Raise my taxes please

Two things you can't escape from in life: tax and death. The United States government is so much in debt. It's time to raise taxes and plug the budget hole. Many articles have been written about whether or not the Government should let the Bush era tax cuts to expire. Some argue that we shouldn't raise tax this year because the economy is still in a fragile state.

While I agree that letting the tax cuts to expire can have a negative impact on the recovery, but I feel that solving the national debt problem is far more important than betting on tax cuts to save the economy. The US has been borrowing so much from other countries. If we don't solve the national debt problem soon, our lenders may demand for higher interest returns or stop lending us more money. When that day comes, even if the economy is on its recovery path, we would be forced into another financial crisis.

Paul Krugman has a lot of good writings on the subject. I think it's time for people to face the hard reality -- an increase of taxes is essential to save this country.

The Economist on world economy

In this issue of The Economist, it paints a rather cautious outlook of the world economy. Recent economic data shows signs of the world economy could be in a recovery. But, that could be an illusion, the article warns.

Among many tricky issues, reading economic data is always difficult. Even if the economy is on its way to a recovery, the path is going to long and painful. During this recovery period, we will likely to see multiple up-and-downs in the market.

History doesn't repeat itself, but it does rhyme.

... between 1929 and 1932, the Dow Jones Industrial Average soared by more than 20% four times, only to fall back below its previous lows. Today’s crisis has seen five separate rallies in which share prices rose more than 10% only to subside again.

Why is it important for us to be cautious?

"... optimism contains two traps, one obvious, the other more subtle. The obvious trap is that confidence proves misplaced—that the glimmers of hope are misinterpreted as the beginnings of a strong recovery when all they really show is that the rate of decline is slowing. The subtler trap, particularly for politicians, is that confidence and better news create ruinous complacency".

I think the article is a good read. It gives a good overview of the current world economic conditions and intricate relationships between the government financial polices and macro- and micro-economics.

While the economy looks grim, but I have hope. The world's economy will eventually bounce back. In between now and then, there are many good investment opportunities. Individual investors need to be patient and cautious. The Economist article is a friendly warning that "those who try to time the market is a fool".

World Economy, Business

The Economist predicts China in 2009

The Economist predicts 2009 will be a challenging year for China, especially for the Community Party. As the world countries face a major economic downturn, the article argues that a slow growing economy will eventually lead to an unstable society and a troubled government in China.

I think there is some truth to the analysis.

Of all the huge uncertainties that plague attempts to predict the progress of the global financial crisis, two in particular hang over China.

One is the resilience of its political structure to stress of this kind. During the last several years of economic health, it has been hard to imagine anything that could dislodge the party. [...] The head of the IMF, Dominique Strauss-Kahn, has predicted GDP growth could fall to as low as 5-6% next year, half the rate of 2007 and far lower than anyone would have thought possible just a few months ago.

The other big uncertainty is how Chinese consumers will respond to the crisis. [...] Keeping the middle class happy and willing to spend is as vital now in China as it is in any economy. But given China’s rudimentary social-security system and strong tendency to save even at the best of times, this could be particularly difficult.

Certainly the Communist Party is going to face difficult time ahead in 2009 -- an unbalanced wealth distribution between the poor and the rich, a poor social-security and welfare system, and an overly restricted public and internet media. But, I'm rather optimistic about the future. Why? I believe the Communist Party is doing a relatively good job in making changes and adopting itself to changes in a time of great uncertainty.

We should not measure the success of a government by GDP or how much goods its people can consume, but rather, by the pace of progress of a government can bring about. As long as the Chinese government is committed to changes and is able to show progress, I think it can weather through any storms that is ahead in 2009.

Credit crisis hits Silicon Valley

The Silicon Valley is the heartland of technology innovation. New services and products are usually developed with venture capital funding. In news: credit crisis may be hitting start-up companies.

The heart of the Valley's success is, of course, its ecosystem of start-up companies. Many claim that ecosystem remains healthy, thanks to the lessons learned and prudence gained from the dot.com crash.

Nevertheless, a dense fog of anxiety has settled over the land.

"Funding will tighten up. We are certainly going to see some ripple effects," said Ron Conway, a prominent angel investor who has invested in hundreds of Web start-ups over the last decade.

Yet nonstop economic gloom in other parts of the economy seems to have frayed even the nerves of the Valley's sublimely confident denizens. The economic crisis dominates conversations. In the technology blogosphere, prescriptions for riding out the crisis - and what percentage of start-ups are destined to fail - are the subject of intense debates.

