The Switzerland of Asia

As the Western governments look to crack down on tax havens, the money moves elsewhere. In the early days of the 21st century, the preferred haven is Singapore. Chris Mayer explains…

"The city of Singapore was not built up gradually, the way most cities are, by a natural deposit of commerce on the banks of some river or at a traditional confluence of trade routes. It was simply invented one morning early in the nineteenth century by a man looking at a map. ‘Here,’ he said to himself, ‘is where we must have a city.’"

– J.G. Farrell, The Singapore Grip.

Farrell’s tale is about Singapore in 1939. It takes place in the last days before Japanese occupation. The novel captures the early hustle and bustle of Singapore, its sights and smells. He writes, "of incense, of warm skin, of meat cooking in coconut oil, of honey and frangipani, and hair-oil and lust and sandalwood and heaven knows what, a perfume like the breath of life itself."

The man who looked at a map, as Farrell says in his passage, was Sir Thomas Raffles, the founder of the city of Singapore. Raffles’ vision was to add another trading post in the growing British Empire. It became much more than that. I think it’s safe to say it’s become more than Raffles could have ever imagined.

Today, it’s becoming another Switzerland. As the Western governments look to crack down on tax havens, the money moves elsewhere. In the early days of the 21st century, the preferred haven is Singapore.

The story of Singapore is a story of how a place grows rich in the 21st century. One way, Singapore’s way, is to master the arts of international trade. Be friendly to wealth and it will beat a path to your door. For investors, too, there is a surprising opportunity in the Straits of Malacca…

As with most places, Singapore owes its success, at least partially, to accidents of history. Singapore has a natural deep port, which always helps. But prosperity usually needs a little extra nudging to get out of bed in the morning.

The discovery of tin in nearby Malaya in 1848 was one such nudge. It helped make Singapore an important port for the tin trade. The opening of the Suez Canal in 1869 was another. It cut traveling time between Asia and Europe dramatically. As steamships replaced clipper ships, so the world shrank a little further. Singapore also became one of the world’s largest coaling stations.

As a cog in the British Empire, Singapore was indispensable. As Gretchen Liu writes in her history of the city, Singapore was, "an important link in a chain that stretched from Gibraltar, through Malta, Suez, Aden, India and Ceylon, and to Hong Kong and Australia."

Singapore soon became the world’s largest supplier of rubber, helped by Ford’s assembly line in 1913, which kicked off a boom in rubber. By 1919, half of the world’s rubber went through its ports. (An interesting aside… You live by the sword; you die by the sword, as the saying goes. During the Great Depression, rubber prices fell from 34 cents in 1929 to a low of about 5 cents by 1932. A lot of rubber producers met a bitter end.) Even in the 1950s, rubber and tin were still important exports, along with coconut oil, palm oil, tinned pineapple, sago flour, rattan and spices.

So you see, the main business of Singapore has always been trade. It’s also always been a place made up of a variety of peoples from a variety of cultures. Chinese, Indians, Malays and Europeans all flocked to Singapore. Immigrant labor laid down the electric cables, tapped the rubber trees and built the roads, among other things. In the process, Singapore became a unique mix of East and West. Singapore became a hinge upon which the two worlds turn.

Trade and Invest… No Questions Asked

Joe Studwell’s new book Asian Godfathers looks at the successes of various entrepreneurs in Southeast Asia. Singapore figures in the larger story. Studwell’s comments shed light on the causes of Singapore’s successes. Many of those causes still serve it well today.

Singapore’s success is due in part to, as Studwell says: "tariff-free trade (with few or no questions asked about what is being traded) and…places to park money (with few or no questions asked about where the money came from)."

In this, Singapore performs a "simple economic trick." Be a little kinder to money than your neighbors and you will attract the money flow. Though Singapore has a long history of trading and smuggling, its reputation as an Asian Switzerland – as a place to store capital and a financial services hub – is a more recent development.

As the European Union brings pressure on Switzerland to block tax evasion, Singapore has taken up that slack. The number of foreign private banks in Singapore has more than doubled, from 20 in 2000, to 42 currently.

Barron’s reports that Singapore is the world’s second largest banking center, behind Switzerland. Singapore’s worldwide share of the private banking business is around 6%, compared with Switzerland’s 18%. But Singapore is growing 30% per year. Private banking assets are up sixfold from 1998. Today, Singapore is home to about $300 billion, according to Citigroup (which gets one-third of its private banking business from Asia. The folks at Citigroup should know.)

All that money needs "handlers" – accountants, investment advisers and other specialists. It’s why the private banking business is so excited about being in Singapore. As an investor, it’s a little harder to invest in this theme specifically. I’m not particularly keen on owning a large financial conglomerate because I like its Singapore exposure. Nonetheless, it’s something to watch.

