In 1970, the price of gold is US$34.94 per ounce. Today it is around US$1120 per ounce. This is a 32 times increase since 1970. Imagine you had bought a house in Henry Park , a good district 10 area in Singapore for S$70,000 . Today it is selling for S$1.2 million . You think it is a fantastic investment seeing the price goes up from $70,000 to $1.2 million. In 1970, one US dollar buys $3.06 Singapore dollars. Gold price of US$34.94 is therefore S$107. Today the US dollar is 1.40 and one ounce of gold cost S$1,568.
$70,000 divide by $107 gives 2,222 ounces of gold and this is the amount of gold we get in 1970 for S$70,000. Today S$1.2 million divide by $1,568 gives us 2,987 ounces of gold. This is a miserable 34.4% increase after almost 40 years! That is very poor 0.74% per annum increase over a period of 40 years. Thus while in Singapore dollars, we see a decent 7.36% increase per annum , when we look at the price in terms of gold, we see a miserly 0.74% annual increase. THIS MEANS THAT THE SINGAPORE DOLLAR HAS DEVALUED SIGNIFICANTLY OVER THE PAST 40 YEARS!
Singaporeans who are estatic about their properties and the gains they make should recalculate their value in terms of gold. Gold it seems is a very good long term investment. If we use to buy gold with the $70,000 in 1970, we will have 2,222 ounces. Selling the gold at S$1,568 per ounce will get us S$3,484,096. If instead of buying the terrace house at Henry Park, and had he invested in gold, he would reap earn a huge S$3,414,096 in capital gains. Of course during the period the house could be rented but still the rent would not cover the difference of S$2,284,096.
If gold touches US$2,000 per ounce, or S$2,800, then S$1,200,000 will buy even less gold or a mere 428 ounce. If we sell the house for S$1.2 millon, it means we will in fact be taking a hefty 80% hair cut from our investment in terms of gold. There is a psychological factor here. Few people had invested in gold but most adults would have at some point in their life ad bought or considered buying properties. Today that same house in Henry Park that sells for S$1.2m cannot possibly be sold for S$3.4 million. If we ask S$3.4 million for a 2,000 sq ft terrace house, we will be laughed as mad or totally unrealistic in our expectations. There is less resistance to buying gold at US$2000 per ounce as compared to buying that house for $3.4 million.
Gold mania is far more possible than property mania. Foreign investors cannot buy landed property while there is no restriction for anyone buying gold! Therefore as an investor now perhaps is a good time to invest in gold.
Wednesday, December 16, 2009
Tuesday, June 2, 2009
Fundamentals will prevail
The market has rallied and people are optimistic about the greenshoots. But what about the blackshoots which are the opposite to the greenshoots? GM has filed for bankruptcy and the new GM will mean closure of some factories and the loss of thousands of jobs. In any other time, such news would have a negative impact on the US Stock market. But it seems some kind of immunity to bad news have set in and the fact that the US Government has stepped in to "rescue" GM is now treated as good news.
GM is like a sick old man and pumping full of vitamins (money) is not going to revitalise the company. Thousands of managers, supervisors and those who made GM the way it was, remains with the company.Will they change their way of working, will they be suddenly more cost conscious, more creative and more efficient? Possible but very unlikely. They need a boss like Jack Welch , or someone even tougher than Jack to shake up the management and replace the management layer with fresh blood. The fact that no private investors are willing to jump in and take over shows that they know one cannot revitalise a sick old man. With the US Government, union and bondholders being major shareholders, I can imagine how impossible it would be for the board to operate!
With GM , AIG. Fannie Mae and Freddie Mac, the US Government has ended up as owners of large corporate entities. Running a company is like a Viking ship. You need strong and forceful leadership to ensure everyone pulls in the same direction. The US Government cannot provide this kind of leadership and the end result will be a slow decline to lower productivity and even higher losses. Government owned companies in the past has never performed so why should it be different this time around? Britain used to nationalised its major industries and have learned to let them go. The best thing is the hardest to do. Let them all fail and let the marketplace adjusts itself. Failure is not necessarily bad. It opens up opportunities for smaller firms to move into the space vacated by these sick giants. Smaller and more efficient firms will gain market share and in turn create more employment.
