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The U.S. economy is losing its global competitiveness due to the following policy errors:

1.  High Taxes and Labor Unions are making manufacturing uncompetitive in the global market, resulting in a shift of the economy towards more driven by service & consumption.   Engineering jobs are now replaced with sales and customer service agents, making science, math, and engineering unattractive subjects in college.

2. Stringent immigration laws are driving science, math, and engineering foreigners trained in U.S. universities (often on a full scholarship) back to where they come from, helping those emerging economies to compete with the U.S. economy.

3. Loose & government rigged monetary policies fuels high profits in the financial industry.   Attracting the best minds in the country to the business of money shuffling and casino banking.

4. Expansion of government and government sponsored industries are crowding out talents, credit, and profits for the private sector.

admin :: Mar.04.2010 :: The World, Business/Management :: No Comments »

Recently I had a conversation with a friend, who asks me, “why is gold valuable?  It is just a metal that people dig it up and bury it again underground.  It is not income-generating.  You can’t eat it or use it in any productive purpose.  Then why do people buy it and invest in it?”

I think he is right in that gold does not have much value as a productive asset.  The value of gold, however, comes from it being a globally recognized hard money.   Money is what makes trade and division of labor possible.  Without money, trade breaks down and society would go back to bartering.  That means, if you want food, you have to produce some type of goods or services and trade them with the farmers directly.  Therefore, money comes to existence to support indirect exchange.

Being a medium of exchange, there are some attributes that any form of money should have:

1.  Durable.  Meaning it should last a long time without changing or corroding.  Therefore metals like iron would not work because it rusts.

2.  Portable.  Meaning people can easily carry it.  Therefore assets like real estate would not work because one cannot carry land with them to trade.  And oil would not work because to carry $700 dollar worth of money in oil means carrying 10 barrels of it.

3.  Divisible.  Meaning it must be easily divided into small pieces.  Therefore valuable stones like diamond would not work because it takes a lot of technology to cut a diamond into smaller pieces, and the value of a diamond decreases exponentially when it is divided.

4.  Has limited supply.  Meaning that it must be rare and difficult to be brought into existence.   Therefore sand would not work because there are abundant amount of it easily accessible to the public.

Throughout human history, gold has been the ideal form of money because it satisfies the above requirements.  In modern society, paper money has replaced gold as the medium of exchange.  Paper money is fairly durable; it is certainly portable; it is divisible into paper money of smaller face value or coins.  The only problem with paper money is that its supply is artificially controlled.

Central banks controls the monetary supply in modern economies and they have the rights to print money.  Therefore with undisciplined central banks, the supply of paper money can easily get out of control.  When the supply of paper money in an economy increases, the value that existing paper money holds are diluted.   This means inflation:  prices go up and the same amount of paper money cannot buy as much stuff as before the dilution.  When inflation gets out of control, as inflation usually breeds more money printing and more inflation, trading with paper money breaks down.  Who would want to offer their products or services for pieces of paper that lose value the next day?  But then, how can anyone survive in today’s society if trading reverts to bartering?  And thus, people would start to use gold and would only accept gold as payments.

That’s the value of gold.  Even though it is not used as money today, it reflects the risks of a complete break down of the paper money currently in circulation.

admin :: Oct.14.2009 :: The World, Finance/Investment :: No Comments »

If you are wondering about where the U.S. economy is going for the next 20 years, you can bet on that it would become more and more socialistic.  Nationalizing health care would only be a matter of time.  And the government will take a larger and larger role in our lifes.  How do I know that?  It is simple, we have the following demographic drivers:

1.  Baby boomers are starting to retire.   After the recent crisis, most of them do not have enough wealth to keep their lifestyle.   Would they vote for the government to take care of their health care and social security?   You bet.

2.   The shrinking of the middle class.  The only classes that would oppose socialism and any form of wealth transfer would be the middle class and the wealthy.  Unfortunately, the middle class in the U.S. is shrinking and we are seeing a concentration of wealth to the small rich class.  This leaves a large segment of the population broke and wanting redistribution of wealth.   And in a democratic system, they will vote their way to socialism.

3.   The inability of the law makers to distinguish capitalism and crony capitalism.  Government intervention causes crony capitalism (ie. easy monetary policies, debt guarantees, bailouts, etc) and thus enables excessive risk taking with other people’s money.   Therefore, it is very easy for the law makers to attribute the fault to capitalism and try to “fix” the system by passing socialistic laws.

4.   The tendency of the government to expand.  With a diminished understanding and respect of the constitution, the government is finding its way to limit our liberty in the name of taking care of us.

admin :: Sep.24.2009 :: The World :: No Comments »

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 »