The global atmosphere of low inflation rates

The US, the UK, Japna, the Eurozone and many other countries have very low inflation rates, which are often close to 0. The ECB faces the most difficult problem that it has to make decisions based on the situations of all countries in the Eurozone. The countries in the Eurozone have different economic structures as well as different economic growth rates and inflation rates. The policy made by the ECB affects all member countries; therefore, the decision must be made very considerately. Moreover, the US Federal Reserve also faces its problem. The US growth rate is very positive as well as the unemployment rate. With the thinking of stablisation, the Fed should raise rates to leave room to future expansionary policies. However, the US also has a very low inflation rate, higher interest rates may lead the inflation rate to drop further. Under such circumstances, it is important to justify that how much money is not in our economic circuit. If there is a large amount of money that is not in our economic circuit due to negative predictions, it is important to make policies to put the money back into our economic circuit instead of pulling new money into economies. Therefore, not all expansionary monetary policies are suitable under the current situation, as many expansionary monetary policies have lasted for years but showed limited impacts. These inappropriate monetary policies may start to make effects in the future and cause hyperinflation.

An evidence of low inflation has limited negative impacts on good markets as well as labour markets

Japan's unemployment rate has fallen to the lowest level in 20 years when the inflation rate falls as well. The unemployment rate fell from 3.4% to 3.1%, showing a strong performance in the domestic labour market. The strong performance in the labour market shows many companies have confidence of their own future performances and future Japanese economic growth. The Japanese government has used many fiscal tools, the Bank of Japan has also expanded its monetary policy. They hope to use their policies to raise the domestic inflation rate. However, all these policies seem insufficient as the inflation rate stays low. Therefore, we can see that low inflation rates have relatively limited impacts on labour markets as well as good markets

Oil prices may rise next year

Hedge funds's oil shorts reach 2015 peak, this shows they still expect a further fall in oil prices. However, behind closed door, Saudi officials say that they want oil prices to maintain between $60 and $80 a barrel. Saudi Arabia was the toughest country whose energy minister claimed even if oil "goes down to $20" the country would not change course. Now, the speeches have turned much softer under pressures coming from inside and outside. However, the market still has a strong belief of continuous low oil prices. When Saudi Arabia does not make a clear policy to show the other OPEC countries and the market that it is willing to raise the oil prices, the oil prices will still remain low. The effects of "verbal intervention" will be very limited as Saudi Arabia has damaged many other oil exporters' profits and negotiation will not go very well under such circumstance. Therefore, I expect Saudi Arabia will try verbal intervention later this year but receive very limited response then make a policy change to raise oil prices next year, which I believe will push up oil prices.

Low inflation rate will not affect people's consumption decisions

The Japanese government and many other countries are raising their minimum wage levels, which can be seen as a policy of raising inflation rate. The common belief is that low inflation rates would reduce consumption and affect market confidence. Does low inflation rate really affect people's consumption behaviour? Well, I think the low inflation rate will make very limited impacts on our daily consumption unless there is a deflation. Because almost all consumer goods depreciate automatically. The utility of having goods and services today is dominating the utility of having goods and services in the future.Therefore, it is also better to consume goods and services today than consuming in the future. To conclude, low inflation rates will not affect people’s consumption decisions.

Russia may start a large scale war in the Middle East

I always think it is the worst option to start a war, as I have explained in my previous blog. However, it is not hard to smell gunpowder in the air. Turkey shot down a Russian fighter jet and a wider scale of the bombing on ISIS has been launched by France following the Paris attacks. It is not a surprise if there is a war in the Middle East in the near future. A war in the Middle East will definitely affect the oil production, thus an increase in global oil prices. Moreover, the military suppliers can profit from the war. The global commodity prices, including gold, silver and aluminum will increase as many of the metals are important military resources, and gold and silver are good alternatives to the banknotes which can depreciate badly during a war. Russia has very rich natural resources; however, the recent falls in oil and commodity prices damage its economy heavily. By starting a war in the Middle East, Russia could recover its economy by the increasing oil and commodity prices. Moreover, in terms of its military power, it is unlikely for Russia to lose its battle in the Middle East unless NATO intervenes. However, NATO seems to lack interests in intervene, as NATO did not take any active response to back Turkey against Russia. Therefore, when NATO does not intervene, Russia is very likely to start a much larger scale of war in the Middle East, as it could achieve many economic goals by starting the war.

