Archive for July, 2008

The result of the June 2008 CFA level 1 exams were out last night!
Congratulations to all who passed especially to my good friends Roderick and Michael! Well Done!

Now it’s my turn to wait for my level 3 exam result in three weeks time!

Imagine paying $500 billion for your dinner bill or spending $10 trillion for your grocery shopping. Well, it sounds impossible but it’s real and it’s happening in the hyperinflation-ravaged African country – Zimbabwe!

The country has a record breaking 2.2 million percent of inflation where all prices of goods double or triple every other day! The country’s central bank has been printing money of high denomination notes to cope with the skyrocketing prices and higher demand for money! Recently, the central bank just issued a $100 billion note.

Businesses, individuals and machines face a difficulty of dealing with so many zeros! Most calculators can only hold up to 12 digits making it difficult to do arithmetics. Price tags now have a caution sign saying multiply all prices by $1 million!

Inflation occurs when there are shortages in the supply of goods and services which is a rampant problem in Zimbabwe. With too much supply of money competing to buy a very limited supply of goods and services cause prices to go up. Shops and other businesses sometimes accept US dollar note when selling their goods. However, they face arrest when caught as it is illegal to do so.

The root cause of this problem is the political crisis of the country which has been going on for several years when their president started to forcefully confiscate the farms of white people in the country without compensation. The farms were given to the african people who do not have the necessary skills to continue the farming business which resulted to a shortage of food supply.

This fact only means that the political situation of a country has a direct and strong influence on the economy. For instance, statistical data show that unemployment rate in the United States is higher when Bush was the President compared to the time of Clinton!

 A head of the government has the control over the economy through the tax policy and goverment spending policy. That is why it is very important to consider economic programs of the candidate during elections!

Zimbabwe has already showed the world a living example of the direct relationship between politics and the economy. With the worsening political and economic situation of the country, I think it is about time for other countries and maybe the United Nations to intervene and remove the current President from office!

Recession is associated to a weak economy where the demands for goods and services decline resulting to lower prices. Drop in the stock market and increase in unemployment rate are among the few indicators of recession. 

The ongoing failure of the US Subprime Lending market is threatening the US and the global economy as a whole to collapse. Subprime lending generally involves extending loans to borrowers with poor credit history at a higher interest rate than the market rate. The increases in the interest rates increased the default rates of the subprime loans causing subprime lenders to file bankruptcy. The securitisation of subprime loans into marketable securities such as mortgage backed securities (MBS) has magnified the impact of the subprime mortgage crisis to the investors of MBS’s not only in the US but also in the whole world market triggering recession of the world economy.

Invesment strategy during recession is a tough challenge. The following are the few investments generally acceptable in a falling economy:
1. Gold – Generally a good protection against inflation and the effect of the credit crisis. However, price of gold at the moment is very high so the return might not be that great.
2. Money market instruments – The traditional term deposit accounts with highly established financial institutions at least guarantee a fixed return of investment. In Australia, you can get as high as 8.5% interest from BankWest!
3. Government bonds – This is another area where an investor is guaranteed a cash flow return. However, if the recession extends for a long period of time the possible increase in interest rates will decrease the value of the bonds realising a huge capital loss!
4. Stock market – This should be the last option to consider in investing during recession! Extra care must be exercised in selecting stocks that are non-cyclical, meaning those companies that are not heavily impacted by the weakening economy.  In general, invest in companies whose products are necessities that people keep on buying such as consumer goods (e.g. food items and groceries) and utilities (e.g. oil and gas). Short selling of cyclical stocks (e.g. real estate, banking) is also a good investment strategy.

Government, on the other hand, normally interferes to combat the effect of recession. Tax cuts, increases in goverment spending and lowering of the interest rates by the Central Bank are among the common responses of the government. Finally, the benefit of diversification should still not to be understated during recession.

Last week I went to Melbourne for a 3-day business trip. I consider myself lucky as the day after I flew, Qantas Engineers had a strike causing massive delays of all Qantas flights and stranding thousands of passengers all around Australia. I will be flying again next week to Sydney and there’s a rumour that another strike will strike again. Fingers crossed that this won’t happen as I don’t want to be delayed and also there are a lot of people travelling to Sydney for the World Youth Day who will be affected.

In general, strikes are costly to both the companies and workers as they represent lost of income to both parties. The longer the strike, the more costly to both parties. This occurs because negotiations do not always run so smoothly. There is also an element of misunderstanding between the interest of both parties. Unions might believe that the company does not appreciate their effort and value to the firm. Management might believe that unions do not appreciate the willingness of the owners to earn high profits.

There’s a debate between economists whether unions are good or bad for the economy as a whole. Unions are a solution to the market power of the firms that hire workers. In the absence of unions, companies use its market power to pay lower wages and offer worse working conditions. In this case, a union balances the firm’s market power and protection to workers from being at the mercy of the owners.

On the other hand, if the wages demanded by unions rise above the competitive market level, companies would limit hiring workers causing some workers to be unemployed. This also results to decrease in wages in the rest of the economy and decrease in the business activities resulting to lower output. In some companies, successful unions benefits only union members at the expense of non-union members and other employees in other companies.

In the end, is there really a consensus whether unions are good or bad for the economy? I just don’t care as long as my flight next week will fly as high as this Qantas 747-476 plane on time!

Superannuation is a pension system in Australia that requires employers to pay a compulsory 9% of its employees salaries and wages into a Superannuation Fund. The investment cannot be withdrawn by an employee and can only be accessed when the employee retires.

An employee has the option to increase its contribution from 9% and such additional contribution will not be taxed as a government’s way of encouraging the people to save more. A lot of people take advantage of this in order to pay less tax and obviously to have more money upon retirement.

I just saw a news today that most superannuation funds earned negative returns during the year due to the weakening financial markets. And the worse thing is that my superannuation fund earned a depressing negative 5%! I looked at the breakdown of the return and 1% of this is the ongoing fees charged by the fund.

In general, employees have no control over the way their superannuation contribution is invested by superfunds. I remember when I signed up for the superannuation account, the only involvement I had is to choose from 3 options which are conservative, moderate and agressive. The difference between these three alternatives lie upon the risks being taken by superfund in investing the contribution. Conservative invests more on money market and cash instruments and Agressive invests on equities, a more risky but with higher expected return investments.

With a slowing down financial markets, employees can’t do anything but to accept negative returns on their superannuation investment. With this fact, maybe the least employees can do is to reduce their contribution to the minimum 9% required by the government as the benefit of paying less tax is not sufficient to compensate for the negative returns and paying fees to superfunds for managing the investments. It is also normal to still pay fees charged by superfunds even your investment incurs losses.

In 2005, the government allowed each employee to choose which fund their contributions are paid into which is a good move to give employees more control on their money. In this way, employees can switch over their investments if their superfund is not doing well to another superfund that’s earning good returns! I am thinking of doing this one at the moment but I’m not sure about the cost of doing this. The new superfund might charge employees for transfer cost or other fees which may not make the transfer valuable.

There is a special type of superannuation fund called Do-It-Yourself Superannuation Fund which is a fund established for small number of individuals only. I think this is also a good way of having more control on your superannuation money. However, the negative side of this one is that it requires more involvement and investment skills from the employees themselves which is only suitable for people who have exceptional abilities in the investment world like yours truly!