Large funds are good, but don't become too large

Currently there are many types of financial institutions that help individuals and organizations to manage their wealth, and some of these institutions may claim to offer fixed incomes. These offered returns are normally higher than the returns given by the definitely safe securities such as government bonds, and become very attractive to certain types of investors who normally hold enormous funds and have scheduled payments each time period.

The word "fixed" may be confusing to some people, as a fixed income fund does not mean it offers a fixed return, instead it pays a return on a fixed schedule and the return could vary. Therefore, although people generally believe investing in a fixed income fund is less risky than investing in an equity fund, it still has some risk and it does not necessarily meet the return that you expect. Imagine you are a pension fund manager who manages an account of trillions of dollars and invest in fixed income funds. Once the fixed income funds cannot meet the requirement, which you should expect and do something about, you would choose several other funds which could be more risky but offer higher returns. By doing such thing, you turn yourself into a fixed income fund as you are doing what a fixed income fund would exactly do to meet their scheduled payments. However, you are still less likely to do better than the fixed income fund you invest in, when we assume you and the fixed income fund manager have close abilities. This is because you have high management costs and have to pay very high commission fees.

In the real world, many national pension funds and large multinational insurance companies employ fixed income fund managers and other types of fund managers including hedge fund managers to offer them fixed incomes, then they offer their clients with some products with fixed payments. Theoretically they are fixed income funds themselves, but their operation costs are much higher.

Therefore, I often believe large funds are more productive than smaller ones, as they can have more investment opportunities; however, once becoming too large, it is inevitable to start to invest in other funds, which I think is a very inefficient investment option.

Automated trading and its effect on the markets

Goldman Sachs introduces a computer programme to allow investors to trade bonds without speaking to any member at the investment bank. It could increase the frequency of efficient trading activities and reduce the transaction costs as it does not depend on the Bloomberg platform any more. Moreover, there are other advantages of using mathematic algorithm to make trading decisions, as all trading orders executed by computers will allow the certain rules that are pre-programmed. Therefore, the irrational decisions or miscalculation will not happen in such trading process and human errors could be limited to almost zero. In addition, the trading executed by machines has been proved to be more profitable than human activities, as based on researches on the top traders, the machine has a better performance than the human traders on average. Therefore, computing will replace human forces in the field of trading including highly frequent trading.

If computing has been widely used in the markets, then we could probably see that trading could concentrate at certain periods as I do not think there could be very different ideologies and strategies behind the trading algorithms, instead of creating a very different strategy, investment banks are more likely to improve their calculation efficiency in order to make faster decisions and place orders ahead other investors. Based on such assumption, the trading activities could become concentrated. The weakness of such system is it is vulnerable to unexpected risks in the markets. Moreover, the standard of cybersecurity could be pushed up to a much higher standard. In addition, once a mistake is made, the losses could be extremely high and almost impossible to be recovered. Furthermore, as the vast majority of trading is executed by machines and the market is still a zero-sum game, worse algorithms will be eliminated because of their performances very fast and if the speed of developing new algorithms is not fast enough to replace the eliminated algorithms, then the algorithms used by the market could be more and more similar and could potentially increase the system risk, as the risk is not dispersed.

To conclude, the use of machines in trading could increase the profits of the investors who use better algorithms; however, such system may be more vulnerable to unexpected risk, as our human traders may make some experienced decisions which could potentially limit the losses when facing such risk.

Create space for future stimulus policy

The Federal Reserve is very likely to increase the base rate in the following month, as many insiders and expertises point out that the Fed wants to stay away from the negative interest rate zone and create space for the use of the monetary policy in the future possible economic crisis.

The current low interest rate environment is difficult for any central bank to conduct more interest cuts to provide effective expansionary monetary policy, as the current base rate is very close to zero, and the real rate is almost negative. Although some banks start to introduce the negative deposit rates, which could help to encourage more spending and investment, when a crisis hits the economy, bank runs become highly likely and the price of precious metals can rise sharply. Even worse, the previous quantitative easing programmes create incredible amount of cash in the economy, but which is inactive due to the market's conservative action, could blow out and damage the current monetary system. Therefore, the US Fed wants to increase the base rate in order to ensure the banks in the US will not consider to introduce negative interest rates. Moreover, when the real interest rate is above certain range, the US Fed could reduce the base rate again when the US economy is in trouble. However, the concern about increasing the rate now may increase as people may think that increasing the short term rates could slow down the US economic growth and reduce the current financial activities. I think that the move to increase the rate is a way to reduce the future risk by sacrificing the possible growth potential in the future.