The impact of GM closure of factories will have greater impact especially when the number of jobless is already high. The focus seems to be on minimising the impact of negative events such as managing the bankruptcies of GM and Chrysler. There is too much of an eagerness to return to the good old days of double digits return on all sorts of investments. There is a need to reduce consumption, to increase and encourage savings. Interest rates should be high to encourage more savings so that these savings and not money created out of thin air by the US Goernment can be used to reinvest in businesses. If a person lost his savings in a bad investment, he should start to save again to rebuild his nest egg rather than continue spending.
The approach should be bottoms up. Take care of the consumers and businesses will take care of iself. Now it seems the mantra is take care of businesses and it will take care of consumers! The consumer must comes first. He must learn to save more and spend less. Saving more will rebuild capital that America so desperately needed. To keep interest rate low is to punish the consumer. Any business that solely relies on low interest to survive and compete is not a healthy business. It should be able to make money from its equity capital and not from loans from banks. A company with an equity capital of $100 million and makes $10 million profit is earning 10% on its equity. If it borrows $100 million and makes $10 million, its return on capital is hlaved to 5%.
The policy of keeping interest rates low to help businesses is flawed. Higher interest will encourage more savings and some of these savings may end up as equity investments which means companies need not even pay interest since it is equity capital. Without savings, consumer have no money to invest in shares and companies have to revert to the more expensive alternative of borrowing.
The huge amount of debt incurred by US Government and the huge amount of printed money it created will come to haunt it in the years to come. Future generations of Americans will find they have to pay more taxes and suffer a lower standard of living. America will no longer be the consumer capital of the world. It will behave like the son of a rich man who has gone bankrupt. There will be years of denial and Americans will continue to hope and believe that its former glory days can be restored.
America has one trump card up its sleeve. It can spend less on its military. Under President GW Bush the 2009 defence budget is US$515 billion. This is ten times higher than Russia's defence budget. America can trim its defence budget to $200 billion and still spend many times more than any other country. It can save trillions over the next decade if it is willing to pare down its military spending. When Obama starts to reduce the number of trrops stationed overseas, troops not only from Iraq but Germany (56,200 soldiers) ,Japan (33,122 soldiers) and Korea(26,339) soldiers, we will know that they are cutting the defence budget out of sheer necessity. All empires end because they did not have the financial resources to maintain their massive armies. The fall of the Roman Empire is because it could not maintain its soldiers to defend itself. This reduction in military spending will give America the space to recover economically. To maintain its huge military bases overseas is like a bankrupt rich man who insists on keeping its mansions in ten countries.
The fundamental of economics is that money cannot be created out of thin air without long term consequences. Sure there may be no short term consequences but in time, the consequences will be felt. To maintain a huge defence budget in the face of its current huge budget deficit is not to face reality . We will watch and see if the Obama's administration has the courage to face reality or prefers to believe in Hollywood's kind of miracles.
GM is like a sick old man and pumping full of vitamins (money) is not going to revitalise the company. Thousands of managers, supervisors and those who made GM the way it was, remains with the company.Will they change their way of working, will they be suddenly more cost conscious, more creative and more efficient? Possible but very unlikely. They need a boss like Jack Welch , or someone even tougher than Jack to shake up the management and replace the management layer with fresh blood. The fact that no private investors are willing to jump in and take over shows that they know one cannot revitalise a sick old man. With the US Government, union and bondholders being major shareholders, I can imagine how impossible it would be for the board to operate!
With GM , AIG. Fannie Mae and Freddie Mac, the US Government has ended up as owners of large corporate entities. Running a company is like a Viking ship. You need strong and forceful leadership to ensure everyone pulls in the same direction. The US Government cannot provide this kind of leadership and the end result will be a slow decline to lower productivity and even higher losses. Government owned companies in the past has never performed so why should it be different this time around? Britain used to nationalised its major industries and have learned to let them go. The best thing is the hardest to do. Let them all fail and let the marketplace adjusts itself. Failure is not necessarily bad. It opens up opportunities for smaller firms to move into the space vacated by these sick giants. Smaller and more efficient firms will gain market share and in turn create more employment.
