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Recently there are a lot of debates between the Keynesian and Austrian economists on the skyrocketing government deficit.

My opinion is this:

In general, government spending is wasteful.  To expect governments to efficiently allocate capital is a larger mistake than to believe in Bernie Madoff.

Keynesian policies only makes sense if consistently followed.  The true Keynesian policy maker would save money during good times and spend money during bad times.  The intention of such policy is to smooth out the business cycles.  Unfortunately, our government hasn’t been saving money during good times, therefore to spend now requires the nation to elevate its debt level.  And high government debt would easily lead to money printing & hyper-inflation.  The solution to too much debt is not be accumulating more debt.  If there is no saving, there should be no spending, especially when the spender has a tendency to be very wasteful.  In the U.S. case I would side with the Austrians.

The Chinese government, on the other hand, is also spending a lot of money to stimulate the economy.  Fortunately for the Chinese, they were saving a lot of money during their economic boom.  And now in a global recession, they can snatch up assets and resources for cheap.  This investment mentality is what drives the “easy-money” policy in China right now.   Therefore, in China’s case I would side with the Keynesians.

admin :: Aug.20.2009 :: Market Analysis, The World, Business/Management, Finance/Investment :: 2 Comments »

The recent stock market rally signals a decoupling between the stock market and the economy.   The economy, given its current state, would have a L-shaped recovery at best.   As the consumers facing terrible job market, and high debt levels for households and government remains if not worsen, the economy powered by consumption is not likely to have a robust recovery.

On the other hand, aggressive cost cutting has fueled a recovery in corporate profit. However, sales trend still remains weak.  With the decline of the dollar, I expect U.S. exports to recover as foreign countries start buying up electronics, IT and capital-goods.   Foreign consumption would be the fuel for sales recovery for American companies.   Therefore, companies that sells to foreign markets would see a healthy recovery while others would continue to face a tough market.  The sales boost from foreign consumption would further increase profitability, and cause positive earning surprises which drives up market.

Another source of divergence between stock market and the real economy is inflation scare.  With the government printing so much money, and skyrocketing budget and trade deficit over the years, it is hard to be bullish in the currency.  The prospect of currency devaluation is enough to drive a lot of investors out of bonds and cash and into equity markets.

Therefore, while the real economy is struggling, the stock market might perform surprisingly well.

admin :: Aug.17.2009 :: The World, Business/Management, Finance/Investment :: No Comments »

admin :: Aug.13.2009 :: Doodles :: No Comments »

admin :: Aug.13.2009 :: Doodles :: 1 Comment »

Everyone is yelling “the recession is over”.  The stock market has risen close to 50% since its march low.  Lets examine the forces that might influence future markets:

Upside:

•  For individuals and fund managers who missed the recent rally.  There are intense pressure to get back into the market.  With talks of recovery everywhere, the baby boomers who lost 30-50% of their retirement portfolio are really anxious to get back into the market.
• Cost cutting + increasing productivity + sales recovery might push companies that have heavy international market exposures to produce positive earning surprises.  The recovery in emerging markets are pretty evident.  With the dollar staying weak, multi-national companies can rake in handsome sales overseas.
• Government Spending, Stimulus programs, and loose monetary policies would inject money into the economy, causing asset prices to inflate.  The prospect of recovery and inflation would cause stocks to be more attractive then bonds.

Downside:

• The short term market is very over-bought.  And profit taking is inevitable.  For those who are lucky to gain from the rally, it would be tempting to lock in the profits.   The current price level is pricing in a $75 earning for the S&P, which is almost impossible consider that the peak earning in 2007 is $85, with almost half of it from the financial sector.
• The economic system is not cleaned.  It is actually gotten worse due to poor government policies.  Household deleveraging has not happened, and with the cash-for-clunkers program, people are accumulating more debt.  Therefore, the rosy sentiment that “good days are back” are not backed by fundamental improvements in the economy.  Such positive sentiment might mark the top of the “recovery” bear rally.

admin :: Aug.11.2009 :: Market Analysis :: No Comments »