Long term versus short term

I wrote an article about how some of our experts predict the coming of a financial crisis, but we still cannot avoid the crisis. In the article, I say that people are impossible to precisely know the precise timing of any future event. However, when we are coming to face the real world problem, we have to know the precise timing of certain future events, as we have very tight time constraints.

Do we have any solution for such problem? In some occasion, we treat some immediate issues and assume the factors will stay the same. Because the difference is smaller when the time gap is narrower, then it is better to solve short term problems and accumulate them to form a long term solution. Such solution is very reasonable and easy to do. However, the solution may not be the real solution. When we split a long term issue into many short term issues, because when the time gap becomes narrower, the changes of important factors are too small to be taken into account, but the small changes accumulate over time, when it comes to the end of the time period, the changes of the important factors become significant to affect the result.

This is what happens in our markets and economies, we pay a lot more attention to the short term major changes, but much less attention to smaller changes over time until people notice the accumulated significant changes.

Nuclear power could be the best option for energy

Sustainable green energy should replace the fossil fuel energy, as it is environmentally friendly and we do not need to worry about what will be the alternative when the energy is running out. However, sometimes in my opinion, green energy still has a long path to go. There are three main types of green energy, solar energy, wind power and hydroelectric energy. The advantages of these three types of energy are so obvious that I do not think I need to explain them, as they are already our common sense, the disadvantages are also obvious.

The disadvantage that these three types of green energy share is they all require typical geographical requirements that they do not meet all countries' requirement for energy. In additional, the wind power and solar energy have a lot of room to improve their energy generation efficiency. Moreover, to generate the satisfied amount of energy, the power stations that use these two types of energy sometimes require to be located in some tourist areas, such as seacoast and desert. These disadvantages, such as strict geographical requirements and technological weakness, limit the scale and the use of these types of green energy.

While the use of the green energy is limited and we need to replace the fossil fuel, I think nuclear power could be the alternative to the green energy and the fossil fuels. Firstly, in some ways, it could be described as sustainable energy, as the nuclear fuel could be used to generate energy up to around a hundred year. Secondly, it is powerful enough to meet the demand for energy of the current society and has very limited requirement. In fact, almost all countries have the abilities to build nuclear power stations. The problem of nuclear power is how to dump the nuclear waste, which is something we still have some time to improve our technology to deal with.

To conclude, I expect in the future, nuclear power could be widely for home energy supply and the green energy may not be used as widely as nuclear power. In a longer term, I still expect the solar energy will be the main source of energy, as it does not necessarily require a power station and is more mobile.

How is a long term issue adjusted by short term factors?

We are already used to all kinds of market fluctuations; however, some fluctuations are very confusing that the price of a long term security should change much less violently. It is very easy to understand for all of us that what happens today has more impacts on something that is scheduled for tomorrow than on something is scheduled for next year.

The ordinary stock market could fluctuate very violently as though some people trade stocks for seeking long term returns, there are some opportunists who seek for short term returns or even next millisecond return. Such market fluctuation is sensible and very common. However, when we look at the government bond markets, the situation is much different. The maturity of a government bond is fixed, which means technically you cannot claim back your loans before the bond is mature. As people now can trade their government bonds with other investors, we can actually see that the returns and the prices of the government bonds change over time and sometimes fluctuate very violently. When it is a 10 year or even 20 year government bond, people may be more sensible to consider more about the trend rather than the short term fluctuation of the economic performance. Think about the government bond a consumer product, whatever the market changes, as long as the government does not default, what the government bond delivers never changes. If the utility does not change, the price should not change, unless THERE IS SOMETHING BETTER.

Yes, what really changes some long term issues is other choices, in economics terms, the opportunity costs. As long as we can trade our holdings with other people, there is nothing long termed, as we are no longer seeking for returns in the future, we are actually seeking for the best choices at this particular moment. We still want to have higher returns in the future, but to achieve higher returns, we adjust our choices more frequently when the market is more complete and free; therefore, maybe we have a long term goal, but we are making short term decisions overall.

The emerging market slowdown is not really a problem

Some people may be surprised after the strong Chinese August data were released on Tuesday. Some experts and economists believe the data have shown the stabilization and improvement of the Chinese economy and the worry about the Chinese economy's hard landing is mitigated by such data. In addition, the possibility of a further cut in rates by the Chinese central bank decreases as well. The Chinese economy is the largest economy in the emerging economies and is the model of other emerging economies. Maybe we cannot receive as good data as the Chinese ones from other emerging economies, the great Chinese economy could ease people's worry about the impact of the emerging market slowdown in the world economy.