The impact of GM closure of factories will have greater impact especially when the number of jobless is already high. The focus seems to be on minimising the impact of negative events such as managing the bankruptcies of GM and Chrysler. There is too much of an eagerness to return to the good old days of double digits return on all sorts of investments. There is a need to reduce consumption, to increase and encourage savings. Interest rates should be high to encourage more savings so that these savings and not money created out of thin air by the US Goernment can be used to reinvest in businesses. If a person lost his savings in a bad investment, he should start to save again to rebuild his nest egg rather than continue spending.
The approach should be bottoms up. Take care of the consumers and businesses will take care of iself. Now it seems the mantra is take care of businesses and it will take care of consumers! The consumer must comes first. He must learn to save more and spend less. Saving more will rebuild capital that America so desperately needed. To keep interest rate low is to punish the consumer. Any business that solely relies on low interest to survive and compete is not a healthy business. It should be able to make money from its equity capital and not from loans from banks. A company with an equity capital of $100 million and makes $10 million profit is earning 10% on its equity. If it borrows $100 million and makes $10 million, its return on capital is hlaved to 5%.
The policy of keeping interest rates low to help businesses is flawed. Higher interest will encourage more savings and some of these savings may end up as equity investments which means companies need not even pay interest since it is equity capital. Without savings, consumer have no money to invest in shares and companies have to revert to the more expensive alternative of borrowing.
The huge amount of debt incurred by US Government and the huge amount of printed money it created will come to haunt it in the years to come. Future generations of Americans will find they have to pay more taxes and suffer a lower standard of living. America will no longer be the consumer capital of the world. It will behave like the son of a rich man who has gone bankrupt. There will be years of denial and Americans will continue to hope and believe that its former glory days can be restored.
America has one trump card up its sleeve. It can spend less on its military. Under President GW Bush the 2009 defence budget is US$515 billion. This is ten times higher than Russia's defence budget. America can trim its defence budget to $200 billion and still spend many times more than any other country. It can save trillions over the next decade if it is willing to pare down its military spending. When Obama starts to reduce the number of trrops stationed overseas, troops not only from Iraq but Germany (56,200 soldiers) ,Japan (33,122 soldiers) and Korea(26,339) soldiers, we will know that they are cutting the defence budget out of sheer necessity. All empires end because they did not have the financial resources to maintain their massive armies. The fall of the Roman Empire is because it could not maintain its soldiers to defend itself. This reduction in military spending will give America the space to recover economically. To maintain its huge military bases overseas is like a bankrupt rich man who insists on keeping its mansions in ten countries.
The fundamental of economics is that money cannot be created out of thin air without long term consequences. Sure there may be no short term consequences but in time, the consequences will be felt. To maintain a huge defence budget in the face of its current huge budget deficit is not to face reality . We will watch and see if the Obama's administration has the courage to face reality or prefers to believe in Hollywood's kind of miracles.
Friday, April 3, 2009
The true cost of fiscal stimulus
G20 leaders have decided to throw money at the current financial crisis. As political leaders, they cannot risk not doing anything. By throwing money at the problem, they hope that they can remain in power until the next election. It is politically sensible thing to do. But will it solve the problem? The answer is a simple no because what it means is that future generations will have to pay for the runaway spending of this generation.
Few people understand the concept of money. Money is stored energy and effort. When you work hard and earn money, the money is for the effort and energy you expended in some activity that is of commercial value. You in turn spend that money to obtain the fruits of someone's else effort. When you buy a loaf of bread, you are paying for the effort of the farmer who planted and harvested the wheat, the truck driver who brought the wheat to the factory and the workers who converted that wheat into bread. You exchange one form of labour for another.
There when money is created out of thin air, two things happen. First one either let the money depreciate or one has to pay it back with interest. Letting the money depreciate is a shrewd political move as consumers are often unaware of the effects of inflation. They are happy to learn their house has appreciated from $500,000 to $1,000,000 but does not know that a loaf of bread that used to cost $1 is now $3! The inflation does not happen overnight but fortunately for politicians a couple of years or more . By then who knows who is in the seat of power?
