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Paul Gambles
Co-founder of MBMG Group


Update May 30, 2015

Investment Markets: Is there anything to learn from 1929? Part 2

Despite all the warning signs, including stock market prices dropping in March and May 1929, the Dow Jones Industrial Average gained around 28% between June and September 1929.

In fact by September 1929, there had been a near 200% rise in stock market prices in 7 years. Whilst this was not something which happened prior to the GFC, it is in fact a trend that is happening today - evolution between prices in 1922-1928 and 2009-2015 is eerily similar: (See Graphs 1, 2 & 3)

Graph 1 - Data: St Louis Federal Reserve; Chart: author

Graph 2 - Data: St Louis Federal Reserve; Chart: author

Graph 3 - Source: NYSE

Any remote event can be the trigger
The 1922-1929 rise may have given the likes of Irving Fisher the impression that it was permanent but things began to unravel in the autumn of 1929. In September, American optimism in overseas markets took a blow thanks to a case involving Clarence Hatry, described by John Kenneth Galbraith as “one of those curiously un-English figures with whom the English periodically find themselves unable to cope”.1 Hatry had built up a business around vending machines but was discovered by the London Stock Exchange Committee to have expanded his empire through issuing unauthorized stock.2 The fraud was for a significant amount of money, but it was nevertheless committed in England - a world away from the big banks of Wall Street.
This event may not have been solely responsible for a sudden lack in confidence; however, it did nothing to ease public concern just seven years after Charles Ponzi was jailed.3
We would do well to take heed from the Hatry example. When markets become vulnerable, any remote incident can burst it. For example, the first quarter of 2015 was marked by a sharp drop in oil prices. As some commentators lauded this as positive news for the consumer, it is worth noting North American oil companies have since reduced plans for 2015 capital expenditure by 41%. One way of reducing spending so rapidly is to make redundancies - it has been estimated that by March this year, 75,000 global oil industry workers had already been laid off.
Lower oil prices puts pressure on shale gas producers, whose exploration funding has largely been financed by junk bonds.4 Once enough investors get twitchy about shale gas companies’ ability to repay, it could trigger a financial crisis.5
Once the scene had been set in 1929, governments’ reactions globally were to adopt beggar-thy-neighbour policies to advantage their economy of competing countries. The US government passed the Smoot-Hawley Tariff Act6 which raised import tariffs to record levels. Since the 2008 GFC, this mentally has returned, particularly in the form of competitive devaluations, sanctions and through easing interest rates.7 The US, the UK, Japan and the Eurozone have embarked on unprecedented policy experiments.
Despite a one-day respite the day after Black Thursday, the Dow continued to fall until mid-November. Recoveries and putative bounces followed - including a long slide from April 1931 to July 1932 when it hit the lowest point in the whole twentieth century. Consistent upturn did not come about until after the US had entered World War II and it only came back to pre-crash levels in 1954. (See Graph 4)

Graph 4 - Source:

To be continued…

1 John Kenneth Galbraith, The Great Crash 1929 (1955) Mariner Books; Reprint edition (2009)
2 ibid
3 Barry Eichengreen & Kris Mitchener (2003), BIS Working Papers, No 137, The Great Depression as a credit boom gone wrong).
5 See MBMG IA Update Oil Price drop could fuel crisis, December 2014
6 19 U.S. C ch. 4

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

Update May 23, 2015

Investment Markets: Is there anything to learn from 1929? Part 1

Predicting the future is always a risky business. Accurately forecasting when changes will happen is impossible.

However if, like Kondratieff, we look at the economy as a series of cycles1, the events around the Wall Street Crash of 1929 and the Great Depression of the 1930s can alert us as to what may happen in the near future. (See graphs 1 & 2)

Graph 1 - Source: St Louis Federal Reserve

Graph 2 - Source: NYSE

The Roaring Twenties
Let’s take the 1920s as an example. The Roaring Twenties: a time when average Americans suddenly had more money in their pockets than ever before; a time of booming consumerism and, towards the end of the decade, investing in the stock market.

