An Apple "MediaPad" for Newspaper subscription?

According to a Newsweek article, Apple is working with Verizon to introduce a kindle-like MediaPad device. Hmm, sounds like newspaper subscription comes to the Apple MediaPad. Read my last post about my speculation that Apple is introducing a new netbook-like device for Newspaper app.

Here is the link for the Newsweek article.

Apple to the rescue of the Newspaper industry?

It was rumored that Apple is close to launch a 10-inch screen "netbook" type device sometime this year. Although Apple has repeated squashed the speculation that it would sell a low-priced netbook, a bigger iPdod Touch like device, if it can be called "netbook", seems to be aligned with Apple's strategy.

Let's face it: the "netbooks" out there are pieces of junk. The only thing those devices can do is browsing the internet. Apple should never damage its own brand by making similar piece of junk.

If you study Apple closely for the past several years, every time it introduced a new device, there is a clear application that goes with the device. Apple devices have never been a general purpose device at the beginning. As the product evolves, the device can pull in more applications. But at least in the beginning, there is always one new application that goes with a new device.

For example, when Apple introduced iPod, it was all about music and iTunes application. AppleTV was meant to bring video delivered over the Internet to TV screen (with limited success because of the restrictions content providers put on AppleTV). What about iPhone? Initially iPhone was all about multi-touch internet browsing experience. IPhone is the first mobile device that had a true full-blown internet browser (not the garbage WAP browser) and much more (multi-touch interface).

So if Apple is to introduce a 10-in "netbook", what new application it will bring with the device? How about NEWPAPER and BOOKS?

Everyday you hear the news about the financial stress the Newspaper industry is experiencing: shrinking ad dollars due to web competition and economy, compounded by rising costs of printing and distribution. The business model is broken, just as that of the music industry. If iPod saved the music industry, I believe the new Apple "netbook" will save the Newspaper industry.

Imagine a 10-inch netbook with an Application that bring all your favorite newspapers to your finger tips: New York Times, WSJ, Washington Post, and many other. The multi-touch and multi-media interface will be FAR superior to the inky paper we read every day. I for one will cancel my paper sub and opt for digital.

And the Newspaper can sell TARGETED ads on the screen! Again, I stress targeted, meaning the ads can be different on different subscriber's device, based on subscriber's preference.

Obviously, this device won't be a pure book/newspaper reader, as Kindle is. It will have general purpose applications like the iPhone, iPod Touch and Mac PC has. But the killer app for the device would be the Newspaper reader.

Let's wait and see!

SDR as alternative to US dollar?

Last week Chinese central bank governor Zhou Xiaochuan made a proposal that caused quite a stir among the international finance circles. Zhou proposed to elevate the status of SDR (Special Drawing Rights) in IMF (Internationa Monetary Fund) to replace US dollar as international reserve currency. Both Obama and Geither rejected it as "not necessary". But is it really?

What are the problems of current system where US dollar is the de facto currency for international trades and the world currency reserve? There are many. And I believe the main cause of the current global financial crisis can be traced to the problems with US dollar:

1) US has enjoyed an extremely low interest rate for a long time due to dollar's special status
Because dollar is the standard currency in which international trades are settled, excess capital has to flow to dollar denominated assets (US treasuries, agency MBS, and other US assets), creating an artificially low interest rate environment for the US and relatively high interest rate environment for the rest of the world. Due to the low borrowing costs, US government and consumers have over time accumulated huge amount of debt to support large government spending and lavish personal consumption. The gradual increase in US national debt (leverage) initially created bubbles in asset pricing (late 90s Nasdaq equity bubble and 2008 real estate assets bubble), and eventually led to global crisis of confidence in the value of dollar (2002-2008) and bursting of the asset bubbles (2008 financial meltdown).

2) When US dollar serves as world reserve currency, US monetary policy has impact beyond US borders, affecting global economic growth. When US loosens monetary control to try to finance domestic spending, it also creates liquidity glut around the world, and causes inflation to spike. That was what happened during 2002-2008: crude oil price rose from 20s to 150. Prices of grains, and other commodities rocketed during the same period. On the other hand, when the US ran into a liquidity crisis, as it is now, countries around the world are facing liquity freeze as well.

3) Individual countries can use currency manipulation to gain competitive advantage in international trades.
When US devalues its currency, it is essentially reducing its debt obligation to countries who hold US dollar reserve (lend money to the US). Often time, countries resort to currency devaluation to get out of national debt (Obama may be doing it now for the US). And in the menawhile, a cheaper currency increases export and reduces import, helping domestic industries to gain global competitive advantage. Such practices will lead to protectionism in global trades. Protectionsim will result in slower global economic growth.

All these problems can be corrected with a truly global currency, not in place of but on top of local currencies. A global currency, independent of the influence of any single country's domestic economic and monetary policies, should attain a much more stable value. Individual countries can still pursue its owm monetary policy flexibility without too much an impact on global economy. Countries don't feel cheated if their exports are paid for in the international currency that has stable value and cannot be devalued by single country for the purpose of gaining competitive advantage. So all in all, an international currency, maybe in the form of SDR of the IMF, may be a great idea, and may cure the US addiction to low borrowing cost and high consumption.

