US Government Continues to Print Even More Money!

Dear Friends,

This is what China Premier Wen Jiabao had to say about the growing US Government Debt, and I quote from the Wall Street Journal website article entitled "US Insists China Fears Over debt Unfounded" written by Batson, Browne and Phillips: -

"We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets," Mr. Wen said in response to a question at his annual news conference. "Frankly speaking, I do have some worries."

Naturally, like any borrower, the US insisted on its creditworthiness. After all, the US Government is only owing US$14 trillion of debt, or US$46,700 per US citizen as at today.

I don't know about you, but US$46,700 is a lot of money for each US citizen to be owing, including the one day old baby who just got born yesterday. If we only take into account the working population, then the Debt per worker rises to US$82,400. This is on top of any housing mortgage debt, car loans, and credit card and personal loans that the US worker may have.

If we take into account that an average American worker earns US40,000 per year, and saves 3.5% of the earnings, which is the current savings rate, i.e. US$1,400 per year in Savings, then the number of years for the US Worker to save sufficiently to pay down the US$82,400 of existing Government Debt will be 59 years.

Since it is unlikely that a worker will earn US$40,000 in his first few years of work, we can assume quite conservatively, that the Government Debt will have to be repaid over two generations of workers if the current generation is now in his 20s.

I don't know about you, but I don't consider this financial obligation manageable, and I am sure any sane banker will agree with me, if he was assessing any individual's debt obligation. I mean, we have tied the unborn son of the US Worker in his 20s today, to a lifelong contribution of 3.5% of his Annual Income to repaying existing debt already spent, on top of the normal income and other taxes that the worker currently pays.

How would you like to saddle your unborn child with a lifetime debt repayment? I wouldn't. Yet, the US Government is insisting that it is creditworthy, and is even persisting in increasing its Government Spending and Budget Deficit, and thus, increasing its Government Debt even further.

Now, in an act of utter defiance on World Concerns, the Federal Reserve has announced that it is committed to buying more Treasury Bonds in an effort to flood the financial system with cash, in what economists call, "Quantitative Easing". I quote from the Wall Street Journal article entitled Fed in Bond-Buying Binge to Spur Growth as follows: -

"All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases."

Obviously the World is not convinced with the US Government's assurance by presidential spokesman Robert Gibbs -

"There's no safer investment in the world than in the United States"

and the Dollar tumbled badly after the Federal Reserve announcement. Read more about this market reaction in the Wall Street Journal article entitled "Dollar Tumbles on Aggressive Fed Move".

It would seem that the US Government has no consideration for non US parties in their effort to print money, and thus, the challenge is now in China Premier Wen Jiabao's court to respond.

In my opinion, he should actually start to sell US Treasuries on a consistent basis, until he has made a point to President Obama that the US Government cannot simply give pieces of paper not backed by additional Gold Reserves or any other valuable assets and expect the world to take it lying down.

Whether China's Premier will actually do this is interesting news to follow up on in the next few months. Where does it end? After another US$5 trillion of additional paper money? Or US$10 trillion? Why not make it a round number of US$100 trillion?

Where will China, Japan and the European Union draw the line where it says enough is enough? When they do, the risks of Hyper Inflation escalates significantly, which is why Gold Price skyrocketed after the Federal Reserve announcement.

In this regard, my conclusion in the earlier blog article entitled "The Inevitability of A US Dollar Devaluation Crisis" seems to be in the correct direction, although as explained using the Sand Metaphor in that article, the exact timing of the Devaluation Crisis is unclear.

Best wishes,

Ooi

AIG Bonus - Much Ado About Nothing!

Dear Friends,

I stayed up late tonight to watch the US Financial Services Committee Hearing on the AIG Bonus Case. Nothing beats getting the answers direct from the horse's mouth. It was obvious that President Obama did not do his homework when he made hostile remarks on the payment of AIG Bonus. If he had understood the situation, he would not have said what he said.