Beyond that, though, there is another layer to Singapore’s 21st century prosperity that I find fascinating. Singapore is also a hub for water companies, a sort of Silicon Valley of water. Tom Rooney, whom I interviewed for last month’s letter, called it "the most enlightened place in the world on water." There are over 100 water treatment stocks there, with a total market cap in excess of $50 billion, according to Jim Rogers, author of A Bull in China.

China represents nearly 80% of sales. The rest comes mainly from Singapore. The CEO, Olivia Lum, owns about 30% of the stock. She founded the company back in 1989, when it was just a little trading company selling water treatment systems throughout Asia. It’s now a company worth over $1 billion. Someday it could be worth many times that. I’m not recommending Hyflux in C&C’s portfolio, but I point it out as another opportunity in Singapore.

The old trading post dreamed up by Raffles continues to be a hotbed of international trade. The Port of Singapore, after all, is the world’s largest. But it’s also become a private banking boomtown and a hub of the growing water sector. Western countries could learn a thing or two about how to get rich by studying Singapore’s playbook. And investors ought to take a look at putting money to work in Singapore.

Raffles, I think, would be pleased.


Chris Mayer
for The Daily Reckoning
April 24, 2008

Chris’ newsletter, Capital & Crisis, excels in taking often overlooked areas of the market and turning it into a major opportunity for profit.

Chris is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Daily Article series to here in The Daily Reckoning. He is the editor of Mayer’s Special Situations and Capital & Crisis – formerly the Fleet Street Letter.

Chris also recently wrote a book: Invest Like a Dealmaker: Secrets from a Former Banking Insider.

"The baths, the wine, and Venus corrupt our bodies,
But the baths, the wine and Venus are our life…"

-Inscription found on a Roman tomb

Yes, dear reader…we are here in Rome. We have enjoyed the wine. We have had a bath or two – in our own private bathroom. And Venus? Well…this is a family publication…

This afternoon, we are going to visit the baths of Caracalla, built at the beginning of the 3rd century by Caracalla’s father Septimius Severus and inaugurated by the son after Severus’s death.

‘Overreach’ is not a Latin word. But it was practically invented to describe what the Romans did to themselves…to their empire…and to their money. About which, more below…and more about our own overreach, circa 2008, too.

But first the bare facts, yesterday’s financial news in a nutshell:

The Dow rose slightly. Oil held steady at an all-time high of $118. Gold dropped another $16 to close at $909.

There is so much ‘noise’ in the financial system, it is hard to think. The papers are full of distractions and absurdities. You can find almost any point-of-view you want. Some argue that central banks are winning…that the stock market hasn’t gone down because it is getting ready to go up…and soon, the housing market will bottom out too.

"Fears of bank failures recede," says a headline in the Financial Times today.

Others argue that the worst is still ahead…that the stock market will melt down…that housing prices will fall another 20%…and that the whole world will go into a monumental downturn.

"Housing slump may exceed Depression," says a San Diego paper.

We take a middle view – that financial assets (including paper money), the financial industry, the credit cycle, the dollar-standard monetary system and the U.S.A. itself are in an historic decline…while emerging markets, gold and commodities are in a once-in-a-lifetime upswing.

We’ve heard about the panic that the doubling of wheat and rice prices is causing in China, India and other Asian countries. But now, reports the Washington Times, this panic is beginning to spill over to Americans. The article goes on to point out that bulk grocery stores, such as Costco, are having to put a limit on how much rice customers in certain states can buy. Americans have gotten a whiff of the high prices and fear that the shortages will spread from overseas, and have begun hoarding necessities such as oil, rice and flour.

"Commodity prices across the board are at levels not experienced in many of our lifetimes," said CFTC Chairman Walter Lukken. "These price levels, along with record energy costs, have put a strain on consumers as well as many producers and commercial participants that utilize the futures markets to manage risks."

Resource Trader Alert’s Kevin Kerr assets that "this profit parade [in commodities] isn’t going to end anytime soon." He’s so certain, in fact, that he’s offering three month’s of Resource Trader Alert – completely free of charge.

But let’s take a look at the headlines and then we’ll come back to our analysis.

Is the housing market getting worse? Well, you already heard the report from San Diego; it could be worse than the Great Depression, it says. Up the coast, the news from the LA Times is that California is suffering a record level of foreclosures. And in Nevada, the local press tells us that many erstwhile homeowners are not being very considerate to the new owners. They’re wrecking the houses before they leave, says the paper, even putting cement down the plumbing. Of course, they’re upset, continues the report, because they feel they’ve been roughly handled by the mortgage industry.

Meanwhile, in Chicago, Jesse Jackson is in the news; he thinks borrowers have been roughly handled by the mortgage industry too. He’s called for a moratorium on foreclosures.

