Insurance - paying the Sky.

Suppose you own a BMW that costs $100k with five years left to drive. As per the rules, you have to buy insurance on the car, which ideally should cost a small percentage of the purchase cost. Then NTUC Insurance quoted $40k per year or $200k over five years. You look around and this seems to be the most "reasonable" price around. Over-the-top? Crazy?

Well, this is exactly the situation in the credit derivatives market for an emerging market name like Argentina or Pakistan. At 4000 basis points, one would have to shell out $400k of insurance (or more appropriately, premium) to cover $1M government debt issued by Argentina or Pakistan. Of course it is different from buying insurance for a beemer, because the market believes that the government is MORE LIKELY to default on payment than you wrapping the beemer around a tree.

Basic differences between an insurance contract and a CDS (credit default swap) contract:
- You don't need to own the underlying to buy a CDS i.e. I can buy protection (pay premium on a CDS contract) on a debt before owning the debt whereas you can't take out insurance on Mr Patel who owns the corner mama-store.
- You don't need to prove that you suffered a loss to "claim" the payout on a defaulted CDS ie if you buy a CDS on a Argentine bond and the government subsequently defaults, you will get a payout from the protection seller whether or not you bought the Argentina government bond. However if you "buang" a car and it miraculously escaped with no scratches or bumps, you won't get a single cent from the insurer.

Having said that, it's amazing how the market is pricing the default swaps now. Two years ago, a CDS on AA-rated Barclays PLC costs 10bp. Today it would cost 125bp for the same protection on AA-rated Barclays PLC. Simplistically it implied that the probability of default has increased 12.5 times. HSBC is a hefty 103bp while Singapore's very own DBS bank is at 180bp.

The all-powerful United States of America comes in at 30+bp. So what do you think of our beloved triple-A rated sunny island?

So the Dow closed down another 200 points lower as I write. The HSI has also been in a free fall, shedding close to 13% as Asia tracked the dismal overnight close on Wall Street last Friday.

My view on this? It is only going to get worse. Any multi-billion-dollar relief package is only short-lived although it appears that the broad market is bottoming out.

The entire global financial crisis must be taken in consideration and in perspective with past and recent down-turns. No one should be surprised by what is happening now (and will happen) given our Economics 101 understanding of the cyclical economy. What goes up must come down. What's surprisingly is the extent of the damage of this fall-out. Three veritable institutions folded in one year, sky-high credit spreads (which I will talk about later) and a seemingly bottomless equity market. I am so blessed to witness all these (future bragging rights. "I was there in London when Lehman Brothers employees were carrying...").

The decoupling theory has failed and will be some time even anyone uses that. Then again, institutional memory is so short that all the CDOs and minibonds and boom-theories will come into play in a few years. Amid this crisis, UK has been hit hard. Real hard. The sterling has fallen faster than gravity in the last ten months. About 20% since the start of the year and in my bounded knowledge, a level unseen against the Singapore dollar for years. I remember changing a small fortune at Change Alley back in February at the rate of £1 for $2.78; I cursed under my breath and told myself I had to change at this pathetic rate just to manage my SGD-denominated transactions. I should have thrown in everything plus the kitchen sink for that rate, given sterling closed at 2.33 last night! Hindsight review makes geniuses out of us.

If I am an Aussie working in the UK, I would be happy, but not when I am a Singaporean with Majullah Singapura running in my blood. I was on instant messaging with another Singaporean friend (Joyce) last Friday.

Me: What to do now? Sterling is sh!t now.
Joyce: Oh, I hope you are not long on sterling.
Me: I am very, VERY long.
Joyce: gosh, I feel your pain. I can really feel it.
Me: Da Jie, what to do?
Joyce: Bite the bullet and change all now. The end has not arrived.

Change?!?!? I am seeing a paper loss of close to six figures. And FX-changing that will crystallise the loss! Another female colleague asked if I have been using some special face-whitening cream after I exited the IM conversation.