Firstly, few people know that the current AIG CEO, Hank Liddy, was newly appointed about a year ago, when AIG required bailout money. More importantly, Mr. Hank Liddy came out of retirement from managing a large American Insurance firm, to steer AIG as a national service, for the pay of US$1 (One Dollar) per annum, for the two years of 2008 and 2009.

Thus, Mr. Liddy is a noble man of high integrity, a Government appointee who was entrusted to protect the Government's Bailout Money sent into AIG.

Under the circumstances, why would such a professional man of more than 37 years of business management experience pay out bonuses to people considered to have caused the collapse of AIG?

I reserved my judgement right from Day One when I heard the "AIG Bonus Scandal". In my mind, if a Government Appointee decided to pay the bonus, it must have been done in good faith, after careful consideration of the consequences of a public outcry.

Here, my instincts was to trust this new CEO, although at that time, I did not know Mr. Liddy's pay. Had I known his pay, I would have even stood firmly behind him from Day One, even if I had not known the full facts of the case.

Why? Because, it is an important management principle that you stand firm behind the man you use, and support him, if you know for sure that he has not in any way, compromised himself with a lack of professionalism or integrity.

No one top manager will make similar decisions in times of uncertainty and high risk. Thus, if we use a CEO, we must respect his right to make a decision on behalf of the firm, and whilst we may not necessarily agree with the decision, we must accept it. We may take action to minimize such decisions by setting new ground rules of communication and approval process, but we should accept what has already been done. This should be applicable, even if an error of judgment was made, for "To err is human", and in fact, "One man's food is another man's poison", and thus, what is viewed as an error by some, may be the right decision by others.

Obviously, this is not the case with the present American leadership, who seems more interested in winning popular votes than in "Doing the Right Thing".

Instead of finding out why a Government appointee CEO would pay out bonus, all kinds of indignant remarks were made to embarass the CEO publicly, and remove his credibility beyond all doubt. Worse, this stoking of fire by the President of United States has resulted in death threats to Mr. Liddy and his family, by people who are possibly of low mentality, more driven by emotions than rationality.

Why should Mr. Liddy be defended? Was he right or wrong in his decision? As I have said, even if in our opinion he was wrong, had I been the President, I would have stood behind him and said that

• We must trust the CEO we use, or don't use him at all.
• We must give the CEO proper authority to decide if we are to entrust him with the responsibility to safeguard our investments; in this case, the taxpayers' money.
• We will take appropriate action to ensure that proper channels are consulted with to prevent such mistakes from happening again.
  

However, in this particular case, I actually believe that Mr. Liddy is right in his judgment. This is not easily understood by layman who have not managed companies in times of high uncertainty, and in fact, I noticed many Congressmen who could not get pass their biasness, but let me say that again - "In my judgment, Mr. Liddy made the right decision".

Why do I believe that Mr. Liddy did the right thing in paying out the bonus?

There has been a lot of public misinformation, and I see that the media is not turning around in its paradigm at present.

First, there was no performance bonus paid out. This was stated categorically by Mr. Liddy. What was paid out was Retention Bonus.

Now, hold on to your horses. You might be thinking, "Yeah right! Why should we pay out Retention Bonus?"

Let's consider the case with an open mind and reserve judgment after hearing all the important facts.

Other than its normal insurance business which is profitable, AIG has been saddled with the following challenges causing losses from the moment Mr. Liddy took over (possibly late 2007 or early 2008, I am not sure): -

• Notional Derivatives amounting to US$2.7 trillion (US$2,000 billion).
• Regulatory Capital Trades of US$350 billion, and
  
• Credit Default Swaps of US$80 billion.
  

Crazy. That is all I can say of what the previous management has done to AIG. It is not Mr. Liddy's fault, and in fact, he is the Knight in Shining Armour trying to resolve the difficult situation.

The Retention Bonus contracts were signed by the previous management, and Mr. Liddy has stated that he was not in favour of such contracts, i.e. he would not have made such contracts if he was the CEO. However, he was left with legacy legal commitments that he had to decide whether to honour or not.

