23 April, 2016

Getting What You Really Want by Asking for More

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

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

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

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


The Benjamin Franklin Effect

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

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

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

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

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


Market Crashes are Often Planned

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

There is a very interesting report called Examining Financial Holdings Companies: Should Banks Control Power Plants, Warehouses & Oil Refineries.  It began when Senator Sherrod Brown, the chair of the Senate Banking Subcommittee on Financial Institutions & Consumer Protection, opened a hearing to probe into the connectedness major Wall Street banks to the holding of physical oil assets in July 2013.  This pertained to the ability of these companies to manipulate oil prices.  And we have not considered other commodities.

The findings of the hearing were damning.  This prompted an investigation by the Senate’s Permanent Subcommittee on Investigations, which was published as “Wall Street Bank Involvement with Physical Commodities.”

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

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

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

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

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


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

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

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


13 April, 2016

Quora Answer: Are REITs a Good Investment?

The following question was asked on Quora and answered on the 30th September, 2015.


Answer: As to whether it is a good investment, that is impossible to answer because like any form of security, ‘good’ and ‘bad’ depends on many factors.  As to whether it can be a good investment, on the other hand, the short answer is yes.  REITs provide a liquid stake in an illiquid investment.  This allows smaller investors an opportunity to participate in an investment that would normally be out of their reach.  Also, depending on the market you invest in, there may be tax breaks as well.


Quora Answer: Are Israeli Bonds a Good Investment?

The following question was asked on Quora and answered on the 30th September, 2015.


Answer: Please note that this is my personal opinion, and others may differ.  The short answer is no, not really.  Unless you feel a particular affection for the country, there are far better options elsewhere.

Firstly, we must consider the geopolitical situation that Israel is in.  To put it succinctly, they are in a troubled neighbourhood.  Secondly, the Israeli government is a coalition government.  They have had a recent bout of instability, and this is expected to continue for a while.  The extreme righting Likud coalition has only a one seat majority.  These two factors alone create concern.

Secondly, much of the Israeli economy is propped up by the US through massive aid.  Considering the state of the US economy, and the real possibility that the next president will be very much to the left, there is a small possibility that aid will be reduced, or at least become conditional.

Thirdly, the state of the Israeli economy itself is not very strong.  GDP growth slowed in 2014, and although there is a projected slight rise for 2016 by some analysts, continued volatility in the region will affect the state of future projects.  The official unemployment rate is 5.3%.  But when we factor underemployment and consider youth unemployment, the numbers are worse.


12 April, 2016

Money Laudering is Not What You Imagine It to Be

Money laundering is the process of transforming the proceeds of funds of indeterminate origin, likely criminal, into legitimate money or assets.  Nowadays, it refers to many other forms of commercial crime, or regulatory irregularities.  There is also the phenomenon of reverse money laundering.  Reverse money laundering is the process of disguising a legitimate source of funds for use in illegal enterprises.

According to the United States Treasury Department, “Money laundering is the process of making illegally-gained proceeds appear legal.  Typically, it involves three steps: placement, layering and integration.  First, the illegitimate funds are furtively introduced into the legitimate financial system.  Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts.  Finally, it is integrated into the financial system through additional transactions until the “dirty money” appears “clean.””

Many countries treat fund movements in breach of international sanctions, or even their own currency control regulations, as money laundering.  Some even define money laundering as obfuscating sources of money, either intentionally or implicitly.  Some places consider it money laundering to move funds generated from activities that are a crime in that jurisdiction, even if it was legal where the actual conduct occurred.  Thus, “money laundering” is not always money laundering.  And this is problematic.

Although it is impossible to reliably estimate, it is thought by those of us in the industry that perhaps 10% or more of the global economy is involved in laundering.  The International Monetary fund estimated it conservatively at 5% in 1996.  20 years later, that estimate seems hilariously small.

The biggest money launderers are not crime bosses or even individuals.  They are governments.  And governments have a lot of reasons to launder vast amounts.  Rogue states such as North Korea and quasi states such as ISIS need to trade and move funds.  Both they and their customers are laundering.  Some countries use this to acquire or facilitate the movement of hard currency.  Some countries use this to mask their involvement in certain activities, such as China’s building of infrastructure in the South China Sea to stake claims in disputed territories or to hide the extent of their indebtedness.  At a smaller level, businessmen need to move funds to facilitate business, particularly in places such as Indonesia and Malaysia due to corruption and currency controls.  And then there is illegal cross border trade such as in Indochina.

Officially, the main concern of governments regarding the billions of US dollars laundered in the black economy is large scale criminal enterprises and terrorism.  The real reason is political control and revenue.  Another reason of course, is that when it comes to laundering, governments do not like competition.

There are many ways of laundering money, and some methods can move surprising amounts of funds quickly undetected.  For example, used car businesses are a simple way to launder money.  Selling a used car afford many opportunities to inflate the cost to justify movements of funds that come out clean on the other end.  They include:

1. Payments to a vendor by unrelated third parties;
2. False reporting, such as misclassification, and under-valuation;
3. Carousel transactions, which is the repeated importation and exportation of the same shipment; and
4. Double invoicing.

And that is just for the cars.  A lot more shenanigans can be done with car parts and accessories, meaning that a single shipment can be inflated by several degrees and is useful for the purposes of layering funds on a massive scale.

