There is once again heightened debate about inflation or deflation going forward.
Mind you this is not the first time. The deflation and inflation camp has been in debate for quite some time.
There is merit for both.
On one hand, the massive amount of debt accumulated in developed nation didn't reduce as a result of the financial crisis instead government filing up even more debt.
The effect of money printing is reflected in one of the best run of stock and commodity market in history in the short run. Now this cannot go on forever. This is an inflationary environment in the short term. However, the weak economy with high unemployment rate offsets the effect of quantitative easing.
In the long run, I favour deflationary pressure. The financial system remains toxic with unprecedented levels of debt in developed nations worldwide.
As Marc Faber suggested, the ultimate crisis is yet to arrive. Once it does, it will be mother of all crisis. The real crisis will clean up the system so that global economy can start all over again.
It sounds very scary. Unfortunately, it is not a joke and there is nothing funny about it.
As to where the market is likely to go, I think there is still room left for the upside however the margin is wearing extremely thin. Market sentiment is such that many participants are finding reason to be bearish a number of times yet nothing happened so far re-ignite this bearish concern. Every time, it fails to find sufficient reason to be bearish, the market rallies higher.
The weariness itself means the sentiment is not extremely bullish. However, market does not have to reach extreme bullishness in order to turn the corner.
One space to watch closely is the housing market in the U.S. and unemployment rate. We are at the very start of another wave of mortgage reset. Last time, reset in subprime mortgage market caused a devastating effect on the market.
Also US Dollar has been fairly bearish for quite some time. There appears to be support around 75 for the US dollar index. A snap back in US dollar will cause grief in the asset market like what we saw in 3 months period from Dec08 to Mar09.
It is not a bad time to take some money off the table. Rather be safe than having regrets.
Tuesday, October 27, 2009
Sunday, October 25, 2009
Words of Wisdom
I wish I can have the following attributes when it comes to investing.
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Exercise independent thought, as you'll shoulder the responsibility of your decisions.
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Only risk (trade with) what you can afford to lose.
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Always ask "why" rather than "what?"
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Running with the herd may prove profitable but it often obscures the edge of the cliff.
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Size matters in more ways than one; if you're staring at every tick, you're likely out-sized in your positions.
Australian education export
As far as Australia economy concerns, education is the third largest export contributing AUD 14 billion a year according to 2007-08 statistics from ABS, following coal and iron ore.
Recent government's call to end the "study-residency" link is likely to temper the third largest earner for Australia economy. If handled carelessly, it will have significant long term impact.
All of this started from a series of attacks on Indian students in Melbourne and a handful of dodgy education providers tarnishing the industry.
As a result, government called on radical changes to protect the reputation of Australian education industry.
In brief, government officials proposed that international students should be forced to return home and wait two years before being allowed to apply for permanent residency in Australia.
They claimed that this will decouple the link between study and permanent residency. This does sound like a probably outcome if implemented. However, this is also likely to cost Australia billions of export dollar.
Let's leave the debate about the rationale of the proposal aside and focus on the fundamentals.
The reason why so many international students are fond of Australia being their preferred education destination is largely because of the "study-residency" link.
Many will argue that Australian education attracts international student because of the quality of education provided here. I won't argue. But instead I would like to ask:
"how well does it compared with countries?"
At least for those international students I knew of had clear intention of using education as a mean of obtaining residency.
So decoupling such link is likely to mean significant reduction in interest amongst prospective international students.
It is not difficult to imagine what this will do to the education industry.
The story does not end here. There will be ripple effects.
The reduction in international student enrollment will mean less demand for student related services e.g. accomodation.
A potential weakening demand especially in areas surrounding universities may lead to weakness in pockets of the residential property markets. This may well manifest itself into a broader market since many experts attributes growth in immigration being one of many reasons underpinning Australian property market.
Obviously good news for some bad news for others.
Of course, all is at best hypothesis at this stage. Nothing is set in the stone yet.
