21 Wilson Street

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!

This is the Saint Paul’s Cathedral - a famous landmark of London, England. This is an Anglican Cathedral built in the 17th century which, at the present, is considered one of London’s most visited sites.

The church is open to the public with a charge of 15 pounds entrance fee to non-worshipping visitors. The interesting part of visiting the place is its famous 530 narrow steps to the “Golden Gallery” area which is the topmost portion that you can see in the above picture. At the pinnacle you will be able to go around the circular open space where there is an excellent view of the City of London.

I visited the Cathedral in February this year and the experience was very superb. The climb was very tiring but once you reach the peak you will experience the feeling of relief and sense of achievement. Halfway through you can rest at the “Whispering Gallery” which is around 260 steps from the ground. It is the huge dome that you can see in the middle of the building. At the “Whispering Gallery”, you will be amused because your whisper against the wall can be heard by a listener whose ear is held to the wall at the other side or at any other point around the gallery. Remember only a whisper is audible. A shout or a normal voice cannot be heard! It’s amazing!

My friend who accompanied me to visit the Cathedral felt so tired enough to continue to climb up to the “Golden Gallery” and decided to just stay and wait for me a the “Whispering Gallery”. There are separate stairs on the way up and on the way down as the steps are so narrow that only one person at any point in time can fit.

There are very nice architectural works inside the Cathedral and also at the basement. However, picture taking is prohibited inside, thus, I’m only showing you the photos I have taken from outside the Cathedral and at the “Golden Gallery”.

The facade of the Cathedral

View from the “Golden Gallery” overlooking the Thames River, London Eye and the Millenium Bridge.

Another view from the top but from the opposite side.

Side view of the Cathedral:

Put a visit to the Cathedral in your list of the places to see if you happen to visit London!

We should consider ourselves luckier today than our ancestors in the past because we are enjoying a much higher standard of living. Even the kings and queens didn’t enjoy the simple luxury of having airconditioner, flying in the plane or even just using mobile phones. However, there’s been a debate recently whether our quality of living standards can continue in the future.

The world economies have grown because of natural resources like oils and minerals. Eventually, the supply of these natural resources would start to run out and when these shortages occur, they may stop economic growth and maybe force our current standards of living to fall!

Over the past 8 years, the price of oil tripled from $35/barrel in 2000 to $100/barrel in 2008. This is just one sign that the supply of natural resources such as oil may not be not enough to cope with the demand in the future. There’s speculation that the oil wells in Dubai will run out in 15 to 20 years time that’s why they’re trying to convert the place into a tourist destination by building the World and the Palm islands!

In spite of this, there’s a continued technological advances that might be able to avoid the development limits set by the fixed supply of world’s non-renewable natural resources. If we compare the economy today with the economy of the past, we see various ways by which the use of natural resources has improved. Modern cars are more efficient. Recycling allows reuse of non-renewable resources. Ethanol is now used as alternative fuel to petrol. There’s a recent Japanese invention of a car that uses only water as fuel. However, such invention is not economically viable to mass produce yet. Few decades ago, tin and copper were non-renewable resources that feared to run out. There was a campaign to conserve and make them available for our future generations. Tin was used as food containers and copper was used as telephone wires. But technological advances replaced tin with plastics and copper wires with fiber optic cables which are made of sand! Fiber optics give better quality sound transmission than copper.

But some questions still remain: Are all these efforts enough for the economic growth to continue? What will happen when the oil wells in the Middle-East run dry? Are we able to fly in a plane that uses only water as fuel?

Have you ever been to the most isolated capital city in the world where it takes more than 4 hours to fly to the next foreign capital city and around 3.5 hours to fly to the next state capital city? That’s how remote the location of the City of Perth, the capital city of the State of Western Australia. The nearest foreign capital city that I’m referring to earlier is Jakarta, Indonesia and the nearest state capital is Adelaide, the capital of the State of South Australia.

I saw another article about Honolulu, Hawaii being considered as well as the most isolated capital city in the world as it’s in the middle of the Pacific Ocean! It takes around 4 to 5 hours to fly to California. Well, that title is not really a big deal! Let’s just see more pictures of Perth..

Enron’s multibillion dollar collapse in 2001 is considered the greatest corporate scandal in history. In the accounting world, it has been set to become the weapon that the International Accounting Standards setters have been looking for in its battle to convince US to adopt International Financial Reporting Standards (IFRSs).

IASB board members have indicated that Enron’s collapse could not have happened under existing UK or IAS during that time (note that the UK GAAP is closest to IFRS). Enron had a massive investments in off balance sheet special purpose vehicles whose negative positions were only discovered later when the losses could hardly be hidden anymore. IASB says IFRS would probably have got them on the balance sheet as it’s very tough.

The convergence of IFRS and US GAAP would be very helpful to Companies that are reporting both in their local country and in the US. This would save them the cost of reconciling local reporting to US reporting. However, US being the world economic leader is sometimes politically arrogant in terms of world issues and policies. They may not just accept the IFRS as they are claiming that the current US GAAP is more superior than IFRS. There’s even a rumour that it’s IFRS that’s going to adopt US GAAP! Is it for real?

