Effect of QE

According to Richard, the inflationary effect caused by QE has been offset by the deflationary effect on low wage offer by the workers from third world country. The same job require USD200 can be done by someone from India for USD5. This is phenomenon is done through globalisation and world trade liberation and the use of information technology as enabler to control manufacturing process from the other side of the globe.

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 Whatever It Takes, For As Long As It Takes

Posted on: Tuesday, October 02, 2012|Written by: Richard Duncan

At the beginning of August, I posted a blog called “When Will The Fed Print Again?”. Now we know. The answer is now. On September 13th, the Fed announced that it will create $40 billion per month and use that money to buy agency mortgage-backed securities in order to push down long-term interest rates so as to support economic growth. Furthermore, the Fed’s press release stated, “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

This round of money creation differs substantially from the two rounds that came before. During both of the earlier rounds of Quantitative Easing (QE) the amount of money to be created and the duration of the exercise were announced from the beginning. This time no limits on either quantity or time were announced. In other words, this time the Fed is going to continue creating fiat money for as long as it takes to bring down the unemployment rate. Some economists have dubbed this exercise “QE Infinity” instead of QE 3 due to the opened-ended nature of the Fed’s commitment.

But why did the Fed launch this extraordinarily aggressive program of open-ended money creation just now? In my August 2nd blog, mentioned above, I outlined four triggers that would force the Fed to switch back on its printing presses: 1) a stock market crash; 2) much higher government bond yields; 3) deflation; or 4) a jump in the unemployment rate. None of those criteria were met between then and now. Moreover, the spike in food prices brought about by the US drought should have deterred the Fed since there is a clear cause and effect relationship between paper money creation and food price inflation. Nevertheless, the Fed went ahead anyway. Why?

Some commentators have expressed the opinion that the Fed acted to help President Obama get reelected. I don’t believe that is the reason. If the Fed had wanted to help reelect the President, it would have acted sooner to ensure the economy was powering ahead by election day in early November. It waited too long for that. It’s going to take more than a month or two for this measure to begin to meaningfully impact economic growth.

I believe the Fed acted now because it is afraid – afraid that our global economy is about to go under. In the past, I have written that it is useful to think of the global economy as a big rubber raft, but one inflated with credit instead of air. On top of the raft float not only all the asset classes – stocks, bonds, commodities and real estate – but also the world’s seven billion people. So much credit has been created globally that the raft is now fundamentally defective because the income of the world’s population is insufficient to pay the interest on all the debt. The raft is full of holes and the credit keeps leaking out as one group after another is forced to default on its debt. Therefore, the natural tendency of the raft is to sink. But, if the raft sinks not only will asset prices crash, people will begin to die – just as they did during the 1930s and 1940s, after the credit-inflated global economy of the Roaring Twenties went down.

Signs abound that the global economy is beginning to submerge. The US economy grew by only 1.3% during the second quarter. The UK is in recession. Europe’s economy is in crisis. And Japan’s economy, which has been in crisis for 22 years, is deteriorating rapidly due to a sharp contraction in exports. Even China’s great economic boom is over. Chinese exports grew by only 1% year-on-year in July. It should come as no surprise that China’s export-led growth model cannot work when all of China’s trading partners are in crisis.

With the global economy going down fast, the Fed has begun to panic. Having already cut short-term interest rates to close to zero percent, it has only one policy tool left to keep the global economy afloat. That is to create more money and inject it into the raft in order to reflate it.

The Fed is not acting alone. In recent weeks, the European Central Bank has announced it will do “whatever it takes” (i.e. print as many Euros as it takes) to hold down the interest rates on Spanish and Italian government bonds so that the Eurozone does not disintegrate. And, in late September, the Bank of Japan announced it would expand its own version of Quantitative Easing by the equivalent of $126 billion. The Bank of England has been the most aggressive player of all, having bought up approximately 30% of all UK government debt with newly created money.

The central bankers are at emergency stations and manning the pumps. They are pumping credit into the global economy as fast as they dare. If they don’t pump in enough, the raft will sink. If they pump in too much, it will turn into an inflationary balloon and float away.

Will this work? It will – for a while. Then it won’t. So much fiat money creation would have caused very high rates of inflation long ago had it not been for one, separate factor: globalization. Because of globalization, the marginal cost of labor has fallen 95%. It is no longer necessary to pay a factory worker $200 per day in Detroit to build a car. That job can now be done with $5 a day labor in India. This unprecedented collapse in wage rates has been extraordinarily deflationary; and that deflationary pressure has completely offset the inflationary pressure produced by the enormous increase in fiat money creation in recent years.

For the moment, fiat money creation is keeping the global economy afloat and globalization is preventing inflation by driving down wages in the developed world. This arrangement is inherently unsustainable, however. The global economy is in crisis (and sinking) because the income of the world’s population is insufficient to service the interest on all the debt. With median income in the developed economies shrinking because of globalization, it is inevitable that credit defaults will accelerate, causing the global economy to sink that much faster.

The only lasting solution to this crisis will be one that causes incomes to rise.