He did seek legal advice, and he was adviced to honour the contracts. However, as Mr. Andrew Cuomo, Attorney General has brilliantly pointed out (a compliment to him that I learned something new, not being a lawyer myself), a contract is INSTRUCTIVE, but not DETERMINATIVE, i.e. whilst we should generally comply with the terms of a contract, there could be mitigating circumstances not to fulfil it. Very good advice. Fair enough.

The next two statements by Mr. Liddy is what makes me vote in favor of his decision: -

AIG and its employees subscribe to a philosophy of high integrity in honouring contracts.

To some, especially in times of huge public outcry, this philosophy may not mean much as people expect the employees to be understanding and to write off contractual bonus, due to a much more noble objective, i.e. it is taxpayer's money, bailing out the firm.

This usually wins public support EXCEPT the one taking the pay cut. Except for a minority few, most people who are vociferous and enraged by the AIG Bonus would fight to get their bonus if they were on the opposite side of the fence. As the saying goes, "It is easy to say, but not so easy to do."

Anyway, I agree that there is some basis to the public outcry, but as a man of high principle, I do believe that contracts should be honoured, especially if the other party has honoured his.

So, the biggest and most important question is,

"Has the receipient of the bonus honoured his part of the contract?"

Again, most people has misjudged performance of the receipients. They think that just because these receipients are in the Financial Products Division, they are the ones responsible for the collapse of AIG.

This is about as correct as saying that the person who invented the share market is evil if the world loses money in the share market.

But let's not even go there, because Mr. Liddy did not argue on this ground. Mr. Liddy explains that these people were paid for honouring their contracts in that they helped AIG mitigate its contractual risks and saved it from much deeper losses.

In the one year that Mr. Liddy has managed the firm, he has relied on these people to reduce the risks of losses in AIG as follows: -

• Notional Derivatives has been brought down from US$2.7 trillion to US$1.6 trillion.
• Regulatory Capital Trades (whatever that is) has been brought down from US$350 billion to US$230 billion, and is expected to be brought down much further within the year.
• Credit Default Swaps (CDS) which had caused massive losses for AIG has been brought down from US$80 billion to US$10 billion.
  

Thus, in Mr. Liddy's judgment, these people, the receipients of the Retention Bonus were paid for staying, when there was no more future in AIG. The idea was that if they delivered results for AIG, which they did, their contractual obligations would be honoured by the CEO. Otherwise, these people would have left long time ago.

This makes perfect sense to me, and I would have done the same as CEO of AIG. If the receipients are the key people who solved billions of dollars, and even a trillion dollars of potential losses for AIG in the past one year, don't they deserve to get their contractual pay?

Shouldn't we pay key people who continue to support the firm from collapsing some decent amount of money equivalent to market rate? In fact, talent should be rewarded, and it would seem that the receipients are the talent in mitigating the huge risks.

Mr. Liddy explained that right now, the damage is done. Today, some people want to leave, and some of the expertise for unwinding these complicated "Assets" (should be called liabilities), or more correctly, these contractual obligations of high risks, will be gone.

With more than US$1.6 trillion of such Toxic Assets left with AIG, who is going to do the job for Mr. Liddy?

We can all talk about noble objectives and sacrifices, but hey, unless you come from a rich family or have earned financial freedom, you still need to be paid fairly. Worst, these people who have stayed behind to solve the problems have been crucified and death threats abound towards them.

America! The very heroes that you should be worshipping, to safeguard your money, should they be successful in unwinding the balance of the US$1.6 trillion of Toxic Assets, you have chased away, with public criticism and even death threats! Such immaturity of understanding is beyond comprehension.

There is a saying for this - "Penny wise, pound foolish."

Now, let's see if the taxpayers' money can be safeguarded without some of these key people. Who would want to join a firm that insists that there will be no bonus for a long, long, long time to come? Who, in his right mind, would want to stay in such a firm?