The rice shortage in various Asian Countries at the moment is considered a silent tsunami affecting all people especially the poor. The recent cyclone in Burma and earthquake in China worsened the already dreadful situation. Rice is the lifeblood of almost all people across Asia and its prolonged shortage could make more than 2 billion people hungry.

The average price per kilo of rice in the Philippines increased from Php22 a year ago to about Php40 today or almost a 100% increase. This does not include inflated prices in very remote areas where additional transport costs are added. This escalating price is even worse in other countries where rice shortages are resulting in violent riots.

The law of demand in Economics tells us that the higher the price of a product the lesser would be the quantity demanded. However, consumers are not able to change their demand for rice since it is their staple food and often there is no close alternative substitute. Even if there is an available substitute, the prices are also high!

I have gathered the following main possible causes of rice shortage and skyrocketing rice prices in the world based on my reasoning as well as readings from various articles.

1. Population growth increasing rice consumption which is outpacing production;
2. Plant diseases that hurt harvests;
3. People hoarding rice supplies in anticipation of higher prices;
4. Drought in the largest rice-producing and exporting countries (e.g. Australia  suffered 6 years straight of drought. Australia was once among the largest rice exporting countries that supplied rice to millions of people around the world;
5. Increases in the price of oil which increases the cost of producing rice which eventually leads to lower production and higher cost;
6. The drive for renewable energies such as biofuel which converts food into fuel (e.g. In the Philippines they have started using sugarcane as an additive to petrol. This additive is known as ethanol). Although no one has used rice yet as biofuel, corn, as a close substitute for rice, has been widely used as biofuel, thus increasing the price of corn;
7. The conversion of ricefields into other uses like housing development and golf courses.

In the Philippines and in other Asian countries, the government is subsidising the rice supply to keep the price of rice at least affordable to poor people. However, this solution is just temporary as the government cannot afford to do this for long.

I have thought of only two possible long-term solutions. Can you think of some more?

• People should learn to shift to cheaper alternative substitute food like sweet potato;
• Governments should invest more on infrastructure, technology and research on genetically modified rice and higher yielding varieties that could increase rice harvests.

The second one is the most lasting solution but developing countries may not be able to finance this. A well planned project and reliable courses of action are needed to attract the confidence of foreign capital providers. Another challenge is the project implementation which maybe affected mostly by unstable political situation in Asian countries where corrupt government officials may intervene and embezzle the funds!

Coincidentally, the Philippines and Russia are celebrating their independence days on June 12. Philippines celebrate their independence from Spain which happened in 1898 and Russia celebrates the adoption of its declaration of independence from the former Soviet Union in 1991. Another coincidence however is that there are controversies surrounding the genuinity of this celebration of these two countries.

The Philippines Independence Day occurred on 12 June 1898 ending the 300-year colonial rule of Spain after the latter were defeated during the Spanish-American War in 1898. Spain sold the entire Philippine archipelago to the United States for $20 million. Shortly afterwards, the Filipino forces proclaimed the sovereignty and independence from Spain and named the first president of the Philippine Republic. However, the declaration was not recognised by the US or Spain for some reason. The $20 million deal may have played a huge role in the decision of the two countries. There’s even an additional debate that the Spanish-American War was not a real battle at all – just a drama!

The United States only recognised the Philippine Independence day on July 4, 1946 which is after World War II. Since then Philippines celebrated Independence Day on July 4 until it was changed again to June 12 in 1964 as advised by some Historians. I’m not sure if July 4 is another coincidence again because US is celebrating their Independence Day on July 4!

Russia on the other hand has its own controversy about the June 12 celebration. The day was not actually an independence from any colonial rule as the former Soviet Union was ruled by the same Russia now. Russian people and foreigners are disoriented completely by the name “Independence Day” which raises the question, independence from what? Obviously, June 12 is just the date when the Russian Parliament declared its Sovereignty of the Russian Federation.

Independence is something that should have been fought for by the people for a common reason. It should be something that are widely recognised first by the people as their independence before the authorities can officially approve and declare them as independence day!

“Buy Low, Sell High”, this is the norm of a profitable investing activity.

Most investors earn money by buying stocks and taking a profit when the price rises. The most difficult part of this strategy is to identify which stocks to buy that are going to rise in value in the future. Because the higher the price will go up the higher would be your gain. This investment strategy though is only good if the market is going up. There are times when the sharemarket is going down. Are we still able to earn profit from a downward market? The answer is yes. The strategy is called “Short Selling”.

Some investors do precisely the opposite of buying stocks and taking a profit when the price rises. These investors deliberately identify stocks they think are about to fall. Then, they sell those stocks short. This means selling the stocks they don’t actually have!

The objective of short selling is to buy back the stock when the price falls, and in the future, buying the same stock at a much lower price than the price at which they sold!

This strategy can generate huge profits in a downward market. This is one of the most popular strategy used by hedge funds. Individual investors find this difficult to implement though because they normally need to be settled in a few days. However, keen individual investors can still proceed to invest by using the services of special firms that facilitate short selling. The way it goes is that the investor needs to borrow the stock they want to short sell from the facilitating company. The latter provide the required shares to be sold short.

However, you may incur unlimited loss from short selling though if your price expectation does not happen. For instance, if an investor short sell a stock for $100 expecting the price to fall, but they instead jumped to $110 and kept on rising, the loss will become unlimited!