Posted on: Tuesday, October 02, 2012 | Comments (12) | Written by: Richard Duncan

Look in the Mirror

Posted on: Tuesday, October 16, 2012|Written by: Robert Kiyosaki

Why money isn’t the answer to your problems

When I was a child, my dad told us that the Japanese were aware of three powers: the sword, the jewel and the mirror.
The sword symbolizes the power of weapons. Great nations throughout history have invested in their military to gain an advantage over other nations. For instance, America has spent trillions of dollars on weapons, and because of this, is the most powerful military presence in the world.
The jewel represents the power of money. I've observed there is some truth to the saying, "Remember the golden rule. He who has the gold makes the rules." History is filled with examples of the rich using the power of money to gain an advantage.
The mirror symbolizes the power of self-knowledge. And, according to Japanese legend, self-knowledge is the most treasured of all three powers because it guides how all other powers are used, whether they are used for good or for ill.
What controls you?
For the middle-class, the power of money all too often controls them. Each day, members of the middle-class get up, work hard and fail to ask if what they do makes sense.
Instead, controlled by the power of money, the middle-class follows the crowd. They conform rather than question. They blindly repeat mantras handed to them by so-called experts: "Diversify." "Your home is an asset." "Get a safe job." "Don't make mistakes." "Don't take risks." "Save your money."
Ultimately behind the power of money is fear.
We fear not having enough, and we fear being ostracized. The fear of not having enough causes us to work harder and harder. The fear of not being ostracized causes us to try and keep up with the Joneses. All too often, the result is the same. The American dream turns into an American nightmare. Here is the familiar story.
Recently married, a happy, highly-educated young couple moves into a cramped, rented apartment. They realize they are saving money because two can live as cheaply as one. For a while they are happy.
Then, the apartment begins to feel cramped. They see friends moving into homes and having kids. They decide to save money to buy their dream home so they can have kids too. They now have two incomes, and they begin to focus on their careers. They make a lot more money, but their expenses go up as well.
As the young couple's income goes up, their tax burden rises. And when they buy their dream home, they incur property taxes. Additionally, they also buy a new car, new furniture and new appliances to match the new house. Their liabilities column goes up and is full of mortgage and credit-card debt.


They are now trapped in the rat race. Soon they have a baby and work harder to make ends meet. A credit card comes in the mail, and they max it out trying to stay afloat. A consumer credit agency calls and promises to help them consolidate their debt into one low payment. They do it, pay off their credit cards and feel like they've done the smart thing. They breathe a sigh of relief.
Then their friends invite them to the mall for the Memorial Day sale. The young couple promises themselves they won't buy anything, but they bring the credit card just in case.
I've heard this story thousands of times all over the world. Each time, the story is followed by the question, "How can we make more money?"
I tell them, “Your problem is not a money problem.”
Rather, the problem is a financial education problem. They don't know the difference between an asset and a liability.
Money seldom solves people's problems. Intelligence and a financial education solve problems. And if you want to be rich, you must understand both how money works and how you work. You must look in the mirror and understand your motivations, desires, and dreams—and stay true to them even when it means going against the Joneses.
Some people go after the power of weapons. Others go after the power of money. But true power comes from the mirror.
I encourage you to spend some time tapping into its power today.
Portions of this post were adapted from Rich Dad Poor Dad.
Do you see someone with a financial education when you look in the mirror?

World Market PE

It is interesting that the Korean market has the lowest market PE among countries in Asia Pacific. Another interesting fact is Malaysia has such high market PE - 16x. Definitely will lower down the yield investing in Malaysia market. 

Theme Park's Royal Link

Theme Park's Royal Link

The above is verbatim from the Edge weekly page 36 this week. This article profiled a prince from Negari Sembilan aged 33, who worked for Khazanah. He has astonished background being educated in English Boarding School and went to Cambridge for a degree. Before joing Khazanah he worked with Mckinsey, one of the most prestigious consulting company from US. 

Usually, as i read about any of the rich and famous, i realised most of them are educated and trained from oversea. I always wonder why the the powerful elite, range from rich businessman, politician, Royal families sent their children to famous schools overseas typically United Kingdom. Even our current PM, Dato Seri Najib and his brothers are trained in UK since young. Hence, the fact is the rich and famous study oversea the poor and unknown study locally! 

What's more interesting is, we Malaysian like to appoint these so called Malaysian, oversea trained  to lead us as though they know more than us about how to run the country whether in public and private sector. By the way the current head in Khazanah, Azman Moktar was also trained oversea. And the smart oversea trained Malaysian will appoint a locally trained Minister to tell us that Malaysian Education System ranked one of the top in the world. Not sure whether you could see a big contradiction or rather just coincident! Worst is the smart oversea trained Malaysia continue to flip flop on the education policy. Honestly, i am not sure why is it so difficult to decide what is the good education system for the less privilege children in Malaysia. If you are a father that sending kids to Malaysian schools and drawing the evidence that most of the successful leaders and the rich and famous are generally oversea trained, i think the answer is pretty obvious. 