However, often perception alone can become self-fulfilling and manifest itself to cause the same effect even if the proposal remains proposal.
Recent government's call to end the "study-residency" link is likely to temper the third largest earner for Australia economy. If handled carelessly, it will have significant long term impact.
All of this started from a series of attacks on Indian students in Melbourne and a handful of dodgy education providers tarnishing the industry.
As a result, government called on radical changes to protect the reputation of Australian education industry.
In brief, government officials proposed that international students should be forced to return home and wait two years before being allowed to apply for permanent residency in Australia.
They claimed that this will decouple the link between study and permanent residency. This does sound like a probably outcome if implemented. However, this is also likely to cost Australia billions of export dollar.
Let's leave the debate about the rationale of the proposal aside and focus on the fundamentals.
The reason why so many international students are fond of Australia being their preferred education destination is largely because of the "study-residency" link.
Many will argue that Australian education attracts international student because of the quality of education provided here. I won't argue. But instead I would like to ask:
"how well does it compared with countries?"
At least for those international students I knew of had clear intention of using education as a mean of obtaining residency.
So decoupling such link is likely to mean significant reduction in interest amongst prospective international students.
It is not difficult to imagine what this will do to the education industry.
The story does not end here. There will be ripple effects.
The reduction in international student enrollment will mean less demand for student related services e.g. accomodation.
A potential weakening demand especially in areas surrounding universities may lead to weakness in pockets of the residential property markets. This may well manifest itself into a broader market since many experts attributes growth in immigration being one of many reasons underpinning Australian property market.
Obviously good news for some bad news for others.
Of course, all is at best hypothesis at this stage. Nothing is set in the stone yet.
However, often perception alone can become self-fulfilling and manifest itself to cause the same effect even if the proposal remains proposal.
Friday, October 23, 2009
House price
The economist has compiled a really great interactive graphs of the residential real estate price over the last 20-30 years for many countries.
House price
House price
Most hated and unbearable rally
The rally since March 2009 low had many skeptics worrying from the start.
According to them, a "true" bear bottom is not usually featured by a short and shape rally like what we've seen since the March low.
Historically, the ultimate "capitulation" is met with loss of faith and utter disgust in stock investment as the conventional wisdom of achieving long term return is thrown out of the window.
However, the market kept on proving them wrong. Really? We will have a "V" shape recovery after a perceived worse than the 1930's great depression many feared towards the end of Decemeber 2009 after Lehamn failure.
A closer look at the cause of the financial crisis in 2007 and what the government and central banks around world has done in response to this crisis will perhaps provide the answer.
The root of the cause is the availability of cheap debt for a prolonged period of time.
I didn't know much about history before 1983 personally. So starting at 2001, Fed Chairman Alan Greenspan slashed the Fed funding rate to 1% in wake of September 11 terrorist attack.
Around that time, the economy perhaps had just came out the recession and was in a fragile state. Greenspan tried to use low interest rate to entice a re-ignite in economic activity.
he succeeded in a sense that the ultra low interest rate encourage lending and business activities. However he kept the rate too low for too long. He didn't increase the Fed fund rate until 2004.
A low interest rate environment effectively increased you capacity to borrow money. Such low interest rate also encouraged growing loose lending standards as the risk of defaulting will also be suppressed.
Cheap debt manifests its way into the markets and created an amazing impact. It managed to prop up almost every single asset class in nominal terms except for one asset i.e. the US dollar.
House price, bond price, stock prices, commodities, art etc all boomed from 2002 to 2007 at an incredible pace yet unsustainable.
It is not surprising to see that because excess supply of money/credit drives down the value of the currency. Many assets in the world are denominated in US dollar. So when US dollar went down, the nominal price of the asset goes up.
Of course, nothing kept on going in one direction without a pause. The question is when and how big the correction will be. It turned out the pause was gigantic and caused significant stir in the financial markets while the US dollar strengthened during the period but not enough to arrest its downward spiral.
