Mr Bogle Says Buy
Saw this article on Wall Street Journal by Jason Zweig, “Why a Legendary Market Skeptic is Upbeat About Stocks. ” that talks about John Bogle being optimistic about stock market returns being better than many people expect..
John Bogle if you don’t know, is the founder Vanguard, which can be said to have started the whole craze into index funds as he kept the fund costs very low and helped to popularize this type of investment type.
At the moment, according to the Vanguard site, they are managing $1.6 trillion worth of mutual funds at an average expense ratio of 0.21%. Yes, it is that LOW.
I had read books about Bogle from the local library and his philosophy to indexing and investment is worth looking into.
So when he says something, people will listen. Especially since he is right most of the time also according to Jason Zweig.
In the article he blasted ETFs which are narrowly focused and utilize leverage to speculate. But I think he is talking about selected ETFs and not every ETF. There are those that are similar in nature to index funds. And there are narrowly focus index funds too.
His own portfolio is 80% bonds and 20% stocks which doesn’t really tally with his buoyant outlook. A matter of not doing as what you are saying?
Mr Tan Kin Lian Running For President of Singapore
I would like to ask blog readers to support Mr Tan Kin Lian in his bid to get elected for the post of President of Singapore.
I got to know of Mr Tan for just over a year and he has impressed me during this short time with his idealism, enthusiasm, courage to stand up for what is right and honesty.
Through the year long contact with him, I saw how he was willing to help out Singaporeans from all walks of life. From the taxi driver who got into an accident to the housewife who is proficient only in Mandarin and needed help to draft a letter to appeal to financial institutions. He did it not for any monetary benefit, only to help and ask the beneficiaries of his help to contribute to FISCA where he is the President.
He is honest when you aren’t up to mark. Scrutinizing my slides and giving valid comments to improve my presentation. During meals with him, what comes through is the fact that he is always looking out for things that can help people. He showed us how to SMS for booking which he piloted with one of the taxi companies. So if you have ever booked a cab using SMS, he is one of those people who made it happen.
Also I witness first hand him questioning and listening to an engineer by training on Mr Tan’s idea to have a sound system at all bus stops to announce which buses are coming along as this will help old folks. The idea has yet to take off, but don’t be surprised if it does when he becomes President. Some may call the idea hare brained, but I prefer someone is trying to help and improve than one who is constantly throwing stones instead.
Last month, he was contemplating if he should withdraw and not run for president. He took a straw vote around the table to listen to the opinions of everyone. I gave my piece on why he should still run while some gave their honest opinion that he should withdraw after all the flak about how the president has limited powers and no role in policy making.
If the same Mr Tan that I saw for the past year runs for President, I am very sure that at the end of his presidency term, Singapore will be a better place because we will have someone at the highest level who is listening, constantly exploring on how to make things better and questioning, scrutinizing items and looking after things critically with the ordinary Singaporean in mind.
I support Mr Tan’s bid for Presidency and would like to humbly ask all blog readers to support him and spread the message to your family and friends. Please go to Mr Tan’s blog for more information on his ideas and learn more about the man he is.
Volcker Rule- Glass Steagall Act Part II
In 1933, during the midst of the Great Depression, the United States senators Carter Glass and Congressman Henry Steagall pushed the Glass-Steagall Act which effectively separated the commercial banking and investment banking.
Research by the Congressional Research Service found that:
In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s.
Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.
In the 1999, this act was repealed by a bill introduced by Senators Phil Gramm and House of Representative Jim Leach.
This repeal enabled the formation of huge financial institutions like Citigroup which was formed by the merger of Citibank and the Travelers Group. More importantly, it allowed banks to underwrite and trade instruments in mortgage back securities and collateralized debt obligations which are sometimes called structured investment vehicles. Whatever that means.
And we all know what happened in 2007 when it all fell down.
The same people doing research in Congress has concluded that the repeal of the Glass-Steagall Act contributed to the financial crisis of 2007-2009.