In fact, the rush to become a consumerist society was merely part of the surge in American urbanization - the urban population rose from 28% in 1880, just under 40% in 1900 to over 51% in 19202. Whilst the cities prospered, this trend also meant that the agricultural sector suffered greatly:3 a factor which in itself has been cited as a factor leading to the 1929 Crash4. Consequently, 1920s USA suffered a significant disparity of wealth, the likes of which we have not seen… until today. (See Graph 3)

Graph 3 - Source: Washington Center for Equitable Growth

Another similarity between the 1920s and the 2000s is the level of confidence in the strength of the markets and the overall economy. Key players shared an unswayable belief that the economy could take a downturn as it had in the past.

Stock prices have reached what looks like a permanently high plateau.
- Irving Fisher (economist), 15th October 1929 (9 days before Black Thursday).

At this juncture […] the impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained.

- Ben Bernanke, (chairman of the Federal Reserve), 28th March 2007 (by 3rd April, over 50 mortgage companies had declared bankruptcy in 2007, including highly-respected New Century).5

This is far and away the strongest global economy I’ve seen in my business lifetime.6

- Henry Paulson, (US secretary of the Treasury), 12th July 2007 (1 month before BNP Paribas froze 3 funds, acknowledging risk of exposure to sub-prime mortgage markets.

There had already been a drop in prices in March 1929, which had caused panic before Charles E. Mitchell’s National City Bank provided USD 25 million of credit to prevent the market from dropping further.7 However the rise was temporary and the overall US economy was flagging, with industrial production symptomatic of the slump. If we compare industrial production figures of the early twentieth century with those of today, the similarities are uncanny. (See Graph 4)

Graph 4 - Source: St. Louis Federal Reserve

Furthermore, consumer debt tripled in the 1920s reaching around USD 7 billion in 1929. This was because, for the first time, middle-class Americans were able to buy on credit through buy now, pay later practices. Generous lines of credit were offered by department stores for families who were not able to pay upfront but who could demonstrate their ability to pay in the future. Instalment plans were also offered to buyers and more than half of the automobiles in the nation were sold on credit by the end of the 1920s.8 In the eight years before the Wall Street Crash, household debt levels in America more than doubled - a pattern that was replicated in the build-up to the GFC in 2008. (See Graph 5)

Graph 5 - Sources: Historical Statistics of the United States & Federal Reserve Bank of New York

2 US Census Bureau
3 Dan Bryan (2012). The Great (Farm) Depression of the 1920s, American History USA http://www.americanhistoryusa .com/great-farm-depression-1920s/
6 archive/2007/07/23/100134937/index.htm
7 Jerry W. Markham, A Financial History of the United States: From Christopher Columbus to the Robber Barons (1492-1900), M.E. Sharpe 2002

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

Update May 16, 2015

A seventh year of bulls?

March signalled the sixth anniversary of bulls dominating the S&P 500 - and the run may have some more fuel in it yet, but for how long?
Six years of bullish behaviour is quite a feat - in fact it’s only the fourth time this milestone has been reached since the end of World War II.1 One senior strategist - Brian Belski at IMO - even believes the trend could reach the 15-20 year mark.

(Graph 1)

Stock prices and QE

A large reason for such high prices post-Global Financial Crisis (GFC) has to be the Federal Reserve’s quantitative easing programme.
It’s no coincidence that the policy of the Fed spending USD 4.5 trillion on long-term bonds has boosted US stock markets. After all, that was one of its objectives as Alan Greenspan (Fed chairman 1987-2006) admitted back in 2010.2
In fact, between January 2009 and October 2013, more than 100% of equity market gains took place during the weeks the Fed was on its massive bond-buying drive.3
Some analysts believe that QE isn’t the only reason, however. In fact, one senior strategist at Charles Schwab suggests that the policy wasn’t even the most domineering factor. She suggests that earnings growth and stock buybacks are the main reason why the market has continued to rise.4
A look at the S&P price-to-earnings per share ratios shows that, for almost five years now, they have been back to pre-crisis levels. Similarly, earnings in constant dollars are actually higher than their previous peak in 2006.
I would venture to say that the markets are in fact being pushed higher by multiple expansion; as well as in conjunction with earnings per share, which are being flattered by share buy-backs.

How share buy-backs can influence P/E Ratios

Hypothetical example:

If a company’s net profits are, say $100, and there are 100 shares, then earnings per share = $1. If profit falls to $99 but the company buys back 10% of its shares then earnings per share has increased by 10% to $1.10.