According to a quarterly survey by the University of San Francisco Entrepreneurship Program, the confidence of venture capitalists has plummeted to the lowest level since the survey began in 2004.

There is no doubt that the current economic crisis is serious. But, it's also naive to believe that all business and technology innovation will collapse. Not all investors are cash dry -- Warrent Buffet still has a lot of cash. Because technology innovation is important to the survival of human race, investors will find money to fund start-ups and create new business opportunities. The rules of the game haven't changed, just the competition for fundings is getting tougher.

On the US Government massive bailout plan

The US financial market is in a state of extreme stress. Triggered by a sub-prime mortgage market collapse, banking institutions, both investment banks and traditional banks, are having trouble raising cash and afraid of leading money. Recently the US Government steps up its action to calm the market by issuing a massive bailout plans to save troubled financial institutions.

A constant reporting of these news events in different media streams can create confusion. It's important that we keep our head straight in order to make sound decisions for our financial futures.

Important questions that people should know are as follows:

1. Why does the US Government want to bailout troubled financial institutions?


2. How will government actions affect an individual's personal finance?


3. What actions should we take to protect and secure our financial future?

A1: The US Government is very concerned about the current crisis. It worries that if a significant number of financial institutions are to close doors within a short period time, a series of chain reactions will destroy any potential for the US economy to recover in the near future.

A2: US taxpayers should expect greater inflation and higher taxes in the near future. The government's bailout plan will require a large amount of government-back bonds to be issued. Most likely that they will be sold to foreign countries. The effect of this is equivalent to printing cash, which will lead to inflation. Greater national debts will reduce foreign investors' confidence in the US-dollar-backed investments. To reduce the national debts, unless the government finds others way to fund it's current operations, it will raise taxes.

A3: Don't panic. We're in a tough situation, but it's not the end of the world. The best way to protect our financial future is to diversify our investments. Diversify means putting your money into different vehicles of financial instruments. If you have money to invest and don't yet own a home. Go buy a house -- if you plan on staying at the same place for years and enjoy maintaining your own home. Remember to invest in retirement funds. In a down market, increase your investment funding if you can. Find ways to reduce your income taxes. Owning a home and invest in qualified retirement plans (401K and IRA) can reduce your income taxes.

When it comes the US economy, I'm an optimist. I believe that the US has the best governing system in the world (though imperfect) and with a culture that will allow a fast market correction and recovery. Most of the world's countries are in a deep financial crisis. My belief is that the US will be the first to come out of the woods. The question is when.

Additional Reading: Wall Street Bailout Plan

Depressing economy, but don't panic

It's really hard to find good news about the US economy. Everything seem to be falling apart: the real estate market is in trouble, banks are closing their doors and the stock market is a bear mode. I woke up this morning and asked myself, but what can I do today to protect my financial future?

First, don't panic. Don't let negative media news cloud your judgment. Don't sell your investments just because the market is in a bear mode. Don't sell your house just because its price is falling every week. Second, assess your family's financial situation. Know how much debt your family is carrying. Known how much asset your family has. Once you understand all these, evaluate your family's financial goals -- saving for retirement, children college education or a new house down payment. Third, develop plans to achieve your financial goals. Your plans must be independent from the current market condition. They should work in both good and bad market condition.

Let me argue why people should not panic. The ups and downs of the world economy are cyclical. Unless we expect the world comes to its end soon, there is no reason to believe that the economy will continue to go down and collapse completely. If you are lucky enough to live for a good number of years, you will experience many more ups and downs of the economy.

We shouldn't ask the question whether or not the current conditions will improve. We know for a high degree of certainty that it will improve. The question we don't know for sure if when. It's difficult to time the market.



Since no one has a crystal ball that can tell the future, we must rely on our understanding of the history. Because we expect the market to come back sometime in the future, while everything is cheap, it's a good time to invest.

Technology innovation in a poor economy

"How Does a Poor Economy Affect Tech Innovation", a Slashdot reader asks. Specifically the reader asks whether companies will pull back from risky research & development and stick with selling what they know how to sell?

I think the answer is somewhere in between. There is no doubt some companies will layoff workers and reduce R&D budget in order to weather through the poor economy. But, I doubt any smart companies will completely stop their technology innovations even if they are risky. I always believe that whenever the economy is in a downturn, it's the best time for a company to invest. Those who invest early will likely to come out strong when the economy turns its head. Should Google, Amazon, Netflix had stopped their technology innovation and expansion during the dot-com crash in the late 90's, they would probably be overran by Yahoo!, BN and Blockbuster today.

In addition, I think continuous technology innovation is the only way to pull us out of a economy recession. If you trace back into the US economic history, you will see that there is a strong correlation between new technology and economic growth.