In general, we could see that the tools that a central bank could use to stimulate the economy are very limited as the US Fed has to increase its base rate to create space for its future rate cut; and when a new crisis hits our economy, it seems necessary for our central bank to invent new monetary tools to help stimulate the economy.

The PMI and the indicator of the future economic performance

The purchasing manager's index (PMI) is considered by many people to be a better indicator to predict the future economic performance than some GDP estimates, as it records the actual activities in the economy. Based on the records, we can see how confident the market is from the new order number. Recently the British PMI had a sharp fall in its PMI after the Brexit referendum, some economists argue that the fall in PMI overstates the effect caused by the Brexit vote; however, I believe it may not precisely predict the future economic performance but definitely shows the problem existing in the economy and the public opinion about the British economy after Britain leaves the European Union.

As PMI records the activities in the economy, a fall in PMI shows a decrease in the weighted sum of the numbers of new orders placed,  the employment data and many other important economic information. I think the most important element is the number of new placed orders. This represents the increase in companies' receivables, which partially shows the future cash flow increase of the companies. Moreover, we probably should look into more details. Some orders might be some customer goods, but some orders are machinery and these orders represents the confidence of the companies about their future growth and future productive capacity. Moreover, the companies' recruitment decision is made based on their predicted future productions, which are estimated by the current data. In addition, some orders require longer period of production process, which could indicate the future growth of the certain businesses better.

Therefore, PMI is certainly a great indicator of predicting the future economic performance; however, the number of new placed order should be weighted more (could be risen up to 35% or even 40%) and orders should be put into more categories, which I believe can make it even a better indicator.

The effect of the Fed's rate hike

The chairwoman of the US Federal Reserve has saide that the case for an increase in short-term interest rates has strengthened, signalling an increase in the probability of a rate hike in the coming month. There are some facts supporting the rate hike. Firstly, the Fed believes the inflation rate will soon return back to its target, 2%. Secondly, the firm job growth shows the strength of the current US economy and the confidence of the market. Thirdly, though the US economic growth of the second quarter falls to 1.1%, the consumption spending remains strong and the third quarter performance seems very strong so far that the Atlanta Federal Reserve predicts that the economic growth has accelerated to 3.4%. Based on these facts, the US  Federal Reserve believes it is a good time to increase the rates.

The financial market may dislike the idea of high interest rates, as it means an increase in transaction costs to many institutions, as we can see today's US stock index turns red. However, such action could bring the stability to the market. The increase in short-term interests may force the deposit interest rates stay in the positive zone, so people and companies can safely save their cash in their bank accounts without fearing having negative returns. Moreover, it increases the cost of borrowing, so some firms have to be more careful when they are issuing bonds or directly borrowing from financial institutions. This could cool down the increasing danger of defaults, and improve the stability of the financial markets, as the securities issued by companies with very high debt to equity ratios could create instability in the market. However, this could be the danger of the rate hike that it may burst the bubble created by the increasing number of new bonds issued.

To conclude, the rate hike could improve the stability of the market, but it can burst the bubble and increase the defaults sharply in a short period.

The problematic British Rail and privatization

Since I have lived in Britain for over eight years, I think British railways are very problematic and privatization does not work well to improve the public transport capacity. Trains are expensive and slow and cannot meet the need of the public. For example, travelling from London to Edinburgh by train could cost over 100 pounds for a single adult; however, people can choose to travel by plane, which is sometimes cheaper and much faster. This is a relatively long travel distance, so how about shorter ones? Nowadays people have cars available to them for daily uses, even if they do not own a car, they can still rent cars. If you can drive a car, the time taken when driving a car is actually shorter than the time taken when travelling by a train, and has similar costs. Therefore, when people choose to travel by train, there are several main reasons: they cannot drive a car, they dislike driving for long distance, the airlines are not available, they are tourists who want to watch the views. The railway service companies complain that because the small number of passengers, the average cost is too high, so they have to set up high prices. I think that the real problem of British railways is it needs to update its hardware. It does not have modern locomotives to drive trains fast enough to catch up with people's pace in the modern era. This requires huge investment in the early stage, which is not something that private companies can afford or even are willing to do. Therefore, privatization does not solve the problem in the railway industry. It may improve the management efficiency but ignore the fundamental problems in the industry. The government should intervene in such something which is deserved by the society but no one is willing or able to pay for.