Isn't US trying to reverse trade deficit with other countries? SDR may help a long way towards that objective.

What is money?

What is money?

In ancient times, money used to be something tangible, such as gold, silver or copper. Business transactions, be it trade of physical goods or capital transaction, were done with physical money changing hands.

But the world has evolved into a credit world. Business transactions have long gotten rid of changing-hands of physical money. Transactions have been done through credit: a promise to pay in physical money in the future.

With the adoption of computer technology, money is just a number on the ledger. It is an accounting entry, a mere measurement of wealth. It no longer takes a physical shape.

So in essence, money is just a promise, a credit, or a trust. When the trust in money is broken, such is the case right now, money becomes elusive. When the central banks around the world are freely printing money to bail out financial institutions and businesses that are deemed too-big-to-fail, what is the worth of money we are holding? At what point, the trust in paper money will be completely broken?

We have already seen people fleeing paper money to find refuge in the physical store of value, such as gold and silver. Gold price is approaching $1000.

But the question is: should we go back to gold? Will commodity-based money cure the ill of paper-based (or promise-based) money?

The answer in my view is no. We are not going back to the days when physical money was the primary medium of business transactions. Credit money is here to stay, which means, even in a commodity-based monetary system, money will still be just a promise, a promise to pay in gold, silver, or what ever commodity the money is backed with, in the future. When business transactions (trades of goods and flows of capital) continue to expand, credit money will also expand. Credit money will always be greater than the ACTUAL physical reserve the central banks hold. In times of financial crisis, when people come to redeem the credit for physical money, central banks won’t have adequate physical money to meet the redemptions. At that point, the decoupling of money from its commodity backing will have to occur (such was the case in 1971 when President Nixon formally decoupled US dollar from gold).

My view is that we should not go back to gold or silver standard. And I do not believe commodity-based monetary system is the answer. The answer is proper regulatory oversight of the financial institutions.

Money is a trust. We need stringent regulation to safeguard the trust.

AIG disclosed payments of > $100B to banks related to its derivative bets

Finally AIG disclosed the names of the counter parties of the CDS contracts it has written. The headline reads that AIG paid out >100B. But in fact, that wasn't exactly final payment. AIG just posted collateral on the CDS contracts that it has sold to those counter parties, Goldman being the No. 1 on the list.

Regardless it is payment or collateral, AIG should not be allowed to write so much CDS contracts without having sufficient capital to back them up. Gambling on CDS should never be allowed for the regulated financial institutions. If investors wanted to gamble, let them do that. But regulated financial institutions have fiduciary obligations to its constituents (depositors in the case of banks, and policy holders in the case of insurance companies).

_______________________________________
Here are quotes from CNNMoney.com:

AIG Reveals Over $100 Billion Of Payments To Banks, U.S. States

March 16, 2009: 07:55 AM ET

LONDON (Dow Jones) -- American International Group said over the weekend it had paid over $100 billion of its bailout funds to U.S. states and international banks including Goldman Sachs, Deutsche Bank and Societe Generale.

The cash was used to cover collateral payments, cancel derivative contracts and meet obligations at its securities lending business after the firm had to be bailed out last year.

Most of the major U.S. and European banks were represented on the list, but AIG (AIG) revealed that Goldman Sachs was the biggest single beneficiary from the payments, receiving $12.9 billion.

Bank of America Corp. and Merrill Lynch together received $12 billion in payments, followed by Societe Generale , which got $11.9 billion and Deutsche Bank , which was handed $11.8 billion.

Payments to municipalities totaled $12.1 billion.

"AIG recognizes the importance of upholding a high degree of transparency with respect to the use of public funds," the group said in a statement.

The group had previously argued that disclosing the identity of counterparties could damage its business relationships or cause competitive harm, but it had come under increasing pressure from lawmakers to provide details.

The remainder of the $173 billion that AIG received from taxpayers has been used to repay debt, boost capital levels at some of its units and fund vehicles created to wind down its derivatives contracts.

Shares in the group, which is now 80% owned by the government, have fallen more than 99% from their peak in early 2007.

The announcement over bailout payments came after AIG became embroiled in a row over bonus payments to employees at the unit that was largely responsible for its near collapse last fall.

The decision to pay around $450 million in bonuses elicited howls of protest in Washington, with key House lawmaker Barney Frank, D.-Mass, calling on the government to examine whether the bonuses can be legally recovered.

Citi shares will soar if mark-tomarket accounting is modified

It appears that the regulators are finally examining issues with the current mark-to-market (MTM) policy governing regulated financial institutions (mainly banks), and close to provide new guidance for MTM accounting.

In concept, MTM accounting is a good thing, because it requires companies to report their assets at the true market value. However, in practice, such requirement has serious flaws, and is threatening (or has already threatened the viability of the entire US banking system). Many of the assets carried on the banks' balance sheet do not trade on a liquid market. To account for their market value is very difficult, and in many cases, seriously flawed standards have been applied to mark the value of the these assets. For example, it is seriously flawed to use thinly traded CDS contracts or CDOs to mark the implied value of these assets. CDS and CDO are not traded on a public exchange, and are subject to price manipulations.

