Kuta Beach

Kuta Beach

Saturday, 22 May 2010

Investing During GFC II

A few years ago the world was plagued by the global financial crisis (GFC) that originated in the USA where out-of-control lending led to a property price bubble that eventually popped, leading to the destruction of private debt, which brought down property prices, stock prices, and commodity prices.

Today, what we are seeing is not really a private debt problem but a government debt problem. Instead of private banks needing to be bailed out, sovereign governments now need bailing out. The United States is in an interesting position because the stimulus and bailouts of the government have significantly increased government debt. These debts taken on by the banks are absorbed by the government, which means the average American pays for the mistakes of the banks via taxes.

The Greece economy is in tatters as it faces the likely scenario of defaulting on their debts. Worst yet, similar problems may also occur in many other countries, not just the PIGS--i.e. Portugal, Italy, Ireland, Greece, and Spain--but arguably also countries like the UK, France, Japan, and the US.

In my opinion, the debt problem in the world is so severe that we are likely to see the stock market go up and down but remain flat for maybe a whole decade. Here is the reason why. If governments are in debt then they have only three options: print, cut, or default. They can print money, cut spending and increase taxes (or both), or default on their debt. If they print money, there will be a bout of inflation, and stocks will rise. If they cut spending and increase taxes (or both) they will impede business and this will reduce stock prices. If government defaults on bonds, the cost of borrowing will be higher, which will lead to higher interest rates, which will prevent businesses from borrowing, which also leads to reduced stock prices. Some countries can print money and some cannot (e.g. Greece cannot print Euros). If we assume about half of countries in crisis will print money and half will default or increase taxes then the world economy should see saw back and forth for a long time.

To invest during GFC II, I believe you need to address both inflation and deflation. Protect yourself against deflationary recession by buying bonds or cash when you notice a rally in the stock market that you think is most likely the cause of irrational optimism or money printing. Any debt-fuelled growth should be looked upon with skepticism and you should accumulate cash or bonds. However, once the market pulls back and stock and commodity prices go down, try to acquire stocks and precious metals, probably biasing your stocks to resource and energy stocks.

I also feel that you should be a little bit optimistic and bias your portfolio a little more towards stocks rather then gold, bonds, or cash. This is because something may happen in the world that improves the economy. Technological improvement may result in a massive worldwide rally, so a stock/bond ratio or 2:1 seems good to me.

Friday, 21 May 2010

Survivor Heroes vs Villains - Final Episode

This blog post contains Survivor spoilers.

It's been a great season, but the final five were Russell, Sandra, Jerri, Parvati, and Colby. Colby was the last Hero, and I definitely wanted him to do well, but in the immunity challenge he came short and lost against Parvati, so he was voted out. In the next immunity challenge, Russell won and initially thought about voting out Parvati. Instead everyone voted out Jerri. The three contestants in the final tribal council were Russell, Parvati, and Sandra.

Russell played a similar game to Samoa and the results were just the same. The jury hated him so much that they voted for the weak player instead, and the winner of Heroes vs Villains was Sandra. Sandra was very good at the end. The problem with Sandra is her poor performance in challenges, but whenever someone in the jury brought this topic up, Sandra very skillfully changed the subject and spoke about how she tried hard to get Russell out, so she capitalized on the jury's hatred for Russell very well. The fact that she was against Russell made her look very good.

At the reunion, Russell looked distraught. I felt really sorry for the man because he had worked so hard to win. He may have been a bully and he may have been very malicious, but if there's one positive I see in him it's the fact that he is honestly and obviously malicious. He is a true wolf, not a wolf in sheep's clothing. He is more like a street thug rather than a popular but secretly corrupt politician.

The next season is in Nicaragua. The previews look very ordinary. There seems to be no twists or innovations or gimmicks, but this may be a good thing as Survivor returns to its roots.

Sunday, 16 May 2010

16-Year-Old Jessica Watson Returns

Jessica Watson is a 16-year-old girl who attempted to sail around the world all by herself. She has returned to Australia today. Many people were not happy that a young female would do something this dangerous all by herself. That she has managed to come back safely seems to have vindicated those who thought that it was a good idea for the young female to undertake the adventure. According to Spirit of sailors guides our girl home to glory, the author says the following:
Jessica Watson's safe arrival is seen by many as vindication for those who supported her from the beginning, against those curmudgeons who criticised the venture as dangerously foolhardy from the first. One critic in particular - no names, no pack-drill but I am talking about me - noted that her attempt was somewhere between an "admirable endeavour, insane and … admirably insane".
I think Jessica is a brave girl, but what if she hadn't been successful? What if her boat capsized and she drowned? What if she were kidnapped by pirates who then proceed to rape and torture her and then demand ransom via the internet? The public would be outraged that parents let their children do this and laws would be implemented that protected children.

