What is Economics

Economics as a subject is to study how to locate scarce resources efficiently. Really? There are too many definitions and understanding about what Economics is about. However, back to the era of Adam Smith or even earlier, Economics was part of philosophy and the purpose of Economics was to make one's country wealthier than other countries. Nowadays Economics is about stabilizing the society by narrowing the wealth gap and mitigating economic downturn. There is never a single purpose of studying Economics. People's goals of studying Economics vary from time to time. Is there a benefit of studying a subject like this. Of course, there is. Always focusing on the most popular topic can make the subject attract people's eyes and absorb more resources from the society. However, because the goal always varies, Economics has become a "huge" subject that covers so many fields. We do not need an economist to study Economics, everyone could participate into Economics study. Recently we can see that many people who are mathematicians and psychologists have won the Nobel Economics Prizes. Economics is a combination of all studies that relate to wealth.

The US economic growth from last quarter was lower than expected, but external risks are still what we mainly need to worry about.

The US economy in the fourth quarter of 2015 is reported to grow 0.7 percent, which is lower than many economists had predicted 0.8 percent. The economy expanded 2.4 percent in 2015. I think the US economic growth fell under expectation because of external risks. Consumer spending has made up two third of the economic output, and the US employment is close to full employment. However, the cause of the slowdown is due to external risks. Investment fell 2.4 percent due to the slide of the oil price. Moreover, exports fell because of the US dollar appreciation. These are all external causes. In the new year, 2016, these external shocks will continue, such as the oil price shocks, the EM slowdown. However, the Fed's decision on interest rates may be seen as an internal risk. In general, I believe the US economy will still perform better than other developed countries.

China may have a "subprime crisis" starting from P2P platforms

Many Chinese P2P lending platform companies have grown rapidly in recent years. Now some struggling Chinese companies are turning to P2P platform in order to finance themselves. Internet financial industry is under-regulated. Many borrowers are usually considered to be high risk borrowers. Many of the struggling companies are raising money for their rollout programs. Because the interest rates on the P2P platforms are generally very high, many individuals lend their money on these platforms in order to have some high returns in the future. If there is enough money on the platforms for the companies to borrow, the companies can pay back their debts by borrowing more. However, if suddenly there is a company that is unable to borrow enough funds to pay back its loans, then it could lead to people questioning other companies' ability to pay back their loans. People would stop lending, and all the companies that use P2P borrowing as a rollout instrument will bankrupt. The individual creditors will lose some of their wealth. It may not sound as scary as the subprime crisis; however, they have a similar cause, "unreliable borrowers"; if the scale of P2P finance becomes larger, the effect of such problem will be multiplied and damage the Chinese economy.

The Fed is still trying to figure out the actual economy performance which is currently clouded by market shocks

The Fed's speech about opening choices of increasing interests offset the gains of the market from the oil price rise today. Under the current circumstance, everyone expects that the Fed will remain its current rates or even cut the rates, as the global economy is not performing well and the market has a very bad start of this year. I think the Fed wants to see how companies are actually doing and if the oil price could restore itself. If the finance reports released show that companies are doing relatively better than expected and the oil price rises back to its year ago level, then the Fed will continue its previous policy of gradually rising its rates. However, if the opposite things happen, the Fed will maintain or even lower its rates. Therefore, whatever the Fed is speaking of is not going to be the final decision. Actually I think even the Fed does not what its next move will be.

The risk of the Fed's increasing rates on companies' finance

Companies have two main types of financing: borrowing and equity. Usually companies only focus on using one or the other; because usually the interest rates are high when equity prices are high, the interest rates are low when equity prices are low. However, last year, there was a period of high equity prices and low interest rates, which means the two ways of financing companies became extremely cheap and easy. This was a period that was friendly to new established firms. However, currently we face an opposite situation. The Fed raised its rates last December and the market is experiencing the worst January in the history due to the continuously falling oil price. Maybe in the near future, the fall of the oil price could be stopped by the output cut. However, if the Fed still decides to increase rates "gradually", leading a fall in the market, many companies will face financing difficulties as interest rates will be high and the equity prices will be low. Therefore, companies which have not got a lot of cash from the good period will face financing difficulties, this could hurt the economy as a whole.