What happened in this financial crisis was that banks were forced to mark down the value of their perfectly fine assets, due to the use of flawed market value indexes such as CDS and CDO. Hedge fund managers who have shorted bank stocks manipulated the prices of CDS and CDO, forcing banks to mark down their assets value, triggering capital shortfall and credit downgrades. In many cases, the assets that banks are forced to mark down are performing assets, generating steady incomes. After the mark down, banks have either to sell these assets at depressed valuation, or have to raise capital at prohibitively expensive rates.

What we need is a MTM accounting system that does not rely on flawed valuation methodology, but rather truly reflects the economic value of the assets.

I am hopeful that we soon will have a new set of MTM accounting guide lines that will reflect the true economic fundamentals of the financial institutions. If that happens, many bank stocks will soar. Citi shares can increase more than ten-fold easily.

With the current incredibly wide credit spreads, US banks must be making huge amount of profit. Yesterday's news about Citi is not an isolated event. I believe other banks are also generating handsome profits. In terms of really depressed valuation, I like Capital One (COF), which is trading at only 0.2 times of its book value! Obviously Citi is even cheaper. But Citi faces large dilution from government stakes in the company. So I prefer COF. WFC and JPM are also good investments at current prices.

Disclaimer: You should consult your financial advisers before making any investment decision. The above opinion is not a recommendation for anyone to buy or sell any stock or other financial assets. Invest at your own risk!

Market shot up more than 6% on Citi news

Today, the market rose more than 6% (Nasdaq was up actually 7%), on the report that Citi was profitable for the first two months of the year.

Investors seemed to be surprised by this news. That just shows that majority of the investors do not understand the nature of the current financial crisis.

I am not surprised at all. Citi, and other banks, should be making tons of money right now. The yield curve is so deep, and the FED is giving them almost free money to borrow. If they can't make money now, when can they?

In fact, according to an internal memo sent to Citi employees by Citi CEO Vikram Pandit, the company may generate more than 8B operating profit in the first quarter of the year.

From the very beginning, the root problem of many US financial institutions was not operating problem, but asset problem. Because the value of mortgage back securities many of these company hold on their balance sheet has declined dramatically, these companies are facing a capital shortfall.

I would argue that some of the decline in value of the mortgage-backed securities was artificial, a result of mark-to-market accounting based on questionable market valuation (for example, CDS-implied value), and does not reflect true economic value of these securities.

Let me explain: the total US MBS outstanding is valued at 10 trillion. Most of these MBS should have loan-to-value ratio of 80%. Let's assume that house prices have all declined 40%, which is a much worse assumption than what actually occurred, then the maximal write-off of the MBS value should be 20% of the 10 trillion, or 2 trillion. Between the FED and Treasury, more than $5 trillion has been pumped into the US financial institutions. Are we still saying these companies are insolvent? Give me a break!

I believe that most of the US banks are now making a killing. Their borrowing cost is almost none (interest rate is close to zero), but the interest rates they charge to borrowers are very high. And the Fed is willing to lend to the banks as much as the banks demand, through the Fed funds discount window. There is absolutely no reason why banks won't make huge profits right now.

But banks will have to continue to face asset write-off problems, as long as the current flawed mark-to-market accounting is in place. There is an analogy here: the banks are like a person who have a very well paid job. The person is earning a very high income, but because of the bear market, the person's 401K and other equity investment accounts have lost a lot of money, and his house is probably worth a lot less. But the person does not intend to cash out his investments, or sell his house. His job pays him well. Is he worried? No. He shouldn't. Because the stock market will eventually recover, and the house price won't remain depressed.

I think same is true with the banks now. The value of their assets is now depressed, because risk premium is high (the discount rate is high). But the banks continue to earn good profit from loans they give out. Overtime, when risk premium starts to subside, the value of the banks' assets will recover.

All of those doomsday-sayers don't know what they are talking about.

We need to restore confidence in the US financial institutions

Tonight, the President addressed the joint session of the Congress. Unlike the typical State of the Union addresses, the President spoke directly to the American people, trying to explain why the $800B stimulus spending is necessary when the private sector spending is right now in retreat, and why the government needs to do whatever it takes to shore up the nation's financial institutions, to get the credit flowing again.

I think the President was articulate and made a strong case. In contrast, the Republican response, delivered by Louisiana governor Bobby Jindal, was so poor that it sounded like a botched Saturday Night Live skit.

The old Republican argument that "the government is not the solution, but the problem" sounds so irrelevant these days. If the Republicans don't believe government can ever work, why do they seek to be elected to public offices? To prove that government indeed does not work? Yeah, we got plenty of proof in the Bush administration. Bush's cynical view about the role of government led to massive outsourcing of critical government functions to private contractors run by those who put him in office. The end results were terrible and deadly (in both Iraq war and Hurricane Katrina).

OK, I don't want to go back talking about Bush nightmare anymore. It is past. Now the critical task is how to restore investors' confidence in the US financial institutions.

There are concerted efforts to undermine the financial institutions. Some cried for "nationalization of the banks", while others screaming "No more bailouts. Let the banks fail".