The Core Competency, i.e. the Insurance Business will be destroyed in no time with such a precedence. Those who can't perform will stay as they cannot go any where, whilst those who have the talent will leave because they are hot commodities in the employment market.

It is not a question of finding a job for the talented but one of the right pay. But with lower pay and absolutely no future, the taxpayers have just lowered the bar significantly for the talented to leave. And some have left, to prove my point of the mobility of the Talented. Well done, America! Sigh ........

In fact, Mr. Liddy explained that in his judgment, payment of US$165 million is a lot of money, but worth it, in view of the US$1.6 trillion of Toxic Assets to manage down.

What about the people leaving? The argument by the Government and Media is that the strategy to retain these people did not work. That's the wrong argument.

The correct argument is, "How many good people can we retain as a result of showing the honourable fulfilment of a contractual Commitment to people who did contribute to the well being of AIG (despite the loss, which arguably could have been much greater without these people), and thus, created the feeling of Hope amongst the morale of the employees?"

To look at the few who left is extremely myopic leadership. Sigh again.

Most people do not realize that AIG's Strength, and for that matter, the strength of any financial institution, is in its people. The assets of tables, chairs, computers, and filing cabinets to keep the insurance contracts are useless and minimal at best. If you do not retain AIG as an intact insurance business because you withhold proper remuneration, then, the American Taxpayer will get a lot less than it would get if the business was intact with all its key people.

It is the key people that is valuable in AIG. Here, before you crucify me, let me point out that I am not talking about the people who caused the damage, but the thousands and thousands who made AIG the global brand name that has been so well respected until recently.

For the US Government to invest US$100 billion and then not pay proper remuneration whether bonus or salary increments, is like putting the money into a furnace. How do you expect AIG to make a profit and retain its Distinctive Competencies and Competitive Advantages against other Global Insurance Firms if you don't pay for talent? The ignorance of the US Government is bewildering!

At this stage, I would summarise that this is a very sad situation aggravated by politics and lack of communication. In fact, Mr. Liddy consulted with the Federal Reserve before making the necessary payments. Obama's Government is now embarrassed for shooting itself in the foot.

Up to now, this blog article serves only to help alleviate the death threats on Mr. Liddy and the AIG people. However, let us proceed further with some learning points: -

• Check Your Facts First - As a leader of the world, President Obama should check his facts properly first before making remarks, what more, stoking the fire. It is not good for the President of United States to be embarrased in this manner.
• Do not Be Emotional - As the President, it is important to manage the indignation of the nation rather than stoke it further merely to win public support. Here, an excellent leader can sell ideas and explain the Right Thing to the public. Many Presidents have done that in the past. The truth will prevail.
• Trust the man you use, or don't use him at all. If you use him, empower him, and live with the consequences. Nothing is worse than a leader who leaves his next in command out to burn on the streets. Of course this principle does not apply when it comes to People who are Unprofessional and Dishonest.
• Be a Proper Spouse.
  

The last point, I need to elaborate. Although the US Taxpayers have been dragged unwillingly into bailouts after bailouts (via the Government) which I myself oppose, the Taxpayers (and Government) are now married to AIG, Citigroup, etc., for better or for worse, till death do us part.

The Government (Taxpayers) may seek a divorce settlement at any time, but if it is not seeking a divorce, then, it should do its best to be a good spouse, irrespective of the circumstances under which it got married.

At present, the Government behaves very badly towards its spouse, who is in serious trouble and in need of help. WHY it needs help is no longer relevant. What is important is whether the Government decides to help or not. The Government has a right not to help.

If the Government decides to help and get married to the partner, then, it should treat its married partner with respect, irrespective of who has more money.

Has society degraded in morals to the extent that a person who marries a poor person be allowed to treat the poor person like dirt, to be humiliated and punished (verbally and psychologically)?

I hope President Obama will wake up from his mistake, and be a more balanced leader in this respect. You can decide not to help, but if you do help, please do so graciously. You will find it more rewarding in the long term because people in need, have longer memories than elephants.