To conclude, the state management may have some efficient issues; however, when it comes to some investment decisions which have very high risk and requires significantly large amount of financial support, the intervention of the government becomes crucially important, as the government may be the only party in the society which is able to take such high risk. I think that the importance of the government spending strategy is to take the risk that no one else is able to take in order to correct the market failure.

The Chinese tech giants' future growth

In the west, some Chinese tech giants are only known to the investors as they like to stay their businesses at home. For example, Baidu and Alibaba are the two Chinese IT giants in terms of their market capitalisations and many other characteristics; however, the majority group of people in the west has never tried to use the Baidu search engine or Alibaba's e-wallets. Of course, people can argue that the mainstream products of these Chinese companies have perfect or even better substitutions in the western market; therefore, the Chinese giants cannot break into the western market. This could be one explaination; however, when we look at the search engine market, we can see that apart from Google, there are produts like Microsoft's Bing, Yahoo and some other less famous search engines. Microsoft, Yahoo and other search engine companies all have or at least had tried very hard to win market shares from Google. However, the Chinese search engine company, Baidu, has only tried its best to win the dominating market share in the Chinese market and with the help from the government regulation, and it finally succeeds; meanwhile, it has done almost nothing in the foreign search engine market. It does not mean that these Chinese giants do not join the international business, as they join the international business in a differnet form. In the global market, they do not perform like tech companies, they perform like investors or asset management firms. They may aggressively buy foreign companies with potentials and instead of selling their own products, they sell the products of the companies they owned. The very classical example is Tencent. Many Western teenagers may never use its popular chatting application in China, QQ, but they play League of Legends, whose company has been bought by Tecent.

Besides the companies like Baidu and Alibaba, some Chinese tech giants have become very active in the global market. Xiaomi, Huawei and other Chinese smartphone companies are winning more and more market shares in recent years and become known to many foreign customers. Some of these companies do have some very advanced technologies that they do not only offer the traditional Chinese products, the cheap products, they actually are able to offer some very quality products. Once they become more and more famous in the global market, they are no longer just Chinese brands, they have the potentials to become global brands, just like Apple and Samsung. They have the ability and possibility to produce some cutting edge products, which make them much greater in the future.

To conclude, the current Chinese tech giants are entering into two growth paths. One group is trying to become international asset holding companies, which have less risky future but relatively limited growth potentials; the other group is trying to become supernational tech giants, which is a more risky strategy but greater growth potentials. Both strategies are reasonable; but in terms of effects on the Chinese tech industry, the second path could lead to more innovations.

Pension programs

There are two types of pension programs in general: defined contribution and defined benefit. Pension program of defined contribution is paid out depending on how much is paid in, and defined benefit depends on workers' salary levels and how long workers work for their employers. In addition, people pay for their pension programs compulsorily and voluntarily. The compulsory part of contributions is usually collected by state-owned institutions and the voluntarily part is paid to private insurance companies which normally offer higher returns.

Pension programs exist because people do not trust their own abilities to generate positive returns from their current excess incomes for their future spending; therefore, they give their money to the professionals and trust these professionals to manage their wealth. Then how well the pension funds are managed depend on the abilities of the fund managers and the general market environment. The security markets at one time spot are zero-sum games, as the amount of losses is equal to the amount of gains. However, the market is not stable, when more cash flows into the market, the losers of the last period could be the winners of the next time period. Therefore, when the market is expanding, there would be more winners in the market over time, and vice versa.

The security market should not be the major target of the pension funds. Although when the economy is in boom, they can generate very high return rates, when in a recession, the pension funds could be stuck in the security market and lose liquidity at the same time.

Bonus and the conflict of interest in companies

Everyone has its own preference and due to the differences between each other's preferences, the conflict of interest occurs. It is the same in a company that a company and its workers have different preferences and sometimes the workers may not behave in a way that the company wants its workers to behave. Bonus is introduced by firms to give their workers more incentives to work harder and parallel their workers' preferences with the companies' preferences.