Paying back with interest is less palatable since someone has to work and expend energy and effort to repay the loan. When money is borrowed by the Government , it has to pay it back via taxation or otherwise. Money is created by the Central Bank or Federal Reserve Board ( out of thin air) and then loaned to the Government. This means energy and effort is borrowed and must be repaid from future energy and effort. So somewhere along the line, someone has to work harder to pay back what was spent earlier! If I am living in the UK or USA, I would consider migrating to a country that has less debts because somewhere, somehow , I need to pay it back. The Government does not work to pay back its debts. It taxes the people to redeem its debts.
It reminds me of past kings and emperor who builds magnificent monuments at a cost of losing their kingdom. There is only so much energy and effort and so it it is used to build monuments, it cannot be used to train and sustain an army, feed its people better and so forth. This borrowing or fiscal stimulus is akin to an emperor building a huge monument. The country will become poorer for sure. Its roads will show signs of wear , its schools will become shoddy, universities will not have the latest laboratory equipment and even its army will be less well equipped.
Leaders of those countries using financial stimulus will have to start cutting back on other programs. Fortunately for the USA it can and should cut down on its military expenditure. It can remain a world military power if the next 10 years it does not have new fighter planes, new stealth frigates and new aircraft carriers. It can bring its soldiers back from Germany and Japan. Goodness gracious World War Two is a thing of the past. Overall infrastructure will see signs of decay and wear. In the past Europe was the OLD Country and America was the NEW Country. In ten years time, China will be the NEW Country and America together with Europe will be the OLD continents.
Don't think of money in terms of share prices or jobs but in terms of energy and effort and one will be able to understand where it will eventually all leads to!
Few people understand the concept of money. Money is stored energy and effort. When you work hard and earn money, the money is for the effort and energy you expended in some activity that is of commercial value. You in turn spend that money to obtain the fruits of someone's else effort. When you buy a loaf of bread, you are paying for the effort of the farmer who planted and harvested the wheat, the truck driver who brought the wheat to the factory and the workers who converted that wheat into bread. You exchange one form of labour for another.
There when money is created out of thin air, two things happen. First one either let the money depreciate or one has to pay it back with interest. Letting the money depreciate is a shrewd political move as consumers are often unaware of the effects of inflation. They are happy to learn their house has appreciated from $500,000 to $1,000,000 but does not know that a loaf of bread that used to cost $1 is now $3! The inflation does not happen overnight but fortunately for politicians a couple of years or more . By then who knows who is in the seat of power?
Paying back with interest is less palatable since someone has to work and expend energy and effort to repay the loan. When money is borrowed by the Government , it has to pay it back via taxation or otherwise. Money is created by the Central Bank or Federal Reserve Board ( out of thin air) and then loaned to the Government. This means energy and effort is borrowed and must be repaid from future energy and effort. So somewhere along the line, someone has to work harder to pay back what was spent earlier! If I am living in the UK or USA, I would consider migrating to a country that has less debts because somewhere, somehow , I need to pay it back. The Government does not work to pay back its debts. It taxes the people to redeem its debts.
It reminds me of past kings and emperor who builds magnificent monuments at a cost of losing their kingdom. There is only so much energy and effort and so it it is used to build monuments, it cannot be used to train and sustain an army, feed its people better and so forth. This borrowing or fiscal stimulus is akin to an emperor building a huge monument. The country will become poorer for sure. Its roads will show signs of wear , its schools will become shoddy, universities will not have the latest laboratory equipment and even its army will be less well equipped.
Leaders of those countries using financial stimulus will have to start cutting back on other programs. Fortunately for the USA it can and should cut down on its military expenditure. It can remain a world military power if the next 10 years it does not have new fighter planes, new stealth frigates and new aircraft carriers. It can bring its soldiers back from Germany and Japan. Goodness gracious World War Two is a thing of the past. Overall infrastructure will see signs of decay and wear. In the past Europe was the OLD Country and America was the NEW Country. In ten years time, China will be the NEW Country and America together with Europe will be the OLD continents.
Don't think of money in terms of share prices or jobs but in terms of energy and effort and one will be able to understand where it will eventually all leads to!