Having bashed President Obama, the Administration, the Media and the layman and made almost everyone an enemy, I would like to say that although I don't agree with President Obama's Financial Policies, which tantamounts to excessive printing of money, I admire him for his Desire and Work Commitment, and most of all his Energy Level to drive action to resolve massive problems not encountered since the Great Depression.

If only he can stop being angry at Wall Street and businesses that collapse, stop being petty, and focus on the solutions, I think he will get much better, more effective results.

The most important thing that the US Government hasn't understood is Executive Compensation. By setting all kinds of ceiling caps on remuneration, the whole business world is laughing at the ignorance of the Administration. True, we must not overpay. And we should only pay for performance. But when the President gets involved in who gets what bonus, we know that he has overdone himself. This, is my last food for thought.

Having said all the above, I would put in a prayer for all those who are suffering right now from the current economic turmoil. Unfortunately, it is going to get a lot worse. However, even in very dificult times, a level headed decision usually yields more favorable result than an angry reaction with a stinging vengeance.

Best wishes,

Ooi

No, We Aren't Going to Spend More, the World Tells USA

Dear Friends,

Three important issues are discussed in this video of Larry Kudlow's Interview with Daniel Yergin, author of "The Prize".

First, Europe is telling Timothy Geithner, the US Treasury Secretary that they aren't going to spend more money on Economic Stimulus, as Europe braces itself for the worst economic recession it is going to face in many decades. China has also said the same thing, and thus, the World is watching what the US is going to do.

Obviously, the World thinks that there needs to be some form of accountability, i.e. sooner or later, somebody is going to have to pay for all the money spent, and thus, the World is not going overboard with Economic Stimulus Packages, and some, possibly China, are even asking the US to reduce the amount of such measures.

This is the 2nd Issue, i.e. "Does China trust US Treasuries?" The US Government officials argue that US Treasuries are the safest investment in the world, while the World watch with a quesy feeling as the US simply prints more and more US Dollar while maintaining the FOMC Interest Rate, which is the Price of Money of the US$, at a ridiculous level of 0.25% p.a. when the World Banking System is struggling, and reeling from a liquidity crisis. The low FOMC Interest Rate is artificial and Government motivated, versus a free market situation.

The question is whether the World will accept this US Government Policy and continue to hold US Treasuries for the long term.

In my opinion, it looks like a spanner has been thrown into the Obama Plan on Economic Stimulus and the need to print an additional US$3 trillion this year, which I had highlighted would be the case. much earlier.

The 3rd issue discussed is the simple but important question, "Has Oil Price bottomed?" However, I am not clear on the answer to this question.

Best wishes,

Ooi

The US Debt Question - What is the Problem?

Dear Friends,

This video interview by Martin Soong and Sri Jegarajah of CNBC Asia with Kirby Daley, Senior Strategist at the Newedge Group is worth watching. Kirby gives a balanced summary view of the situation on the Fears of US Government's Excessive Printing of Money, and what China thinks about it.

Best wishes,

Ooi

Higher Risk of World Depression

Dear Friends,

Putting the Hyper Inflation Scenario aside, which is a Wild Card in the sense that we don't know exactly when it will happen, or that whether it will happen at all, the latest information is pointing to a higher risk of a World Depression.

I still believe that the risks of Hyper Inflation is growing with each passing day, but let's just assume that this will not happen in the near future, for the purposes of the current discussion.

The most significant news in the last one to two months has been the Eastern European Banking and Economic Crisis the potential Disintegration of the European Union.

Potential Losses in the European Union Financial System has been estimated at US$25 trillion!

To put things in perspective, the total potential losses in the American Financial System is estimated at US$3 trillion, and thus, the losses in EU dwarf that of USA.

However, as we have already experienced, the US Government is struggling to keep its Financial System from drowning in its losses, and thus, can you imagine what even 20% of the total estimate, i.e. US$5 trillion loss will do to the EU?