Hence the former Federal Reserve chairman Paul Volcker is recommending that the two different parts of the banks be separated again. Along with powerful states in Europe like France, Germany and Italy who are all looking at some form of legislations based on the Glass-Steagall Act.
A return to restrict banking activities is supported by past treasury secretaries and also prominent financial figures like George Soros, former Citibank honcho John Reed and John Bogle.
The crux is that bank deposits are supported by government from failure and bank runs. If banks are allowed to put these money without the depositors knowledge to high risk investment products like the structured investment vehicles or whatever funny name people come up with, then another financial crisis is inevitable.
Sources
1. The Glass Steagall Act Wikipedia entry
2. Goldman Sachs and The Republicans
3. Volcker Rule: 5 Former Treasury Secretaries Back Obama’s Reforms
Dr Goh Keng Swee- A Tribute to Singapore’s Fireman
Dr Goh Keng Swee passed away today. He was 91 years old.
As a former history teacher, I remember teaching about him to a new generation of Singaporeans who have not even heard of him.
I labelled him as Lee Kuan Yew’s fireman. When Mr Lee found big problems in an area, more often than not, Dr Goh was the one chosen to solve it.
He was the Defence Minister who pushed for conscription and strengthened the Singpore Armed Forces while the Indonesian Confrontation was doing on. He left an inedible mark on all Singaporean males who have undergo this rite of passage to reach manhood.
While Mr Lee was a wreck after the separation from Malaysia, Dr Goh was instrumental in orchestrating the succession of Singapore from the federation in August 1965.
When the economy needed help, he was again the chief architect. He had the guts to choose a swamp land at Jurong. People scoffed at him and called him mad. 15,000 acres of swampland was transformed to a gleaming industrial park of mammoth scale (at least for a country the size of Singapore)
As Singapore first Finance Minister, he was the point man who called for attracting MNCs to Singapore to drive our growth, create jobs and transfer skills. He started the Economic Development Board, the Port of Singapore Authority, Jurong Town Corporation and the Central Provident Fund. I think he also started the Singapore Symphony Orchestra (SSO), the Singapore Zoo and Sentosa.
I think you can appreciate his enormous footprint on the Singapore landscape.
While there are controversial (to me anyway) policies he implemented later in 1979 to introduce streaming as Education Minister and later his stance in the bus versus MRT debate, where he argued for bus while the other camp led by another Singapore stalwart Mr Ong Teng Cheong argued for MRT.
Singapore will miss the likes of men of caliber like Dr Goh.
Sources:
2. Channel News Asia on Dr Goh.
A CEO Who Cleans the Toilet
I read this letter by a CEO to his manager from a book:
Congratulations on how wonderfully you and your staff handled the overwhelming crowd on June 17. I was especially impressed with Dorothy on the cash register. Great smile. Great manner. In a busy place, a lot can happen in just an hour. That’s why we need you to be sure the bathrooms are inspected at least hourly. We avoided a potential public relations disaster at 11.15 am on June 17. God forbid that a customer, a health inspector, or a food editor from the newspaper might have gotten there before me. Keep up your outstanding customer service. I appreciate it.
Cleaningly yours,
CEO
P.S. Check the supplies closet. You may need to replace the gloves. JD.
If you look at the content of the simple letter, there is no recriminations or accusation anywhere. Instead it is littered with words of appreciation and congratulations on a opening well executed.
Except that the CEO was the one who was doubling up as a janitor and cleaning up the toilet because one of the cubicle was soiled with faeces.
This is someone who folds up his sleeves and work with the rest of his team when he sees that everyone is overloaded. An “eye power” leader will just assign someone to do it. Worse is someone who will look for the manager, berate the manager and leave the team to clear up the mess.
There is another type of “leader”, one who will just notice this, give an evil smile and tell the manager later during appraisal that he felt that the opening could be better managed.
What is a leader?
