Tuesday, August 25, 2015

Stock Market Crash

I am not going to write a commentary on what is happening to the stock markets around the world. Things are happening in ways that many do not expect. But some do expect such happenings and are therefore not surprised.

What I propose to do here is to bring some clarity to thinking about the stock market in general.

1. Market Capitalisation, Market Valuation

This is probably the most exaggerated way to think about value and wealth. The market cap or valuation is just a very bad concept to use.

Say there are a 1,000 shares. The price of the last share traded is $1. The market cap is $1,000. The price of the second share traded rises to $2. The market cap is $2,000. The market value is said to have "increased by $1,000" making everybody feel richer. If the price of the third share is traded at 50 cents, then the market cap is $500 and the market is said to have "lost $1,500" in market value.

It is incredibly how people are made to think that they have created and lost wealth just by the value of one last share traded.

So in the current "red lights" markets, speculators glorified as investors are said to have lost billions of dollars around the world. Bunkum! I think people really have to work hard for a living and just punting stocks and trying to be filthy rich overnight.

2. Stock Market Is Not The Real Economy

The stock market is not engaged directly with the underlying economy of investments and workforce and transportation and sales. The stock market deals indirectly with the underlying economy by trading in the shares of companies and in raising funds for investments.

The stock market functions properly with a well-controlled financial and banking industry, with relative scarcity of funds so that stock prices will be more reflective of fundamental values of the companies.

In an economy with ease liquidity and zero interest rates, stock prices tend to be over-priced because everybody is piling into stocks for lack of better assets to keep value. This is when investors become speculators, as share prices soar way above their fundamental values.

The stock market crash is one way to reduce the excess supply of money in the system.

Unfortunately, those who do not have money may be the ones to suffer in a stock market crash while those who have money may be the ones making the money simply because it is their business and they are experts in playing the stock market.

The stock market crash is not necessarily a bad thing; it may be positively desirable.

3. When Is A Stock Market Crash Bad For The Real Economy

A stock market crash is bad for the real economy when banks have also been lending to speculators or have also been speculating in stocks themselves, so that a stock market crash immediately and directly impairs the capital base of the banks themselves.

When there is a bad loan, the bank must set aside a portion of their capital corresponding that bad loan, with a view to writing off the loan in the end should the worse comes to the worse.

When the bad loans of a bank rise very sharply, the bank may not have sufficient capital to be set aside as reserves for the bad loans. This is when a bank becomes insolvent and shareholders must pump in money to pay for the bad judgement of their lending policy. If the shareholders have not enough money, then the government may have to step in to shore up the capital of the bank. If not, the bank cannot function and it has to close down, thereby leaving depositors with only a few cents for every dollar of deposit they have left with the bank.

A stock market crash is bad for the real economy when many banks in the economy are caught by insolvency and they have to curb their lending to real businesses or are unable to function as proper banks anymore. This is when the investments in the economy fall as a whole and the economy shrinks into recession.

4. When A Stock Market Crash Is A Good Time to Buy Stocks

When we know that the banking system as a whole is still strong during a stock market crash, we know that the stock market crash is the time when share prices have fallen sharply and sometimes to way below the values of the stocks. This is the time to start buying stocks.

5. Ways To Invest In The Stock Market

(i) Identify companies that you like. Good companies are those that sell products that are always needed by consumers into the far future.

(ii) Identify the fair value of the shares of the companies you have identified in (i). You must do your homework.

(iii) Wait for share prices to fall to below the fair value of shares as identified in (ii). The only input is patience.

(iv) You must have set aside a substantial sum of capital to invest in stocks in the first place. It will be money that grows by itself as the economy grows.

(v) If you can do (iv), then you may already found a way to make and save a significant sum of money and why on earth would you then want to dabble in shares.

Monday, August 17, 2015

British Economics Graduates

This is a recent piece from the UK magazine The Spectator which may be provocative for some people, and which I have copied and pasted below.

http://www.spectator.co.uk/features/9589072/how-british-universities-spread-misery-around-the-world

Note to those who don't read the fine print: This article is not written by this blogger. Author is James Bartholomew and if he protests, I shall have to delete this post!