The governments have to make their tough decisions as the problem of public debts is inescapable: raise taxes or cut spendings

Government finances itself through two channels: taxation and borrowing. Any increase in government spending can lead to an increase in tax in the future. Building up a welfare state requires a massive increase in government spendings. Therefore, when people receive better benefits, people as well as firms have to face higher tax levels. With high tax levels, many companies will choose to move outside the country, as their corporate costs are increased by taxes and their competitiveness is affected. Thus a welfare state may slow down a country's economic growth. Therefore, without the support of a strong economy, a country will never succeed to build up a welfare system. However, the welfare system has many advantages. It can avoid social unrests as people have safe nets that people's living standards will not fall below a certain level. This also reduces the opportunity cost of starting a new business. This is why we can see many successful companies were founded in developed countries. Nowadays, many developed countries have very high debt level. The ratios of the total US debt to its GDP is over 100% and the ratio of the UK debt to GDP is over 89%. These countries have two choices: to increase their tax levels or cut their government spendings. Increasing their tax levels can maintain their welfare systems, but may force some companies to move out. Cutting government spendings will affect their welfare systems and may lead to some social unrest and affect their future outputs. The governments have to make their tough decisions as the problem of public debts is inescapable.

Low oil price is not sustainable

Who decides the oil price? We commonly believe the OPEC has the power to choose the oil price. If this is true, then current low oil price should be beneficial to the oil export countries. However, this is not true. The Russian economy is in trouble, 40% of its economic outputs rely on its oil industry. The oil price reduces the value of its outputs. It has only one option: it can produce more in order to maintain its revenue, but this act can pull down the price further. Saudi Arabia was not benefitting from the oil price either. Many funds from Saudi Arabia withdraw their money from global markets, this is not a good sign. Now, if the countries do not start to cooperate again, the oil price could be pulled further down as the oil export countries need to supply more and more to maintain their income levels. Therefore, we can see a deflation in the oil market, as our money against oil becomes more expensive, we tend to save money on oil, and the oil price can decrease further. Overall, I think we can see the oil exporting countries uniting again or an oil market crash followed by bankrupt of many oil exporting countries.

The difficulties of Jim Slater’s investment strategy

Jim Slater, who was a famous financier in 1970s, died on the 18th of November 2015. He was famous in buying stakes in undervalued firms and also wrote a book called “The Zulu Principle” which explains his investment strategy of “clearly defined and narrow area of knowledge”. However, such an investment strategy has some difficulties. Firstly, defining an “undervalued” company is a difficult job. Small but successful companies are not always undervalued, as stock prices do not only reflect the companies’ current values, but also reflect the public opinions about their future values. Therefore, your prediction has to beat the market, which is very difficult. Moreover, some small, undervalued companies have difficulties to find themselves; therefore, even you believe they can have bright futures, but the market force is actually working against these companies, they have more difficulties than you may imagine. Secondly, when narrowing areas of knowledge, it is easier to ignore existing exogenous risks, just like what Jim Slater died. Jim Slater’s fall was largely caused by the stock market crash following the oil crisis. Thirdly, narrowing areas of investment makes risk management more difficult. Good investment has much higher returns, but meanwhile bad investment has much worse losses as well. Being specialized makes one more efficient, but also creates higher opportunity cost and increases the losses if one fails.

The challenges facing BRIC

The slowdown of emerging markets adds more worries on the global markets. Brazil had negative GDP growth in the first two quarters this year with a 12-year high inflation rate. The Chinese economy is also slowing down. Russia is suffering from low oil prices and about 40% of its economy relies on its oil industry. The Indian economy is also slowing down. I think there are three changes that have to be made for their future success. Firstly, the countries have to reform their economic structures. Some economies rely too much on investment and some rely too much on only a few industries. Secondly, a wealth redistribution needs to be done in order to secure social stability. When an economy is growing rapidly, the gap between the top and the bottom is widening at the meantime. A wide gap is a cause of social unrest. For sustainable economic growth, a stable society is a must. Thirdly, an improvement of financial markets is necessary. A well-functioning financial market can help companies grow faster and reallocate resources to the industries which have fast growth rates. Moreover, good financial markets can signal future performances.

We smooth our lifetime expenditure because we lack the ability to manage and store our purchased goods and services.

We want to smooth our lifetime expenditure; however, we do not care about smooth our income. Why does this happen? Although future incomes and prices are all uncertain, we are more confident about our ability of managing our wealth instead of  goods and services consumed. When we receive our incomes, we feel our wealth is increased, and wealth can be managed well and used wisely. However, when we consume goods and services, because they have various characters, it costs much more to manage and store the goods and services after we consume them. Therefore, in order to reduce the costs and use our money efficiently, we tend to consume goods and services when we just need them. Moreover, we want our life standards to be constant; therefore, we tend to smooth our expenditure across our lifetime. To conclude, We smooth our lifetime expenditure because we lack the ability to manage and store our purchased goods and services; otherwise, we might spend all at once.