However, recently in the financial sector, many banks and institutions cut their bonuses in order to prevent their employees from focusing too much on short term returns. I do not think cutting bonuses will solve the problem of focusing too much on short term returns. People focus on short term returns because of these two factors rather than their bonus level.

Firstly, when people can easily swtich their jobs within the industry, they are more likely to focus on their short term performance as they can boost their short term performance to win highe positions in other firms in the industry, in this way they get promoted more easily and faster. Secondly, how much people focus on their short term performance depends on how much and often their records and work will be tracked. If a worker's past work will not be tracked after he/she switches his/her position and stops working on the past project, then the best interest of the worker is to boost the performance before he/she switches his/her position and has no interest to care about the long term effect of his/her work after he/she leaves the job. Based on these two factors, bigger bonuses can enlarge the problem of focusing on short term performance but it is the cause of the problem.

Therefore, I think to avoid focusing on short term interests and ignoring long term effects is a job that the whole industry should cooperate and build a system of tracking workers' job in the industry, it cannot be solved by one or two individual firms cutting their bonus levels.

What could central banks do when there is a “liquidity trap"?

A liquidity trap is when any form of injections of cash into private sectors by central banks fails to decrease interest rates and make monetary policy effective. This is a Keynesian economics concept. Many people do think currently we may enter the so-descirbed "liquidity trap", as real interest rates in some countries have already been negative and there is no room to decrease interest rates further. However, we can see some banks take some unorthodox actions, charging negative deposit interest rates on individual and corporate accounts. This by definition denies the opinion of we are entering a liquidity trap, as the interest rates have been brought down by the current monetary policies and will definitely have a lot of effects on our consumption behavior, investment behavior and the economy in general. Therefore, I believe we are not entering a liquidity trap.

How do central banks pump cash into economies? This question is simple and does not give what we really want. The real question we want to know is how central banks boost their money supply. The answer is clear, the quantitative easing program. The quantitative easing is central banks buy assets from the markets, the money spent by central banks is the hot money central banks want to pump into the economies. When does it work? It works when assets are generally dumped by the investors during economic recession periods. However, when central banks are trying to buy some safer assets, there comes the problem. For example, the Bank of England tries to buy government bonds from institutions and some offers get rejected. Therefore, we can see that the assets central banks can buy via their quantitative easing programs are usually those rubbish grade assets. Such programme I think is not efficient to boost investment. Selling bad assets to central banks is cutting losses rather than gaining more profits. So investors will not boost their investment, as the market uncertainty still exists and they are not sure if such good luck could come again. The best result is investors do not reduce their investment level as their losses have been covered by the central banks. I think central banks' quantitative easing program may best described as "rubbish cleaning programs" that they clean up the rubbish assets holding in the investors' hands and replace them with cash.

Such "rubbish cleaning programs" can hardly boost the economy, all it can achieve is to create some safe net for the financial sector, just like the concept of minimum wage. The action of buying government bonds and foreign currencies via the quantitative easing program may have the worst outcomes. When uncertainty happens, the US 10 yr bonds and the UK 10 yr gilt are the top two safe investment choices, the market is hot and does not need the intervention of the central banks. The buying action could only lift up the bond prices and make the market even hotter. To boost the economy, you do not want to see all hot money flowing into the government bond market, what you want to see is an increase in the general investment level.

I think the central banks may not boost up the market confidence by offering their quantitative easing programs, but they can use the quantitative easing program to create some really detailed guidance of the economy. When central banks could be like investors when they are carrying out their quantitative easing programs. They could guide the market investment focus. For example, if a central bank thinks the economy needs to improve its infrastructure, then it could buy assets of the infrastructure sector via its quantitative easing program and draw the market attention to this market. So the central bank has the ability to guide the market behavior by taking actual actions. Moreover, in the future, when the market confidence is restored, central banks can sell their assets, and because central banks act like investors, the assets could be sold without significant devaluation and the money created by the quantitative easing program is recalled from the market, so people do not need to worry about a blowout of oversupply of money occurs when all hot money becomes active.

To conclude, I think that the quantitative easing program should be carried out by central banks as a program of guiding the market investment instead of cleaning up the mess created by the market. The option of buying the safe assets is the worst option, as it may make the market think that even the central banks believe the government bond is the only investment option at the moment. Therefore, I think that central banks should act more like a wise investor rather than a cleaner in the market.