It is all well and good that Jessica is safe but young children may see this and be inspired to do something similar, and just as a coin flip will eventually turn up tails if you continue to flip it so too a voyage around the world by a child will eventually end in disaster.

Saturday, 8 May 2010

Greece and the Problem with Public Debt

The public debt crisis in Greece certainly looks serious. Riots in the country have caused the deaths of three innocent bank employees already. But what is public debt and why is it so bad?

A country has public debt when the government borrows money. When governments borrow money, they eventually need to pay it back. Governments make money by increasing taxes or lowering spending, and so if suddenly a government needs to repay debt, it may need to increase taxes or decrease spending, or both. This means less welfare spending and taxation will burden the private sector. Public debt is a major problem in democratic countries because often voters are short-term thinkers who want immediate gratification. Political parties who are desperate to stay in power may pander to these wants and, to fund them, may borrow money. This is great for the short term but in the long term it is not good.

According to Indexmundi, here is a ranking of select countries with their public debt to GDP ratio. Public debt is divided by GDP because GDP is a rough measure of a country's ability to pay back its debt with taxation. A $10,000 debt may be crippling for a janitor earning $10,000 per year, but a $10,000 debt is not going to harm a CEO with a $500,000 salary. Likewise, countries with strong economies and therefore high tax revenues are able to take on more debt than countries with weak economies and low tax revenues.

194% - Japan
81% - Greece
58% - India
43% - Brazil
36% - USA
33% - South Korea
31% - Taiwan
18% - China
15% - Australia
8% - Hong Kong
7% - Russia

As this ranking of countries show, Japan has the highest debt. To compound this problem even more, Japan has a massively aging population and because of the Japanese government's reluctance to increase immigration its labor force is shrinking, which therefore means its tax revenue must decline as public health costs will increase due to the aging population. I am extremely pessimistic about Japan's economy and discourage anyone from investing in that country.

A lot is said about India and Brazil but surprisingly their public debt is quite high. I would have initially thought that Brazil with its massive resources would benefit from some sort of mining tax but perhaps public spending in the country is very high. These debt figures put doubt on whether the BRIC countries are doing well. Brazil and India have high debt, although Russia and China have low debt.

America's debt does not seem that bad. Many people like Peter Schiff claim that the USA has major debt problems but given that American GDP is very high.

China, Australia, Hong Kong, and Russia all have low debt. Russia especially looks good because its public debt is extremely low and the country has massive reserves of natural gas. The same may apply to Australia, although to a smaller extent.

Public debt is a problem, but private debt is also a problem. If individuals have massive private debt, they may need to curb spending to pay off these debts.

Image: Petr Kratochvil

Saturday, 1 May 2010

Survivor Heroes vs Villains Episode 11 - Jumping Ship

This blog post contains Survivor spoilers.

In the previous episode of Survivor, JT was voted off, giving the Heroes only four people, namely Amanda, Colby, Rupert, and Candice. On the other hand, the Villains have five people: Russell, Parvati, Danielle, Jerri, and Sandra. The upper hand seems to be with the Villains in terms of numbers. However, Sandra is on the outs with the Villains. If voting goes as normal and the Heroes are voted off one by one then Sandra will only be guaranteed in the top five as the Villains will vote her out as soon as all the Heroes are voted out. Sandra can get be better deal by aligning herself with the Heroes, voting off a Villain, and then switching to vote for a Villains and then continuing to alternate until the final three during which she brings the three most hated players along to the final tribal council. In this episode, it seems like Sandra was indeed trying to flip. She wanted to flip to the heroes and vote out either Russell or Parvati. If Sandra flips, it's five vs four.

When Amanda, Danielle, and Colby went to the reward challenge, Danielle found a clue to a hidden immunity idol (HII). Amanda saw Danielle finding it and the two of them got into a fight. Colby did not involve himself in the fight. Amanda then gave the HII back to Danielle. This incident I thought was interesting because I don't know what the rules are with regards to HII clues. I think with HIIs ownership of the idol goes to the person who finds it. However, with HII clues, what is the rule? I assume there are no rules, and if this is true then Amanda and Colby could possibly have wrestled Danielle and forced her to reveal the clue. However, there is a rule of Survivor that says you cannot hit someone. I don't like it when there is uncertainty over rules. In my opinion, the current system of dropping HIIs into food and napkins should be replaced by a system whereby HII clues are earned by winning a reward challenge.