Large merchants need to keep their physical stores when having online stores

Moving stores to online seems like a fashion; but I feel physical stores have their advantages that online stores will never have. Larger merchants can gain more advantages to have physical stores. 

People expect lower prices when shopping online, mainly because of two reasons. First, the information provided online is not as good as the information collected when visiting a physical store. Secondly, the goods ordered online need some time to be delivered home. A good received at time t is always better than the same good received at time t+1. Therefore, demands for one good online are fewer than the demands in a physical store if we have the same customer pool. Large merchants already have many stores all over the world; therefore, the cost of opening new stores is lower if we take into account their sizes. By having physical stores, because large merchants have huge amounts of customers already, they can create more sales.

Moreover, if large merchants can efficiently use their money received in their stores, they can create more profits. Because in physical stores, merchants receive their revenues immediately after customers pay. However, online customers pay to a third party and the third party transfers the money to merchants when the customers receive their orders. Therefore the money received by online merchants is discounted by time. If large merchants can use their money in stores wisely, they can grow faster.

The impact of terrorist attacks on economies

By the end of Monday, we can already see the picture of how a terrorist attack will impact on the economy. The tourist industry suffers the most: the stock prices of many French hotels fell sharply on Monday. Moreover, the currency may depreciate as the economy, which suffers a terrorist attack, is considered to be damaged. If attacks cause incredible chaos and damages, people will feel their lives in danger, thus the prices of some goods, such as food, water and first aid equipments will rise sharply. From government aspects, the spendings of all relevant governments will increase to attack terrorists and avoid future possible attacks in order to make civilians feel safe. After the Paris attacks, France launched revenge attacks on Isis; the British spy agencies plan to recruit extra 1900 staffs, and Cameron announced his £2bn of extra spending aimed at attacking Isis. However, in general, all these effects depend on the scale of terrorist attacks. If the scale is massive, like 911, the damage on the economy and the rise in government spendings will be massive; if the scale is limited, the damage on the economy and the rise in government spendings will be limited as well. In addition, any damage caused by terrorist attacks is hardly to be a systematic damage on an economy, thus terrorist attacks are almost impossible to bring one economy into recession, unless people lose their confidence in their government's ability to bring security.

Adverse selection in the EU migration policy after the Paris attacks

Previously, the EU member countries came to some agreement of each country receiving a certain number of Syrian refugees. However, the attacks in Paris this Friday fuel the migration debate. Many people believe there might be more terrorists hidden among the refugees, and such belief is very reasonable. From humanity aspects, we should accept the innocent refugees; however, it is very difficult to identify each refugee's genuine background. With the lack of information, the safest way is to reject all the refugees, so there is no possibility for terrorists to pretend as refugees and enter the countries. This is also the most common way for people to deal with adverse selection. Such phenomenon is called by economists as "the market for lemons". Therefore, if no countries have 100% confidence to identify the refugees' genuine identities, no countries will take the risk of being attacked by terrorists. My opinion is after the Paris attacks, the number of refugees accepted by the EU countries will fall sharply.

More funds might be set up for particular interests in the future

I read an article on Financial Times, “Is banking about to be ‘Uberised’?”. The proportion of corporate financing coming from banks fell from 2006 to 2014. People have individual investment preferences, and investing directly without the intervention of banks has higher expected returns. However, because individuals have limited ability to satisfy corporates’ financial needs, they might form interest groups that create enough money pools to support their investment plans. Therefore, I expect in the future more funds with particular interests will be set up. Large financial institutions will play more important roles of advisory and credit ratings rather than direct investment. The good thing is increasing levels of competitions in the financial industry, and corporates are more likely to have good deals. The bad thing is without cooperations, funds can all focus on one “hotspot” field and create huge bubbles.

Is it good or bad to have a competitor?

Firms hate competitions, hate having any competitors. The market generally believes that a firm will lose profits when the level of competition increases. This is not necessary to be true. With a competitor, a firm has to work harder and be more creative in order to stay in the game. I want to say without competitions, Apple would never have become this successful. Many people think Steve Jobs played an important role in the rise of Apple Empire. However, at the time of Steve Jobs rejoined the company, Apple was facing competitions from Microsoft and other computer companies and it seemed that Apple had lost the fight against the PC world. Yes, Steve Jobs made Apple become successful. But without the competitions Apple faced, Steve Jobs would have never come back to Apple. In addition, Microsoft was once the most successful company in the world, its Windows dominated all other computer OSes. Microsoft earned a good amount of profits from its Windows, because it lacked competitions, it had few incentives to be creative and develop new products. These years, we saw the sales in Windows-installed computers fall and its smartphone OS was a late enter of the industry. From these two examples, I want to say that competitions give firms a chance to explore their potentials and those with greater potentials can become more successful than if there is no competition.