How should we protect our environment?

Firstly, I believe protecting our environment is a wise and moral and good-for-our-own-will thing to do. There are many activists who put all their efforts into improving the natural environment; moreover, many governments have also noticed the importance of the environment and set up  environmental targets and made policies and regulations to achieve their targets. These are all very positive and encouraging actions.  

However, the environment movement has some opposite force. It is important for the governments and the environmental activists to understand the oppositions' opinions and create something that can suit both sides' wills, as we are rational and we are not extremists.  

There are several opposite facts and opinions that obstruct the progress of our environmentally friendly movement. The first one is technological issue. Currently we encourage green energy and try to reduce the emission of carbon dioxide and the use of unsustainable energy. This should be the future of our energy use, but due to the technological issue, the green energy cannot sufficiently meet our demand for energy. It is fair to say our civilization is driven by the energy and it is not acceptable by the majority of our population to have energy shortage. We are not using green energy not because we do not like green energy, it is because green energy cannot meet our demand. Therefore, what we really want here is not simply switching to green energy, what we really need is a technology breakthrough. I think what governments should do is not awarding firms for entering the green energy field, instead they should award firms in green energy fields for having technology breakthroughs. We have already had many firms in the green energy field, now we should increase the competitions in this industry and give them more incentives to develop their technologies. 

There is another argument against environmental friendly movement that because of many environmental regulations and laws, many firms close down and the regional unemployment rate increases and the growth decreases. This is understandable and reasonable, should be considered by regulators. When an economy grows to certain stages, it requires a structural change in order to expand its productive capacity and have further growth in the future. Here is just another structural change, which may not be caused by economic reasons, but has similar consequences. In both situations, the unemployment figures in certain sectors could rise rapidly and in the worst case this could lead to a social unrest. The policy makers always try to keep the structural change progressing but limit the damage to the whole society as well as the economy. The first thing that the policy makers should be clear about is what is destination of the structural change. Here is crystally clear, it is the green energy industry and other environmentally friendly industries. The next step is to ensure the economy is ready for such change. Getting the economy ready is not simply creating regulations and telling firms in old industries to close down. Getting the economy ready is to ensure such structural change also happens in the labor market and the financial market and all other relevant markets. For example, in the labor market, the regulators should provide workers in old industry with job transforming training in order help them to help jobs in the new industries and also provide the necessary skilled workers for the new industries to develop. 

As we can see, there is nothing that is really against the idea of improving our environment and the arguments like "Environment or Growth" are nonsense. Improving environment cannot just depend on several regulations or laws and it does not occur in certain fields, it requires a structural cooperation. All parts of the society and the economy have to have structural changes, that labor skills need to be retrained, investment directions need to be changed, the use of government spending has to be changed, some scientific researches may change their focuses. Moreover, only when all parts work hard towards the target and help each other, the loss then could be mitigated to the minimum and we can achieve the goal at the fastest speed.

How likely is hyperinflation in the near future?

Some people are afraid of the possibility of hyperinflation in the near future, as they believe the overdone expansionary monetary policies will lead to a hyperinflation. So if it happens, is there any possible action for the government or the central bank to take to deal with the situation?

The definition of hyperinflation is when the monthly inflation rate is above 50% and  stays that way for at least a year. The 50% monthly inflation rate is a very big and abnormal figure that the yearly inflation rate in China never reaches 20% even during its fastest growth period. By doing simple maths, we can see the yearly inflation rate when hyperinflation exists is over 120 times （around 12975%). Although such inflation is very rate, we still have some examples from our history. Weimar Republic of Germany, Greece in the mid-20th century, Soviet Union between 1920 and 1922 and America during the revolutionary war are all very classical examples.

From these example, we are not very difficulty to conclude several major causes of hyperinflation. Firstly, oversupply of money could cause hyperinflation. Oversupply means the supply of money is over the growth of good and service production. Secondly, due to some extreme reasons, such as wars, natural disasters, the supply of goods and services cannot meet the demand of the population, especially when the supply of necessities cannot meet the social demand. My opinion is the second cause is the actual cause and much important than the first cause. Even when there is more than enough money in the market, if the supply of goods and services could meet the population demand, the excessive money is very likely to stay inactive and does not influence the market price, as the money may stay in bank accounts, bond markets and etc.