Will Iran be the rising star?

This January may become the worst January for the market in the history. The root cause is the oil price and the continued worries over the EMs. Iran's sanction has been lifted and Iran has had some positive moves this year. Iran plans to 114 Airbus jets and seeks investment in capital markets. Because of the previous sanction, the Iranian economy is not tightly linked with the rest of the world economy. Therefore, the economic slowdown of the EMs may not affect the Iranian economy. Maybe the falling oil price will reduce the profits earning from exporting oil; however, this will not damage the economy, as the profits are extra profits adding to the economy due to the lift of the sanction. Therefore, because Iran is relatively independent from the rest of the world, the Iran economy may become the new rising star among the EMs.

Tech companies first, banks second?

In Davos World Economic Forum, people want to hear from those famous tech companies and it seemed that many large companies wanted to move in the same direction as those tech companies. Around 10 years ago, people liked to hear from banks and other financial institutions. Does this mean that banks are now less important? I think that banks and the financial system are still very important; however, because of the 2008 financial crisis, people have realised the huge risk inside the financial industry and those big banks could bankrupt, the shareholders' expected profits of those big banks from holding the shares are lower, thus the share prices decrease. Meanwhile, the tech companies have made incredibly profits and people also see that how technology innovations have changed our lifestyles. Therefore, people expect more innovations in the future that can make a difference in our life. Compared with the tech industry, people generally know better about the moves of the financial institutions. In conclusion, banks are still important and necessary in our world economy but make fewer profits for their shareholders; meanwhile technology innovations have changed our life and raise our concerns about how our future life could be changed in both good and bad ways.

We may have a crisis ahead

The market rallied today after the European Central Bank president Draghi hinted on Thursday that the Bank was ready to laugh a fresh round of stimulus for the eurozone in March. Moreover, Mark Carney also said that he would not increase the interest rates before. This may be a piece of good news, but I still believe the ECB needs to come out with new ideas in order to make their policies more effective. The current oil price reaches the 12 year lowest point. This is not good for the global financial market. More importantly, the low oil price may harm the green energy industry. The slowdown of the emerging market economies also reflect the weak demand from the developed countries. There could be an economic recession in 2016 in a global scale. However, the current situation is different from the 2008 crisis. The financial market is not likely to the cause of the crisis if it happens. It would be caused by the current low oil price, the overuse of expansionary monetary policy and the bubble burst due to lack of market confidence.

Why do big businesses want Britain to stay in the EU?

Many US big firms including Goldman Sachs, JPMorgan, are paying 6-figure contribution to support the Britain Stronger in Europe campaign. One senior US investment banker was precise to describe the reason why the big businesses do not want Britain to leave the EU, "every single contract will have to be renegotiated - that means every credit default swap, every derivative, every loan agreement. It's a nightmare." However, there are more reasons. If Britain leaves the EU, the costs due to taxes and tariffs will increase. In addition, if the EU workers are no longer eligible to work within the UK, then the cost of providing sponsorship to the EU workers will also add costs to these big firms. Moreover, many of these companies have their head offices in London. If Britain leaves the EU, they may consider to build separate head offices in the European continent,requiring more investment. Therefore, if Britain leaves the EU, these big companies will have higher operation costs.

More EU workers may flood into the UK

The UK jobless rate is reported to fall from 5.3 percent to 5.1 percent, which is the lowest since 2006. This is contributed partly by the announcement of Mark Carney about the Bank of England's decision of maintaining the current low base rate. However, the unemployment rates in other countries are rising, especially the job cuts in the financial industry may worsen the situation. Barclay is preparing to announce its 1000 job cuts in its investment bank. It plans to exit much of Asia, Latin America and Europe, and focus on US and UK markets. Other financial institutions may have similar strategies and reduce the sizes of their business in the areas with economic slowdown and decline. There are many bankers who might lose their jobs in Europe and look for job opportunities in the UK. Therefore, if Britain does not leave the EU, the domestic labour market may become more competitive due to the EU workers flooding into the UK.