Thursday, February 12, 2009
Will Obama's stimulus package save America?
Let us look at the population in the USA. It stands at around 305 million. 25% are under 18 and that leaves 229 million. 12.5% are over 65 and can be considered as retired. The number is now reduced to 190 million. Assume 10% of the population are mental, have a disability which prevents them from working, are in prison or unemployable for one reason or another. That leaves a total of 160 million adults.
The stimulus package is 800 billion which divided by 160 million is equivalent to giving each working adult $5,000. The average salary for an American is $45,000 . The stimulus package includes infrastructure projects and subsidies to State Governments .About $500 billion will go direct to the people. Assume the unemployment rate goes up by7.5%. Out of 160 million, that is 12 million workers and multiplied that by the average salary of $45,000, the amount comes to $540 billion that is lost because of unemployment. Thus the stimulus package is more or less roughly equal to the loss of income for those who lost their jobs.
But the key problem is that many Americans borrow to spend. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian. (Source: U.S. News and World Report, "The End of Credit Card Consumerism," August 2008).Total U.S. consumer debt (which includes credit card debt and non-credit-card debt but not mortgage debt) reached $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006. (Source: Federal Reserve).Divide by 160 million working Americans, that means each working adult has an average of $16,000 consumer debt EXCLUDING HOUSE MORTAGES!
Now that the borrowing has dried up, spending will drop even with the stimulus package.The latter is just enough to counter balance the loss of income of the increased number of unemployed.There is nothing to replace the spending that dries up because of the credit crunch.
There is only one way to stop the pain and that is allowing consumer debt to start again. My friend who just returned from America was amazed to see TV commercials asking consumers to buy now and pay back two years later.Perhaps the only way is to allow easy credit and resume the borrowings of the past decades.
But now foreign countries are becoming wary of the US dollar. US Treasury bonds will be avoided once everyone sees that debt is going to balloon to even more unimaginable proportions. There are two ways to sustain debt. One is to borrow and the other is to print more money. As the former becomes more difficult, printing money becomes the only solution and the result is a colossal drop in the value of the US dollar versus gold and other more stable currencies.
If Obama risks his political capital on the stimulus package, he will definitely ends up as a one term President. The solution is very painful. Banks must fail and be taken over by corporate raiders to start anew. Bankruptcies will purge all those companies that are not competitive or in the wrong industry (eg pampering people on luxuries ). People have to downsize their homes, their cars and their life styles. People have to be so frightened that they stop borrowing to spend. US companies must start to become competitive again and Americans will have to join the rest of the world in slogging it out just to make ends meet. Thrift becomes a household word and good old fashion work and save atttitude becomes fashionable again.
The stimulus package is 800 billion which divided by 160 million is equivalent to giving each working adult $5,000. The average salary for an American is $45,000 . The stimulus package includes infrastructure projects and subsidies to State Governments .About $500 billion will go direct to the people. Assume the unemployment rate goes up by7.5%. Out of 160 million, that is 12 million workers and multiplied that by the average salary of $45,000, the amount comes to $540 billion that is lost because of unemployment. Thus the stimulus package is more or less roughly equal to the loss of income for those who lost their jobs.
But the key problem is that many Americans borrow to spend. The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian. (Source: U.S. News and World Report, "The End of Credit Card Consumerism," August 2008).Total U.S. consumer debt (which includes credit card debt and non-credit-card debt but not mortgage debt) reached $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006. (Source: Federal Reserve).Divide by 160 million working Americans, that means each working adult has an average of $16,000 consumer debt EXCLUDING HOUSE MORTAGES!
Now that the borrowing has dried up, spending will drop even with the stimulus package.The latter is just enough to counter balance the loss of income of the increased number of unemployed.There is nothing to replace the spending that dries up because of the credit crunch.
There is only one way to stop the pain and that is allowing consumer debt to start again. My friend who just returned from America was amazed to see TV commercials asking consumers to buy now and pay back two years later.Perhaps the only way is to allow easy credit and resume the borrowings of the past decades.