Therefore, I do not think a hyperinflation will hit the ordinary markets, and the prices of many of our goods and services will stay unchanged or even decrease as the cost of production drops due to technological improvement and the modern productive capacity is able to meet the demand of the populations in our economies. However, the financial market and the banking industry may have hyperinflation as the inactive money stays in the sector and becomes the burden of the banks and industries, negative deposit rates show that the banking and financial sectors want to get rid of the inactive money they are holding.

What really does lowering interest rates mean to businesses when there is increasing uncertainty?

We often see that a central bank lowers its base rates and issues QE programmes when its economy is in a crisis. As we all know, the purpose of these actions is to encourage more financial activities and stimulate the economic growth. However, currently the monetary policies taken by the central banks around the world are a bit strange. Many central banks, especially those from the big economies, are maintaining very low base rates, that are very close or equal to the level when in crisis; meanwhile, though the people are afraid of increasing uncertainty, there is no obvious signal of the world economy is now in recession. In such environment, almost anyone is a loser.

Individuals may be able to borrow at lower rates, but often face more strict background checking from their banks. Moreover, after the last subprime crisis, some banks offer their clients mortgages with more tough agreements. Banks are also losers. Lower interest rates mean their marginal profits reduce and the increasing uncertainty limit their lending volumes, thus the profits and revenues of the banks could drop. Governments may benefit from such environment as they can borrow more easily as government bonds are very popular when there is increasing economic uncertainty; however, the primary purpose of government spending, which is to boost the economy and create safe nets for its people, is nowhere closer to be achieved. In addition, many governments are working to reduce their deficit levels, which means they are less likely to use expansionary fiscal policies to restore the market confidence. Small businesses are not benefiting from the lower rates due to the increasing uncertainty, as the banks are making their lending choices more cautiously and conservatively.

The only winner here is the large businesses. The bonds issued by the large businesses are considered to be the second best safe and risk-avoiding securities after the government bonds (mainly the US 10 year bond and the UK 10 year gilt). The large companies can have fantastic cash flows on their balance sheets and attract investors and banks. With the support from more investors and banks, they borrow more money and further improve their financial statements. Basically they do not need to worry much about their future performances any more and do not need to make investment choices more carefully. If they succeed in the future, great, they can borrow even more money to keep their businesses running. If they fail, don't worry too much, they may not be able to borrow more money, but many banks are willing to give enough money to keep them survive and even in the worst case, the governments will step in and pay their debts. Therefore, their future is very secure and they do not need to put much effort.

To conclude, the current low interest rate environment is not going to give incentives and momentum to the economy to grow faster.

How do people overestimate themselves?

Everyone is possible to overestimate or underestimate himself/herself, actually it always happens. The most classical example is gym membership. Although nowadays there are some gyms that offer the pay-as-you-go option, many people will still find gym yearly membership more attractive. What makes people overestimate their abilities? Membership and subscription are influenced by the discount rates and the decisions made depend on the expected discount rates. When people overestimate their abilities, their expect discount rates are lower than the actual discount rates. It always happen and I think some people may know this fact but still overestimate their abilities. Why? Here is purely my hypothesis. Individual expected discount rate of his/her ability is normally a constant, does not change over time; however, the actual discount rate is normally a strictly increasing function. Individuals usually assume that the effects of risk facts do not change. For example, we may consider running 2km per day this year can make ourselves as healthy as if we run 2km per day next year; however, according to this assumption, the effect of running 2km per day at the age of 18 is the same as the effect at the age of 80, which is not true in reality. Therefore, people's expectations are usually roughly right about some short-term events, but are much more imprecise and further from the actual facts when we are making decisions about long-term issues.

Do you prefer working longer and retiring later in your lifetime?