In the end, there is no getting away from the fact that the major peaks in S&P prices have come in periods of QE. When dips have occurred, they have generally been shortly after rumours, or actual slowing or stopping, of easing. That’s why I think that it’s too great an assumption to say that QE has not been the dominant force in driving the bullish market.

(Graph 2)

Continued rise, continued stimulus

Writing this, it is six months since the Fed officially ended its QE programme. The S&P has continued to rise; albeit at a slightly lower rate than during the third phase of easing.
So does this mean that my argument is flawed, and that the bond-buying programme has in fact created a sustained increase in prices, pushing the bullish market towards a seventh year?

(Graph 3)

Not really. To start with QE didn’t actually stop until mid-January this year. The Fed’s total assets held stood at USD 4.493 trillion on 29th October 2014, the day the ending of QE was announced. Yet this figure actually peaked on 14th January 2015 at USD 4.516 trillion, some USD 23 billion more.5
In an attempt to ensure markets in the US and around the world didn’t drop as soon as the end of QE was announced, Fed Chairwoman Janet Yellen announced that the benchmark interest rate would remain close to zero for a “considerable time”.6 Not only that, she hinted that the Fed may hold onto the bonds they bought so hastily for years.7
Thus, although the Fed has decided that USD 4.5 trillion is quite enough spending on bonds for now, it is still artificially stimulating stock markets in a quest to grow the economy.
This shows that the bullish market is greatly reliant on Fed stimulus; raising the question “what happens when the string is cut?” If the political wind changes to one of a more laissez-faire approach by the Fed, will the markets fall?

Bernanke’s beliefs

That all depends on whether QE has genuinely improved the US economy enough as a whole, so that it no longer needs artificial support to bring about rising stock prices. This is something which Yellen’s predecessor Ben Bernanke maintains is true.8 Then again, he also maintains that propping up the economy in such a way will not cause an asset bubble.
Given the facts, I beg to differ. Between Q2 2012 and Q4 2014 (the latest figures to be published) the overall US all-transaction house price index rose by over 13%.9 This figure is put into even greater perspective when we consider that inflation averaged at only around 1.5% in 2013 & 2014.10
Not only that: at the launch of QE 3, then Fed chairman Bernanke also stated, “Higher stock and home prices will provide further impetus to spending by businesses and households.”11 It’s difficult to ignore the irony in the fact that Mr. Bernanke has just joined PIMCO - the largest bond fund investor in the world - considering that his policy has been responsible for record bond yield lows around the world.12
So it seems the Fed actually believes that pushing up prices will help the economy move, will get people jobs and won’t create a bubble. Where the direct connection between stocks, houses and money in our pockets lies, I’m not really sure. Also, given past bubbles - the latest of which occurring only seven years ago - these presumptions strike me as hugely optimistic.
Even if bubbles are not created, the Japanese example of the past 25 years has shown us that once artificial support is lifted, the economy slumps back into recession.13 A look at private debt change and unemployment figures - more realistic measures of an economy than stock prices - shows that the US is on a similar course to that already charted by Japan.

A seven-year itch?

Having said all that, forecasting whether stock prices will drop is a lot easier than predicting when that will happen. Thus it may well be the case that the bulls dominate for a seventh year.
What is more important though, is where that will lead the markets in the longer run, and how much notice the Fed will give before it eventually cuts the string to see if the stock balloon will sail into the air or drop to the ground.
5 St Louis Federal Reserve, All Federal Reserve Banks - Total Assets, Eliminations from Consolidation
7 idem
9 Statistics from St Louis Federal Reserve
10 St Louis Federal Reserve, consumer prices for the US, not seasonally adjusted.

Update May 10, 2015

China reserve requirement cut is a desperate move

Recently, China’s central bank, the People’s Bank of China (PBOC), reduced its reserve-requirement ratio (RRR) by a record-equalling 1% (or 100 base points).
RRR is the percentage of depositors’ balances a bank must retain in cash - the rate is usually set by the central bank. The reduction of this amount is an easing tool, designed to encourage banks to lend more and reduce interest rates.1
The PBOC’s action comes just days after an official announcement that in Q1 2015, Chinese economic growth was the slowest in six years.2 Chinese officials suggested that areas such as industrial output and retail sales caused concern.3
The PBOC had previously implemented steps to stimulate lending, such as the medium-term lending facility. Despite its name, this is a short-term credit programme which made RMB 370 billion (USD 59.6 bn) available in Q1 2015, according to the central bank.4

A desperate measure

The new RRR of 18.5% may still be high by global standards5 but the fact that this is the second cut in just 2 months and the joint biggest ever single reduction (the other was in 2008) smacks of desperation. The move is designed to release RMB 1.2 trillion (USD 194 bn) of liquidity,6 in order to halt the economic slowdown. While official figures put economic growth at the targeted 7% level, I have my doubts that it was really that high.