Rumours are growing of the impending bankruptcies of Greece, Ireland, Sweden and Austria. Some are also showing concerns over the financial health of Italy and Spain. Britain is facing one of its worst economic crisis, but there is confidence from Professor Roubini that UK will survive, although questions have been raised in the media as to whether UK will follow the path of Iceland, which collapsed financially a few months back.

This will be the most significant driving force, aggravated by a significant and rapid rise in World Interest Rates, as per my blog article, "US & World Interest Rates Set to Rise?"

If the estimated losses of the EU Financial System is true, then it is very likely that the EU will disintegrate, and European Economies will fall deeply into Depression, dragging the whole World with it.

It never rains, it pours.

What should one do to prepare for a Depression? Very simple. Have Zero Debt, and lots and lots of cash because everything will be very cheap, from labour to goods in a Depression. If you have cash, lots of it, you will live like a King in a Depression, because everything is so affordable. Real Purchasing Power with the same Dollar you have in the banks, can buy you a lot more in the future, then, today.

On the other hand, if you have debt, you will struggle in vain, to keep the family's heads above the water. This is because interest rate will be high, whilst the potential to earn will be very weak.

For those of you who want to get a good idea of what life is like in the Great Depression, watch the movies, "The Grapes of Wrath" and "Cinderella Man".

Best wishes,

Ooi

US & World Interest Rates Set to Rise?

Dear Friends,

In my opinion, the US Government needs to throw an additional US$2 trillion into its Financial System to resolve the current problems faced by its Financial Institutions. Even then, the resolution is dependent upon effective and efficient usage of the funds. It should be noted that this will be money lost by US Taxpayers because it is money thrown in to support Failing Banks and other financial institutions (insurance, etc.), which have already lost the money.

Can the US Government afford to throw another US$2 trillion at the Financial System on top of US$2 trillion in Economic Stimulus over the next two years, i.e. an additional US$ 4 trillion without any repercussions of a US Dollar Devaluation Crisis?

In my opinion, this is not possible. At the very least, the US Government will have to raise its Federal Reserve Interest Rate to a much, much higher level, if it intends to raise this amount of money.

It has been said that less than a week ago, the Federal Reserve raised US$10 billion (only 10 billion), at 2.47% p.a. interest rate, and the Treasury Note was oversubscribed by only 2 times. If this is true, then, there is no way for the US Government to raise US$ 1 trillion , much less, another US$ 4 trillion, without raising Federal Reserve (FOMC) Interest Rates to at least 4% or 5%.

As a reference, FOMC Rate was at 8% to 10% p.a. in the Depression / Great Recession of the 1970s.

In normal circumstances, Economic Recession will bottom out around the time Fed Interest Rate bottoms. This is Greenspanomics, i.e. the management of economy through interest rates, and it has worked for 20 years, under normal circumstances, where the Government has full control over Interet Rates, in a normal economic recession.

However, in a Severe Balance Sheet Recession, i.e. one where the Financial System is severely challenged, as is the case here, I cannot think of a situation where the US Government have been able to overcome the challenges of the free market forces successfully, and bring the economy back to live within a short period of 3 years.

It should be noted that when a country like Malaysia or Thailand experience a Severe Balance Sheet Recession as in the previous Asian Economic Crisis, they had a shoulder to rely on, i.e. Big Brother USA to buy their goods exported. However, when America catches a cold, everyone falls sick with it, and there is no shoulder for America to rely on. This is a significant difference between the economic management of the USA and the rest of the world.

In simple layman terms, think about this. If the world is so short of money, and yes, the world is really, very short of money right now, as bank lending has frozen for a year now, and doesn't look like it will return to the good old days any time soon, how can interest rates remain low? After all, interest rate is the price of money, and supply is low, while demand is high.

Answer? Governments can print money, thus, increasing the supply of money, even in excess of demand. However, this assumes that the printing of money will not affect the currency value.