Do US financial institutions have adequate capital? The answer is an emphatic yes. Then you ask what is the problem? The problem isn't banks having insufficient capital. The problem is investors' confidence. Majority of the financial institutions need access to the debt market for financing. In normal time, there are plenty investors willing to lend money to the banks. But this is not normal time. Investors have doubt in banks' balance sheet. I think these doubts were healthy. For a long time investors risk premium was too low. But now, there are those short sellers out there trying to create panic among the investors. They claim that "the entire US financial institutions have ZERO equity", without needing any facts to substantiate the claim. And they pay the debt rating agencies to downgrade credit ratings of the banks. They went on the TV, masquerading as libertarian capitalists speaking on behalf of regular people against government help bailing out "Wall Street thieves". But their ulterior motives are to instigate a run-on-bank of the US financial institutions, create a self-fulfilling prophecy of doom-and-gloom.

In my previous post, I have argued that the bad asset issue related to subprime lending is a tiny tinny problem. The big problem is that investors losing confidence and refuse to lend. That is why investors are piling cash into treasury securities, considered risk-free. In this circumstance, the Fed, and the Treasury have to step in to be the lender of last resort. That is what they are doing. And that is why I believe they should continue doing that, and communicate their determination to the public, so that confidence may gradually be restored.

Bernanke today did some of that during his testimonies in front of the Congress. I need more forceful pronouncement from the government more often and more clear.

I am hopeful that today's >4% rally in the stock market is the beginning of an end of the current financial crisis.

Is subprime mortgage problem really the cause of current financial crisis?

I have come to the realization that subprime mortgage problem was just the trigger, not the true cause of the current financial meltdown.

Consider this analogy: there was a man smoking in a theater full of people (back in those old days when smoking was still allowed inside). He inadvertently burned his pants with his cigarette. The lady next to him shouted: "fire!". Then the next a few other also shouted: "fire!". some people started to run for the door. People in the back did not know what was happening, but heard "fire". Then they all started to run for the door. That created a stampede, and people pushed each other trying to get to the door. Children were crying, and ladies screaming. The theater door collapsed, many injured, and some even killed by the stampede.

This is what is happening now in the global financial system. The "fire" here was the subprime mortgages. But it was a small fire that could have been put out easily. The people who first called out the problem was right. Indeed we had a serious problem with the bad assets in subprime mortgages that the banks and financial institutions are holding on their balance sheet. But the scope of the problem was grossly exaggerated, sometimes deliberately by some people who could profit immensely from the problem.

These days it is a heresy to say subprime mortgage problem wasn't a big deal. But look at the facts: according to the Fed, at the end of Q2 2008, the total mortgages outstanding (both residential and commercial) was $14.8 trillion, 10% of which can be considered subprime. Residential mortgage delinquency rate was 6.41%, and foreclosure rate 2.75% (commercial mortgage delinquency rate was much much lower, less than 1%). Even we assume that ALL subprime mortgages were worth NOTHING, the money needed to completely stop subprime problem would be only 10% of the $14.8 trillion, which would be $1.48 trillion. How much money the Fed, FDIC and the Treasury have spent to rescue the banks and financial institutions? MORE than $7 trillion so far!
-on-
What's the problem here? We have a classic run-on-bank situation here, triggered by subprime problem, but more importantly instigated by the hedge fund community and the short sellers. There has been a concerted effort to undermine the US financial institutions and create panic among investors.

Because of the constant bashing of the US financial institutions by characters like Peter Schiff, investors got really confused, and did not see that the real scope of the subprime mortgage problem was actually very limited. Then you had those credit analysts, who paid by their hedge fund clients, kept pushing down the credit ratings on banks and financial institutions in an attempt to instigate a run-on-bank. What you got in the end was a self-fulfilling prophesy.

Financial institutions are built on trust. When trust was gone, these institutions could no longer exist.

Fannie and Freddie were great cases in point. There weren't much problem with their mortgage assets. Fannie's mortgage delinquency rate was a little above 1% and Freddie was still below 1%, before they were rescued by the government and put into conservancy. Either institutions had much exposure to subprime mortgages at all. What happened was that Fannie and Freddie's capital market dried up, because investors simply did not want to lend money to any financial institutions at the time, not even Fannie and Freddie. The securitization market was completely frozen (thanks to Hank Paulson who let Lehman go under). In that circumstance, no matter how money good the assets were, the companies could not survive. That was a typical run-on-bank!

We have to stop all those stupid doom-and-gloom talks. We have to restore people's confidence in our financial system. If you understand what I put forth above, you would agree with me that there IS NO fundamental problem with the US financial institutions! There was a crisis of confidence problem. We need to restore that confidence.

The theory of evolution is seriously flawed

This year marks 200th year of the birth of Charles Darwin. There are many commemorations right now going on around the world. More than 150 years since the publication of his revolutionary thesis, "the origin of species", the whole world almost entirely accept his theory of "evolution through natural selection" as a matter of fact. Even the Vatican accepts Darwin's theory of evolution.

But if you carefully study the theory of evolution, and are intellectually honest, you will come to the conclusion, as I did, that the theory is seriously flawed.