There are many reports reporting the young generation will work longer and retire later than their previous generations in their lifetime, then some young people start to complain about this issue. It is understandable that people do not like the feeling of being forced to work longer. However, if there is a choice, do you choose to work longer and retire later or the opposite? This is a very interesting question to ask and could represent some social phenomenon and issues. The reasons that people dislike retiring late are generally the followings. Firstly, they are tired about their work and could have self-sufficient lives after retirement. This could be caused by several reasons. It could be related to the types of the jobs they do or the difficulties to be promoted. Secondly, they have other plans. For example, they would like to stay with their families or travel around the world which they cannot do when they are working. After talking about why people want to retire early, we could talk about the reasons that cause people like retiring later. Firstly, when the pension scheme could not provide them with comfortable lives, they will then choose to work in order to support their own lives. This is could be caused by the poor pension scheme and other individual issues such as the number of unemployed family members. Secondly, the relatively isolated environment may let people more likely stay in the environment they are used to. If an elderly person does not have many interests in other fields and has been used to doing his current job, he may not consider to change his lifestyle. This could be depending on their job types as well as the general social culture. In terms of job types, craftsmen are more likely to retire later than other types of workers. In terms of the social culture, some societies may have the cultural tradition of disliking changes. Thirdly, the productivities of certain types of jobs largely depend on the workers' experience. For example, senior university professors are more likely to provide more quality work. Therefore, we cannot say retiring late is worse than retiring early, people make their best choices by evaluating the pros and cons of their retirement plans; however, I always believe such plans should be made by the individual themselves other than policy makers (given the current pension scheme state, it is hard to be achieved).

Energy and the economy

Energy and the economy

The energy is such a necessity in the modern life and generates our civilization to move forward. Therefore, people usually tight the energy price with the expected future economic performance. This is very reasonable; however, I think it has been overdone.

The world crude oil price has a close relationship with the economic expected growth. Usually they are interacted, as the oil price generally moves in a similar direct with the world economic growth, and the oil shocks could lead to the economic shock in world wide. Crude oil is a key raw material in modern manufacturing and a key energy supply as well. It has a very key feature that allows itself to beat other types of energy, its efficiency. It is more efficiency than coal, or charcoal. Nuclear power may be more efficient than petrol, the unsafety of nuclear power has been feared by the most of the society. Such features give crude oil its unique position in the energy field and the oil industry dominates all other energy industries.

However, crude oil has not been very generous to our humans that it has very strong geographical bias. Some areas have very rich crude oil resources; but some do not. Therefore, crude oil is not supplied to meet the necessary need but for profits. Nothing is really made to meet the need. However, crude oil is a relatively more extreme and crucial case. It has already become something that is required by almost all parts of the society that all parties compete with each other in order to have more consumption of it. When no party is willing to give up its demand, the supply becomes very powerful especially the supply side is very limited and controlled by much fewer parties. Therefore, the demander in the oil market is basically the general economy but the supply is very restricted and limited.

Both the demand and supply of the oil market could be manipulated and are very likely to be influenced by the global political environment. Thus the market becomes extremely complicated that more parties involves, more uncertainty will be raised.

How great should the economic data influence the market?

Why do the economic data influence the market? Because the economic data release can change people’s expectation about the future. Though individual market prices have already included people’s expectations about individual fields, the economic data change people’s expectation about how the great economy may affect the market, in other words the influence from other fields on the individual fields people care about. Before the economic data release, people may have close to perfect information about the individual fields they pay attention to but they lack information about other fields. When the economic data release, people have to reconsider the effects from other sectors. Therefore, the degree of the economic data influence depends on how much people lack information about other fields. In a more mature market, the influence of the economic data should be smaller than that in a less mature market.

What could happen to dividend yields?

Currently the returns of government bonds decrease and almost approach the negative zone and banks are ready to charge negative rates on deposits and some banks actually have already taken action. In addition, the new raised equity significantly dropped last half of this year. When the uncertainty overwhelms the market, the investment on risky assets becomes unpopular. When investors reduce their investment on equities, which are usually considered to be more risky compared with low yield bonds, some firms may face equity contraction. The contraction of equity may lead firms to financial difficulties as banks like to lend money to firms with large equities. In order to maintain their capitalisation levels, many firms may choose to increase dividend yields to keep their investors and maintain their equity prices. Of couse, increasing dividend yields could make themselves more attractive; however, such action could increase the financial difficulties and some investors may concern their abilities of paying dividends or supporting future growth. Therefore, not all companies can increase their dividend yields, only those big ones are able to do so. The smaller companies may even reduce their dividend yields as they have to maintain rapid growth trends to attract investors; otherwise, they will be forced out of the competition due to the increasing financial pressure.

Is the national pension scheme really “benevolent”?

