Thursday, September 22, 2011

$400 billion to help the US economy?

The Federal Reserve said yesterday that it will shuffle $400 billion of its portfolio to try to drive down long-term interest rates and get the economy going. Is it going to work? I seriously doubt it!

The current economic situation is lack of confidence in the economy, in the government, and in the Euro debt crisis. Yields on U.S. government debt were already among the lowest on record, and investors drove them down further after the Fed announcement. The yield on the 10-year Treasury note, an indicator for mortgages and other long-term loans, closed at 1.86 percent, down from 1.93 percent the day before and the lowest since at least 1962. The US interest rate is already low, by lowering further won't make much difference.

If you look at Japan as an example, you will know this is not going to work for the American.

Focus on the revenue

There are actually two sides of the equation here that most economists do not see, the revenue side and the spending side that can drive the economy. However, because people are too used to the Keynesian and Monetary theories that focus on the spending side, they have neglected the most important source that can boost the economy - the revenue!

And how to get more revenue for the government? Taxation!

The US has the most millionnaires and billionnaires in the world, and the US has the most number of technology companies in the world that are rich source of tax revenue for the government. Even if the US government does not want to tax the companies, how about selling government bonds to these cash rich companies?

The following is the top 10 cash rich companies in US:

1. Apple
Market Capitalization: $330 billion
Cash Hoard: $76.2 billion Source.
2. Microsoft
Market Capitalization: $201 billion
Cash Hoard: $63.7 billion Source.
3. Cisco
Market Capitalization: $83 billion
Cash Hoard: $38.92 billion Source.
4. Google
Market Capitalization: $158 billion
Cash Hoard: $35 billion Source.
5. Oracle
Market Capitalization: $125 billion
Cash Hoard: $28.82 billion Source.
6. Siemens
Market Capitalization: $85 billion
Cash Hoard: $13.42 billion Source.
7. IBM
Market Capitalization: $188 billion
Cash Hoard: $11.76 billion Source.
8. Samsung
Market Capitalization: $92 billion
Cash Hoard: $9.04 billion [slightly dated] Source.
9. Intel
Market Capitalization: $102 billion
Cash Hoard: $7.73 billion Source.
10. Amazon
Market Capitalization: $81 billion
Cash Hoard: $6.3 billion Source.

If we total all those figures up, and this is what they sum to:

Total Market Capitalization: $1.445 Trillion

Total Cash Hoard: $290.89 Billion

So if I'm in the Obama administration, I'll suggest him to get more money from its own people!

Happy investing,

Pauline Yong

Friday, September 9, 2011

Why Keynesian Model Doesn't Work for the U.S. Economy?

After the great depression, in 1936, John Maynard Keynes argued that should the government play a significant role to steer the economy out of recession through public spending, they would not have had a prolonged recession.

In Keynes' 1936 article, "The General Theory of Employment, Interest and Money", he argued that the solution to the Great Depression was to stimulate the economy through public spending such as government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a series of chain reactions, whose total increase in economic activity is a multiple of the original investment.

This is a wonderful concept and many politician applied this economic model through "stimulus packages" during the recent financial crisis, Barrack Obama for one is a firm believer who has trashed trillion of dollars into the US economy, Malaysia - RM60b, Australia - A$42b and many more. The results? These economies have a V-shaped recovery but looks like it's only temporary and many economists are projecting a double-dip recession. So what went wrong with this wonderful Keynesian model?

After Keynes passed away in 1946, Milton Friedman (Monetarist theory) criticized vigorously that Keynesian model did not work well post World War 2 and that Keynesian policy led the country into stagflation (high inflation and high unemployment), which they did during the early 1970's and further deteriorated in 1973 the oil crisis.

In 1942, during the World War 2, Keynes published an article, titled "How to Pay for the War", he suggested that the war effort should be largely financed by higher taxes and compoulsory savings, rather than deficit spending in order to avoid inflation. However, the deficit as a percentage of GDP was as high as 30% per year during that time under the hands of President Roosevelt which planted the seeds for the major economic problems the Americans are facing now.

People may have twisted Keynesian theory a little by saying it's not working but they did not understand that Keynes advocate prudent spending. What is not working is the lack of disciplinary action by the country leaders who are afraid of losing popular votes by taking the easy way out.

In any economic models, there are strengths and weaknesses. Personally, I'm the the follower for Keynesian model. Despite the fact that this model violates Adam Smith "invisible hands" theory which is essential for any capitalist economic system, but if we look around those successful economies, they actually have a stint in socialism!

Finally, in answering the question whether Keynesian model works for the US? Well, Warren Buffett has mentioned about tax raise, but I think maybe some forced savings like our EPF system maybe a good start for them.

Happy investing,
Pauline Yong

Saturday, September 3, 2011

Secular Bull Market for Gold

Secular bull market may lasts for decades. If you buy gold in 2001 and hold till 2011, the appreciation is 700% in 10 years! This is not much compared to the gold bubble in 1980. If you buy and hold gold from 1976 to 1980, your gain would be 850% as the gold price rose from $100 to 850 per oz within 4 years time. However, we must acknowledge that any market operates with bulls and bears. From the above gold chart, after the crash in 1980, the gold market was in a secular bear for 20 years!

What drives gold price? Besides the demand and supply, gold is a barometer for inflation, global currency devaluation or simply put, the public confidence of the state of the economy. In general, when people have lose confidence with their currencies due to over printing of money or inflation, paper money depreciates and many would turn to assets such as stocks, properties and of course gold and silver!

How far the gold price goes depends on people's expectations, politics, economic condition, wars and many factors. There are 2 groups of people here: the goldbugs or the gold lovers who believe that gold represents protection from economic and financial chaos, and political and financial conservatism and they feel secure to own some gold.

The other group is the opposite, they do not think gold is a good investment as they believe gold does not pay dividends, nor does it represent ownership in a company. It's value is strictly tied to what investors are currently willing to pay for it. As long as there are more goldbugs willing to pay for the price, the gold price will continue to rally until the price is so high that buyers are not willing to pay for the extraordinary price. Technically, you'll see the volume declining as the price rises at the top of the bubble and the gold price is deemed for a crash.

When will it be? Maybe next year, maybe 5 years later, nobody knows. However, if you see your friends who have never invested in anything but decided to buy gold suddenly, that's the sign! But for now, I know the sentiment about the gold is still bullish.

Happy investing,
Pauline Yong