In the case of USA, this assumption is false in the longer term. Why? Because currently, the US is still experiencing a trade deficit of US$34 billion a month, or US$400 billion a year. This means that the US Government needs the World Investors to buy US Dollars if it is going to continue to fund its Deficits, not only the Trade Deficit, but also the US Government Budget Deficit.

Any Government Spending to stimulate the economy will translate into more imports because America has lost its Industrial Might. Manufacturing Sector constitutes less than 16% of US GDP today. This is the major difference between US of the Great Depression Era of 1929, and the US of Today 2009, i.e. 80 years later.

Today, the US has to buy most of what it consumes from the world, whilst in the 1930s, the US was selling to the World. US Government Spending will stimulate World Economy, possibly Japan and China, but at a very high price to US taxpayers. The US GDP Statistics will look good, but it will not create much jobs for Americans, for the money spent.

In order to sustain its Trade & Government Deficits, the US Government will have to borrow money from Non Americans, namely China and Japan, possibly to the tune of US$1 trillion, in addition to rolling over its existing Government Debt of US$14 trillion today.

Debt Rolling over means that when a debt is due for payment, new debt in the form of Treasury Bonds can be issued to pay for the debts that is maturing.

I am not questioning so much on the demand for US Government Bonds, but rather, the Interest Rate that will make it attractive for Non Americans to invest in such bonds. At 2.47% p.a., I believe that China can do better with its Foreign Reserves than to invest in US Government Bonds.

For example, China has loaned Russia about US$25 billion to build an Oil Supply Channel to China. This is strategic to China in securing its Oil Supply needs for the next 10 years. Also, China has invested another US$15 billion in Australian Mines, and US$10 billion in Brazillian Mines, to secure its strategic natural resources it will need in the next 10 years, as it builds its infrastructure and grows its economy.

So, why should China buy US Government Bonds at 2.47%p.a.? In addition, if I were the Governor of the People's Central Bank of China (PBOC), I would want to diversify the risks of holding the entire wealth of China in the form of US Government Bonds. Should there be a significant devaluation of US$, then, China's wealth will be diluted. In this case, wouldn't it be wiser to spread the investments around, in the form of British Pounds & Assets in UK, and Europe? Or continue with its policy for the last 5 years of investing heavily in Australian resources? China will need a lot of coal, uranium, steel, aluminium, even Gold from Australia, as it industrializes further.

In my opinion, the US Government Bonds (Treasury Securities) is the latest bubble that has been created by the Federal Reserve, having brought its FOMC Interest Rate down to 0.25%.

Best wishes,

Ooi

10 Years of Wealth Growth Wiped Out - More to Come?

Dear Friends,

The Dow has closed below 7000. This means that 10 Years of wealth growth has been wiped out, in less than 2 years, since July 2007.

The interesting issue here is that fund managers are starting to say it is still too early to buy!

Is it really too early to buy? That depends on our assessment on whether there will be a Depression. The Dow dropped from the peak of 380 to 40 points between the period from August 1929 to July 1932, i.e. 3 years of downturn. 40 points signified levels not seen since the 1890s.

The Dow made a historical high in July 2007 at 14000 and if we use the same calculations of the Great Depression to project where the Dow will bottom, i.e. about 90% downturn, then, we are looking at 1500, i.e. back to levels of the 1970s.

The level of 1500 sounds ridiculous, but so was the level below 7000, a year ago. The big question is whether the US Government can solve the woes of the Financial System, where losses are estimated to total US$2.5 trillion to US$3 trillion? So far, the US Government has thrown less than US$1 trillion into the Financial System, which is why we have not seen much positive results.

Actually, I would venture a guess based on Fundamental Analysis that the situation will not be so critical, and possibly, if the Financial System Problem can be resolved within the next six months, the Dow may bottom out at 5600.

I would not be willing to put my money where my mouth is, today, as we have to consider the new information that arises when we get there, to see if there are evidence to support such a guess.

We must never make decisions based on a Forecast, but to listen to the market. However, Forecasts provide a potential roadmap for us to monitor deviations from normal movements.

Best wishes,

Ooi

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