British economics graduates have left a trail of misery around the world

From Nehru’s India to Varoufakis’s Greece, the trendy doctrines of our universities have much to answer for

25 July 2015 

So farewell, Yanis Varoufakis. You used to be Greece’s finance minister. Then you resigned, or were you sacked? You took control of the Greek economy six months ago when it was growing. Yes, honestly! Growth last year ran at 0.8 per cent, with forecasts of 3 per cent this year. The government had a primary budget surplus. Unemployment was falling. Until you came along.

Varoufakis was a product of British universities. He read economics at Essex and mathematical statistics at Birmingham, returning to Essex to do a PhD in economics. With the benefit of his British university education he returned to Greece and, during his short time in office, obliterated the nascent recovery. The economy is now expected to contract by 4 per cent this year — an amazing transformation. Greece’s debt burden has increased by tens of billions and many people have emigrated.

But Varoufakis is not alone. Plenty of other visitors to our universities have been influenced by the teaching here and returned to their countries to wreak havoc.

Jawaharlal Nehru, the first prime minister of an independent India, is understandably regarded by many as a hero. But unfortunately for that country he attended Trinity College, Cambridge. There he was influenced by British intellectuals such as George Bernard Shaw, a socialist, Bertrand Russell, who once remarked ‘communism is necessary to the world’, and John Maynard Keynes. He returned to India and started to put the ideology into practice with state planning, controls and regulations. This was a calamity. Following his rule, India’s share of world trade fell and a generation failed to emerge from abject poverty. Only when the ideology was abandoned with the free market reforms of the 1980s did India’s growth and amazing poverty-reduction begin.

Perhaps one of the most extraordinary rulers of the 20th century was Julius Nyerere, president of Tanzania, who was famous for living frugally and genuinely not being corrupt. Admirable though he was in this respect, it was his country’s misfortune that he read economics and history at Edinburgh (as did Gordon Brown). Naturally he was surrounded by leftist academics and apparently ‘encountered Fabian thinking’ in particular. The experience made it all but inevitable that Tanzania would endure a bloated bureaucracy, shortages and miserably low growth.

Nyerere had been to the University of Fort Hare as well as Edinburgh. This is a university set up by us British imperialists in South Africa for non-British people from all over Africa. It has bred an extraordinary array of future African leaders who, unfortunately for Africa, mostly developed left-wing ideas there. Among their number was Robert Mugabe, destroyer of the economy of Zimbabwe.

The dishonour of distributing economic failure around the world is spread around British universities but the London School of Economics can rightly claim more than its share, of course. Jomo Kenyatta, first prime minister of Kenya after independence, went there. True, under his leadership, the Kenyan economy was not the worst-performing in Africa — but overblown, corrupt state industries and attempted import substitution took their toll, so that GDP growth per capita was low and, in some years, negative.

Kwame Nkrumah also went to the LSE and then to University College London, although, to be fair, he had probably been radicalised already at Lincoln University, Pennsylvania. After thus overdosing on socialist indoctrination, he returned to Ghana and put through ‘forced industrialisation’, complete with state enterprises and ten-year plans. It was the usual formula with the usual result: decades of low growth, corruption and heavy debt.

In two further cases, Britain can again gratefully offload some of the blame to America. Pierre Trudeau was introduced to Marxism at Harvard and then came to the LSE for his doctorate. He did not finish it but the LSE nonetheless gave him a finishing course in leftist economics. Under his rule, Canada introduced wage and price controls while inflation, unemployment and the national debt all rose.

Zulfikar Ali Bhutto, variously president and prime minister of Pakistan, went to the University of California, Berkeley, as well as Christ Church, Oxford. It is unclear which bears more responsibility for teaching him the statist economics of academia. But once he had gained power, declaring ‘socialism is our economy’, he nationalised the steel, chemical, cement and banking industries along with the flour, rice and cotton mills. Economic growth slowed to a crawl at 1.3 per cent.

