienced, more talented *and* have more capital to burn through, you’ll be up against thousands of hedge funds and sophisticated computer algorithms which are in all probability good enough to hand you your head on a platter. If you think you have the skills, by all means. People *have* succeeded in this arena and from time to time, I hear of people quitting their day jobs to go full time into online trading.
But like I said, the odds are long. It calls for a schizophrenic personality, it calls for quick reflexes, and it calls for the ability to pay attention to 20, maybe 30 different things going on at once. Try this one as a semi-hypothetical example, say you’re trading crude oil and : a. Goldman Sachs puts out a press release talking about $150-200 oil (bullish), b. another press release talks about the Saudi’s increasing oil output when Bush visits them (bearish), c. the recent inventory numbers are down (bullish), d. Brazil talks about hiring thousands of geologists and oil workers for their newly-discovered oil fields (bearish). Ok. You have about two seconds to decide before the prices start running away. What do you do? What do you do? That’s what I’m talking about. I could also quote this sort of push-pull factors for forex trading but I’d suppose you get the idea. Minute-by-minute, second-by-second trading is not really my style, but it might suit some people.
Money supply.
The growth in the money supply is the root cause of all inflation. Or rather, growth in the money supply which is faster than the growth of the economy causes inflation. It’s not escalating crude oil prices, it’s not escalating food prices. These are symptoms, not causes.
Who controls the money supply? The government, through the actions of the central bank. If the central bank “prints” more money than is currently needed by the economy, inflation is the result. The converse is also true, but like you might suspect, inflation is the default operating mode for governments throughout history. There is plenty of historical evidence in this department. The initial effects of inflation seem good – increasing asset prices, property values, wages. The dark side comes some time later – increasing commodity prices, runaway price inflation outstripping wage growth, exponential growth of money supply apparently being required to keep the economy running, leading to an escalating inflationary spiral – in other words, where we are now.
There seems to be nothing we can do about the money supply. After all the government, through the central bank, controls it. But this is not really the whole story. You too, have the ability to indirectly contribute to creating and destroying the money supply. Sounds too good to be true? All you have to do is to follow the advice in the “Liabilities” section above. When you pay down your debt, you are contributing to the destruction of the money supply. When you obtain a new home loan or car loan or whichever loan, you are indirectly contributing to creation of new money, which enters the monetary system, and eventually manifests itself as asset or price inflation of one kind or another. So simply by paying down existing debt and not getting yourself into new loans, you are helping in your own small way. If enough people do that, the central bank should (by right) notice the lowered demand for money and contract the money supply accordingly. Most likely, the economy will head straight into a recession as people slow down spending to pay down loans. Of course the government can still continue to inflate even then in a wrong-headed move to try to prop up the slowing economy and if that happens (which is likely), then we will continue to be headed for worsening inflation. At that point, if the government still persists in doing the wrong thing, the citizens might want to consider a change of government. I am not referring to any specific government here. Examples of runaway inflation leading to political changes abound in the history of humankind (you can read more about these in “Gold : The Once and Future Money” by Nathan Lewis).
Medical expenses.
Alongside education, medical expenses is one of the areas that are inflating faster than the rest of the general economy. For Singapore, earlier figures went something like this : education expenses up 6% per year, medical expenses up 8%, while general CPI inflation was around 4% or less. Again, these are earlier figures – this year and beyond, you could expect more. A whole lot more.
What can you do? You could look for a job (see Part 3) which gives you reasonably good medical coverage – look in terms of general family-doctor type outpatient care, group term insurance and hospitalization benefits. Don’t count too much on your job coverage however – you could be in between jobs, suddenly retrenched, or whatever. You need your own medical coverage. But do not put too much money into the so-called living, or whole-life insurance policies. Whole life policies have always been a good racket for the insurance companies but they are not a very good idea in the long run in an environment of escalating inflation.
Get just one whole-life policy, hopefully from a younger age when you would have had less pre-existing medical conditions, and stick to it for the critical illness coverage. That’s about all you really want from that. Get a term insurance policy or two, and use that to bulk up your remaining coverage. You won’t get back your premiums but buying term insurance is the most efficient way to go. In fact, some investors have this rather unwieldy term that we use : BTAITR – “Buy Term And Invest The Rest”. I would add to that the single whole-life policy for the reason as stated above, and throw in a modest hospitalization plan, perhaps a CPF-based shield plan such as NTUC IncomeShield so that you don’t touch your cash portion. And that’s about it. I mean, really. Invest the rest.
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Natural gas.
What does natural gas have to do with inflation? You may be surprised. 80% of singapore’s electricity is generated from natural gas. And by the look of things, we are going to be even more dependent on it, not less. Singapore is building an LNG terminal and by 2012, when it is supposed to be completed, we will be bidding against major countries such as the USA and Japan for dwindling global supplies. Indonesia, one of our main suppliers of piped natural gas, is building their own LNG terminal – because their own gas fields are rapidly running out.
Natural gas prices are expected to rise. Explosively. Pardon the pun. It *is* cheap right now on an energy content basis, being priced as if it were the crude oil equivalent of $66 per barrel (crude oil is over $126 per barrel at the point of writing). That’s half price, and a great discount for the many countries and regions relying on it to generate electrical power. Including Singapore.
As you know, discounts don’t last forever. Natural gas prices have apparently bottomed and are on the verge of a tremendous rebound. I can write many paragraphs about the many reasons why but let’s just put it this way – as a depleting fossil fuel source for electrical power generation, it isn’t exactly the best idea. But as an investment theme, natural gas makes for a very interesting and potentially highly profitable case. But do your own homework, don’t just take my word for it.
One last thing. If you do buy enough natural gas-related investments, you could be well on your way to hedging your own electrical bills – i.e. as your electrical bills go up, your gas-related investments also go up. I think it’s rather appropriate for us folks here in Singapore. But once again, do your own homework and don’t come running if another Amaranth-style blow-up occurs. Best of luck on your personal inflation fighting strategy.
http://www.post1.net/lowem/entry/abc_guide_to_beating_inflation
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