He or she is one who has one of the levels of leadership:
The five levels of leadership are
(1) position--people follow because they have to;
(2) permission--people follow because they want to;
(3) production--people follow because of what the leader has done for the organization;
(4) people development--people follow because of what you have done for them; and
(5) personhood--people follow because of who the leader is and what he has done for them.
And at the same time a leader maximises the potential of the employees under them.
A leader must
(1) evaluate them;
(2) model for them;
(3) give them permission to succeed;
(4) transfer authority to them;
(5) publicly show your confidence in them;
(6) supply them with feedback
(7) release them to continue on their own
One reason for this article is because Warren Buffett’s Berkshire Hathaway has been rated as top in corporate reputation while the banks finished near the bottom of the list. Dead last is tobacco companies.
According to an analyst, the reputation that he has is because of his “vision, leadership, accountability, admiration and trust”
That is one reason why I believe in Informatics, although they had been making losses for a few years in a row, turning black only last year. I had a superb lecturer from there when I was taking a part time course who was very hardworking and often went without lunch because of his jam packed schedules. He is one of the top management there now.
Bernanke & Geithner- Heroes or Zeroes?
The columnist argues the point that the world is better off because of what Ben Bernanke, Hank Paulson and Tim Geithner have done over slightly more than one year to avert a depression.
I tend to agree with this view and while there were some mistakes, the breath and scope of the bailout and stimulus were essential in stabilizing the financial markets in USA and the world.
Compared to what had happened in the early 1930s, the policy responses of the Fed and Treasury Secretaries were the difference between the relative stability now and plunging to an abyss of a Greater Depression.
It took World War 2 for spending levels to increase sufficiently for USA and the world to escape from the chains of the Depression and the misguided protectionist policies implemented then.
The concerted efforts by the financial honchos in the world to put massive amounts of credit into the markets sized up by disappearing credit at the end of 2008 makes it unnecessary for World War 3 to break out to save us all.
One interesting thing about Geithner is that he was partially educated in Asia- India and Thailand where he once studied at the International School Bangkok. He is also a Sinophile. He studied Mandarin at Peking University and Beijing Normal University in 1982. So if he needs China to revalue its Yuan, he probably can use his Chinese to talk to them directly. Not that it may need to, as the US$ has been dropping like a stone over the months.
Ben Bernanke’s profile is also interesting. He is obviously quite an intellectual- he had a near perfect SAT score of 1590 out of 1600. He also studied the Great Depression as a scholar. So he was the perfect choice to be the Fed leader to bring us all out from the brink.
So my take is that they are more heroes than zeroes with due respect to the artist who decorated the fence.
Oh, by the way, just heard over Bloomberg TV that there is speculation that Facebook is going to do an IPO listing soon.
Source:
Nuggets of Wisdom From Warren Buffett
It is interesting to see the analyst squirm and give a “cover his/her ass” answer with a answer which will invariably add a qualifying statement.
Let’s see how the master investor answer this type of question, while drawing on his 67 years of experience in investing (since he bought his first stock in 1942):
QUESTION: I'm Peter Lawrence, first-year student from Columbia. And, first of all, thank you both so much for coming here. Mr. Buffett, the recent run-up in the market has been historic. And it seems that many people question the sustainability of the current price level. Do you think the rally is for real?
BUFFETT: What's going to happen tomorrow, huh? [APPLAUSE]
Let me give you an illustration. I bought my first stock in 1942. I was 11. I had been dillydallying up until then. I got serious. [LAUGHTER]
What do you think the best year for the market has been since 1942? Best calendar year from 1942 to the present time. Well, there's no reason for you to know the answer. The answer is 1954. In 1954, the Dow … dividends was up 50%. Now if you look at 1954, we were in a recession a good bit of that time. The recession started in July of '53.
Unemployment peaked in September of '54. So until November of '54 you hadn't seen an uptick in the employment figure. And the unemployment figure more than doubled during that period. It was the best year there was for the market. So it's a terrible mistake to look at what's going on in the economy today and then decide whether to buy or sell stocks based on it.