Unique design is far more attractive and profitable

A car company recalling its cars is usually a damage of the company's image. However, this time, Rolls-Royce tells a different story and the recall is seen as its considerate action. The car company only recalled one car due to the airbag safety issue. The number of recalling cars shows its customer that each car it makes is unique. The Rolls-Royce customers want the feeling of being special. Therefore, the recalling is successful telling their customers that each one of them is unique. People like being treated differently to satisfy their unique needs. Large companies which target millions of customers are not able to do that. Only those companies have their unique target groups can differentiate their customer more easily. By differentiating products to satisfy their customers, this type of companies can charge different prices without causing unpleasant of their customers, thus becoming more profitable. We have much easier communication ways to link customers and merchants closer than ever. A company can create a community that all uses its products, or look for a group of customers with a unique character that make them attracted to the company's product. To conclude, I believe scale of a company is less important, products with unique icons are more attractive to customers and more profitable.

allowing short selling can reduce bubbles in markets

When you believe a financial instrument is overvalued, you can short sell it and earn money if your belief is proven to be correct. In a financial market, if short selling is not allowed, then only people, who believe the market is going to grow, will enter the market. Once entering the market, the only two ways to make profits is to wait for price increases and to push prices upward. Small traders can do nothing but wait. Large traders have some ability to push prices higher if they are willing to buy more. Therefore, we can say that everyone who enters the financial market, has the same goal, which is to push prices higher. However, up to a certain level, no one believes there is a reason for the market to continue to grow. Then the capable trades want to hold the market prices for a while in order to create time for them to leave the market; then once the large players leave the game, the prices drop sharply as there is no new player entering the market, because no one believe that the prices will increase and they can make any profit if they enter the market. If the market allows short selling, at each point, there are some people who believe the market prices is overvalued entering the market. The market will take these people's beliefs into considerations. Because there are always two different opinions in the market, change in prices is more likely to be more moderate and close to the real value change.

We never play games with symmetric information, even if symmetric information has been provided to us

We all behave rationally and maximize our own expected utility. In a game, players can have symmetric information, but react like having asymmetric information. In this game, two players have equal information, but are also told they do not have complete knowledge about the game and neither of them know about what the other player know about. We can say that the two players have symmetric information. It is our human nature that we like to guess what the other player know about. Each individual is unique; therefore, each player will develop new knowledge about the game, which can be different from the other player's thoughts. Then we have a game with two players with asymmetric information. Moreover, sometimes players have a  time limit, so they only try to remember the information they believe is important. When they make their choices, the information chosen by each of them can be different. Then they start to play the game with asymmetric information, even if all players are given complete information. In reality, we can never have a game with players having symmetric information, because we like to be creative, smart and efficient.

What type of investment bank is beneficial to our economies

Investment banks have been blamed for the financial crisis and the image of greedy bankers has been branded in people's mind. I think investment banks and other types of financial institutions are necessary in our economic system. The investment banks and other institutions are the leverages for firms to multiple their capacities and raise more money for investment in order to expand at a faster rate. However, firms do not always make profits and the economy does not perform well. In such case, the investment banks and other institutions should hedge against the risks and limit the losses due to the temporary fall in economic outputs. I never like George Soros, even he is very talented and has many genius ideas. He is successful based on the losses of others. Such strategies cannot gain a long term sustainable growth, and no society likes his strategies either. Investment banks and other types of financial institutions have to share their success with other parts of the economy in order to have more freedom from the central government. Therefore, "good" investment banks and other financial institutions are looking for mutually beneficial opportunities and limit the potential risks.

Key elements in job reports, besides the unemployment rate

The US Fed announced its job report today, the results were relatively positive and heighten the expectation of the possible rate raising next month. The US unemployment rate fell to 5.0%. The unemployment rate is the key factor people generally pay attention to. There are many other key elements in the report that could indicate an economy’s performance. The first key element is the actual number of unemployed people. By using the number and the unemployment rate, we could calculate the participation rate of the population. Moreover, when we know the number of employed people, then divide the GDP by this number, we could roughly know about the labour productivity. The second element is the wage. When the wage growth rate is larger than the inflation rate, we can know the economy is expanding in real terms. If the wage decreases, but the unemployment rate also falls, we could believe that despite the economy is not doing well at the moment, firms are still confident about the economy’s future performance. If the wage falls and the unemployment rate increases, it is a sign that the economy is in a deep trouble. The third element is the number of jobs created. By comparing the sum of jobs created each month to the change of the unemployment rate, we can know how many jobs created are permanent and how many are temporary. Temporary jobs have weaker effects on the economy. I think these are the three key elements we need to pay attention to besides the unemployment rate.