It is not a GBP story, but a USD story - from what I read in FX research. The sterling is pounded for the reason that Britain is perceived weaker than a truly battered America. The power of the Treasury and the intricate ties of the American dollar to the world economy ensures that the dollar will not fail. Will not collapse. In times of crisis and heightened risk-aversion, the dollar and yen will appreciate because they are seen as the safest assets (the US government beh toh?).

Gold, which is largely seen as an alternative safe haven to equities, has not been having a good time. In fact, other than government bonds, almost everything from commodities to equities to credit, is going south. Gold lost $100 in a week and was close to testing the sub-$700 after hitting $706.10 this morning.


Flight to safety has seen people dumping stocks, despite the ban on short-selling. Virtually all markets are down as investors flee equities. Even the legendary Warren Buffet, who was calling for red-hot American patriotism, has failed to ignite the market. What's worse - people has been making money running reversal trades and called the bluff on Buffet.

Normalising four stock indices - S&P500, FTSE-100, Nikkei-225 and STI(?!?!?) - it appears that the fall-out has not been as bad in the west as in the east. And for people who are looking for a kill on the stock markets anytime soon, it is wise to read this.

Am I slow or what?

So Friday's release of UK Q3 figures came as no surprise. Perhaps slightly under-estimated on the downside. All the island needs is another contraction in the Q4 to "officially" enter recession. But most has come to realise that UK is already in recession and just waiting for the official numbers to be published in January to confirm an on-going fact is almost a worthless act.

Is the cold numbing my senses and delaying my assessment of the economy? I don't (touch wood) feel any unease about my current job and has been fielding questions from recruiters asking if I am interested in a move elsewhere. The weekly lunch at Sri Nam has not been cancelled. I have also added more ingredients to my daily cooking recipes.

But if I were to take a CLOSER and REAL look, I could already be experiencing the effects of a recession in my life. I may be adding more exotic dishes, but I am cooking/eating at home on most days instead of take-away or dining-in at restaurants. I have started bringing my 3-in-1 Milo sachets to office instead of enjoying the £1.55 mocha and £1-two-slices-of-peanut butter-bread which I DID enjoy on a daily basis. And I have also turned to having fruits for snacks (which is a healthier option than crisps and chocolate). Seeing the lunch crowd in Canary Wharf, it's either more people are exercising in the park to skip lunch or I need a new pair of glasses to see the "missing shoppers/diners".

This morning, for the first time in three years, I went to Billingsgate Market. A fish market just across the road from my place and UK's largest inland fish market. 4kg of haddock for £28, 2 kg of scallops for £12 and more other fishy stuff...

No wonder John Lewis and Waitrose are complaining...

There can only be one president...

But the other can consider an alternative career as a comedian...

Time for an upgrade

Even the clock needs a rest or an upgrade. The counter, which tracks the national debt owed by the U.S. government, has ran out of spaces following the $700 billion bail-out package approved by the U.S. Congress. The authorities better get a bigger clock if this plan is to go through.

Picture from http://blog.wired.com

Raining Cats and Dogs

Judging from the way stocks are plummeting at the moment, it's time to get a good umbrella.

Well, I might need more than an umbrella...

Of soup and salad

Only three days back in London and the distinct differences are showing up. Instead of indecision over lunch choices in Singapore, I had just two options - soup or fish&chips. Knowing how easy it is to put on weight in cold weather, I opted for the safer latter.

Autumn seems to have disappeared in the two weeks I was back in Singapore. It went below 5deg last night. The pounding winds did little to alleviate the already freezing temperature and Xueyan's mood. Other than a rewarding lunch dim sum, we stayed in on Saturday to catch tcs shows (via mobtv - interesting!). And had pak choi, tofu and mushrooms for dinner - Xueyan's style. Marvellous.

With days literally fast becoming nights, it is time to explore and develop the culinary skills.