You cannot be a virgin twice

12 January 2009

Governments the world over are hoping for a return to the good old days. But those days are gone, vanish and kaput especially for the USA. The great bull run funded by easy and almost free money is over. Remember the dot com crisis where profits does not matter and all it takes is an internet idea and voila, your company is worth millions. The dot com balloon vanished faster than it came. Profits does matter and this is fundamental investment logic. You pay to buy shares in a company for its future stream of profits. If there is no profit or only the possibility of profit, then you are throwing away your money investing in a dream.

Likewise good old economics will say that debt matters. You cannot keep borrowing forever and ever. For three decades or more, the USA have been a borrower nation. The Government borrowed, the consumers borrowed, the hedge funds companies borrowed and so forth. It seems that borrowing has become a permanent way of life and some new rule of economics have been invented. So the new paradigm in investment is simple. You cannot borrow ALL the time. You can borrow to invest, to create new services or products but you cannot borrow to spend ....not all the time. So with borrowing grounded to a sudden halt, the borrowers are made to face reality which is they can only spend what they earn. Having known the horrors of excessive liquidity , the financial institutions have learned that money must be lent prudently. The banks in particular the investment banks have lost their virginity in an orgy of unbridled debt and mind boggling leveraging.

Now liquidity is tied to financial engineering. The latter is the twin sister of debt. Without huge debt and excessive leveraging, financial engineering would not be able to make the spectacular profits it made in the past decade. The good old days of thirty year old making a million in salary and bonuses by simple trading and leveraging are over. Now it is back to basic which means money is earned through either the making of a product or the provision of a service. Financial engineering neither makes a physical product or a necessary service. To be blunt, it is gambling in a more sophisticated way. Now that casino has gone bankrupt. The virgin has become a whore and there is no going back.

Obama is asking the Americans to go back to old fashioned ways of earning money. Building roads, repairing infrastructure, designing alternative energy solutions and so forth. But the Americans have long relied on immigrants to do its heavy work like road building and other construction work. Alternative energy requires graduates in Science and Engineering and a high degree of post graduates students are foreigners. He is asking Anericans to forget about baseball and Hollywood and go back to boring subjects like Science and Engineering. Goodness who wants to be an engineer when there is the dream of earning instant millions by becoming a Hollywood star. The American Idol is popular because it is the Amercian dream. Nobody wants to go back to do backbreaking work or mind breaking research unless they are forced to. That means lost of retrenchments, lay offs, foreclosures until reality sinks in. That reality is we have to work and work hard for our money.

Throwing trillions at the economy won't work if mindsets are not changed. You can go from being an investment banker to a researcher in alternative energy unless you go back to college and pick up some technical qualifications. You will have to wait for five years or more before enrollment for engineering and Science courses pick up when the students realised that having a good technical degree will help them get a job. And enrollment cannot just increased like that. You need more professors, more laboratories and being a lecturer has to become a hip profession. So we should not wait or hope for the American consumer to spend again, like they did in the good old days.

But all is not doom and gloom. USA represents only 20% of the world economy. There is still that 80% out there that does not have the same approach to life. Chinese students are studying hard and millions graduates emerge from engineering colleges in China and India. Yes there will be slow down and retrenchments in China and emerging markets. They have to live without their top customer, the US consumer. In time, they will adjust and a new market will emerge. This new market will cater to the needs of consumer in emerging markets rather than in developed countries. Take tourism as an example. Chinese tourists may prefer to tour the cheaper Asian countries than visit Europe or USA. Asian non Chinese tourists may prefer to visit China rather than expensive Europe. The booming Asian market in tourism does not depend on Americans or Europeans.This is the new economy that will emerge from the Western originated debt crisis.

Asians will design, manufacture and sell to Asians. A new market will developed. No longer will entrepreneurs look to the West for new ideas and needs but they will start top design products that meet Asian needs.For example, today modems are designed for developed countries where telephone lines are short and easily available. In many parts of Asia there is a shortage of telephone lines and so wireless technology has come to the rescue. Phone and internet communications can be instantly provided by installing a wirelesss terminal that communicates with a base station thirty kilometres away. Satellite receivers are ridiculously cheap. Newspaper in developing countries will receive their newspaper via such satellite receivers. All it need is a low cost electronic display or what is now called e-paper. Today it is expensive but what if the manufacturer is making it by the billions? A low cost satellite receiver with e-paper can deliver news cheaply to billions of people from Peru, Nigeria , Nepal, India to China. These will be products designed by Asians for Asians and China, Taiwan and Korea will lead the way. Japan is too enamoured with Western markets to pay attention .

Now e-paper with high resolution similar to printed paper may be years away. But consumers in Asia are more concerned about cost than high resolution. A low cost but much cheaper e-paper may not have a market in USA and Europe but readily accepted by Asian customers who prefer low resolution news to no news at all. Today researchers are only targetting at the Western markets but the new market will provide the global growth. It is when emerging markets start trading, selling and servicing to one another. This is a huge potential market but can only be understood if you live in an emerging economy. I once asked a lecturer from Temasek Polytechnic to ask his students to design a low cost vacuum pump. He could not get Singapore students to do the project for to a Singaporean, $10 is low cost already. He got three students from India, China and Myanmar to design a $2 vacuum pump. This will be a market understood only by those who earn less than a $1,000 a month. To UK engineer earning $7,000 will not understand why a $100 product must be made to sell at $3.

Years ago, the former Prime Minister of Malaysia exhorts his countrymen to look east. Now is the time to starting looking Eastward for investments, for product design, for new markets and new services. The money is already in the East with China, Japan, Taiwan and Singapore hacing billions in their reserves. When these reserves are put to serve the needs of Asians , Africans and Latin Americans, a new global market will be created. Look east, the west has lost its virginity already.