Natural selection has supplanted God as explain-it-all. Whatever we cannot explain in biology, we attribute that to the result of natural selection. For example, why do dogs have extremely sensitive olfactory function (sense of smell)? Oh, it is the result of natural selection. Because this trait gives dogs survival advantage in nature. But why human did not attain such a trait? Or why not every animal attain such a trait, if this trait confers survival advantage?

Before Darwin, God was the ultimate answer to every question. After Darwin, natural selection gradually took the place of God.

I plea, for the sake of science, we have to break the shackle of the "natural selection" dogma. Let's probe deeper. Let's not be hindered by any presumed dogma. Let's be honest with our intellect and reason. The theory of evolution in its current form is completely erroneous.

Yes, I am a Christian, and I believe in God. But that is not the reason I question evolution. I used to be a complete atheist, growing up in an atheist country. In my first year in college, I took Biology 101. Towards to the final part of the course, the topic was evolution. I had a huge debate with my classmates, which lasted to the wee hours of the morning. And the next day we would have a final test for the class. I would rather fail the test than accept a flawed (stupid, as I called it at the time) theory.

I wasn't a Christian at that time. I never heard about God. But I was honest to myself, and to reason.

Natural selection simply cannot explain the diversity of species. In order for the nature to select certain traits, you have to have the traits to begin with. But aren't we trying to explain the ORIGIN of these traits? How can natural selection PRODUCE so many different traits? Later evolution theorists postulated that random mutations somehow happen to produce many features. Then the force of natural selection would only allow those desirable traits to survive.

But that is inconsistent with the fact. Let me give you a simple example: evolution theorists believe that amphibians were evolved from fish, because nature favors animals that can both live in water and on land. If that is true, then we would see only amphibians, no fish now, because nature has selected out fish in favor of amphibians. You have to have this selection pressure in order for species to evolve, right? If there weren't "negative natural selection" pressure on fish, how can fish evolve into amphibian when fish was perfectly fine being just fish?

Let's assume for a moment that random mutations actually were lucky enough to produce certain traits. But we are talking about extremely lucky. Let's consider the trait of vision for a moment. This trait is the result of coordinated work of multiple tissue functions: the eyeball (the "lens"), the muscles that adjust the "lens", the iris that regulates the input of light, and the nerve cells that transmit light signal to brain, and the brain cells that interpret the signal, and many many more. In order for such a complex trait to evolve out of nowhere, you have to have coordinated random mutations involving multiple tissue cells, and in a series of steps, to finally and luckily result in perfect vision. What a miracle! It is like you put a heap of metal fragments together, and suddenly there is a hurricane, and after the hurricane, alas, a new Boeing 747 was right there! Yes, this could happen, mathematically possible. But it may be easier to believe in God.

Archeological evidence does not support evolution, either. Species tend to spring out from no where in very short periods of time, and then you do not see emergence of any new species for a long long period of time. It seems that the emergence of new species occurred sporadically within very short periods. Darwin theory would have predicted gradual evolution of species, which means we should see emergence of new species all the time. But the fact is different from what Darwinism predicts. Later evolution theorists noticed this glaring contradiction. Some of them proposed a modified theory called "punctuated equilibrium". How punctuated was the process of evolution? Maybe six periods, like the six days in the book of Genesis?

It takes more faith to believe evolution than to believe God!

Who are against the stimulus plan?

There are three groups of people who are against the economic stimulus plan:
The first group are the ideologues. These people are inherently against any form of government intervention. They stick to their ideology and dogma, refuse to consider facts and practical matters. They are like the pharisees in Jesus time, who were against doing anything on sabbath day, even rescuing someone from drowning.

The second group are the short seller. They have a lot to gain financially if the economy continues to flounder and stock market languish. They bet against US economy, equities, mortgage debts, and US financial assets. These people care nothing else other than money. They have no ethics, no moral, no trace of human decency.

The third group are idiots, who knows nothing about economics or anything. They are simply against anything supported by Obama or the Democrats.

Any reasonable person would realize that it is imperative that the US government pass an economic stimulus plan.

Demand is shrinking. Initially the decline in demand was justified, because people over spent in the past few years. But now the decline in demand is spiraling down out of control, not because of the financial health of US household, but because of pure fear and lack of confidence. Because of the shrinking demand, businesses are cutting back production capacity and laying off massive number of workers. The massive job losses are further crimping demand and consumption. The vicious cycle is feeding on itself. If nothing is done to increase demand, stop factory closings, and stem the job loss, we will definitely go into a sustained period of depression.

In this case, one obviously would prefer businesses/private sector to step up, increase investment, stimulate demand and create jobs. But that is not happening. The private sector is holding backing, quite understandably. They are not willing to take risk to invest, not knowing when the economy would improve.

Given this reality, government HAS to step in, to increase demand for goods and services. With increasing demand, businesses will stop closing factories and laying off people. Then gradually consumer confidence will be restored. A normalized demand level will be established. Once demand stabilizes, business confidence will be restored. Risking taking and private investment will come back. New jobs will be created. As a result, consumer confidence will rise. Then demand will further improve, and the loop of positive feedback will result in gradual recovery of the economy.

At which point, the government stimulus can be removed. Increased tax revenue can be used to pay down the debt borrowed for the stimulus spending.