You should decide whether to buy or sell stocks based on how much you're getting for your money, long-term value you're getting for your money at any given time. And next week doesn't make any difference because next week, next week is going to be a week further away. And the important thing is to have the right long-term outlook, evaluate the businesses you are buying. And then a terrible market or a terrible economy is your friend. I don't care, in making a purchase of the Burlington Northern, I don't care whether next week, or next month or even next year there is a big revival in car loadings or any of that sort of thing. A period like this gives me a chance to do things. It's silly to wait. I wrote an article. If you wait until you see the robin, spring will be over.
Now you have it, pearls of wisdom from the master himself that the time you buy doesn’t matter but the price-value and time held matters more.
Source: CNBC Transcript of Interview of Warren Buffett and Bill Gates published on 13 Nov 2009.
Top 30 Investing Quotations
It is always good to hear and learn from sages. Some you make sure you know it by heart others, well, some are just rubbish :)
29. You had a lot of novice investors who got into the market looking for easy money, without any regard to the fundamentals. These stocks were running on fumes. Bernard Madoff on Internet stocks (Looks who's talking here)
28. An Investment in knowledge always pays the best interest. Benjamin Franklin.
27. Every time history repeats itself, the price goes up. Anonymous.
26. There is no finer investment for any community than putting milk into babies. Sir Winston Churchill.
25. I will tell you how to become rich. Close the door. Be fearful when others are greedy. Be greedy when others are fearful. Warren Buffett.
24. It's not how much money you make, but how much money you keep, how hard it works for you and how many generations you keep it. Robert Kiyosaki.
23. How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case. Robert G Allen.
22. Index Investing outperforms active management year after year. Jim Rogers.
21. Successful investing is anticipating the anticipations of others. John Maynard Keynes (go figure).
20. I can calculate the motion of heavenly bodies, but not the madness of people. Sir Issac Newton after losing money in investing in the South Sea bubble.
19. We are certainly not happy with the negative wealth added in March last year, as well as March this year. Ho Ching, CEO of Temasek, after losing US$40 billion- understatement of the year (please just go before March next year).
18. Before this century is over, the Dow Jones Industrial Average will probably be over one million versus around 10,000 now. So for the long-term, the outlook is tremendously bullish if you buy stocks blindly to keep for a century. John Templeton on Bull Market or is it bullshit?
17. In the long run, everyone is dead. Anonymous- my personal favorite quotation.
16. The financial markets generally are unpredictable. So that one has to have different scenarios.. The idea that you can actually predict what's going to happen contradicts my way of looking at the market. George Soros.
15. If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor. Charlie Munger.
14. You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets. Peter Lynch (I must remember this quote when the next roller coaster ride down comes along)
13. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas. Paul Samuelson.
12. As people seek to improve their living environment, there will be continuous demand for residential property. Investment in real estate market should have reasonable prospects in the long run. Li Ka Shing.
11. When it is a question of money, everybody is of the same religion. Voltaire.
10. For investors as a whole, returns decrease as motion increases. Warren Buffett again, trying to put in place a 4th Law of Motion to help the departed Sir Isaac Newton complete his laws of motion.
9. The market is a voting machine but in the long run it is a weighing machine. Ben Graham.
8. The best way to spot investment fraud is the promise of safety and high returns. If someone offers you this, turn 180 degrees and do not walk – run. William Bernstein.
7. Dividends have been a way to show that earnings are real. That there is money behind those earnings. Jeremy Siegel.
6. Time is your friend; impulse is your enemy. John Bogle.
5. I don't want a lot of good investments; I want a few outstanding ones. Philip Fisher.
4. Oh my God, you've got to be buying stocks here. Don Luskin- CNBC (in January 2008 and pretty much all of 2008)
3. Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months. Irving Fisher, Professor of Economics at Yale University speaking on 17 October 1929, just days before the Great Crash of 1929.