Most of our British university teachers imbue their overseas students with disastrous ideas and remain comfortably here, uninvolved in the misery they have sown overseas. One heroic-cum-tragic exception was Malcolm Caldwell, a communist lecturer at the School of Oriental and African Studies who was such a fan of Pol Pot and his murderous regime that he went over to see it in person. He had a private interview with Pol Pot himself and was murdered later the same day.

Are there any exceptions to the rule that British universities cause misery abroad? Yes, but only when they revolt against what they were taught. Singapore’s success is due to its first prime minister, Lee Kuan Yew, who went to Fitzwilliam College, Cambridge, and his economics guru Goh Keng Swee, who attended the LSE. They did indeed become imbued with socialist thought, to the extent that Harold Wilson once called Lee ‘one of us’. But after they left the clutches of British academics, Lee and Goh managed to think for themselves and observe how the real world works. They got over much of the socialism Britain had drummed into them and created one of the most successful economies in the world. It’s easy to imagine cardigan-wearing dons in a senior common room somewhere near the Aldwych shaking their heads and regretting that Lee and Goh were ‘the ones that got away’.

Returning to Greece, one might think that now Varoufakis has gone, things might improve. Unfortunately his replacement is Euclid Tsakalotos, who studied at Queen’s College, Oxford. He did his doctoral thesis under the supervision of a professorial fellow who had formerly been a Stalinist apparatchik in Poland. The British contribution to human misery may not be over yet.

James Bartholomew is the author of The Welfare of Nations.

This article first appeared in the print edition of The Spectator magazine, dated

Thursday, August 13, 2015

Ringgit Management

I wish to write on the behaviour of the ringgit and what we should and should not do in managing it.

1. Global Structural Change

I wish to emphasise that it is not only the ringgit that is weak but all currencies except probably that of the US and the UK.

This is a major change in the global economic fundamentals, or a global structural change.

The major change is that the US has finished with quantitative easing (QE) of the last three decades in order to shore up the US economy which was really in trouble. The US could and can print money to buy goods and services for free because everybody else is willing to hold the US dollar as the currency reserve. Japan and then China were the main accumulators where their people worked their lives off in return for a miserable living wage and inflation whilst their corporates became cash rich. The QE exported inflation to the whole world as the US tried to steal resources from everybody else for its own consumption.

But the real improvement in the US economy came when the US used its trump card of introducing shale gas, as a means to fight off Russia and possibly the Middle East. The US increases the supply of oil in the global market and this cuts the price of oil by almost half.

The two major effects are: (a) the US economy recovers because of the increase in output chiefly from shale gas production; and (b) the drop in the cost of doing business in the US and elsewhere.

For major oil producing countries, particularly the Middle East and Russia including Malaysia, oil revenue drops and this cuts government revenues and raises government deficits. This creates new budgetary problems and how they are tackled have great political implications as they will affect deeply the pockets of the average consumer.

Since the interest rate has been near zero for so long, the only movement for it is up. The question is when is the interest rate going to go up. The answer is" "Anytime now, when the US economy has seen to have recovered." As the UK economy has also been improving as a result of austerity, the UK interest rate is also set to rise as well.

Since the rest of the world seems so miserable, with China and Australia down and the marginal EU economies in debt troubles, the US and the UK seem to be the only two bright lights in the world for those with cash.

2. Regional Currencies

It is a bane of the economic policy of developing countries that they see the stock market as the main measure of the libido of an economy and hence political cleverness in economic management. This is utter rubbish.

The performance of the stock market is not the direct measure of the healthy of an economy. There is an indirect and tenuous relationship between the stock market and the fundamentals of an economy.

But there is a direct relationship between the stock market and the liquidity of an economy. The stock market will always go up whenever there is an increase in the excess liquidity of the economy, in the economy is closed or there are currency controls to keep the excess liquidity within the domestic system. If there are no foreign exchange controls, then an excess liquidity or an increase in excess liquidity will also lead to a depreciation of the currency.

It is therefore inevitable that when there are no more fools in the stock markets, the speculators will sell off the market and take their money and their profits out. A weak stock market and a weak currency always go hand in hand.