America never ceases to amaze the world

Four years ago, the world looked at America in total shock and maybe with a little anger as Americans chose a leader that brought too much damage to both America and the world for a second term. The world was asking: America, what have you done?

Four years later, the world again is looking at America, this time with a sense of awe, and maybe a little jealousy, as America turns a new page in her history. The world is amazed: America, only in America!

America is still the beacon of hope. America is still the light in the darkness.

The world has regained faith in America and the American people.

The night on Nov 2nd, 2008, I could not help calling my old friends in the land where I came from. I said: look, I told you so.

America, I am so proud of you. American people, I am so proud of you. American people are fair, just, and full of grace and compassion. They are not afraid of admitting their own wrong, and they always look forward.

To be honest with you, there is also evil in America. In the last of eight years, you have seen it in full display. But America always overcomes. America always moves forward.

In two days, really two days, Barack Obama will be our President! Mr. President, please remember the people who have voted for you. Please do not break your promises. We want change! Yes, you may have to make some compromises, to win over your political opponents. But never make deal with the devil!

Mr. President, I pray that: may God give you wisdom, judgment, and courage to lead this great nation out of current darkness. Bring back the hope for the whole world.

State of the economy

In four days, a new President will be sworn in to the White House. The nation is nervous, yet hopeful, about how the economy will do under Obama's hands-on approach. Free market economists worry about too much government intervention, while the Keynesian people press for more stimulus spending. Who is right?

I am in the middle of the two extremes. In the extreme left, the Keynesian people put too much faith in a few elites in the government that the government can make sound economic investments when private sectors are gun-shy. On the other hand, the free market crowd put too much faith in the "invisible hand" of the market and its ability to self adjust, forgetting that free market in short term can be very inefficient and irrational, and takes a long time to self adjust. The current economic situation is a case in point. After several years of easy credit, the financial sector is almost grinding to a standstill. Private investment is almost completely frozen. Consumers all of sudden woke up, stopped their spending binge and have been tightening the belt to suffocation. The negative multiplier effect of declining investment and consumption has led to massive layoffs and production shutdowns. Under this situation, if the government does not step in to provide a backstop, the economy will certainly spiral down to depression, and remain there for a long time, until the markets gradually self adjust. We cannot afford to wait. Normally I do not like Keynesian economics and government intervention. But this is not a normal time. If the government has any use at all, now it is the time for it to step up.

There are three types of government interventions that can affect the economy: monetary, fiscal, and tax. We have tried the monetary. Federal Reserve has printed trillions of fresh dollars, only seeing those dollars being hoarded by the banks without being put to use to stimulate the economy. Reducing taxes, or even tax rebates, may not help either, because the private sector does not want to invest or spend the money they get from tax reduction or rebates. So that leaves only fiscal stimulus in the forms of government spending. I think prudent and targeted government spending at this critical juncture is necessary to create jobs for the laid-off workers, stimulate economic demand, and produce long lasting benefits to the society.

That is why I support a "shock and awe"-type of fiscal stimulus package, to increase investment in much needed infrastructure upgrades around the entire US. Still remember the bridge collapse in Minneapolis? Just a few weeks ago, the River Rd down here in Potomac Maryland became a real river road, because a massive water main break. For so many years, we have under-invested the nation's critical infrastructure because no-one likes to pay higher taxes. We should also increase the investment in projects that produce long lasting benefits to the country, such as increasing funding for scientific research, alternative energy, national broadband networks, and smart electric grids.

Yes, I am nervous, but I am more hopeful. I am carefully watching what Obama is saying. And I like what I have heard so far. I am hopeful.

Steve Jobs says: happy new year. see you in six months

Steve Jobs of Apple finally admitted that his illness is more than just a simple hormonal imbalance. He is taking a six-month medical leave of absence, leaving Tim Cook in charge of the day-to-day operation at Apple. I suspect for the past year it was someone other than Steve taking care of the day-to-day operation at Apple, while Steve battling his health problem.

The stock will undoubtedly trade down today. But is it a bad thing that Apple from now on will gradually move out of the shadow of Steve Jobs? There is no doubt Steve Jobs has contributed enormously to the success of Apple. But I don't believe Apple is entirely managed by a few strong personalities (or one strong personality). I think the company has the needed management process (from strategy to operation to marketing, etc.) in place to continue its success in the market.

In the past several months, I have seen some welcome changes taking place at 1 Infinite Loop. For example, for the first time, Apple allows variable pricing for the songs to be sold in iTunes Store. Yesterday, there were reports that Apple has allowed third-party mobile browsers to be installed on iPhone.

I am hopeful that a post-Jobs Apple will be more open and flexible in its way of dealing with developers suppliers media and investors. In that sense, Jobs-less Apple may not entirely be a bad thing.

Disclaimer: I own common shares of Apple.

The entire Wall Street is a giant Ponzi scheme

Oil dropped below $40, standing at $36 and changes. That is lowest in last four years. Just a few months ago it was at above $150, and expected to go to $200. What happened? Supply and demand? Not entirely.

Remember a few months ago, no matter how much production increase OPEC countries implemented, the oil price just kept going up. Now it is the opposite: no matter how much production cut, the oil price keeps dropping. Yesterday OPEC leaders announced a huge production cut, 2.2M barrels/day, or 7%, after slicing 1.7M/day already in the past three months. Surprise, oil price dropped >9%. Go figure!