But now foreign countries are becoming wary of the US dollar. US Treasury bonds will be avoided once everyone sees that debt is going to balloon to even more unimaginable proportions. There are two ways to sustain debt. One is to borrow and the other is to print more money. As the former becomes more difficult, printing money becomes the only solution and the result is a colossal drop in the value of the US dollar versus gold and other more stable currencies.
If Obama risks his political capital on the stimulus package, he will definitely ends up as a one term President. The solution is very painful. Banks must fail and be taken over by corporate raiders to start anew. Bankruptcies will purge all those companies that are not competitive or in the wrong industry (eg pampering people on luxuries ). People have to downsize their homes, their cars and their life styles. People have to be so frightened that they stop borrowing to spend. US companies must start to become competitive again and Americans will have to join the rest of the world in slogging it out just to make ends meet. Thrift becomes a household word and good old fashion work and save atttitude becomes fashionable again.
Monday, January 12, 2009
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.
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.
Sunday, November 2, 2008
Making sense of the strong US dollar
It makes no sense. US markets are down, housing prices have halved, large well known and supposedly well capitalised banks have to be rescued, US total deficit exceeded the US$10 trillion mark which the Singapore Straits Times wrote is qual to a debt of more than half a million per family in the USA and yet the US dollar is high? To make sense of this currency movement, let us take the currency as the equivalent of shares in a company. If a company is doing well, its shares will go up because each share is supposedly equal to a portion of the value or assets of the company. We should table all the assets in the USA, add up all the shares in all the US companies, add up all the properties and land cost, add up all the gold the Federal reserves have and divide them by the total amount of US dollars in the world. This in essence is what each US dollar should be worth
The constant Federal and Trade deficits for the past decades implies that
the US is spending more , much more than it is earning. Thus the US dollar should have a lower value compared to other currencies such as the Euro which cumulatively have a positive budget deficit . So why is the US dollar strengthening? I believed it has more to do with liquidity than with the actual fundamentals. US banks are not lending money which means there is a shortage of US dollars. And when there is a shortage, the price of that commodity goes up. In this case, that commodity is the US dollars. Secondly US investors and fund managers are liquidating overseas stocks and commodities and converting them into US dollars. There is therefore a demand for the US dollars needed to pay the investors who have sold their overseas stocks and commodities. If a fund manager sold $1 million Singapore dollar worth of Singapore shares, he will want to sell that $1 million dollar of Singapore dollars to buy US dollars and bring that US dollar back into the USA.
This will eventually create a humongous pool of US dollars in the USA but this pool is counterbalance by the fact that banks are not willing to lend . Think what happens when the lending starts again? For each dollar in its account, a bank can lend out $10 dollars. Where will these trillions of dollars find a home? I believed many US investors will be fed up with their own stock market and property investment which will mean they will look overseas to park their surplus dollars. I forsee a huge boom for overseas shares and properties once the economic picture clears and it can be seen that Asia and some emerging countries like Poland are relatively unscathed by the financial turmoil.
When I hear the news report on CNN and CNBC, I often hear commentators comment on the GLOBAL Financial Crisis. Yet Asia is definitely not in the same position as USA and Europe and even with Europe some countries fare better than others. Poland for example is booming even now. Once the picture settles and we know that Asia and some countries are not that badly affected., investors will chase after assets in these countries. I predict that shares in these countries will be selling for PE ratios far in excess of 20. Property and gold prices will soar as investors seek safety in assets that does not depreciate. Gold prices can be expected to exceed US$1,000 per ounce.
What is happening is not so much an appreciation of assets but a depreciation in paper money especially the US dollar. With so much money chasing after limited assets, these assets have to increase in price.The paper money in banks all over the world is like a crouching tiger, waiting for the coast to be safe and clear, before it pounce. Asian stocks, Asian properties, Asian anything will soon be the flavour of the month. There will be a huge plethora of unit trusts touting all sorts of Asian investment opportunities. Investment is controlled by two emotions: fear and greed. Today it is fear that predominates and so the tiger waits. But a time will come when greed will prevail and the tiger pounces.
This is a time to reap a massive harvest for those with the courage to be contrarians.