Technology innovation pushes economic growth, even if researches fail

I always believe that technology is a key factor that drive long term economic growth. The content of China's 13th Five Plan shows that Chinese spending on R&D will continue to expand. Chinese spending on R&D was 200 billion dollars last year, second only to the US. Considering the size of the Chinese economy, this figure is very reasonable. There are many fascinating ideas about technology innovations discussed in the five year plan, from aircraft engines to "quantum teleportation". I do not think the success of these plans are the key, I think that the spending on the research and all the side products during the research are more important. Huge spending on research will increase more job places and income of many firms which are relative to the projects. Moreover, during the research process, many new technologies may be innovated and used in our consumer goods. Even some researches might fail in the end, the jobs it creates and unexpected technology improvement already add value to the economy.

My prediction is that the US Fed will raise rates this December, the low interest rates in Europe will survive for at least another year and China will decrease its rates.

Yellen commented on the positive performance of the US economy and raised the likelihood of rate rises in December. The markets certainly do not like the news, but did not react violently. This shows, markets know that the decision of raising rates will be made by the Fed eventually. Moreover, I believe the European central banks will not follow the US Fed after it decides to raise rates. The European economy has not fully recovered to its previous level before 2007. The current FTSE 100 index is at the same level of it was in late 2007. The Greek issue has not been resolved, and more problems are hitting the EU economy. Britain will vote on whether Britain will leave the EU or not. The refugees from Syria are flooding into Europe; in addition, the Volkswagen emission scandal is hitting the European car industry as well as the European stock markets. With all of these concerns, I expect that the European central banks will decide to maintain low rates for at least another year. China does not have zero interest rates and I think China is likely to move in that direction. The China's 13th Five Year Plan states the target of the Chinese economy is to grow at a steady and relatively fast rate. This means the central government wants to stop the growth rate falling and decreasing interest rates can be a very effective monetary tool. Therefore, I think China will decrease interest rates to stimulate its economy.

In conclusion, my prediction is that the US Fed will raise rates this December, the low interest rates in Europe will survive for at least another year and China will decrease its rates.

We cannot give up our rights in today's digital age

The police and security services will be able to access all the UK citizens' internet use records without the need for judicial authorisation, under the Investigation Powers Bill. This is understandable as internet use records can almost tell one's personality and activities everyday. By having the access to people's internet use records, the police and security services could have more information about potential criminals and terrorist attacks. However, court is still the only way that all people believe brings justice and delivers fair trial. Therefore, I will think the Bill is necessary to bring down more potential threats, but the internet use records accessed by the police and security services without judicial authorisation should not be used as evidence of guilt in courts.

Labour Market, the most supplier-unfriendly market

Labour market is the most brutal market for the suppliers, the workers. In a labour market, workers are supplying their workforce to companies. However, due to imperfect effort inspection, the companies tend to keep the market at a level of oversupply in order to push workers to work harder. Because of the oversupply of labours, there are also some people out there who are looking for jobs. When someone is out of employment for two years, he or she would be considered as unemployable. In addition, in a labour market, firms have mutual interests; but workers do not have mutual interests, as finding a job is a zero sum game, as one wins the job position, all the other competitors lose the position. Therefore, the firms can cooperate with each other to keep salaries low; however, some worker may use low wage requests as their sale points, leading to a further decrease in wage levels. To conclude, labour market is a market that the power of demanders dominates the power of suppliers, and some skilled workers lose their skills due to the increased level of competition caused by the firms.

Cuba is open, but the US is locked out

Investors from Asia, Europe and Latin American are eyeing the opportunities in Cuba; however, the US investors are left behind, due to the long history of hostility between the two countries. Would the US investment bring benefits to Cuba? Of course, yes. The US investment would be the same as the investments from other places. However, most of the ordinary people hardly accept to receive investments from a country, they had believed as their enemy for about half a century,  and the central government has to be aware of the public opinions. In this example, we can see that creating an extreme relationship is not a good idea. Having a very close ally needs the government to compromise on many issues and throw the benefits away in order to maintain the good relationship. Having an enemy is also not a wise thing to do. There is no enemy for ever; just like the US and Cuba nowadays, they are no longer hostile to each other, but because of the historical issues, they cannot cooperate with each other easily.