There are just too much speculative trading in oil by the Wall Street. It is creating tremendous volatility in oil price that is very bad for businesses. Same situation is happening to currency exchange. Dollar has gone from dog house to king's castle in a matter of past three months. A few months ago, one Euro can buy more than $1.50. A few days ago it went down to $1.27. And in last few days, it is back to $1.43. Volatility in basic materials and currency exchange is very damaging to global trade and business investments. When business cannot reasonably forecast their input costs and trading revenue (in foreign countries), how can they conduct effective business planning? They will often have to engage in expensive hedging plans to offset the uncertainties. That benefits the Wall Street but hurts economy.

We HAVE to regulate more the hedge fund industry and stop this type of crazy speculations that damage real people and real economy.

Bernard Madoff's "Giant Ponzi Scheme"

The Bernard Madoff saga continues to dominate the financial news headline. This 70-year old fellow has been running a "giant Ponzi scheme" (in his own words) for the past two decades. Loss to the investors could exceed $50B, largest financial fraud in history. Where were the auditors? Where was the SEC?

Ponzi scheme is a term named after Charles Ponzi, a financial con artist. But even Ponzi was not able to deceive people for so long. A Ponzi scheme is like robbing Peter to pay Paul. Investors are promised high return. So they gave the money to the fraudster. The fraudster pay the earlier investors with money gotten from the later investors. As long as money keeps pouring in, the scheme can continue. But if new investors do not come in, the music stops.

Madoff has aroused a lot of suspicion over the years. Today's Wall Street Journal profiled a guy by the name of Harry Markopolos who had been prodding the SEC to investigate Madoff for years. SEC basically ignored him.

Over the past several years, government regulatory agencies have become too cozy with the businesses they regulate. President Bush wants the government agencies to "serve" the industry, and be "business friendly". Republican ideology is "let business self regulate". What you end up with is "Robber Barons" style capitalism. Large business hire lobbyists to pass government policies that favor the big businesses and create barriers for competition. Small businesses and consumers are left in the dark.

I doubt there will be any significant change even under Obama. There are just too many vested interests out there. It would be enormously hard to overcome them. The American public is stupid , and can be easily misled by these big interest groups who control the media and the propaganda machines. If Obama wants to change all that, he will be slandered and demonized, and then rendered completely ineffective. I think Obama understands that. If he really wants to do something good for America, he should make small incremental changes. Gradualism is the key. Don't step on too many toes. I hope he is smart enough. He does not want to end up like JFK, right?

Bailing out auto companies without debt restructuring amounts to bailing out Wall Street

I agree with the Senate republicans: if the auto companies don't restructure the huge amount of debt on their balance sheet, giving them any amount of money will not help them. The money they receive will only be enough the service the interest payment on the debt. Who owns their debt? Wall Street investors. So without first restructuring the debt, the money will just end up in the hands of the debt investors. And a few months (or even weeks) down the road, these dying auto companies will have to come back to ask for more financial help.

A debt restructuring without filing for Chapter 11 is the best way out. Their debt is already trading at below 19c on a dollar. To me that means debt investors are waiting for a Chapter 11 type of debt restructuring.

Treasury yielding 0%: absolute risk averse of the investors

Yesterday, the Treasury auctioned $30B worth of 4-week bills with 0% interest to the investors. For the off-run 3-month treasury, the yield briefly was pushed to negative territory. Basically investors are lending money to the Treasury (Uncle Sam) for free, or even paying the government for storing their cash (in the case of the negative yield 3-month bills), while demanding high interest rate to lend to corporations and individuals even with good credit. In a finance lingo, the credit spreads are unusually wide. That means investors are absolutely risk averse.

We are in an uncharted territory here. Last time when the Treasury auctioned short terms yielding 0% was late 1930s and early 1940s, during the great depression. This is certainly not a good sign.

When the private sector is not willing to take any risk, which is reflected in the ultra low interest rates on public debt and exorbitantly high interest rates on other debts (commercial, local municipalities, and individual loans), should the government step in to provide credit for the economy, as Keynesian economists would propose? I think the answer is absolutely yes.

The banks are not doing the lending. They took the cash from the Treasury's TARP (Troubled Assets Relief Program, widely known as the $700 Wall Street Bailout), and stuffed it in their vault. Homes are continuing to default. Businesses cannot get loans. Individuals cannot buy a house even they can afford (the credit standard has tightened too much). The result is that real economy is suffering. The Treasury bailout did not benefit the main street. It only fattened the pockets of the financial institutions.

Now it is the time to give money to the main street, to the real economy that creates real value to the country, not the paper-flipping Wall Street firms. How do we do that? I think the Obama economic stimulation plan is a good start. But it is not enough. And it is not quick enough. Let's put cash to work, right now!

First, the Treasury should use its cheap financing option to pump cash directly to the mortgage market, by buying high quality mortgage loans. (In my previous post, I argued that this action would even make money for the Treasury). Along the same line, the Federal government should aid the State and local governments by directly giving low interest loans to them to meet their budget shortfalls because they cannot borrow in the municipal bonds market. And yes, the Treasury should rescue the auto industry. Not only that, it should also help other domestic companies who cannot borrow from the commercial paper or corporate bond market.