The constant Federal and Trade deficits for the past decades implies that
the US is spending more , much more than it is earning. Thus the US dollar should have a lower value compared to other currencies such as the Euro which cumulatively have a positive budget deficit . So why is the US dollar strengthening? I believed it has more to do with liquidity than with the actual fundamentals. US banks are not lending money which means there is a shortage of US dollars. And when there is a shortage, the price of that commodity goes up. In this case, that commodity is the US dollars. Secondly US investors and fund managers are liquidating overseas stocks and commodities and converting them into US dollars. There is therefore a demand for the US dollars needed to pay the investors who have sold their overseas stocks and commodities. If a fund manager sold $1 million Singapore dollar worth of Singapore shares, he will want to sell that $1 million dollar of Singapore dollars to buy US dollars and bring that US dollar back into the USA.
This will eventually create a humongous pool of US dollars in the USA but this pool is counterbalance by the fact that banks are not willing to lend . Think what happens when the lending starts again? For each dollar in its account, a bank can lend out $10 dollars. Where will these trillions of dollars find a home? I believed many US investors will be fed up with their own stock market and property investment which will mean they will look overseas to park their surplus dollars. I forsee a huge boom for overseas shares and properties once the economic picture clears and it can be seen that Asia and some emerging countries like Poland are relatively unscathed by the financial turmoil.
When I hear the news report on CNN and CNBC, I often hear commentators comment on the GLOBAL Financial Crisis. Yet Asia is definitely not in the same position as USA and Europe and even with Europe some countries fare better than others. Poland for example is booming even now. Once the picture settles and we know that Asia and some countries are not that badly affected., investors will chase after assets in these countries. I predict that shares in these countries will be selling for PE ratios far in excess of 20. Property and gold prices will soar as investors seek safety in assets that does not depreciate. Gold prices can be expected to exceed US$1,000 per ounce.
What is happening is not so much an appreciation of assets but a depreciation in paper money especially the US dollar. With so much money chasing after limited assets, these assets have to increase in price.The paper money in banks all over the world is like a crouching tiger, waiting for the coast to be safe and clear, before it pounce. Asian stocks, Asian properties, Asian anything will soon be the flavour of the month. There will be a huge plethora of unit trusts touting all sorts of Asian investment opportunities. Investment is controlled by two emotions: fear and greed. Today it is fear that predominates and so the tiger waits. But a time will come when greed will prevail and the tiger pounces.
This is a time to reap a massive harvest for those with the courage to be contrarians.
Friday, October 10, 2008
The Mother Black Swan
Months ago I wrote about the possibility of a Black Swan event for the financial industry. A Black Swan is an unlikely event but with severe repercussions and impact. The melt down of the financial industry constitutes such a Black Swan event. The severity of the credit crisis caught everyone by surprise. It seems no one knows how BIG the sub prime problem is . When the Federeal Reserve bailed out Fannie Mae and Freddie Mac, who are severely impacted by the mortgages they backed, everyone thought the crisis is more or less stabilised.
Then Bear Stern started wobbling and was bailed out by the Federal Reserve Board . Then Lehman Brothers was allowed to go bankrupt but AIG started to have serious financial issues and was given $80 billion loans. A more serious look revealed that the credit market was in a kind of seizure and $700 billion was approved by Congress to solve the mess. Central banks got together to lower interest rates and more liquidity was pumped into the market .But stock markets kept on falling, falling, falling.
When investment banks are leveraged thirty times and commercial banks leveraged ten times, there is an absolutely humongous amount of debt that needs to be cleared and eliminated. The Carry Trade has started to unwind as Japanese banks have obviously recalled loans in yen. This is why the yen have strengthened while the high yielding currencies like the Aussie and Kiwis have fallen. The Aussie Dollar fall resembles that of a bungee jump as it was steep beyond belief. There is no fundamental reason to such a steep fall in the Aussie, a country rich in resources , stable government and a highly educated population. It is obvious that many investors have borrowed yen and bought Aussie and now they have to sell the Aussie to redeem the Yen denominated loans. Hence Yen goes up and Aussie goes the other way.