Danielle shared the clue with her Villains and she and Russell went out to find it. Russell found it but, angry that Danielle and Parvati found an idol and didn't tell him about it, Russell decided to keep the idol for himself and not tell Danielle or Parvati. Instead, Russell told Candice about the idol. What this did was bring Candice over to the Villains' side. Candice is like the Heroes' Sandra. She is on the bottom for her own alliance, and so it would make sense for her to switch as well, but in my opinion Candice needs to realize that the next person to go should be a Villain to even the numbers out. You you engage in a divide and conquer strategy, you want to be able to conquer, and voting out another Hero only skews the numbers in favor of the Villains even more, giving Russel, Parvati, Danielle, and Jerri even more power. Candice told Russell everything Sandra was going to do and because of this Sandra decided to switch her vote and vote with the Villains. In the end, Amanda was voted off because Candice and Sandra voted for her.

Candice has a history of being disloyal. In Cook Islands, she flipped on her own tribe, but this turned out to be a losing move because she flipped into a tribe that had a member who also flipped. I can't really blame Candice for flipping because if she stayed with the Heroes plus Sandra and voted off the Villains one by one then she would be guaranteed either top five or top four since Amanda, Colby, and Rupert are probably strong, although it could be argued that Colby is not really that solid in this alliance. The old core Heroes alliance seems to be dead ever since JT was voted off. When Russell guaranteed Candice top three, it sounds better than top five or four, so she defected and is now with the Heroes. However, Candice is putting a lot of trust in Russell who has already screwed over the Heroes, so it should be evident to Candice that Russell is not trustworthy. Another reason why I think Candice voted with the Villains is because of fear. Russell has the HII and can give it to anyone. He could give it to Parvati or Danielle (Jerri had immunity from the challenge). The Heroes plus Sandra need to choose someone who won't play the HII. There is a 33 per cent probability that the Heroes plus Sandra vote for someone who plays the HII and then Amanda would have gone anyway and then Candice's vote against the Villains would show Russell and she was not loyal to him and therefore her chances of top three are gone. This was a similar tactice Yul in Cook Islands used to get Jonathan on his side. However, in Cook Island, Yul brought Jonathan over and then slit his throat. I think Russell will do the same with Candice. I therefore cannot really blame Candice for doing what she did, but in my opinion a better move for Candice would be to join Sandra, vote off a Villain, then a Hero, and then alternate. If Russell was voted off then it would be three vs three (Amanda, Colby, and Rupert vs Parvati, Danielle, and Jerri) with Sandra and Candice as the swing votes. This is in my opinion the optimal strategy as it gives the swing voters a lot of power. If the numbers are even among Heroes and Villains, swing voters are very important and everyone will do anything for their vote. But if Villains have more power than Heroes then swing voters are not necessary. However, since there is a 33 per cent chance that their vote would be blocked by a HII, Candice decided to put her trust in Russell instead.

The danger with this alternating strategy is if the Heroes and Villains all gang up and vote out the swing voter, e.g. Amanda, Colby, and Rupert allign themselves with Russell, Parv, and Danielle to vote out Sandra and Candice. But in my opinion this would be unlikely. This alternating strategy works because the two groups are divided. The Heroes and the Villains are divided and cannot trust each other. If Russell walks up to Amanda and tells her that they should all vote out the swing voter, Russell could be trying to get Amanda to waste a vote so that he and the Villains can vote out another Hero. Furthermore, even if the Heroes and Villains all align and vote off the swing voters, the result would be a three vs three tie after the swing voters are gone, which results in a massive risks of a tie vote, which means stones will be drawn, which means a 25 per cent probability of going home.

Many people are criticizing the many HIIs used in this show. In my opinion, a HII is great to add action to the same, especially when a member of a weaker alliance gets a hold of it. It equalizes the playing field. However, even though the Villains have numbers over the Heroes, the Villains are so fractured that it is fun to watch Villains flipping over to the Heroes. In this situation, a HII is not necessary to increase entertainment value. If anything, it reduces it because there is a probability that the Villains will find it and it strengthens their power even more, giving them more power and making the game more one-sided. In order to make Survivor most entertaining, game designers need to act as if they were in antitrust. They need to make sure there is competitition and that there is not too much consolidation of power. Consolidation of power leads to order and predictability, which makes the show boring.