Some specuation. During the 90's, a parallel explosion of person computers and the Internet created the dot-com boom. In the next decade, I think mobile and wireless computing will bring about a new wave economic growth.

When will the oil price comes down?

Until it stops going up. Based on my understanding, the uptrend of oil price is mainly caused by speculative trading on the market.

If you’re looking for evidence oil’s surge is the result of a speculative bubble, look at the astronomical trading statistics on energy exchanges. Bill Stone, PNC’s chief investment strategist, notes today that the average daily trading volume in energy futures so far this year is $138.3 billion. That’s a 61.6% increase from 2007 and a 3,000% increase from 1997.

I would note that much of this increase might be the result of technology rather than evidence of a bubble: Sophisticated computerized trading systems make it much easier to try to squeeze out extra profits by buying and selling contracts rapidly throughout the day.

What can we do? Nothing. Just sit tight until the price comes down.

Except the commodities, everything else looks cheap. Given that the economy is kind of under the weather, I think it's an excellent time to invest.

Here is my logic: the future of our economy can only either go up or go down. It has only two possible outcomes. If it goes up, then start investing today will give you a better return in the future. If it goes down, your money in the bank probably won't worth much anyway -- the purchasing power of your savings would be reduced due to inflation.

When everyone is scared, it's time to be greedy.

Recession is here

Eonomists and policy makers are wondering if the US economy is in a recession. It's always difficult to tell whether an economy is in a recession because a formal government announcement usually come only after the event has unfolded. In other words, it's possible that we are in a recession, but no one is sure of it, or no one wants to make a hasty claim about it.

Nevertheless, there are somethings we certain of. First, the economy is not as strong we have hoped. Second, inflation and the housing mortgage trouble are hitting the consumer spending, which in turn affects the US economic growth. Third, many banks and lenders are in serious financial trouble, not knowing how much they've lost in the high-risk investments. Lenders start tightening their lending practices, which affects the borrowing power of small businesses and consumers. Again, this affects the US economic growth.

When it comes to the US economy and investment, I listen to what Warren Buffet has to say:

Berkshire Hathaway's (BRKA $140,000) Warren Buffet said in an interview
on CNBC that he is no longer offering to back $800 billion in municipal
bonds that are insured by the nation's largest monoline insurers. Buffet
also said he believes the US economy has entered a recession and stocks
are not cheap. Though he does not rule out a big downturn, he does not
yet feel that the current situation is anything like what was seen in
the 1970s.

Source: Schwab Morning Market View for March 03, 2008

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Cheap US Dollar

The US Dollar is trading historically low against many major currencies. Few questions come to my mind: (1) How did we come to this situation? (2) Who can and can't benefit from a cheap US Dollar? (3) Should small investors be worried about a cheap US Dollar?

How did we come to this situation?

According to The Economist article, the US Dollar is trading historically low for three key reasons: high oil prices, a weak US economy and a troubled US credit market.

Who can and can't benefit from a cheap US Dollar?

Individuals and companies benefit differently from a cheap US Dollar. For individuals, tourists travel in the US from countries with a strong currency can benefit. Travelers from Canada and EU find everything to be cheaper in the US. On the other hand, US tourists who travel abroad face a complete oppose situation -- everything is more expensive abroad than at home.

A cheap US Dollar can help US companies and depress the economy of foreign countries. US businesses with an international market can benefit greatly from a cheap greenback. This is because the price of their exports are now more competitive than those from countries with a strong currency. Developing countries whose economy depend on exports to the US may be hurt by a cheap US Dollar -- a weak US economy will demand less imports.

Should small investors be worried about a cheap US Dollar?

In general, small investors in the US shouldn't be worried about a cheap US Dollar, assuming that their investment portfolios are diversified and are aimed for long-term investment. Currency exchange rates are cyclical -- the US Dollar was the king in the late 90's. It's only a matter of time for the US Dollar to come out of its low (the question is when). Meanwhile, I think investors should continue to invest in the US stock market, in particular in S&P 500 companies. The profits of US national business may be hurt by a weak US economy, but multinationals should do relative well because of their diversified international markets.

Diversify your investment in cash

Experts believe that now it's a good time to diversify some of your investment in cash. This is because the yield of cash is very attractive given today's market condition.

1. Cash yield as much as long-term bond. As of July 9th, 2007, 10-year US Treasury yield is 5.16%, and 6-month CD offered by INGDirect is 5.15%.


2. The yield of cash investment is ahead of the current annual inflation rate, which is around 2%. If your cash investment yield 5%, then you enjoy real cash yields of 3%.