The reality is that the Chinese economy is weak and the equity markets are strong; although comparing the volume of shares traded on the Shanghai Composite to that on the Hang Seng China Enterprises Index shows that most of the recent trading in Chinese companies’ equity is being done in Hong Kong.
This emphasizes the scale of gross and net outflows, now that exports have dried up.7

The fact is that China is currently dealing with many economic issues. It has bloated housing and construction sectors which are consequently suffering.8 Not only that, it is facing a private debt time-bomb, similar in scale to that seen in the US sub-prime market in 2007.
Of course, the main difference between the two scenarios is that the US government was guilty of dereliction of duty in 2007. Today the Chinese government is actually the main cheerleader of private debt9 - especially since it moved the sector itself as a developer to support the market - and playmaker.
With that in mind, my view is that more liquidity is not what is needed - all that will do is simply shore up debt and mal-investment problems. Contacts in Hong Kong tell me they believe that the Chinese money flowing into Hong Kong-listed stocks right now10 is a sign of distrust in the government and the mainland’s financial institutions.

The effects on the Chinese economy

It’ll be interesting to see how people will react to the PBOC’s RRR announcement. Will people find a workaround? Will this redress the lack of confidence? I don’t think so: once the exuberance dies down, I think it will undermine the economy further.
Will this cure China’s underlying debt problems? Not in my view. In fact, I think it will make them worse. As for helping the economy as a whole: I think the restriction change will ultimately stifle it.
One effect the change may have is to boost the property market; however, this may be in the very short term, putting air into a bubble that is trying to deflate. With that comes the risk of bursting that bubble.
Even though the first full trading day since the announcement saw falls in the Shanghai composite and the Hang Seng,11 I do think the RRR change will boost stock prices in Mainland China. However, Hong Kong will probably trade most of this - thus defeating the aim of stemming capital outflows. Should Hong Kong prices go up in the short run, it would mean the PBOC will have to pull another rabbit out of the hat to avoid a fall-back.
In essence, the PBOC is using the wrong tool for the wrong job. It has tried to address this by cutting the RRR by 200 base points for rural credit co-operatives and 300 base points for the China Agricultural Development Bank.
Any way I look at these RRR cuts, they strike me as desperate moves. Not only that, the PBOC is replicating the flawed policies of pushing on a string, implemented by Western governments in 2008. Those policies have left many countries facing a deflation crisis, worryingly similar to that experienced by Japan over the last quarter-century.
3 Xinhua news agency
5 idem
6 idem
7 idem

Update May 2, 2015

Thailand Tax Changes

There have been a number of changes to Thailand’s economic and business environment since the current government took power last May; not least in the area of taxation. Here’s a quick guide to some of the major changes, proposed or implemented.


Back in July 2014, the government announced a further 1-year extension to the reduced Value-Added tax rate of 7%. The official VAT rate is in fact 10% but, in order to boost consumer purchasing power and thus help economic growth, a 3%-reduction has been re-applied every year since the 1997 Asian Financial Crisis. The current extension expires on 30th September 2015. It has been stated that VAT will be back at 10% from 1st October 2015;1 although it’s worth keeping an eye out in the coming months, in case this changes.

SME business income tax

The business tax applied to small and medium-sized businesses (SMEs) has applied since the beginning of the fiscal year 2015 (which started on 1st January 2015).2 If an SME has paid-up capital of less than THB 5 million at the end of each accounting period, and revenue from sales and goods in that period is less than THB 30 million, then it will now be eligible for a 15% rate up to THB 3 million in net profit. Previously this rate only applied up to THB 1 million in profit.