Investors have also borrowed yen to buy shares and this has triggered selling all over the world. No one in his right mind would sell shares at such low prices. They did not want to but HAVE to because they have to return their loans whichever currencies the loans are in. Now assuming the total value of shares worldwide is worth $21Y trillions. Only $Y trillion is bought with cold hard cash .The remaining $20Y trillion is bought with loans, loans which now the banks are asking back. Investors borrowed to buy hedge funds which are extremely highly leveraged themselves. So we have this leveraging upon leveraging. Investors who are leveraged are buying investment products which are highly leverage. The deleveraging process has still some more weeks to go before their positions are unwind .
Central banks seem to see the problem as a credit problem and think that by providing more money at lower interest rates, confidence would be restored . What the Central Banks should do is to follow what Hong Kong did many years ago. The Hong Kong Government went in and buy the shares to prop up the market. Perhaps in time they will recognise this but buying shares seems to be political suicide especially with the Presidential elections around the corner. Shares will continue to fall until the loans have all been redeemed and then the rebound will begin. US and European shares will fall until overseas buyers see value and start buying them up. The first rebound will be Asian shares as they are fundamentally sound and do not have the debt and leveraging issues faced by USA and Europe.
But the Mother of all Black Swan has yet to come. This is the real biggie, the knock-out punch that will floor all but those who have hedge in gold. This is when confidence in the US dollar evaporates. When overseas customers stop buying US Treasuries, or US bonds or even US shares. The Federal deficit needs $2 billion a day. Without this infusion of funds from overseas, the only solution would be to print dollars. The result is extremely high inflation in USA and for a period of time, markets will be even more volatile than what we have seen.
There will be a scramble to find a currency to replace the US dollar. The IMF and World Bank will be expanded to include Asia and will be more reflective of the actual financial strength of each country. Perhaps even majority vote in these two world institutions may move to Asian and Middle East countries for after all they are the ones with the money. He who has the money calls the tune.It will be an irony that now IMF and the World Bank will be assisting developed countries who were previously the ones who provided them with the funds. Now an Asian pied piper calls the tune and it would be interesting to see a Chinese or a Japanese lecturing the Prime Minister of Germany or UK on how to manage his country. The only solution to such a massive crisis is to let the ones with the money decide on how they are to lend to the one who needs the money. The current situation is that the ones in debt are the one who decides how their debts are going to be repaid. China, Japan and Middle East countries are not going to provide loans to IMF or World Bank when they have no control over these institutions.
There will not be a collapse. The world is too sophisticated for that to happen. Central bankers and economist will gather together to find a solution. But it will not be just Western bankers and economists but Asians and Middle Eastern bankers and economists who has to come up with a solution that is palatable to their own citizens as well. A price must be paid for the folly of the past. Just as IMF insisted on strong medicine for the countries in which it provided loans, the same strong medicine has to be given out, this time to Western countries; higher tax, lower Government spending , no agricultural subsidies for farmers and so forth.
China , Japan and Asia will have to find new markets for their products. The emergence of countries like Brazil, Russia , Poland and others plus China's potentially huge domestic markets will take up the slack from the US. After all the US contributes only 20% to the global economy and this can be taken up by the emerging countries. Japanese consumers have not been spending but will be encouraged to do so when their Yen becomes so strong that going overseas and buying overseas products become very cheap. Will Japanese consumer take over from the American consumer? Not totally but together with Chinese, Brazilian, Russian and Korean consumers , they will take up the slack that the American consumers have left behind.
A reverse brain drain will occur when top talents and professionals now flow West to East , increasing the competitiveness of Asian companies. The West becomes a less important market .Already we see this in China where there are products catering solely to the Chinese market.Likewise we will see products tailored to Japanese taste which means smaller products to taken up less space and more functionality as well. The lack of funds by Western countries will lead to Asia becoming more dorminant in Africa and even Latin America.
In time to come , Latin America will become the next Asian tigers. America will be too pre-occupied and too poor to interfere with its southern neighbours. It would be interesting when educated Latinos and Mexicans start returning home from USA to their home countries and start new companies. Many Chinese and Indians have done the same in the past decade. It will be a different world but still a rich world where knowledge will continue to grow and new products , new services will sprout.
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