I am a strong advocate of free but responsible, informed speech. I don't believe in jailing someone for their political thoughts, unless he advocates violence or hatred. I strongly believe in a free but responsible press, and a free election.
However, the last 10 years I have seen how western democracy has degenerated into a farce. In the US, Obama tried to reform healthcare and cut taxes for the middle-class. All the Republicans want is to make sure Obama doesn't get a second term. They are not interested in making America strong. Republicans are backed by strong corporate lobbyists, by the National Rifle Association, the Religious Right, the arms industry. They propogate half-truths about what Obama is trying to do. The Republicans are also anti-environmental protection. The Kyoto Protocol will never be ratified as long as the Republicans have a say. It's incredible that half of America forget that it was under Bush junior that their fiscal surplus was turned into a massive deficit. Under Bush, they fought a unjust war in Iraq looking for weapons of mass destruction without fruit. If a Republican president gains power in 2012, it will be the Democrats' to turn on the power incumbent. The Republicans had great president. Ronald Reagan brought rampant spending under control in the 80s after a series of ineffective and spendthrift Democratic presidents. But since the 90s, the Democrats have shifted to the centre. If the Americans choose Republicans, they choose war, global warming and the demise of all.
In Europe, decades of democratic rule, socialist/communist parties have come into power. In many European countries, dangerous anti-immigrant right-wing parties have come into power. Many of these parties have nothing but promises of free education, high taxes, high unemployment benefits, free healthcare. But there's no free lunch. The Portugal, Ireland, Italy, Greece, Spain and Belgium are finally admitting fiscal deficits larger than their GDP can handle.
The result of one-man-one-vote is a sprial towards petty politics with parties only interested in immediate results without a care for long-term implications.
I don't have an answer to this. Perhaps the answer lies in giving the person who pays more taxes slightly more votes. If person A pays S$50k per annum in taxes, he should have twice the number of votes as a person who pays only S$5k. This is not a perfect system. There are many important interests that may not be met by such a system. For example, how will environmental protection be looked after by such a system? After all, the one who pays the most taxes may not more interested in protecting the environment than say a fresh graduate who pays little taxes. It's open for discussion.
Saturday 11 December 2010
Mr China: Memoirs
For anyone who wish to do business in China, this book is a must-read. It's funny, it's so true. It's the way China works and you either adapt or die.
There is also a blog on doing biz in China:
http://managingthedragon.com/
What we need now is a similar book on Russia and Indonesia.
There is also a blog on doing biz in China:
http://managingthedragon.com/
What we need now is a similar book on Russia and Indonesia.
Why the Market Multiple Will be Higher in 2011
Why the Market Multiple Will be Higher in 2011
by: Jeff Miller December 10, 2010
Market relationships differ depending upon the time frame. Right now, higher bond yields are bullish for stocks. This article explains why.
The most important question for equity investors relates to rising interest rates and the implications for stocks. Nearly everyone (including us) agrees that long-term rates are moving higher. That has been the recent move and it implies significant capital losses for those holding long bonds. Here is a nice analysis of the risk by John Lounsbury.
Several pundits have weighed in on the effect of an interest rate increase. Let us take a closer look.
Background
On a theoretical basis, lower interest rates are bullish for stocks. Companies can borrow more cheaply. The choice for those doing asset allocation tilts toward equities. The data support the traditional stock/bond relationship - usually.
But these are not typical times. Higher interest rates may be consistent with higher stock multiples. Abnormal Returns covers the topic and also highlights other sites on bond yields. I want to go beyond the generalized arguments and look to some strong supporting data.
Exceptional Periods
There are circumstances where the relationship is reversed, when higher bond yields are actually correlated with higher stock prices. Several commentators have suggested that this might be such a time, but I always like to look at the data.
We have seen this before....
We had a similar situation in 2004. A top analyst from a major firm, drawing upon the help of his entire team, developed a regression model relating bond and stock prices. The research team facilitated their analysis by throwing out data that did not fit their thesis. As usual, it was a mistake to begin the research with a pre-destined conclusion in mind.
This research was actually one of the things that inspired me to start blogging. I figured that if the proprietary research by big firms has such major flaws, there had to be room for people who had strong and discplined methods. You can check out my old article (one of my favorites) by looking for the initial reader challenge here (no one solved the problem then, and you won't now) or the full exposure of the big firm's blunder here.
If you want to see the entire logic -- and you should -- check out the full article. It required more hours of research than any other piece I have ever done. Meanwhile, here is the key finding:
The relationship between stocks and bonds is curvilinear. In the "normal" range of interest rates, stocks and bonds trade as expected. When interest rates fall to a an extremely low level, the relationship breaks down. Why? The very low interest rates reflect deflation concerns and extreme skepticism about earnings from stocks.
Here is the relationship (click to enlarge):
The historical data show the relationship between stocks and bonds. The chart highlights two distinct anamolous periods. Please note that I am not just throwing out data. Analysts (and readers) are free to draw whatever conclusions seem appropriate. The chart facilitates your analysis rather than forcing you into a conclusion. If you read the entire article you will see five different views of the same data. It shows the difficulty of the task.