The overuse of monetary policies today may damage the monetary system in the future.

The IMF expects that in 2016 and 2017, the global unemployment number will increase. Some developed countries, like the US, the UK and Germany, may have decreases in their unemployment rates. However, China as well as other emerging markets may suffer from their economic growth slowdown, their unemployment rates are expected to increase. Moreover, some Arab countries may be affected by the falling oil price and have rising unemployment numbers. All these factors will add to an increase in the global unemployment number. This implies that the global economy may be in decline in the next two years and the global central banks may use more expansionary monetary policies. There could be a possibility that when the global economy is recovering in the future, all the potential risks created by these expansionary monetary policies may be accumulated and add a sudden and huge inflationary pressure on the global economy. Such consequence may lead to a collapse of the current monetary system.

What is money?

From dictionary, money is a current medium of exchange in the form of coins and banknotes. However, money is no longer in form of coins and banknotes. Bitcoin is another type of money that with different concepts behind it. With a general concept, money is anything in any form that could be used as a medium of exchange. To be used as a medium of exchange, it has several characters. Firstly, only inflation can affect the money's future value. Secondly, it is easy to carry and transfer. Thirdly, its supply is limited but infinite. Anything which have all these three characters could be used as money.

The oil price faces new downward pressure

The lifting of sanctions on Iran's economy could add more downward pressure on the oil price, as the oil export by Iran will increase the overall supply of oil in the industry. Therefore, the oil price is likely to fall further. However, I am still confident that the oil export countries are likely to cut their supplies and push back the oil price back in the second half of this year.

Concerns about the Chinese debt level

Borrowing has fuelled some of the Chinese economic growth; however, at the same time, the total debt has reached $23 trillion, which is 231% of the Chinese total GDP. This is a dangerous level, and the cutting of interest rates and the required reserve ratio could increase the Chinese debt further. Debt is like an unstable nuclear reactor. It could create energy for the economy to grow faster; however, it can explode and damage the economy, Greece has set a bad example. I think that the Chinese economy experienced a period of fast economic growth but meanwhile many problems have accumulated and hidden in the economy. Instead of seeking an economic growth, I think that the priority for China from economics respect is to solve the debt problem and restructure its economy.

Most US presidential candidates from both parities plan to increase taxes on Wall Street

The frontrunners from both Republican and Democratic speak of increasing taxes on Wall Street. I am not going to discuss about how these tax plans could affect the industry, I want to discuss a question of what makes these candidates ignore the interests of the big business groups. As I have discussed in my previous article, Internet has reduced the cost of make advertisement. Moreover, they can attend many TV debates to use their good ideas to make themselves more popular. As the public know their names already, either being invited to the TV debates or being isolated can all attract people's attention and improve their popularities. Therefore, now and in the future, the influences of big business groups on the political candidates will be weakened by the diminishing cost of advertisement and these candidates will focus more on winning support from the social majority.

The value of a currency is determined by the economic performance and the government stability

I think there is a correlation between a country's currency value and its economic growth. Back to the early 21st century, the Chinese government was worrying about the rapid appreciation of RMB lowering the Chinese exports. Nowadays, despite the continuous devaluation of RMB, many expect China will have a weaker trade in 2016. Of course, expensive currency lowers the exports; however, the value of a currency at most time presents people's expectation of the country's economy. Currency is backed by the government and the country's economy. If the government is unstable, the currency will devalue very quickly. For example, Hitler's Reichsmark became worthless after the Second World War. Meanwhile, if the economy is not performing well, like current China, the value of its currency will devalue as well. Because when the economy is produce insufficient amount of goods and services, then hyperinflation is very likely to take place. Therefore, the value of a currency is determined by the government stability and the economy's performance.