2. The next five to 10 years will be the most promising in the Republic’s entire history. Lee Kuan Yew on Singapore entering a golden period in a speech on 12th July 2007, a few quarters later, Singapore's GDP plunged 16.4% in 4th quarter 2008, fell another 14.6% first quarter 2009. Let's just hope he's right for the rest of the 8 years.
1. I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. Warren Buffett for the third time.
Interesting Articles from Financial Times
Read some interesting articles from Financial Times:
1. Is high IQ a burden as much as a blessing? This talks about the lives of people with high IQ including one lady who scored full marks for IQ, the highest score possible of 228. In the article it talks about the 'Monty Hall dilemma' and how this person, Marilyn vos Savant managed to solve the problem. See if you can figure it out.
2. An older article, The shaming of John Thain , paints the life of the last CEO of Merrill Lynch and the slanging match between Bank of America's Ken Lewis and him about who was responsible for the bonuses. After reading the article, you'd find out more about one of the key figures in this financial crisis.
4. An interesting technology relate news about the new web browser that Google has released last year and more people are adopting. Chrome. Read about one of the key programmers behind the browser, a guy named- Lars Bak. The article, The genius behind Google's web browser , shows you the life of an extraordinary programmer who managed to craft out a virtual machine that is processes Javascript 56 times faster than the most used version of Internet Explorer. Time to buy Google?
Moving to other news articles, this Wall Street Journal piece talks about falling tourism counters and rising pharmaceuticals, which was the subject of my blog post yesterday.
Paul Krugman made me angry reading this post about the incredible greed in the financial firms that was just bailed out by the government in this article titled, "Money for Nothing". In it he laments the fact that Ben Bernake defends the money paid to these money grubbers as compensation for their 'financial innovations' which includes, get this, credit cards, overdraft and sub prime mortgages. Hellooo.... any body home upstairs?
We ought to install Marilyn Savant as one of the CEOs of the banks bought with public money and ask her to solve the "Wall Street dilemma". At least her solution will be logical and we can send all those CEO/swines to Mexico to get some of the flu that will cure them of their greed for money. Nothing like a bout of illness to realise what is more important.
Happy Faces in Worst Crisis Since 1930s
Its official. Ben Bernake has admitted that this is the worst crisis since the 1930s.He blamed it on trade imbalances and flow of capital in the late 1990s, which was when the Asian Financial Crisis occurred.
In this hard hitting article in the Guardian, East Asia's Economic Revenge, Dean Baker presents a well argued piece about how the key economic figures in US were responsible for the hard line stance by the IMF towards the Asian countries suffering from the economic crisis in 1999 and how this stance made all the countries take note.
This unyielding stance which topped governments in Asia made a lot of countries watching keen to accumulate reserves to prevent their countries ever going to the IMF for the bitter medicine. The result was that the US suddenly had a glut of investment monies from these same countries which we all now know became hot money for speculating in real estate and sub prime mortgages. You can see these two well written papers on the effects of the Asian Financial Crisis.
Amidst this crisis, there are still companies like John Lewis which paid out the equivalent of 7 weeks wages as bonus despite profits being hit by the recession. We only hope that there are more companies and employers like John Lewis.
The long suffering folks over in Citibank has some good tidings yesterday too. They finally made a profit after a 2008 to forget. Citi's good news lead market to best day of 2009 should make more people smile and hope that this small pebble will add to more rocks to block and channel the recession away.
Finally, one of the villains, the hated money grubbing CEOs, investments con artists etc, Madoff, is likely to plead guilty to the charges laid out against him and he is likely to face 150 years in prison. So that's one sad face.
But he deserves it along with whatever is going to come by Allen Stanford (his "Sir" should be revoked by the Queen of England) or John Thain, ex CEO of Merrill "We need a bailout" Lynch who spent $1.2 million on office renovation(see the list of items he spent on in his office) to make himself comfortable while his company is sinking in red ink and bailed out using government money.