However, I never worry about the emerging market slowdown. The slowdown of the emerging market expansion is not a cause but a result. It is the result of the slowdown of the whole world economy, as the emerging markets often play the role of the manufactures of the world. When there is a decrease in the demand, the supply will reduce to re-balance the market, this is the reason for the emerging market slowdown. When the world economy is in a boom, we do not need to worry about the emerging markets, even some emerging economies may not perform very well, the problems are very individual and less likely to affect the entire world economy.

I have repeated myself for many times that the one thing that I really worry about is the default rates around the world. Not only the default rates in the high yield bond markets, but also the possible defaults in the low yield bond markets as well as the government bond markets may have deadly effects on the financial markets and the entire world economy as a whole.

What if Trump becomes the next US president?

The media do not like the idea of Trump's being the next US president, as there is much criticism about Mr Trump's speak and behavior and they see him as the symbol of the angry white lower classes. Maybe some American people and many people from other countries do not like Mr Trump to be the next president, when Hillary Clinton staggered and left a 9.11 memorial ceremony due to her health issue, the chance of Mr Trump's being the next American president increases, as due to common sense, people would like a healthy president rather than a sick one. People may need to get themselves ready for the Trump's at least 4 year presidential period.

What do we know about Mr Trump's policies if he gets elected? Although he changes many of his comments and arguments, we should expect a more strict migration regulation and an increase in military spending. As Mr Trump is not as experienced as Hillary Clinton in foreign policy, his strategy of foreign policy remains unclear; however, he makes clear that he wants more jobs to be created domestically, which means he would encourage firms to set up manufactures in the US. In order to achieve it, there is a possibility of increase tariffs on import consumer goods. Mr Trump's domestic economic policy is more clear, as he wants a less regulated market.

By adding all his policies up, we can see the US businesses may benefit from the less regulated and low tax rate markets; however, due to the tariffs, the cost of living of the ordinary American people may increase, and as the current unemployment rate is already very low, it is very hard to see a further improvement in the US employment. Frankly speaking, I do not see Mr Trump's policies really benefit the angry white lower class.

To conclude, if Mr Trump gets elected, I expect that the most traditional industries in the US may benefit from his policies while the growth in the clean energy industries may slow down as he is likely to remove the energy restrictions and more companies may choose the traditional energy due to the cost issue. Moreover, I do not think the general economic growth in the US will increase over the current level.

The post-war economy

Some areas in the world have suffered from wars and their economies have been in deep trouble since the wars. Most of these areas are in oil-rich areas and it seems not very difficult for these countries to get rich again due to their rich natural resources; however, the facts are very different.

Why is it so difficult for these countries to recover their economies? The most obvious answer is that the political system is broken down after the wars, there is no regulator in the economy to reset up the market order. Maybe sometimes foreign forces may intervene, but such intervention is unwelcome domestically and often does not suit the local interests. Therefore, the market order is hard to be reset up after wars. In addition, the infrastructure is damaged in wars, the economies have to rebuild their infrastructure, but the incomes of the economies are too limited to satisfy such large expenditure. Without the necessary infrastructure, the economies cannot recover very fast by taking advantage of the rich natural resources. In addition, some countries have very complex domestic conflicts. When the people in the country cannot unite together, it is hard to restore a domestic order spontaneously.

Therefore, we can see that restoring a domestic political and economic order is important to restore the domestic economy. When we look into some post-war economy, we can find it seems it has all the institutions and markets required, just like some developed economies have. However, the problem is it does not have the order restored inside these institutions and markets and the communication in the system is confusing, unpredictable and often changes very fast. The lack of orders in the system could be concluded as the risk in the system is too high for any participation to satisfy their preferences.

Should the world markets be combined to be a single market?

In most of our time currently, the markets across the world have very similar response to the same information. For example, after the surprising outcome of the Brexit referendum, the markets around the world fell sharply. Such phenomenon is understandable, as in the globalized world, the markets around the world intersect with each other. If the markets are so interacting with each other around the world, maybe we could ask if the increasing interdependence is enough to combine these markets together to form a single global market.

I think such change could improve efficiency, but damage the nations' interests and reduce the employment rates in some countries. Having a single market means it is not necessary to set up another office in a different country to do a similar job about making activities in the market. The people who work in a certain field will be put together and doing their work together, which could improve the efficiency, compared with if they work separately across the world. When the efficiency and productivity is improved, there is no need to maintain the same amount of employees, so there will be a job cut in the industry. Moreover, we have to admit some countries are more capable to provide professional workers than other countries, so the countries which have more professional workers will take the jobs from the countries which have fewer professional workers. Although it always happens, when there is a single market, it could be more significant. In addition, if the industries in one country are not very active in the financial markets, when there is a single global market, the resources put into this country by the financial industries could drop sharply.

Therefore, if we are going to have a single global market, it makes sense to the globalized financial industry and could improve the efficiency and productivity in the industry; however, it could significantly increase the level of competition in the industry and the competition between the nations and could probably widen the wealth gaps within individuals as well as nations.