Financial Literacy for Dummies aka Me (Week 1)
Introduction
Talking about money has always been kind of dirty in my mind. The idea of wanting more seems “greedy” and so when my family lost a bunch of money after working with a financial advisor a few years ago, my parents took it as a sign to just hunker down and save instead of investing. As I got older, I realised I was actually extremely avoidant when it comes to money. This avoidance also led to a lack of basic understanding of the mechanisms of investing. Hence, I am kickstarting this Financial Literacy for Dummies series as an accountability goal this second half of 2023. With education, I hope to become more educated and more realistic about investing (as opposed to extreme risk aversion).
How I plan to go about this is to read Investing 101: From Stocks and Bonds to ETFs and IPOs, an Essential Primer on Building a Profitable Portfolio and provide my learnings as well as additional notes on topics mentioned.
Interest Rates
Interest rates are rather self-explanatory, it is the price borrowers incur of their principal for borrowing from lenders. It serves as a good anchor point to which most other financial products are compared.
Interestingly, the Monetary Authority of Singapore provides simple APIs to query Interest Rates of Banks and Finance Companies and Domestic Interest Rates. This is when I realised interest rates are as diverse as they come. Some common interest rates referenced on MAS are the Interbank interest rate (the interest rate at which major global banks lend to one another in the international interbank market for short-term loans — SIBOR is the Singapore Interbank Offered Rate), 3-month commercial bills (short-term debt instruments issued by corporations to finance their immediate cash flow needs. The interest rate associated with these bills represents the cost of borrowing for the issuing corporations.) and SGS Repo Overnight Rate (overnight repo rate represents the interest rate at which participants in the repo market borrow or lend funds overnight using government securities (such as treasury bills or bonds) as collateral).
If we observe the Interbank 12-month interest rate at one point was close to 3.5% before the economic crisis in 2008 but has floated around 0.6–0.8%. This coincides with the lower interest rates in a recovery/high-growth economic environment, something slowly changing in the coming months. We also see the creep in interest rates in the past 5 years of the Federal Reserve.
<iframe src=’https://d3fy651gv2fhd3.cloudfront.net/embed/?s=fdtr&v=202305241813V20230410&d1=20180612&h=300&w=600' height=’300' width=’600' frameborder=’0' scrolling=’no’></iframe><br />source: <a href=’https://tradingeconomics.com/united-states/interest-rate'>tradingeconomics.com</a>
Treasury — a government department or financial department that manages the taxation or wealth of an organisation
Government Securities
Securities refer to any tradable financial instrument that is fungible and negotiable and has some financial value to it — an unnecessary term for what could just be called an investment. So I naturally asked ChatGPT what is the difference between the terminology.
I guess there is some sort of tradable ownership characteristic for securities not necessarily present in the other terms.
Leading Economic Indicators
Gross Domestic Product (GDP) — The amount of economic activity generated by a country in the form of consumption, investment, government purchases and net exports.
Consumer Price Index (CPI) — measures the average price changes of a fixed basket of goods and services commonly purchased by a household.
To find out more about Singapore’s CPI, you can check out this website. It is actually quite interesting to see the variables that go into the calculation of CPI, here are some categories:
We notice that CPI are in fact very localised, as shown by the inclusion of Hawker Food under the Food category (rightfully so). I can imagine this being rather different across countries. Looking into The International Comparison Program Newsletter, we also get some information regarding how international bodies try to standardise and contextualise this index.
To ensure that the PPPs derived are meaningful, the products priced are “like-for-like” across economies. Detailed product specifications are provided for every price-determining characteristics for each item in the product list, such as brand, quantity, unit of measure and material. Economies were to strictly follow the listed product specifications for the price collection.
The remaining items were not priced as they are not commonly available in Singapore. Examples include: • Flight, domestic, return ticket, 500–800km, • Internet connection, 1–4 Mbps, and • Cut up watermelon from street vendor
How to interpret CPI: The CPI is expressed as an index number relative to a base period. For example, if the CPI for the current year is 120 and the base year is 2010, it means that prices, on average, have increased by 20% since the base year. By tracking the CPI over time, economists and policymakers can assess the rate of inflation and evaluate the impact of price changes on consumers’ purchasing power.
Other indicators: Unemployment Index, Housing Starts, Leading Economic Indicators (LEI), Producer Price Index (PPI) etc.
Types of Indicators
While reading the book, I also encountered this idea of leading, coincident and lagging indicators. So what is the difference between these types of indicators and which indicator belongs in which category?
A leading indicator is one which helps to anticipate trends in the economy and is primarily used for forecasting. Coincident indicators usually move in tandem with the economy while lagging indicators, well, lag behind the economic situation.
I also found it funny that Investopedia quickly corrected a misconception I had about lagging indicators — that they were useless. It is said that lagging indicators are able to confirm and clarify economic patterns over time.
Cycles
Just like most natural systems, the economy works in cycles. There are various names used but a common set is: downturn, recession, upturn and recovery.
An upturn is a growth in the economy while recovery (though also technically means growth) means there is some recuperation of lost ground by the economy.
Conclusion
This week was mainly the basics of Economics — stuff I have basically returned to my A Levels Economics tutor. With that said, this was a timely revision of the bedrock of our economy.