Oil price and the oil export countries (focusing on Russia)

Oil slips towards $30, and many oil export countries face financial difficulties. For example, Russia is cutting its budget expenditure by 10%, and the Saudi Arabia's cost of riyal-dollar forward prices is pushed up. Currently, as the demand side is weak, the oil price will not rise back in a short period. This means the finance of many these oil export countries will become worse. Many financial problems could grow to become global issues. The most obvious problem is whether Russia is able to pay back its debt. If the oil price remains at the current level or even lower, the Russian economy may face the same situation of what Germany faced after the First World War. After the First World War, German industries were hit heavily and many workers and post-war soldiers were left on streets jobless. At that time, Germany economy could not produce sufficient goods for the economy, leading to a hyperinflation as the result. Currently, the largest Russia industry, the energy industry, is hit by the low oil price. The unemployment rate in Russia in 2015 is expected to be higher than it in 2014, the figure is expected to be even higher in 2016. Moreover, the inflation rate is currently above 10%. If the Russian government decides to devalue its currency, the inflation rate will rise rapidly. Therefore, at the moment, Russia will do everything to push up the oil price. If the oil price remains low or even continues to fall, there might be a Russian debt crisis, which could spread its affect around the world via the financial system.

Are professional investors good or bad for stock markets?

I read an interesting comment about the Chinese stock market today. It says that retail investors make up the bulk of the Chinese stock market. I am not going to make any judgment on it. Let's assume this is true. I think that this can be a cause of the fragile stock market and I also believe that professional investment is healthy to the market.

Could professional investors, in other words, financial institutions, absolutely make more money out of the stock market? It is not necessarily true. Looking at the last year returns of many retail equity funds of big institutions, most of them have negative returns. The average loss was greater than 5%. I believe there are definitely some retail investors who make positively returns last year out there. Therefore, I am not saying that retail investors should give their money to institutions to invest, but I am saying institutions should be more active.

The big institutions have more resources than retail investors, in terms of information, intelligence, human resources, money and etc. They are more likely to make more rational and more precise judgement. When the market is overheated, they are the ones who are more likely to sell their equities and cool down the market. Therefore, the institutions should be greedy and a profit maximiser. "Nation teams" could push the index back but cannot reduce the bubbles in the market. The "greedy" institutions will hold the market prices within a reasonable range, as they cannot sell off all their equities without letting the market knowing, so they need to worry about their remaining equity value and profits of selling of equities. Therefore, active big institutions can make the market more stable and reduce the speed of bubble creation.

Of course, those big institutions can make mistakes; however, the chance for them to make mistake is lower than the chance for retail investors to make mistakes. Overall, I suggest that large institutions being active can help to stabilise stock markets.

personal recommended articles

Heed the fears of the financial markets (Larry Summers)https://next.ft.com/content/c860bdde-b606-11e5-8358-9a82b43f6b2f

A vote for Brexit is a leap into the abyss (Martin Wolf)https://next.ft.com/content/1f770eb8-b529-11e5-8358-9a82b43f6b2f

Rational markets expect crazy economies (Gillian Tett)https://next.ft.com/content/c68285c4-b2e6-11e5-b147-e5e5bba42e51

The US Fed's move in 2016 prediction

The US Fed is about to announce their job reports and forecasts about the US economy as well as the global economy. I think that the US Fed will face a similar situation as it faced in 2015 September. Last September, the US economy was performing well in terms of job increases; however, meanwhile, the Chinese stock markets were sliding and the global economy was affected by the worries over EMs. The same is taking place currently. The Chinese stock market is sliding and the world asset markets are affected as well. Many companies and institutions lower their expectations of 2016 revenues by taking the Chinese economy effect into account. All these will be added up and affect the US economy finally. Therefore, I think that the US economy will not perform as well as it did in 2015, so the US Fed may wait for a longer time to raise its rates even it might not choose to raise its rates by the end of 2016.

Can hedge fund managers really work to maximize their clients' profits?