(Likewise, we have heard so much foolishness in the past when increased speculation in the stock market was welcomed as a sign of a strong economy argued on the simultaneously strengthening of the currency just because foreign fund managers were coming into the local market to cream off the local speculators.)

The worst that we have seen about increased excess liquidity was when banks and financial institutions were left to lent indiscriminately to fund asset inflation in real estate which are being used as collateral for the loans. There is no great madness than this, to allow banks to create their own collateral values for their loans at the expense of the average savers who were and are being paid nothing for their austerity and thrift.

No doubt the global impact of the US QE has been so great that it would have been impossible for local monetary authorities to sterilise short-term capital inflows. But there must be attempts to limit and restrict these disruptive flows as much as possible, as the police for examples must try to reduce a spate of crimes no matter how rampant. There were no signs of warnings and lecturing to reckless bankers, and everybody seemed to enjoy surfing the wave so long as they have a nice surf board to ride. Everybody else simply got drowned in high waters.

So the speculative funds which have had enough of ravaging the regional bourses, look up and see the two bright spots in the distance and decide to find new pastures. This the another global structural change in thinking.

3. Speculative Momentum

When we are talking about a major structural change, we are not talking about a person going to the toilet during a show in a theatre. We are talking about the entire audience leave the theatre because the show is over. One by one, they got up of their seats and head for the exit door.

Because of the enormous size of the audience, because the show was good, there appears to be a major exodus. And this probably brought the index to 4.

Well, let's see who is going to shout "Fire!"

You know it is very tempting to make that shout. How else can one think, to see everybody leaving, and may be you want to capitalise on it. You are way back in the queue and you have an urgent need to go to the toilet. You are dying for a cold drink. Whatever. You want to move the crowd faster. You want to change the scenario for your own gain.

Very tempting.

4. Currency and Democracy

If you believe in freedom of movement, in freedom of choice, in freedom of gains and losses, then you should let the ringgit be.

The ringgit had been glorious, and went to as high as 2.50. The many waves of speculative foreign inflows had made everybody in Malaysia rich, lifting the standard of living to unprecedented heights and be among the best consumers in the world. We have paid for all these with our oil money and many Malaysians now have the luxury of freely sprouting their views without thinking, though not without agendas. We have learned to be wealthy without working, though not worthy maybe.

Where the ringgit is today is a good reflection of the underlying fundamentals of the economy. Not exactly but thereabouts. More swings are to be expected as the currency market tries to find a fair value for the ringgit. This takes time. Many factors have to be considered, factors now and factors in the future.

At the moment, the last show is over and let's see what is the new show going to be. In the meantime, we all adjourn to another venue.

There are calls for us to get our act together. To start a new, not to replay an old one. The squabble is now over who is going to be the main actor, the star. There is intense competition among producers, over genre as well. Tragedy? Farce? Special effects?

The last thing we should go for is to shut the door and lock those who haven't exited inside. This will create a major loss of confidence.

The call to fix the exchange rate is not without its cost. If there is really a major exodus, then you are threatening to deplete foreign currency reserves which when it is depleted will mean a freefall for the currency because then there will be a total loss of confidence in the ability of the central bank to defend it under any circumstance.

5. Independence of the Central Bank

The independence of the central bank is a sacred doctrine of economists who wish to control inflation.

The head of the central bank is usually called the governor, which means almost like a head of this monetary world.

In principle, the governor of the central bank is to be able to say to the finance minister whose job is to manage the finances of the state that their is a limit to the spending by the government. The government of any country is a sovereign entity but not the head of the government, say the prime minister. The prime minister is keen to stay in power as long as he can, if there is no limit by law. As economies go through cycles, there is a tendency for the head of government to spend his way out of his economic problems. The job of the central bank government is to define that limit for that person heading the government.

We have already compromised the fiscal integrity of this country by having the prime minister taking up also the position of the finance ministership when these two posts should be separated.

If the independence of the central bank is lost, then we fear that the consequences will be dire: high inflation and a weak currency. Socially, poverty and confused social groups.

We need the governor of the central bank to be independent and strong.

6. State of Economy

We have gone past our golden age. The good life of a simple plantation life is over. The good life of an oil-rich economy is over. We have spent it all and we have destroyed the goose that laid the golden egg. We need to find a new economic force.

I am tired. Maybe we shall deal with this another time. Big topic.

Thursday, August 6, 2015

Global Economic Structural Change

Sorry for the big title. The purpose is to give an alert that what has been festering is likely to happen later this year or early next year. The US has decided to stop printing money - thank God!, the inflation and the arms rampage.

The next thing that is going to happen is that interest rates in the US and the UK are going to rise. This is a major structural change for the world which had been enjoying low interest rates and an abundant supply of money and bank loans.

That is why the US dollar and the British pound are strengthening steadily. Is this high already? Will it reverse soon? Because we think that this is a major structural change for the world, therefore, we expect the strengthening to go on further.

How long will it go on for? Do not think of small incremental changes. Small incremental changes are changes in the margin when there is no structural change. Structural changes bring along big sizeable changes.

Have we seen big sizeable changes in the world lately? Yes. The massive inflation around the world. The awakening of the China economy. The cooling of the China economy. The asset bubble in China. The burst of the asset bubble in China. The war in the Middle East, funded by the quantitative easing and the buoyancy of the arms industry. The coming onstream of shale gas, a major strategic and structural change by the US to shore up its economy. The sharp drop in the price of oil. The sharp drop in the price of gold. The economic disaster of fringe EU countries. The coming of 3D printing. The bowing down of Windows in Windows 10.

The debate now is whether the US and UK economies have recovered strong enough for interest rates to  go up. Of course, from near zero, everything else would look big. But it is very important that money has a positive value, and we can start with savings deposit rates of at least 3% pa going all the way up to 6% pa. The mark-up should be small because banks are now transacting in massive volumes, which means that base lending rates should be about 4.5% pa to 7.5% pa. I think depositors and borrowers are tired of paying for the incompetence of banks and their reckless lending. This are restraints that central banks can stipulate for those institutions they take care of - what we used to call "prudence" in the old days.

I will brace for the sustained strengthening of the US dollar and the British pound against the ringgit, firstly, because I think the local central bank will not follow those interest rate increase when they come for fear of upsetting the performance of the vulnerable local economy and, secondly, because there is nothing to invest the money kept at home apart from buying another apartment.

The local politicians have to get their act together, whoever is going to be in government. There is no point shaking the confidence of the entire society and economy just for the sack of being in power. There is no glory in that power when we have laid the whole environment in waste. This country is built on hard work, sweat and tears in hope of a better future. Without this hope and commitment, there is no investment and hence no economic prosperity, no matter how much investments the government is going to pour in. The government is only a small group in the entire society.

Wednesday, August 5, 2015

Top Five Regrets Of The Dying

>>There was no mention of more sex or bungee jumps. A palliative nurse who has counselled the dying in their last days has revealed the most common regrets we have at the end of our lives. And among the top, from men in particular, is 'I wish I hadn't worked so hard'.
Bronnie Ware is an Australian nurse who spent several years working in palliative care, caring for patients in the last 12 weeks of their lives. She recorded their dying epiphanies in a blog called Inspiration and Chai, which gathered so much attention that she put her observations into a book called The Top Five Regrets of Dying.

Ware writes of the phenomenal clarity of vision that people gain at the end of their lives, and how we might learn from their wisdom. "When questioned about any regrets they had or anything they would do differently," she says, "common themes surfaced again and again."

Here are the top five regrets of the dying, as witnessed by Ware:

1. I wish I'd had the courage to live a life true to myself, not the life others expected of me.
"This was the most common regret of all. When people realise that their life is almost over and look back clearly on it, it is easy to see how many dreams have gone unfulfilled. Most people had not honoured even a half of their dreams and had to die knowing that it was due to choices they had made, or not made. Health brings a freedom very few realise, until they no longer have it."

2. I wish I hadn't worked so hard.
"This came from every male patient that I nursed. They missed their children's youth and their partner's companionship. Women also spoke of this regret, but as most were from an older generation, many of the female patients had not been breadwinners. All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence."
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3. I wish I'd had the courage to express my feelings.
"Many people suppressed their feelings in order to keep peace with others. As a result, they settled for a mediocre existence and never became who they were truly capable of becoming. Many developed illnesses relating to the bitterness and resentment they carried as a result."

4. I wish I had stayed in touch with my friends.
"Often they would not truly realise the full benefits of old friends until their dying weeks and it was not always possible to track them down. Many had become so caught up in their own lives that they had let golden friendships slip by over the years. There were many deep regrets about not giving friendships the time and effort that they deserved. Everyone misses their friends when they are dying."

5. I wish that I had let myself be happier.
"This is a surprisingly common one. Many did not realise until the end that happiness is a choice. They had stayed stuck in old patterns and habits. The so-called 'comfort' of familiarity overflowed into their emotions, as well as their physical lives. Fear of change had them pretending to others, and to their selves, that they were content, when deep within, they longed to laugh properly and have silliness in their life again."<<

As for this blogger, the simplest way to live is to live the life of a liberal and celebrate liberty. After all, John Stewart Mill defined liberty as (my paraphrase) "the right to live our life in the best way as we see fit without preventing others from doing the same."

In the current climate of ours, we are looking at political infighting. Honesty is the topic of discussion among thieves. And sometimes, honour.


But I am nothing. So, just let me do what I wish to do, so long as I do not prevent you from what you want to do. Likewise, you should not prevent me from doing what I want to do, so long as you get to do what you wish to do.

I think wish for peace over violence, no matter how great the treachery. I can live with treachery but not in violence.

Tuesday, July 7, 2015

China Market Tumble

The China stock market is tumbling by nearly 30% after a year of run-ups of 150%.

This is nothing. Say, if the run-up is from 100 to 250 and if we consider that the run-up had been pure fluff, i.e., "leverage retail investors, egged on by bullish statements by official state media (Bloomberg), then for the index of 250 to return to 100 is 60%. Technically, at 30% down, there is still a lot of fluff.

We are talking in aggregate. If we were to think in spectrum, there may be stocks which have been super-hyped while some may be slow and steady. In the end, in the market, the focus is always on the so-called blue chips, if only we know what they are.

But the official reactions to the market is not something which Malaysians have not seen before.

This is the same old story where the government of a country gets involved in the workings of the stock market, on the illusion that the buoyancy of the stock market is a good indicator that the government of the day is clever.

Their first instinct is to try to intervene in the market, to prevent the market from adjusting to the fundamentals.

In the Malaysian case, they used government funds to prop up the market, prevent people from selling, prevent people from taking their money out of the country (when they had happily welcomed the short-term capital inflows).

No doubt, China may attempt to repeat these little silly tricks. The major consequence will be that the market will become less "real" in the sense of private-sector market determined, and more of a reflection of the delusion of the government of its perceived libido.

Greece


The referendum vote of "No" yesterday was no to austerity drive which the creditors demanded if they were to lend more money to Greece. The call for austerity is part of the economic thinking that if a country needs to borrow all the time in order to keep going on, then there is a structural change and one way to restructure is to cut spending and reduce the deficit.

But with many people without jobs, further austerity will mean that more people will be made unemployed and social benefits will have to be cut.


Being in the eurozone means that the Greece economy is tied to the euro whose value is determined basically Germany, the strongest economy and probably the most powerful partner of eurozone. This means that, for Greece, the currency it uses (the euro) is too strong for it which makes it uncompetitive. The major consequence is slow growth or recession and high unemployment.

If Greece gets out of the euro, its own currency (the drachma) will probably depreciate sharply and this could be a boost to its economy, at least to tourism. (Presuming that the current financial fiasco, the banks not opening their doors, ATMs without cash and capital controls are not scaring tourists from the Mediterranean paradise.)

I think the creditors of Greece should cancel off most of the debt (as called for by the IMF) because it is only money and this could save lives, in as much as possible so long as the creditors do not themselves get into bankruptcy.

I think Greece should get out of the eurozone but continue to be part of the European Union, as Britain is.