3. The Fed probably will keep the short-term interest rate at 5.25% for the rest of 2007.

For those who are interested in cash investment, I recommend CD laddering.

Source:

• Daily Treasury Yield Curve Rates


• INGDirect Orange CD


• Diversify into Cash?

Rich investors and poor consumers

These days investors of the stock market are happy because the Dow is at its all time high. However, US consumers are not very happy because of rising energy costs, grim housing markets and possible inflation and stagflation crisis.

This situation looks odd to many people. If the US economy is doing well, shouldn't it benefit both investors and consumers (remember the age of dot-com)? If the US economy is not doing well, how is it possible for many companies to report record earnings?

Answers to these questions can be found in Robert Reich's podcast -- Wall Street's up, Main Street's down.

Will the U.S. dollar value continue to slide

The value of the U.S. dollar continues to soften against the euro and the British pound. According to an IHT report,

Last year, the euro appreciated more than 11 percent against the dollar. The British pound rose nearly 14 percent against the dollar in 2006.

Obviously, this is a good news for the European travelers in the U.S. and the European currency investors. However, it was a bad news for people like me whose salary is paid in the U.S. dollar.

Will the value of the U.S. dollar continue to slide in 2007?

China to be the second-highest in R&D investment

A key to maintain a country's competitiveness is to invest heavily in research and development. The U.S. is a good example. Scientific advances and entrepreneurship have helped this country to be a dominant force in the global market.

According to OECD (Organisation for Economic Co-operation and Development), by the end of 2006, China will become the second-highest investor in R&D.

The burgeoning economic powerhouse has rapidly increased the money and manpower being invested in R & D, and spending by government and businesses will reach more than $136 billion in 2006, the OECD said Monday.

For comparison, Japan, formerly the nation with the second-highest investment in research and development, will dole out $130 billion this year, and the EU nations (including France, Germany and the U.K.) together will allocate $230 billion.

An interesting fact is that the growth rate of China's R&D surpasses the growth rate of the country's GPD.

Its R&D went from 0.6 percent of its GDP (gross domestic product) in 1995 to more than 1.2 percent in 2004. That doubling growth rate is faster than the rate of growth for China's entire economy.

Source: China rising rapid in R&D, report says, CNET.com

Booming Chinese economy is a two-edged sword

The rapid growth of China's economy is a two-edged sword. On one hand, young people have prospered because of the booming economy. Their wages have increased, their life styles have improved, and the wealth of few elites have even surpassed their Western counterparts (link, link, link). Because the country becomes richer, the government now plays a bigger role in changing the political balance in various regions in the world. On the other hand, the booming economy has also brought about critical social issues that people have never faced in the past.

Two articles from The New York Times tell this story well.

China enacts new bankruptcy law

Recently China's parliament enacted an updated bankruptcy law that better protects commercial creditors. The new law requires troubling firms to pay their creditors first instead of their workers.

This is a major news. In the past, the communist Chinese government typically gave a higher status to workers and farmers, as oppose to commercial businesses. In this new bankruptcy law, it does exactly the opposite. Creditors first, workers second. The new law brings China more in line with market-based countries such as the US and Japan. In additional, the bill will also permit firms that are struggling financially to request reorganization.

Source: BusinessWeek, BBC News.

Building a Better China Tomorrow

Coming back from a two-week vacation in Hong Kong. During this time I noticed that there is a lot more mainland China tourists in Hong Kong today than it was few years ago. From what I heard, these tourists have brought significant economic contributions to the city.

It's evident that more Chinese tourists in Hong Kong means the Chinese economy is doing well. Chinese people are making more money and spending more money.

POD: Podcasts of the Day

In Technology

• Go Digital (January 30th, 2006): do you know the last week of January 2006 marks the 40th anniversary of the invention of fiber optics? Do you know how important is Wi-Fi to New Orleans people and gorillas in Africa? Subscribe to BBC Go Digital Podcast.

In Business

• There's Oil in Them Thar Sand: do you know Canada has the second largest oil reserve only after Saudi Arabia? The only reason why Canada hasn't profit from their oil because it wasn't economical to extract it. Now a barrel of oil costs around $50-$60, Canadian oil reserve becomes extremely attractive. How will this impact the local natural environment, native Americans, and world economy?

US GDP Slows in the 4th Quarter of 2005

MarketWatch reports US GDP in 2005 4th quarter slows to 1.1%, the weakest growth in three years.

Implications:

• The Fed may finally stop raising the interest rate


• CD investment looks good if the interest rate won't go any higher in the short term