In summary, here’s how the new and old SME tax rates compare:

Accounting Period

Net Profit 1-Jan-12 1-Jan-13 1-Jan-15
  - 31 Dec 2012 - 31 Dec 2014  onwards
< 150,000 Exempt    
150,001 – 300,000 15% Exempt  
300,001 – 1,000,000 15% 15% 15%
1,000,001 – 3,000,000 23% 20% 15%
> 3,000,000 23% 20% 20%

Automobile excise tax

As of 1st January 2016, those people who choose an energy-saving model when buying a new vehicle will be charged less tax. The planned restructuring of the automobile excise tax regime was first announced in 2012 and has raised concern within the industry that it would make production difficult, as manufacturers try to marry low-emissions with market requirements.3
In March, industry minister Chakramon Phasukavanich stated that the new tax rates will only apply to new models, as it would not be fair to apply them to older ones.4 The objective is to charge more tax on less-efficient models of vehicle, thus discouraging manufacturers from producing them and customers from buying them. The president of the Thai Automobile Association has suggested that if the vehicle tax rate is raised by between 5% and 10%, the retail price could be raised by 2%.5

Land and building tax

There have been plans to introduce a property tax in Thailand since 2010 but no law has been implemented to date. The current government, however, sees this as one of its priorities. It has stated that it wants to enact the law before it gives up power, as it seeks to narrow economic disparity and pay for investment in areas such as infrastructure.6
The latest proposals suggest that homeowners would be charged 0.1% of the appraised value. The rate for agricultural and commercial land use would be 0.05% and 0.2% respectively. Houses with an appraised value of up to THB 2 million would receive a 75% tax allowance, meaning a THB 250 tax payment for every THB 1 million.
Residences with an appraised value of THB 2-4 million would receive a 50% tax allowance, calculating into THB 500 tax for every THB 1 million on amounts exceeding THB 2 million but no more than THB 4 million.
For houses with an appraised value of over THB 4 million, homeowners would have to pay THB 1,000 for every THB 1 million of the appraised value above the THB 4 million mark.7
However, there has been a public outcry that the tax will impose too high a burden on homeowners.8 The government has therefore decided to postpone implementation indefinitely9 and review the plans. It has promised to publish its conclusions in August 2015.

Tutorial schools

Currently tutorial schools or cram schools, which provide extra lessons to help students pass exams such as university entrance tests, qualify for tax exemptions under the Private School Act.10 However in March the government gave the go-ahead to tax such schools.
Education minister Narong Pipatanasai has stated that the idea behind the change is to tax cram schools’ profits, without mirroring the cost onto students. However, one school owner has already said he would have to increase course fees because of the increased accounting and auditing costs involved.11
As yet no official timeline has been set for the changes, which the Revenue Department expects to bring in annual tax revenue of some THB 2 billion.

Inheritance Tax

In August of last year the government made clear its intentions to introduce an inheritance tax (IHT) in Thailand. This wasn’t something new: proposals for such a tax have been doing the rounds of various Thai governments for the last decade.12
Whilst Singapore and the Philippines already have IHT regimes, all the other ASEAN countries do not.13 According to finance minister Sommai Phasee,14 an estate worth THB 120 million separated equally between two children would result in the following:
* The first THB 50 million each child receives would be exempt of tax.
* Each child will be taxed at 10% for the THB 10 million that exceeds the ceiling.
Taxable assets would include residences, land, vehicles, bonds, equities and deposits at financial institutions. Non-registerable assets such as jewellery, amulets and luxury watches, however, would be excluded.15
Whilst the finance minister feels that a THB 1 million tax on an inheritance of THB 60 million is “negligible”16, the National Legislative Assembly failed to reach any conclusion on the bill’s second reading in February. The minister suggested that the law should not be implemented at all if there is a reduction to his proposed 10% rate.17
Since February there has been no news of any rewrite of the bill or a new attempt to push the current proposals through.

Future developments

With so many uncertainties regarding how and when these new tax regimes will be implemented, it would be advisable to check with an independent expert.

2 Royal Decree 583 2015 B.E. 2558
5 idem
7 idem
8 idem
10 Private School Act B.E. 2550
16 idem
17 idem

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


HEADLINES [click on headline to view story]

Investment Markets: Is there anything to learn from 1929? Part 2

Investment Markets: Is there anything to learn from 1929? Part 1

A seventh year of bulls?

China reserve requirement cut is a desperate move

Thailand Tax Changes