What do you think should happen to people like John Thain?
Hank Paulson- The Donald Tsang of the Financial Crisis?
While trying to understand what is being done to resolve this issue, his name comes up a lot of times. So it is good to see what type of person this guy is.
"I love my kids too much to leave them money" is a quote attributed to him in a very long New York Times article about Paulson. I think his net worth is about US$500 million so that is a lot of money that he is talking about. He has a fine cv which you can read about in Wiki, a footballer, an Eagle scout, an MBA from Harvard and an ex CEO and Chairman of Goldman Sachs etc.
The article from New York Times asked if he can defuse the crisis and from what is observed so far, it seems that Paulson is trying very hard to do that. There maybe people who think that using US$700 billion of taxpayers money to detox the financial mess is being too kind on those financial fat cats who were living it up not too long ago.
However, not intervening and letting market forces dictate what happens is too scary a thought, as it could plunge the world into a depression that makes the Great Depression look like a cake walk. The Fed Chairman, Ben Bernanke, had studied the Great Depression in depth and would know that the non intervention by the government at that time excabated the effects of the Great Depression at that time. You can read the implications of Ben Bernanke research into the Great Depression here at the Wall Street Journal.
Who is this Donald Tsang? Well he was the Financial Secretary of Hong Kong during the Asian Financial Crisis and for me, he was the guy that stopped the speculative attacks on Asian currencies by taking an interventionist approach using, yes- tax payers money. Asian currencies were attacked by speculators and were devalued one by one. The next to fall was supposed to be either Hong Kong or Singapore, they chose to attack Hong Kong and got a bloody nose.
Donald Tsang used about HK$120 billion to defend against speculative attacks by buying stocks. When they sold off these shares later as the Asian economies recovered, the profit came to be about HK$30 billion. If the $700 billion that US uses to defuse the crisis can earn such a return, it will be money well spent.
United States has two very able financial leaders in Hank Paulson and Ben Bernanke. Between the two of them, we all hope that they go down in history as the two persons that saved everyone's bacon.
Preventing the Domino Effect- Financial Firms Failing
This means that the US$ will be under attack again, fueling inflation fears and making it more likely that stagflation will happen.
There are two things which needs to be done.
1. The world and USA needs a little of someone of the stature of the old John Pierpoint Morgan in the early 20th century. This is to bind all the financial firms operating in the USA and who holds sub-prime or any type of mortgages. So if there is a bank run or flight of capital from any institution, the rest will stand by these firms and provide the liquidity to make it solvent and viable. This prevents the domino effect where banks fall in turns until there is a systemic failure in the credit market and all credit dries up.
Some may argue that there are firms which are relatively unaffected by the sub-prime so why should they be involved? The counter is that all the financial firms lend to companies and each other in a global economy. Here in small Singapore, some of the local banks here had written down assets because of the sub-prime meltdown. And more to the point no one knows for sure which firms have yet to announce losses due to this. The key is that when it spread to firms which fail not because of sub-prime but because of the secondary effects of this contagion, then it may be too late.
2. The small home owners in US affected by the sub-prime or have yet to be but are servicing unbearable interests but cannot refinancing their mortgages because no banks or mortgage firm are willing to bear the risk needs to be taken care of. Or the contagion will be a full fledged housing loan crisis, not just the sub-prime.
Home owners at risk or are defaulting needs to be taken care of by immediately nationalising the housing debt to be service at near to the levels that the Federal Reserve is providing for the banks and at risk financial firms. It is no good just taking care of the banks while a disaster in the making looms in the background. The next wave of defaults could flood the whole financial edifice, even if they are united. So this is even more pressing than point 1.
When the crisis settles, a tax on the financial firms will be impose to recover any monies extended by the government to resolve the crisis, including the costs of nationalising the housing debt. These debts will be rated by independent rating agencies or auditors before being sold off to the banks and financial firms. Dangerous times calls for extreme action and government intervention.
