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.