Perhaps the best reflection of US dollar strength, or weakness for that matter is gold price. Gold made its low in 2002 at US250 and increased more than 4 fold to US1060 recently. It coincide with a consistent dollar slide from 2002. Coincidence? Not so much.
Back to now, the fact is that S&P 500 has rallied more than 50% since March 2009 low. Many hated this rally as many investors sat on the sidelone watched the market going up. The higher the market rises, the more skepticism grows. It is very difficult to watch such a spectacular run in the market and not be part of it.
Here is the thing.
If you don't believe this market rally as the beginning of a sustained recovery, then there is little to worry about a 9 monthly rally. If you span the chart of Dow, it first reached the 10,000 mark back in 1999.
If you think you are too late to participate in this rally, I think you are probably right. Getting into the market when it is running hot is never good economics.
However, the fundamental human nature (greed and fear) will ensure that your time will come sooner or later. Be patient. When your time comes, make the most of it.
As mentioned previously, nothing goes in one direction indefinitely. The rally since March 2009 will end. The question is when and how big.
According to them, a "true" bear bottom is not usually featured by a short and shape rally like what we've seen since the March low.
Historically, the ultimate "capitulation" is met with loss of faith and utter disgust in stock investment as the conventional wisdom of achieving long term return is thrown out of the window.
However, the market kept on proving them wrong. Really? We will have a "V" shape recovery after a perceived worse than the 1930's great depression many feared towards the end of Decemeber 2009 after Lehamn failure.
A closer look at the cause of the financial crisis in 2007 and what the government and central banks around world has done in response to this crisis will perhaps provide the answer.
The root of the cause is the availability of cheap debt for a prolonged period of time.
I didn't know much about history before 1983 personally. So starting at 2001, Fed Chairman Alan Greenspan slashed the Fed funding rate to 1% in wake of September 11 terrorist attack.
Around that time, the economy perhaps had just came out the recession and was in a fragile state. Greenspan tried to use low interest rate to entice a re-ignite in economic activity.
he succeeded in a sense that the ultra low interest rate encourage lending and business activities. However he kept the rate too low for too long. He didn't increase the Fed fund rate until 2004.
A low interest rate environment effectively increased you capacity to borrow money. Such low interest rate also encouraged growing loose lending standards as the risk of defaulting will also be suppressed.
Cheap debt manifests its way into the markets and created an amazing impact. It managed to prop up almost every single asset class in nominal terms except for one asset i.e. the US dollar.
House price, bond price, stock prices, commodities, art etc all boomed from 2002 to 2007 at an incredible pace yet unsustainable.
It is not surprising to see that because excess supply of money/credit drives down the value of the currency. Many assets in the world are denominated in US dollar. So when US dollar went down, the nominal price of the asset goes up.
Of course, nothing kept on going in one direction without a pause. The question is when and how big the correction will be. It turned out the pause was gigantic and caused significant stir in the financial markets while the US dollar strengthened during the period but not enough to arrest its downward spiral.
Perhaps the best reflection of US dollar strength, or weakness for that matter is gold price. Gold made its low in 2002 at US250 and increased more than 4 fold to US1060 recently. It coincide with a consistent dollar slide from 2002. Coincidence? Not so much.
Back to now, the fact is that S&P 500 has rallied more than 50% since March 2009 low. Many hated this rally as many investors sat on the sidelone watched the market going up. The higher the market rises, the more skepticism grows. It is very difficult to watch such a spectacular run in the market and not be part of it.
Here is the thing.
If you don't believe this market rally as the beginning of a sustained recovery, then there is little to worry about a 9 monthly rally. If you span the chart of Dow, it first reached the 10,000 mark back in 1999.
If you think you are too late to participate in this rally, I think you are probably right. Getting into the market when it is running hot is never good economics.
However, the fundamental human nature (greed and fear) will ensure that your time will come sooner or later. Be patient. When your time comes, make the most of it.
As mentioned previously, nothing goes in one direction indefinitely. The rally since March 2009 will end. The question is when and how big.
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