The Treasury needs to act quickly. TARP is not working. Credit for the real economy is still frozen (although inter-banking lending has loosened). By real economy, I mean those "goods-producing" companies, not those trading financial papers (Wall Street). According to some estimates, there will be $800B corporate debt that needs to be refinanced in 2009. And $200B faces refinancing in the next quarter! If the credit spread does not narrow, many companies will be put to the brink of bankruptcy. The ripple effect throughout the economy would be unthinkable.

We need to end this lame duck government sooner than Jan 20. Can we amend the Constitution to allow Obama to swear in right now?

Treasury to the rescue: 4.5% mortgage interest rate?

Today Wall Street Journal revealed that the Treasury Department is mulling a plan to bring down mortgage interest rate to as low as 4.5%. According to WSJ, this can be accomplished by direct purchasing of new mortgages by the Treasury through Fannie and Freddie. You know what? This is a fantastic idea. Only the Wall Street type would come up with this great idea. The Treasury is headed precisely by a Wall Street pro, Hank Paulson. (No, I am not being sarcastic here. I mean it. Finally, some real good idea came out of there.)

How does this work? Let me explain.

Right now the Treasury Bonds are trading at an extraordinarily low interest rate. Yield on the 30-year T-Bond is below 3.1%, while yield on the 10-year bond is around 2.6%. That means the Treasury right now can borrow money at very low cost. In the meanwhile, the interest rate on Mortgage debt is relatively high. A 30-year conforming loan right now is yielding around 5.3%. In the Wall Street lingo, the "spread" between Treasury and Mortgage is very wide, at least 2.2% (5.3%-3.1%).

What if Treasury borrow money from the financial market by selling Treasury Bonds at an interest cost of 3.1%, and then use the money to buy mortgage debt that generates a much higher interest income. The higher interest income the Treasury would get from the Mortgage investment would more than enough to pay for the borrowing cost on the Treasury Bonds, still leaving a smart chump for the Treasury.

How much the Treasury could make if it indeed decides to go ahead with such a plan? The Treasury will not buy all mortgages. It will buy only high quality conforming mortgages, minimizing default risk. Total market for these mortgage loans could be more than $600B/year. Let's assume that the Treasury would buy $100B of these Mortgage loans at a target interest rate of 4.5%. On the other hand, the Treasury would have to first issue $100B Treasury Bonds, probably at a higher cost than current, say 3.5%. So the spread would be a full 1%, which translates into $1B net interest income per year for the Treasury.

Secondary effects of these transactions would be very positive. Home sales would go up because of the attractive interest rate. Existing mortgages should be repriced because of thawing up of the mortgage market. Indirectly banks would be helped because their mortgage investments will regain liquidity. I think this is a great idea. This is an idea that would first help homeowners and also help the financial institutions. So far the $700B Bank Bailout Plan (the "trickle-down/top-down plan", as I would call it) has not produced the desired result. Banks are hoarding the cash they got from the government, instead of lending out to businesses. Credit market has not seen any much loosening so far. I believe this proposed plan, (a "bottom-up plan" as I would call it) would produce the desired result: loosening up the credit market.

One caveat remains: the money Treasury would get from Mortgage payments should go back to pay down the debt it borrowed in the first place. The government cannot get its hand on this bucket of money for other budget use. Any profit from the transaction should also be used to pay down the government debt. This way, we would not end up creating another inflationary bubble.

Bailout for the Auto industry: good or bad?

Chiefs of the Big Three auto companies came to the Capitol Hill to beg $34B to bail out their companies. This time, they did not come on their private jets. They took Southwest Airline and took a train to the Capitol. But there are still significant doubts among the lawmakers whether the bailout will be sufficient to turn around the failing US auto industry.

First of all, I think the government SHOULD help the auto industry. As to what is the best way to help them, I am not sure. Will writing them a check for $34B help? I don't know. But we cannot let the auto industry fail. It is one of the very few REAL industries that the US still has. If the federal government can spend a tune of $5 trillion (based on some analysts' estimate) to bail out the fraudulent financial industry, how can it not spare a small change of $34B to rescue the REAL economy?

But I do have lots to complain about the US auto industry:
1) Don't blame your failure on the Union
Sure it would be nice to have low labor cost. But why not these companies also reduce their executive compensation? Alan Mulally, the CEO of Ford, made $55M in last two years, while the company lost over $15B during the same period.

2) Big Three's problem is not that their cars are not cheap enough. Their problems is people don't want to buy their cars no matter how cheap they are
So the Big Three's problem is more of a REVENUE side, than a COST side. If they can sell more cars, they would be able to make a profit. But their market shares are dwindling despite the fact that they offer so much enticement for people to buy their cars, such as 0% financing and thousands of dollars of rebate. Lowering cost would not reverse the trend of their market share loss.

How do we deal with the problems at the Big Three? Honestly I have no clue. And I do not think anybody has any clue. Until we can convince American consumers to buy US cars not Japanese cars, no matter how much money we give them it will save them.