My Conclusion
The evidence shows a long-term relationship between the forward earnings yield and bond yields. This is what we would expect.
When bond yields get very low, the relationship breaks down. This also makes sense. Yields have been very low twice in the last decade, both times when there were extreme deflation fears. Under those circumstances there is intense skepticism about future earnings forecasts, so the multiple is low.
Investment Conclusion
We are currently at the unusual tipping point in the relationship. The emerging consensus about improving economic prospects is having two effects: higher long-term bond yields and more confidence in earnings.
The implication is that stocks will get a higher multiple in 2011 as confidence improves. This is not merely speculation, but a conclusion based upon the data cited.
If the market were to embrace this traditional relationship, the forward earnings multiple would be in the 20's. This suggests an S&P 500 value that is 50% higher (or more) than current levels.
I am not making this as a prediction, since the climate of fear has cast a negative spell upon earnings. Who knows how long this will last? I have often suggested that low market multiples are the best single gauge of investor sentiment. I do predict that the path of least resistance is higher, and it could be much higher.
The summary:
Higher bond yields imply more economic confidence and a higher stock multiple.
You heard it here first, including when I highlighted the topic in the gloomy days of August.
by: Jeff Miller December 10, 2010
Market relationships differ depending upon the time frame. Right now, higher bond yields are bullish for stocks. This article explains why.
The most important question for equity investors relates to rising interest rates and the implications for stocks. Nearly everyone (including us) agrees that long-term rates are moving higher. That has been the recent move and it implies significant capital losses for those holding long bonds. Here is a nice analysis of the risk by John Lounsbury.
Several pundits have weighed in on the effect of an interest rate increase. Let us take a closer look.
Background
On a theoretical basis, lower interest rates are bullish for stocks. Companies can borrow more cheaply. The choice for those doing asset allocation tilts toward equities. The data support the traditional stock/bond relationship - usually.
But these are not typical times. Higher interest rates may be consistent with higher stock multiples. Abnormal Returns covers the topic and also highlights other sites on bond yields. I want to go beyond the generalized arguments and look to some strong supporting data.
Exceptional Periods
There are circumstances where the relationship is reversed, when higher bond yields are actually correlated with higher stock prices. Several commentators have suggested that this might be such a time, but I always like to look at the data.
We have seen this before....
We had a similar situation in 2004. A top analyst from a major firm, drawing upon the help of his entire team, developed a regression model relating bond and stock prices. The research team facilitated their analysis by throwing out data that did not fit their thesis. As usual, it was a mistake to begin the research with a pre-destined conclusion in mind.
This research was actually one of the things that inspired me to start blogging. I figured that if the proprietary research by big firms has such major flaws, there had to be room for people who had strong and discplined methods. You can check out my old article (one of my favorites) by looking for the initial reader challenge here (no one solved the problem then, and you won't now) or the full exposure of the big firm's blunder here.
If you want to see the entire logic -- and you should -- check out the full article. It required more hours of research than any other piece I have ever done. Meanwhile, here is the key finding:
The relationship between stocks and bonds is curvilinear. In the "normal" range of interest rates, stocks and bonds trade as expected. When interest rates fall to a an extremely low level, the relationship breaks down. Why? The very low interest rates reflect deflation concerns and extreme skepticism about earnings from stocks.
Here is the relationship (click to enlarge):
The historical data show the relationship between stocks and bonds. The chart highlights two distinct anamolous periods. Please note that I am not just throwing out data. Analysts (and readers) are free to draw whatever conclusions seem appropriate. The chart facilitates your analysis rather than forcing you into a conclusion. If you read the entire article you will see five different views of the same data. It shows the difficulty of the task.
My Conclusion
The evidence shows a long-term relationship between the forward earnings yield and bond yields. This is what we would expect.
When bond yields get very low, the relationship breaks down. This also makes sense. Yields have been very low twice in the last decade, both times when there were extreme deflation fears. Under those circumstances there is intense skepticism about future earnings forecasts, so the multiple is low.
Investment Conclusion
We are currently at the unusual tipping point in the relationship. The emerging consensus about improving economic prospects is having two effects: higher long-term bond yields and more confidence in earnings.
The implication is that stocks will get a higher multiple in 2011 as confidence improves. This is not merely speculation, but a conclusion based upon the data cited.
If the market were to embrace this traditional relationship, the forward earnings multiple would be in the 20's. This suggests an S&P 500 value that is 50% higher (or more) than current levels.
I am not making this as a prediction, since the climate of fear has cast a negative spell upon earnings. Who knows how long this will last? I have often suggested that low market multiples are the best single gauge of investor sentiment. I do predict that the path of least resistance is higher, and it could be much higher.
The summary:
Higher bond yields imply more economic confidence and a higher stock multiple.
You heard it here first, including when I highlighted the topic in the gloomy days of August.
Subscribe to:
Posts (Atom)