And over the on East Coast, the Washington Post says lenders are "being swamped" by delinquent loans.

Partly because of the risk of bad payers, mortgage approvals have fallen to a 10-year low. But not all the delinquents are homeowners. Many former students, who took out loans to get through college, are finding it hard to pay the money back. Lenders are tightening up on the scholars too. And the Bush Administration is so alarmed at the thought of all the college keg parties that might be canceled; it has proposed to buy student loans from the lenders.

Where will it get the money, you ask? From taxpayers, of course. Who are the taxpayers? The parents of the students, obviously. Then, why not let the parents keep their money and pay for their own children’s education? Oh, stop being a silly old fuddy duddy…

*** First, we turn to Project Overreach: America’s Imperial Budget, 2008. George W. Bush et al. have been stretching in all directions. And now comes his party’s chosen successor, John McCain, with even longer arms.

McCain wants to lock in place Bush’s $350 billion of tax cuts…and then cut another $300 billion more. Here at The Daily Reckoning headquarters we’ve never met a tax cut we didn’t like. But it’s the other side of the ledger than concerns us. If revenues go down, how would McCain pay for all those spiffy projects – mortgage rescues, student loan bail-outs, the never-ending war in Iraq, bombing Iran…not to mention all the regular giveaways to America’s seniors, poor, cripples, veterans, bankers, and feeble-minded citizens?

The idea, put forward by Arthur Laffer and the Reagan crew, was that lower tax rates would stimulate economic activity and, ergo, more tax revenue to the government. But now, McCain’s top economist – Douglas Holtz-Eakin – says the estimates of increased tax revenue as a result of lower rates were "overblown." As director of the Congressional Budget Office, he admitted to Congress that a "dynamic analysis" of tax cuts (taking into account the likely positive effect of cuts on economic activity) made essentially no difference to the outcome. Conclusion: if you cut taxes…you also must cut spending…or you’ll find yourself in the hole.

The Bush Administration has worked the United States into the biggest hole ever. Like Diocletian, Septimius Severus and Caracalla, the next president will face the consequences of overreach…inflation, budget deficits, and rapidly expanding debt.

*** But mommas still want their babies to grow up to be president…or even better, to land a job on Wall Street. And to break into finance or politics, it helps to have a degree from a prestigious university. It is proof to your employers that you have been indoctrinated with the latest Efficient Market claptrap…that you believe the hocus pocus of modern macroeconomics…and that you can do the miracle math required to turn trashy credits into triple A-rated investments.

But for all those mommas hoping to get their babies a place at Goldman or Blackrock, we have a suggestion: aim for the legal department. Yesterday brought word from the Financial Times that "sub-prime produces a tsunami of lawsuits." Our guess is that the financial industry has seen its best days. The wheels are falling off the deal machine. Bonuses are coming down. Employees are being laid off, cast off, spun off, and blown off in every department – save where the legal team does its work. The next few years are likely to produce further trimming in the financial industry ranks. But the in-house lawyers…and lawyers who work face them from outside firms…are bound to enjoy a boom. They’ve got to work out, renegotiate, defend, and deny thousands of claims. Their jobs are safe for years to come.

*** Poor Caracalla. The man spent his whole life pushing the barbarians back…or being pushed back by them. And for his thanks…one of his own men stabbed him to death.

But he had it coming.

He was a good child, say the historians: "sed haec puer." But he went bad fairly early. After his father died, he ruled as co-emperor with his brother, Geta. Then, he murdered Geta in 212 A.D. and fled to the army for support. After he had solidified his position, he began purging his brother’s old friends and supporters. More than a 1,000 were killed.

He seemed to want to imitate Alexander the Great…and even began walking with his head tilted to the right, as he had seen in a depiction of Alexander. He set out to make his military glory with a series of campaigns against the Gauls, the Chatti, the Alemanni, and the Getae. He pillaged Alexandria, after hearing that the citizens spoke of him with contempt. And he was preparing a war against the Parthians when he was killed.

His greatest achievement was the "Constitutio Antoniniana," which made all inhabitants of the empire equal citizens. He is also remembered for a new coin – the Antoninianus – which replaced the denarius. It was a way of dealing with the inflation that was troubling the empire. Wars were expensive then, as they are now. But back then, were sometimes profitable enterprises, as a victorious army usually captured enough booty to pay its way – and then some. But the larger the empire became, the more neighbors it had, the longer its borders grew, and the more garrisons it needed to protect them. The people at home needed bread and circuses too – or they would go turn on an emperor…and shift power to a rival.

Pretty soon, Rome ran out of money, which was then calibrated in gold and/or silver. The Antoninianus was a way to depreciate the currency. It had a face value of 3 times the denarius, but with the same silver content.


Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning