Life As It Goes By

3 years on, the global financial crisis or “tsunami” has not only subsided but completely overturned. Today, markets around the world are breaking new highs, except for a few in Europe. Asia is a hot spot now, with tons of panic money pumping in. As the fear factor begins to lose its weight, speculation slowly shifts in the balance. Risk taking could be more visible, particularly in Asia.

Looking back, we may ponder about the big bets taken by the U.S. government (and at one time, leading all other governments). Optimism was scarce and is still in U.S. As it all seems now that the true beneficiaries of all the stimulus are the so-called “too big to fail (TBTF)” companies. Not long from now, we will see the fairy tale of General Motors: from the verge of diminishing to dawn of a re-birth. It would only take a fool to realize the simplicity of a deal. Buying stocks of a TBTF is not only the safest “insurance” (which you know nowadays is becoming less credible) , but also the best bargain in town on returns. If the government can bring a dead company back to life, you must believe in the great potential in it. Fret not if you don’t have enough cash on hand, there are other available options such as Citigroup and AIG (or not…).

In a sense, it demonstrates the highest level of protectionism a country may enforce in subtlety. When a government became the greatest investor in a gloomy market, even the worst company in the industry can instantly become one of the greatest in the world. All others (productivity, product quality, brand etc) matter less. This should be the trump card on the table. All companies should strive to grow and extend beyond its physical limits. In this way, they can secure a ticket to the government’s deep pockets (this is why I don’t see a slowdown in any leveraged buyouts or acquisition through borrowing) . Those who are sad over missing the opportunity should not despair. If the economy is going for a double dip recession, they would still stand a chance. Now that employment is a big political issue, the number of employees you have will determine how big your chip is. A word of advice: don’t take your corporate jets (or your private ones as well) to meet the officials when you are asking them for money.

These two (dragon and eagle) creatures could be the icons for the decades to come. Maybe clash of titans would be a more appropriate title. As the world quietens down after financial woes in the past 2 years, the world’s greatest economy, US, and the newly installed number 2, China, are tugged in a series of trade wars (primarily anti-dumping duties). The conspiracy behind is said to be currency-driven. US hopes that the Chinese yuan to hold a higher value and hence, shifting the balance of the overall trade more to the US side. There remain questions that need to be answered. What should be the satisfied value for the yuan? As China progresses slowly towards this forced move, US accelerates the process by letting the dollar to fall not just against the yuan but also against all currencies.

This creates political resonances around the globe and has much of its desired effects. Now, the world is pushing China to speed up its currency reforms. Much lobbying efforts can be seen from both sides. International bodies such WTO and IMF are basically stuck in the middle, giving neutral opinions and unforced warnings. China should not be as surprised as they are now. If they learn from the history, this would be how US treats its biggest trading partner. It cannot be a win-lose situation. In fact, the only possibility of that happening is when US is the sole winner.

While China is complaining that US domestic problems are not caused by them, they have to pick themselves up to adapt to the game play at the highest level. No one dares to defy the US. No one can even describe the Americans as “buxxxes”. They are just better negotiators and they fight for the best deals they could get. You have to give credit to them, really, otherwise they won’t be what they are today. Ask the Japs, the Europeans and those who had been at wars with them.

One cannot underestimate the intelligence (or stupidity…) behind all the accusations towards the currency ploy. It takes certain courage for someone with a certain status in the society to make such statements. Someone just have to take the gun and start firing. If you can’t solve the problems internally, just take them outside. At worst, we all die together and we see who recover faster. It’s a dog eat dog world out there. What do you expect? Honeymoon is over. It’s time for the real thing.

Besides, it takes all the attention away and buys the much needed time and space for the brainy guys to work out something. Many had failed as it seemed and the number of bullets left are disappointing. A big shot has to be made sooner or later. What China has to do is to admit that fact it has gotten itself a tough-to-accommodate partner and continue to live on with it. This is what happens in marriage when you start to see the true colors of your partner. Basically, this partner is in deep shit and it needs lots, and lots of help to get itself back in shape. It cannot afford a ten-year recession like in Japan. Too much is at stake. It has its people to look after even though it is these people who bring these to themselves. It’s a sad story. We must learn to give empathy in times like this (and I mean it).

Of course, China has its own domestic problems: poverty, social change, (unorganized?) urbanization and so on. Being the only large economy making growth in the past 2 years, it may have more burdens to bear now when the whole world situation has changed. It’s time to decide if China can carry the world on its back and move forward. Helping to heal US might lighten the load. China has to work out its own sums though. It has to be clear about how much percentage growth it would have to sacrifice in return for the higher valuation of its currency. It should have enough savings to stimulate the economy back by a certain percentage points. It’s not a test anymore. It’s for real. To be honest, I am still pessimistic of how much help would the revaluation of yuan will help the US. US has just too many domestic problems (mainly debts) to solve. Anyway, they are grabbing everything they could reach for to make the U-turn. So, any help is welcome, I guess.

Chinese companies can take the opportunity to expand their market to international if not regional by acquiring sales channels and distribution outside China. Employment for Chinese can be kept. Government should also be supportive in such activities. Stronger yuan will command cheaper prices for inputs. Perhaps it is time to shift manufacturing, which will take the greatest hit from the currency change, from labour intensive to capital intensive. Productivity per person should be raised. There still exists many infrastructure work for people. The same applies to service sectors such as retail, finance and IT in big cities. These changes have to be driven by the government. Only rapid and smooth transitions would keep the economy vibrant. It would be like a revolution.

The meaningless trade wars can go on so long as China can bargain back some, but not all, that it would have to sacrifice because it should be clear that after all this, no one would be truly grateful for what it has done. So what’s fair is fair. No doubt about it, the chips are definitely on side of the Dragon. The Eagle has shown its hand, so it’s up to the Dragon to take the bet or not.

As China moves to a more market oriented currency policy, questions for the rationale behind this move remain unanswered. True enough, the main topic of the debate is unfair valuation of the currency, which is now currently used by almost every country around the world (actually only those who have trading with the Chinese, but who hasn’t). A slanted view would be to the benefits of trading businesses in US and Europe. But how so?

Apparently, number crunchers for trade figures feel that reducing the deficit is the top priority in improving the overall economy (though raising the prices of the imports will, in fact, increase the deficit). Making imports more expensive will turn the ‘free’ market to alternatives or substitutes such as cheaper if not, more convenient or better valued local products. In the world today, where everything we buy has some parts manufactured in China, there should be more than 1 reasons why they are made there. At the same time, more expensive yuan doesn’t automatically translate to more expensive exports from China. It would be a big mistake to think the Chinese as big fat, lazy workers (and more productive maybe) as in the West. With 37% of its people (about 481 million;greater US’s 309 million population) earning less than $2 a day, it won’t be too difficult for Chinese bosses to find cheaper employees to tide over. Having said so, it is still worth a try for the West to find out the effects of better valued yuan. It feels better to be in the shit together.

What is in for the Chinese to perform such an act? And as a big nation, the central government will not be easily let off for such a grave mistake made. Not only will they lose their competitive advantage, the US treasury bills on their hands will worth less as well. There were calls to reduce the value of the US currency but they were all ignored. China could have done the same. There are now accusations that the wrongly valued yuan has a part to play in the financial meltdown in US and subsequently in Europe and around the world. These even encourage bankers to stand out openly to claim it is not their faults.

Perhaps the steel trade means a lot for the Chinese. This is not the first time duties has been imposed on Chinese steel. From my understanding, such duties are meant to help US industry and punish China for their dumping activities. China has been singled out (as previously on the rubber tyres). I was alarmed to learn that (having known only Arcelor Mittal) there are already 4 Chinese steel producers in the top 10 list (no wonder, the special treatment). So much for the anti-protectionism…

China must have taken the hits quite badly. By agreeing to the terms, it hope to receive more favourable treatment. If this is the case, then China will have to prepare for more “sanctions” (since it sets as a perfect example on how to pressurize China). This is also a move that breaks away from its normal self: unwavering and uncompromising.

A more market oriented currency would imply a step nearer to the status of a world currency. To be as exchangeable as the US currency, this is definitely a big step to take. At the same time, it also expresses the high level of confidence shown by the Chinese government on its currency, economy and future. There are also concerns about the risks that a more global currency would bring. Many have failed before (such as Russia, Argentina and Thailand). Even the mighty pounds can fall into the hands of the speculators. By opening its door to attack, China will show the world that it is more than just a manufacturing base.

Unlike Google, China seems to listen more to its big customers now. In return, it may expect something greater. A shift up in the service level will justify for the higher price paid for. All this while, the manufacturing giant has accommodated all kinds of unreasonable demands to produce at a cost not even half of the local produce (I guess this applies to almost everywhere). However, the giant does know a tip or two. It can’t stay low forever. To compete with the best, it has to raise its standards. For those who can’t compete at this level, they would simply continue to make low end products by cutting further into their costs. For those who make it, it will have a vital stabilizing effect on the economy. In other words, China can’t be the world’s 2nd largest economy for nothing. It has to show it has quality as well. By selling its products at almost the same price, Chinese hope to match the required standards if not more.

The pursuit for perfection is the key. Productivity levels in China are not really that high (I don’t think they work as hard as the Japanese, Korean and Americans). The reason why Japan is ahead of China for so many years despite having a smaller population is partly due to its workers’ productivity. Now that China has raised its level to maybe half of what is possible, but at a much larger scale, things look totally different. Technologically, China is at a distance away from Japan, Europe and US. But it has much room of improvement and it has an easier task in achieving that, unlike its rivals.

If the transition to a more flexible currency is managed well, the benefits to be reaped can be great. Besides, the fact that yuan is under valued brings out more why this is the direction that China should head.

The financial crisis is over now. At least for the bankers. They have the best of years for the past few years. Having received record bonus in the year 2007 before the tumbling of stocks in 2008, which triggered the flow of funds from governments to help them save the free fall. Amazingly, like perfectly crafted plan, the stock market returned to the levels before the crisis towards the end of 2009. The bankers were thrown another lifeline: another chance to bag big money. Once in a lifetime opportunity, some must have felt. Where can you find someone who will give you money to gamble, take back exactly what he or she has lent you and ask no share of your winnings even though they are 2 or 3 times the amount you have lent? There is no way they are going to let go of this chance…

Disappointed? Why should I? I have finally found a certain future for myself. No matter how smart the governments are, they are just politicians. What do they know about making money and controlling the financial systems? It belongs to the exclusive club, only for the most intelligent men. The past 3 years have shown who are made of better materials. Even in the post crisis, the bankers still dare to show hand to the guys in the White House or Westminister. Never once there is a need for them to be on their kneels to beg. Saying sorry in the public costs so much little to the amount of dollars they will get from the bonus. It doesn’t take a financial analyst to see how worthwhile the deal is. Only the fools at the top of the nations think repentance is on the way.

The end is fixed. A sad ending for the bankers is a mission impossible. Sarcastic I may sound here but helpless is the louder voice in me. There is nothing anyone can do to change that. No, it’s not the duty of the God to punish those who take profits for the risks taken. It’s the choice of the governments to pick the jobs of the bankers, rather than the general public to save. Their fears of greater failures have provided the answers to why they made such a choice. And now to save their own jobs, they are thinking of ways to raise taxes (or incomes to the governments) for the majority while keep taxes on sensitive items such as stock markets and currency stimulant.

I have decided not to wait and see anymore. No more disappointments. Now it’s the time to jump on the bandwagon. Join the banks or you will regret for life. Be on the winning side. The line is clear.

A few days ago, Japan Finance minister reassured the position of the US dollar in the world by giving it Japan’s endorsement. It openly states that Japanese yen is not a candidate for the USD replacement. Remaining contenders are Euros, Yuan (unlikely too, as the Chinese has proposed a “basket” approach, rather than a single currency approach) and Special Drawing Rights, SDR from the IMF.

Question is  which one of the above carries the weight that the US dollar holds. It is true that the US currency has devalued though current trading value doesn’t truly represent that (those betting against or for dollar must be having lots of fun now). Having defeated the gold and slowly changing from paper to plastics or electrons, the US dollar has a presence which no other contender do have. As I learn from my ex-boss, history always play a part on the current development. All the constraints we see now could be the effects of the past. The US currency has deep roots.

To replace it, its rivals shall have to begin from the roots. The reason why you can use US dollar in  places where there is no access to the local currency, is because the huge foreign reserves of the US currency worldwide. The person who takes the USD from you can easily find someone else to exchange something for him. In a sense, it’s like gold.

Not only that, many things are priced in USD. One notable example is oil. It is almost impossible to value the current price of oil. If it is to correctly represent its worth, the price of oil will be too expensive for everyone and immediately, another round of world inflation will occur.

It is not possible to replace US dollars in one day. One has to prepare enough pulp or bakelite for the world consumption. Maybe the EU has such capabilities. However, they are not really united on this front. Till today, it still amazes me to see the existence of European Union. Who would have imagined that the colonial powers have gathered and cooperated, after seeing the centuries of wars among them. Have they lost their desire to dominate the world? It’s really hard to say. One thing is for sure though. Too many minds together can be as constructive, and as destructive as they can be.  Adding to that, are the diverse cultural background and historical contraints.

What about Yuan? China has been the topic of the new millennium. It is like it has been away for the past millennium. Its growth is envied by all though typical for all developing countries. The uniqueness about China is its ability to produce, not just for its own billion of consumers but also for the other billions in the rest of the world. Its value proposition is undeniably the best around the world at the moment. However, despite its actual age, China is still relatively young as an economical power. There are still many stages for it to reach before it fulfills its potential and matures. By this, I mean, when the China economy sneezes a bit and the whole world’s economy shakes. Then, the yuan and China are ready.

Having set such a difficult condition, it appears that there is no contenders that can really qualify and we are back to the same spot. We may need more than just a major change. A change that may take decades. Is it worth it? But if we were to keep status quo, we are devaluing our own money in relation to the current world currency of US. If we set appropriate values for our monies, we will face widespread inflation. It seems out of the 2 options, the first is a safer approach. Just like the choice taken by the Japanese minister… The Americans have promised that there won’t be a repeat of the financial system failure we just witnessed. I am thinking how long will this be? End of President Obama’s term? A decade? 2 or 3? The next generation will forget about this naturally and the effects for this time around is not as catastrophic (so who will remember this hard).

If you had bought and sold shares of AIG and Citigroup over the past year,you would not have expected their prices nowadays. Still a distance away from their prime (especially Citigroup), the 2 highly debated stocks have now shifted the bar from SELL to HOLD and now to BUY. Those who had ridden through the high and low deserve to earn a medal or some recognition, at the very least for the confidence they have shown in their choice. They gambled well, almost winning at the very last. Big winners, however, are those who have anticipated these early this year and were busying snapping up the shares.

So you see, this is a true game of fear and confidence. Forget about the fundamentals. Forget about the numbers on the balance sheet. Just remember guts. If you dare to bet against the majority, you stand a really big chance to win it all. And what does this make you? A more daring wagerer which is what the US government is trying to groom now. Here is how you should go about it. Set up a financial institution now (be patient with the gambling first). Obtain government funds to provide loans to those who need it. Be it consumers who need to pay their monthly installments or businesses which need some cash to tide over this crisis. Make some decent gains from the difference in interest. Use this gain to make investments such as buying AIG shares, foreclosures and smaller companies. Do it in a big way just like how you would gamble. When you run out of funds, request from the government and fill it back up again. Post the decent gains in your balance sheet and write-off whatever loss you have gambled away. Remember, just keep a huge turnover figure. Make sure the figure is really huge and grows at an amazing rate. The goal is to be so huge that the government can’t let you fail. Then, they will pool in more funds. Of course, they may take your CEOs away and limit your bonuses. Sit back and relax. The gambles you have made should pay in time to come and they should grow greater than what the government had put into your company. Then, you pocket the remaining (with nothing down in the first place, how’s that?).

No matter how well the politicians play the role of regulators, they still look like idiots when dealing with financial or economic matters. You can’t really blame them; it’s just not their cup of tea. They do share something in common: the guts to gamble big. Team Obama, banging on the success of their earlier policies, is pushing more reforms such as the health care and only to be seriously challenged by the Republicans this time. The fact about how the budget deficit will blow up into previously unreachable level provides enough brake power. From the economic point of view, the only government income are derived from taxes (maybe now from the investments they have made in “national” companies). In any form, taxes are unlikely to appeal to people. It’s like taking the freedom of a soul. However, there is not too much good in printing tons and tons of money without taking income of any form. Some of the states are already suffering from their poor budget management. Raising taxes might be the only way out for some of them. Let’s face it. The government is now sucked dry by the financial sector of the economy.

Again, it’s a question of fear and confidence. If you are confident, you would forsee that businesses would pick up and stock market would hit through the roof again. Then, the income and capital gain taxes would bring in the necessary income for the government. This is perhaps why the stock market has to be as where it is now. Hope is what everyone wants. But the truth is financial sector is not the whole of the economy. It’s just a part of it. Stock market, according to some, is a good indicator of the performance of the economy. A more accurate prediction were to consider the performance of housing sector as well as unemployment rate. Anyway, current performance shown in the stock market received much help from the ailing government. This is perhaps where the fear sets in. If the government had spent on its budget on the financial sector, where can they find the budget to spend on the other sectors? Cutting on expenses in other budgets would help much. What is gone is gone. The TARP funds were meant to avert the Great Depression. The remaining funds (God knows how much) have to be divided among the rest of the economy, as well as the “must-have” expenses such as defense (or war, in this case) and education. This leads to the most feared question, will the government go bankrupt? How do we define that? A few governments have bankrupted before (usually because they can’t repay the loans or government bonds issued) and there are always a limit set to where they feel they can’t go on anymore. What would be the limit in the case of the US government? Definitely, it has to be more than trillions of dollars. Otherwise, they would be bankrupt by now.

Oil and housing prices threaten to rise now that investors with profit on hand (from the stock market) are scavenging around for better, sound investments. The world is actually quite limited though. If it’s not the stock, bond or housing markets, it got to be the commodities. Everyone is so desperate that they would go for anything. Recently, the cheese in Parma like wine in France would be traded. It was told from the newscaster that it is for the benefits of the both sides. And what exactly are the 2 sides? The producers and traders. Yup, you get it right. It’s not you or me, the bloody consumers or tax payers who save the asses of these traders. So this is how they pay back to us: pushing the prices of commodities to the limit, making our lives tougher with high inflation.  What would the government do about this? Or what did they do in the last 2 years? Nothing. Nothing for us. So, please tell me, how can I feel confident at all?

Change is coming and it’s uncertain that who would really benefit from it. We are still learning to adapt to it now. Just like how we saw personnel being questioned by Senators publicly, even in front of the television. Tough questions were being thrown at the “defendants” (if I may call them that) and answers were given. At the end, no actions are required. It’s for the better understanding of the situation and hopefully we can all learn from these painful experiences. You want to know what do I think of this? Complete waste of time. I am not catching another of this anymore. Unless I am hooked again with the reality shows, it’s out of the question for sure. What did it mean when Mr Bernake said he hated the decision to save the “Too Big to Fail” companies and he had done so to prevent a systematic risk from occurring? If the only person who can make the decision felt it that way, what else can we do as commoners? Yes, we should think of ways to help those in finance sector. Without them, we can’t survive. I don’t see any traders paying for my meals or offering me jobs. Instead, I have to thank them for not taking these away from me. I think the Fed is the biggest systematic risk and my greatest fear. It doesn’t want to protect the consumers like us. Instead, it is working with the wealthy to enslave us. With this, I rest my case as this game is too much for me.

Here we go again. The billion dollar question, are we at the end of the recession? Recently, the markets have got really heated up and all of a sudden, recession no more. The first thought that came to my mind was bankers must be busy cashing out their profits now, having booked a record Q2 earnings for themselves. This could save the whole year. But who really want the bull’s run to end? The DJIA has risen from 6,440 to 8,799, a whopping 2359 or 36.6% jump! Everyone who I know is in the market for the past few months is putting up an all-smile face right now. Making money in this worst expected recession makes one feel like god.

I could only explain that this must be the great work done by the Obama administration. The government injection had brought forth an enormous impact on the economy. There is a saying that the performance stock market is an indicator for the economy. It seems like the measures have worked tremendously well, just like the right antidote to the subprime poison. How could they not work? Based on Keynes’ teachings, government spending (like an invisible hand) has a multiplier effect. By pumping few hundred billions of dollars, you would expect trillion of dollars in return. The difference is that these funds are currently spent on a handful of financial institutions. Of course, these funds could be used to invest in the markets. Where else can one find with better returns. There got to be someone out there who might have tightened their belts but with lots of money to spare. Not to forget, there are other government monies around as well. In some of the Asian stock markets such as Hang Seng and KOSPI, things are almost the same as in 2007.

These signals give hopes of recovery and raise overall confidence at the same time. This is natural because if you are not going down, then you must be going up (just like how high and low tides work). The only concern is, will the prices for goods i.e. inflation then go up too? This is what the worried economists warned about: the W recovery. If this is according to what the economists expected, then we would be reaching the end of the first “V” of the “W”. We should prepare for the dive. That would be the case if you are one of the believers.

The thing is economic indicators (there are more than 50 or even 100s of them) are not always forward-looking. It’s true that the reason we use indicators is that history repeats itself and hence, by detecting the trends similar to the past, we shall be able to predict what is to come. However, this is also a self-fulfilling prophecy. Just like in a casino, you can see people scribbling the results of each bet on a piece of paper, hoping to find a winning pattern, whereby the odds (or probability of winning) for each game is the same. Indicators such Consumer Confidence Index have their own limitations. I mean, what does really the index tell us? I feel that the economy is picking up but I am preparing for the worst. So, am I confident or not? It is really subjective and of course, one can overcome this by selecting a large sample size (but then you face the problem of getting focus groups). Well, a wise way to go to get a collection of indicators and try to paint an overall picture. Even so, these telling signs should give an idea of what is going on. You still have to make your own judgment.

As for what I think of current situation, I feel that a turning point might be coming soon (in next 1 or 2 quarters) though the likelihood of going up is equally there. I am more for a “W” kind of recovery, if not “V” + “U”. I believe the government policies are effective and for a certain period of time, stabilization should be sustainable. After that, the reactions to these policies should come. Either the economic growth drives the prices up or the short-term effects of resource re-allocation has lost or expended over time. Interest rates might go up depending on how governments want to act. Those affected by the previous recession will then feel the stress and may shrink their outputs again (however, this is also a simple line of thought as government should also be available for these businesses). When the prices pick up the momentum, I feel the same would apply to the housing sector. Recent gains in stock markets should bring greater long term benefits if they are transferred to housing markets (where there are great bargains). This would help to raise prices further. The need for raw building materials might not be that great as new housing doesn’t look convincingly cheaper than the existing ones.

Raw materials might be used for the infrastructure building programs and if they are imported, it would help the Baltic Dry Index. As for finished product exports or imports, the currency plays an important part.

Thus, if things are looking good, why would I still think that there will a dive in the market after this? My instincts just tell me that things are not really the way the indicators are telling (i.e. I stress again earlier). Just like a person who went on dieting and had some results on slimming down. You can’t really expect the guy to get fat again immediately by stuffing him all the food. It takes time. Now, it’s like the body has adjusted to lower volume of food and it may fail to function well if there is a surge in the intake. It’s just the organic part of the policy implementation.

The economy has contracted much in this 1 year and it seems like, in the modern trends, things will come and go in quick succession. Imagine the current DJIA, who will think of it reaching this point a few months ago. The momentum may keep going till the nature takes its course. The artificial demand created by the government stimuli shall be met by the actual supply. And when this demand vanishes, the supply needs to be shifted to the right equilibrium again.

I hope the economy will continue to grow but I would love to see it going through another round of correction. It will be better for those wounded in this round. Otherwise, there will be no mercy for them. Bigger gaps will be created and faster pace will be set from here. It’s still pretty much in God’s hands, I reckon.