We can read many from newspaper articles that talk about how hedge fund managers play strategies to maximize their own profits instead of their cilents'. This is natural but immoral. Hedge fund managers have very good incomes, especially with their "two and twenty fee" structure. With this fee structure, managers with better performances will have higher incomes; however, if there is a strategy that can increase their own wealth more than if they better manage their clients' wealth, they are more likely to go for that strategy and not to improve their clients' wealth management strategy. Therefore, if clients want their investment managers to maximize their profits, the clients have to increase their payments to match the managers' gains from maximizing their profits. Managers with more personal wealth tend to be more difficult to be satisfied, so managers who stay in the industry for longer time demand higher and higher incomes. This results the incomes in this industry increase rapidly. To maintain the income level, it is important to attract more people into this industry and increase the competitiveness. If the managers are not performing well, but still have high incomes, the firms need to hire new people and make the income level more relevant to the managers' performances.

UK bonds are more attractive to investors

2016 is going to be a challenging year for the global economy, as there are many uncertainties among EMs and commodity markets. The equity market fell on the first trading day of 2016 globally. Britain is to decide about its future in the EU this summer. The debt problem among the Eurozone has not been solved yet, and I do not see it could be solved by the end of 2016. The falling commodity prices and the worries about the EMs will affect the performances of many financial markets. UK bonds are cheaper than those of Spain and Italy, whose futures are more uncertain. Moreover, UK bonds have higher returns compared with those of US and Germany, which have relatively stable economies. Maybe the UK economy is expected to grow relatively slowly compared with the US economy; however, the UK government has a record and always pays back its bonds. In general, the UK bonds may become even more attractive in 2016.

What is the most likely to cause a global economic disaster?

I read an article by Martin Wolf on Financial Times, about if it is likely to be another global economic disaster. Martin Wolf suggests that global economic disaster is an unlikely event. He suggests that there are three things to worry about in general: inflationary shocks, wars and financial crisis. He is optimistic about the global future performance but also lists some potential risks, such as central banks' balance sheets, the risks in emerging markets and geopolitical upheaval and conflict. I agree with Martin Wolf mostly; however, I think the three potential risks have different degrees of effects on our global economy. Considering the current low inflation levels, I think we do not need to worry too much about inflation, as a high inflation is not likely to occur in a short period. The risks in emerging markets have been realised by the market, meaning they are not unexpected risks. Expected risks are less likely to cause a major crisis in general, However, the geopolitical upheaval and conflict is the most uncertain risk among the three that can directly affect the global economy immediately. Therefore, I think if there is a global economic disaster, it is more likely to be caused by geopolitical upheaval and conflict.

Why global economic disaster is an unlikely event (by Martin Wolf): https://next.ft.com/content/db57a57e-b38b-11e5-b147-e5e5bba42e51

What is circuit breaker and how does it perform so far?

Circuit breaker is designed to pause the tradings when the violation of the market reaches a certain point in order to control the risk. This policy was announced on the 4th of December, 2015 and officially put into practice today. Based on the market performance, it is not a successful policy. It speeded up the falling speed from the circuit breaker level. The circuit breaker system does work in the US stock markets. What is going wrong in China? The traders in the Chinese stock markets look for "long" opportunities; therefore, the market is falling unexpectedly, the market has a big swing from one extreme to the other. Because the circuit breaker and the daily fluctuation limits are both designed to pause the market and limit the market bubble creation. However, when both policies are used, the markets could become easier to be paused as people rush to buy in or sell off their stocks when they realise that the markets are more likely to be paused than previously.

An instructive article by Gavyn Davi

https://next.ft.com/content/6c4bf745-6f57-33b7-be72-f64c4c903a21

This article is published in the Financial Times, with informative and intelligent analysis. Moreover, it is well structured and gives out clear conclusion by the end of the article.

Public or private? The number depends on the market performance

Tech companies raised less than 10 billion dollars in the US in 2015. The figure was lower than the previous years. It could be caused by two facts. Firstly, if the investors are not as interested as previous in investing in high tech, the funds raised could be lower than the previous levels. Secondly, if more tech companies feel staying private is important, fewer companies will choose to issue IPOs. However, the advantages and disadvantages of going public and staying private are generally the same. The one that changes often is the size of funds that could be raised from the financial market. When the stock markets do not perform well, the benefit of going public will be weakened. Therefore, more companies will choose to go public if the stock market is performing well. The decision largely depends on the market performance.