Other legitimate businesses are also used.  This is for the layering and integration process.  People need to use that money and need to create a reason for that money to be there.  For it to work, it has to be a cash business so that there is minimal documentation of transactions.  This makes inflation possible.  This also means that they have to pay taxes, but in reality, that is another avenue for tax fraud.

There are many accounting tricks and methods where a company can be used for laundering money, particularly when engaging in a legitimate business as cover for an illegal one.  For example, a trading company can be a front for smuggling.

For something on a smaller scale, there are stored value cards, SVCs.  They are a fast, reliable, and anonymous method for storing cash.  It is unwieldy to move money in the tens of millions, but this is more than adequate to store and carry several hundred thousand dollars.  They are a favourite method in cross border narcotics trades.

A new method uses bitcoins, the virtual currency.  Bitcoin is the currency of the deep web.  Its advantage is that a single bitcoin is worth several hundred dollars.  At the time of April 2016, a single bitcoin is worth over US $400.  Also, this is a peer-to-peer financial transaction with no intermediary, allowing a level of anonymity.  The disadvantage is that, on their own, bitcoin transactions are recorded in a “block chain,” a sort of public ledger, meaning that transactions are relatively transparent.  But there are now tools to bypass this as well.

Perhaps the simplest way is to have shell companies.  A shell company is a seemingly legitimate business, but provides no actual services.  The sole purpose of a shell company is to create the illusion of legitimacy by creating a documentary trail to justify illegitimate funds.  These funds are used to purchase assets such as real estate, commodities or even art, and the proceeds cashed out through other entities, or simply kept in a tax haven.  Shell company are also used to purchase assets to mask the identity of the true fund owner.

China uses shell companies to borrow vast sums of money without booking it under their debt.  This allows the government to hide its true public debt levels as a percentage of GDP, by counting it as private debt.  This means China’s true estimated debt to GDP ratio is almost 300%.

Then, there is the hawala, an informal banking system from ancient India.  The term means “money transfer without moving money.”  The hawala consists of thousands upon thousands of hawaladars, brokers, throughout the world, wherever you find the Indian subcontinent diaspora.  Each of them keeps a detailed ledger of transactions that relies on an honour system to enforce.  An individual, wanting to send money to another person in a different town, region or even another country, simply gives the money to his local hawaladar.  This money does not move. Instead, the hawaladar will communicate to the hawaladar in the recipient’s side.  That hawaladar will settle the balance, minus a commission.  The hawaladars settle up each other separately.  This is a nearly untraceable money transfer in the billions of dollars.  There is no paper trail, and total anonymity.  This makes it perfect for tax avoidance.

In summary, almost all strata of society actively engaged in various forms of money laundering for a variety of reasons from nefarious to simple tax evasion.  In sum, the amounts are enormous and the players are very well connected.  Whenever somebody gets caught, the amounts, which may sum astronomical, are actually a drop in a very large ocean.  The sum total of all currency in circulation is just shy of US ten trillion.  The illicit amount uncovered by a single leak in a single firm in Panama is more than twice that.  How much do you think an actual financial centre such as Singapore or Hong Kong launders, and how much of it is hidden in these places?


Critical Illness Spotlight: Diabetes

Even when you are young, there is still a need for hospitalisation and critical illness insurance plans.  One reason, for Singaporeans, is diabetes.  According to a Channel NewsAsia report, dated the 16th March 2015, Singapore’s diabetes patients are amongst the youngest in Asia.

The report said, and I quote, “A local study on patients with Type 2 diabetes across nine Asian territories showed that Singapore has the highest proportion of younger patients.  The study among 319 patients was conducted by the Asian Diabetes Foundation from 2012 to 2014, and included patients from Singapore, Thailand, China, the Philippines, Hong Kong, India, South Korea, Taiwan, Thailand and Vietnam.  The study found that three in 10 patients in Singapore had diabetes before turning 40.  Younger patients also fared poorly in terms of glucose control, hypertension and cholesterol management compared to older patients.”

According to statistics, almost 500,000 Singaporeans have Type 2 diabetes.  Diabetes mellitus Type 2, the most common form of diabetes, is a metabolic disorder with effects that get progressively worse over the long term.  It is characterised by high blood sugar, insulin resistance, and the relative lack of insulin.  The most common symptoms are increased thirst, frequent urination, and unexplained weight loss.  They may also include increased hunger, lethargy, and sores that do not heal.  Often symptoms come on slowly.  In the long-term, there will be complications such as high blood sugar, heart disease, strokes, diabetic retinopathy which may result in blindness, kidney failure, and poor blood flow to the limbs which may eventually necessitate amputations.

Type 2 diabetes is primarily due to obesity and a lack enough exercise in people who are genetically predisposed.  This lack of exercise and increased obesity is increasing amongst Singaporeans.  Whilst treatment is possible through lifestyle changes, and medication, you must still deal with the possible long-term consequence.  And that means future possible treatment.

According to the Straits Times report, published on the 12th February, 2015, more people here and around the world are succumbing to diabetes.  Worldwide, it is expected to affect 66 million people, which is more than double the 171 million in 2000.  This is according to the World Health Organisation.


There are critical illness plans that specifically cover complications from diabetes and there are provisions in plans that do not specifically mention diabetes but cover its complications as part of the plan, all this providing that none of them are a pre-existing condition.  So a critical illness plan will cover heart disease, liver failure and stroke even if the plan itself does not mention diabetes.  Like any sort of plan, it is generally advisable to take the up when you are young and healthy.  Should complications develop, you want to be thinking of treatment, not how to pay for them.