Well, it is still difficult because the bunch of people that decide on the future of our locally trained children do not send their kids to Malaysian school instead oversea school. That is why they flip flop on the policy. As the people that decided are in difference (ie they do not have local school going kids), so good education or bad education policy does not really matter to them. Imagine, if all Malaysians are prohibited to receive education from oversea, the same bunch of people will be fighting to death on what is a good education to fellow Malaysian.    

QE1 & QE2

Found this website (http://www.bankrate.com/finance/federal-reserve/qe3-financial-crisis-timeline.aspx) tracking the amount of money from QE1 and QE2 inject into US economy.  In summary Q1: USD1,425 billion Q2: USD600 billion => Total USD 2 trillion. Do you know how many zeros are there for a trillion? hahaha.......just to give us a perspective how much is USD2 trillion: Malaysia 2011 GDP is USD278 billion. The amount injected to US economy will be around 7 times of Malaysia's economy. The Fed has just created 7 economy of Malaysian size out of thin air. There are more to come after QE3 is announced.

Mortgage rates and the Fed

 

QE3

Finally the much-waited QE3 is launched. Refer to highlight below, cheap funds will continue until mid-2015. It is really interesting to see assets price continue to rise in next 3 years.

Fed to launch QE3 by buying mortgage securities

$40 bln of MBS per-month, will do more unless job market strengthen

The Fed announced on Thursday a third round of asset purchases to drive down interest rates and help lower the unemployment rate

By Greg Robb

WASHINGTON (MarketWatch) — The Federal Reserve, worried that improvement in the unemployment rate has stalled, announced a third, large purchase of bonds on Thursday in an effort to bring down long-term interest rates and spur growth. 

The Fed said it would buy mortgage-backed securities at a pace of $40 billion per month.

The Federal Open Market Committee, which ended a two-day meeting on Thursday, said it was concerned that, without the action, “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”Read text of statement.

In addition to bond purchases, the Fed said it intends to keep the benchmark short-term interest rate – the federal funds rate, at nearly zero until mid-2015. The prior guidance on the first rate hike had been late-2014.

The guidance now extends well beyond the term of Fed Chief Ben Bernanke, which ends early in 2014.

The Fed has left the federal funds rate at nearly zero since December 2008.

Successin Life vs Success in Academic

Which is more important? I believe this is an interesting question!

Some argue, success in academic is essential in leading to success in life. Sounds logic. But a lot of rich mans (assume they are successful in life) has no or just very little education!

Another would argue, having good academic will just train you as a good employee. But without good academic how would people know you are good?

So which is more right? For me, good academic at early stage of life (up to 20 years old) is critical to build up the foundation of logical thinking, analytical thinking, self confident, ability to speak your mind, ability to do simple arithmetic, simple science, politic, finance, geography, history..........................you name it. Well you may ask sure or not have to learn so many things? The key word lies on "Foundation" - mean the basic. Obviously, our current education system in Malaysia is unable to cover some many subjects. So the responsibility lies on parents to continuous teaching our kids on everything that you know. it does not matter your kids do not understand, the important things is they are aware such things exist. Do not worry of overloaded of information, you are not forcing the kids to memorise those information, merely expanding their brain capacity. 

Research shown that human only use less than 10% of the brain, as we rarely develop it to further extend. If your body muscle need exercise to expand so do your brain. But how? I m sure you have seen acrobatic show from China that a small little girl can bend and twist her body easily as if she is boneless. How was that done? It has to do with our mental state? If you are told at very young age that this act can be done, you will believe so it can be done not at later stage. Hence the little girl has expanded her capacity beyond normal person. 

Likewise,  we as parent, need to expand kids brain capacity beyond the norm while they still believe it can be done. Once kids have reach a more conscious stage, ie they start to believe they have limitation, then it become difficult to expand their capacity. That fact is once kids enter primary school which is structured and fixed and disciplinary, they will lose the flexibility as other kids are doing the same thing - then become norm.

So please catch the golden time zone.

I think this is a extremely important exercise must be done before it is too late. 

Market Pulse + 13th GE

KLSE is plunging for last two days. At 1:40 pm today KLCI was downed by 24 points. This event should indicating some big things will be happening. The big boys in the market always has first hand info compare to other players in the market. The rumour that has been speculating in the market for the last one year was when is the 13th Malaysian General Election. The current Parliament will due to be dissolved in March 2013. I believe the March 8 2008 event - the blood shed of KLSE is till fresh in our mind, when BN lost 2/3 majority for Parliament seats.

Practically, PM has left with only 6 months to decide when to call for 13th GE. Lets analyze by two phases. 1st phase will be Sep to Dec 2012 and 2nd will be Jan to Mar 2013. If i were PM i will choose 1st phase. why? should anything happen in between, the GE still can be deferred. So to me  2nd phase is out as it is too risky to plan.    

Phase 1 which month? i really think it will happen in end Oct or early Nov (coincide with national school holiday). It should not be done in Dec as it will be heavy monsoon rain session. The feel good factor just after end Sep budget 2013 announcement will be fresh and at its peak. So sit tight and watch.