The national pension scheme is provided as a social safety net, especially for the elder population. This is the original idea and the national pension scheme is often funded by individual contributions and government expenditure. In many countries, the national pension scheme dominates private pension schemes, which means the issue of the national pension scheme can become a national issue. As the national pension fund is enormous, especially when the national pension scheme is absolutely dominating, the national pension fund becomes extremely powerful and influential in the financial market, giving the example of the Japanese national pension fund, the largest fund in the world. As the pension scheme is national, the government has a lot of control on the fund. As the pension fund is so influential, the government uses it as an additional government budget, especially when they believe they can use the pension fund to boost the economy thus create a higher return for the pension fund in the future. Such belief is reasonable, but as the consequence is not necessarily immediate, the possibility of the consequence of failure is often ignored. Moreover, in some governments, some politicians could be forced to take short-sighted actions due to the election pressure. Therefore, sometimes the national pension fund is used in other purposes, which are more risky and dangerous. Such behavior could worsen the fortunate of the pension fund. The expansionary fiscal policy has to entirely use the government budget, other than other sources including the national pension fund; otherwise, the risk of the expansionary fiscal policy is too high.

Are we entering an "Ice Age"?

The Bank of England's new bond-buying program got into trouble as pension funds and insurance companies refused to sell gilts to the central bank. The price of gilts will continue to rise even more rapidly when the Bank of England continues the program. Then the era of negative rate will eventually and inevitably come. It could be a disaster because entering the era of negative rate means we expect the future will be worse than the present and the general behaviour will become extremely risk averse. When we start to expect the future is worse than the present, we are very likely to experience a high inflation. Moreover, the investment strategy will freeze the economic growth. The phrase I use here "Ice Age" means people are too afraid of the uncertain future and refuse to invest in the future, then the economic growth could be frozen.

What can avoid labour strike?

Labor strike could be damaging to the economy and cause inconvenience to ordinary people.  What causes labor strike? Of course, the most direct cause is poor payment and working conditions. However, there are some fields, which do not have frequent labor strike, but still suffer poor payment and poor working conditions. Why? Because of the competition. Labor strike is much more likely to happen in an oligopoly industry than in a competitive industry. In a competitive industry, labor strike risks their company's fate and when a labor strike happens, labors are very likely to lose their jobs as their company will lose the competition.

Does the modern technology make the small businesses’ lives easier?

Many people believe that the modern era has built a great opportunity for the small businesses. As we can see that the costs of advertisement and start opening shops have reduced to a great extent. The Internet allows people to shop in virtual shops (online stores), the cost of opening one virtual shop is extremely low and sometimes is completely free. For a small business or a new entrepreneur, it has become a lot easier to sell their products. Moreover, the social media also helps small businesses to advertise themselves. Access to social media is free, this provides small businesses with an opportunity of free advertising. Therefore, many people see that the cost of start up a business is lower and the cost of advertising could be close to zero and come out a conclusion that small businesses are easier to growth.

However, this is not the full image of the story. The modern technology also makes the big businesses stronger as well. The modern technology does not include the Internet; it also includes other innovations. Let’s talk about the use of the Internet in big businesses. The big businesses also can set up their online shops just like what many small businesses do. The advantage they have is extremely important that they do not need to worry too much about the trust issue. The brands of the big businesses reduce the customers’ concerns about their credibility which put themselves in a stronger position when customers make their choices. Moreover, the current search engines are more friendly to the big businesses that the big businesses are searched more often than the small businesses so they are always above the small businesses on the search lists. Therefore, when people search a product which is produced by a large firm as well as several small firms, due to the rank of the search list the large firm is more favored by people. This can create a loop that strengthen the big businesses, that more people search big businesses, then more people consume from the big businesses, then the big businesses maintain at the top of the search lists, so the big businesses are searched by more people. Moreover, the rich resources of big businesses allow the big businesses to advertise almost everywhere online. This cannot happen to the small businesses. In addition, small businesses traditionally have one advantage that they can establish a good relationship with the locals; however, the Internet changes the shopping habit that establishing a good relationship becomes less important, or at least it makes big businesses easier to establish good relationship with their customers by employing professional online service teams.

Besides the use of the Internet, large businesses employ other  modern innovations to boost their productivities and such rich resources  are not available to small businesses or new established businesses.