Bill Clinton's Legacy- A Balanced Budget
So I went online and read the interview on the PBS site about Robert Rubin's term as the Treasury Secretary in Bill Clinton's adminstration.
After reading the interview, I was struck by how much achievements the Bill Clinton adminstration manage to attain and at the same time, I thought about what type of legacy George Bush Jr will leave behind. I am not sure what he did except for allowing the 911 to happen on his watch and his subsequent alienating 'With Us or Against US' speech to the whole world and the anti-terrorist campaign in Iraq and Afghanistan. Oh, there is the small matter of the sub-prime crisis too.
This against Clinton's record makes Clinton looks positively angelic (sans Lewinsky of course- Clinton's administration was mirred in scandals, maybe he stepped on a lot of toes raising taxes and cutting spending in a lot of states which is bound to make a lot of politicians angry). Balancing a stratospheric budget deficit in his term in office makes him a contender for the 3rd best president of the 20th century after Franklin D. Roosevelt and Ronald Reegan (who caused the deficit but at least pushed the Russians so far they abandoned their communists leanings).
The little I have heard is that he will be more protectionist of the US economy versus Clinton's open economy which was practised by Bill Clinton and also Hilary's Health Care reform was hijacked by Obama who has made it part of his agenda too. So until he speaks more about what exactly he meant by change, I will keep my own counsel and preference for Hilary as the next president. After all, having a woman as the President of the most powerful country of the world is a pretty big change isn't it?
High Possibility of Stagflation?
I have been taking a long break and recharging my batteries. At the same time, I have been busy at work and so when I reach home, most of the time, my energy level is spent. The news on the financial and economy fronts are pretty depressing so far. It is going to be a recession year in 2008 from all the signs and indicators.The key for the world economy has always been United States. They are the driver because they have the largest consumer market in the world where the people there are big spenders and this spending has been fuelled by the housing boom in the past few years where housing prices have gone up. Mortgages and re-mortgages taken out on houses have enabled the American consumer to spend and spend. When the housing market bottom out last year, a lot of these same consumers got their fingers burnt.
We are seeing the effects of this spreading through the financial system and it will hit the economy very soon. If it hasn't already hit. The alarm bells is when the default rates for the American Express customers went up. This shows that the consumers have their credit drying up and are defaulting on their credit card payment. The cause of that is, of course, the housing market slump. When the house owner money channeled or all tied up to the house, their disposable income falls. And as any half baked economist will tell you, when disposable income fall, this will lead to a fall in the demand for goods and services.
On its own, this is enough to cause a recession, where the economy of US goes into negative. However, what is alarming is that inflation has not halted, and in fact it is showing signs of increasing. This is cause by the high oil prices on one hand and also by the expectation that the Federal Reserve is going to decrease interest rates to prevent United States from going into a deep recession. This expectation of a decrease in interest rates is causing people to sell the US dollars and look for other alternatives like the Euro, gold and other commodities. So it means that the same US dollar will be able to buy decreasing amounts of commodities and oil and so the prices of things goes up everything else being equal.
Some commentators have argued that the chairman of the Federal Reserve should have been more aggressive in cutting interest rates and softening the fall of the US economy. But to that will be to increase the risk of inflation in the US economy and when combined with the impending recession will cause the nightmare of every central banker- stagflation. This is a scenario of stagnation or recession combined with inflation.
It is hard to overcome stagflation because with a recession, prices are high so when interest rates are cut to stimulate lending and growth in the economy, the prices of goods and services goes up. This makes it a disincentive for businesses to expand because when they borrow money it is in a situation where raw material costs may increase to the point it becomes unprofitable for them to produce or provide any goods or services.
Also with increasing prices, demand falls so it doesn't make sense to expand your business and it becomes a huge vicious cycle. So cutting interest rates could be a bad thing to do quickly and continously. The Federal Reserve Chair is being prudent if what I remember of expected inflation which wikipedia explains pretty well from what I remember.
