3rd MasterYourFinance.com Gathering – 16 May 11

[Lion]

Thanks a million Alvin.

Didn't managed to get a seat too but very glad to see your posts.

[jamestai]

Hi Alvin,

Thank you so much for your quick summary on Dennis had said on 16 May. This help alot because I was not able to attend due to my work commitment.

Dennis, I have a question here. The other day, Ein55 and me has some discussion on the co-relation between Bond Rate and Stock market. Generally we see that if Bond rate go up, it will help to push the stock market up. This is because if the return of stock market is better than buying bond, then people will rather invest in stock than bond. Therefore to attract investor to buy bond than bond rate will need to go up.

But if there is an anticipation of Bond market crash which mean Bond rate will go down, how would that help to push STI up ? Could it be due to that big fund see that STI is way undervalue compare to other Asia stock index so they would come to play up the STI and to make last round of money before they pull out to let the stock market crash ? Or the crash of Bond will not happen so soon due to QE3 therefore Bond rate will still go up and this in turn help to push up the stock market ?

James Tai

[patng8]

Tks Alvin for the fast update n summary

[Jeffreyteo]

Hi Alvin,
That is super, just have to say thank you to your contribution.
Jeffrey

[Dennis Ng]

Hi Alvin,

Thank you so much for your quick summary on Dennis had said on 16 May. This help alot because I was not able to attend due to my work commitment.

Dennis, I have a question here. The other day, Ein55 and me has some discussion on the co-relation between Bond Rate and Stock market. Generally we see that if Bond rate go up, it will help to push the stock market up. This is because if the return of stock market is better than buying bond, then people will rather invest in stock than bond. Therefore to attract investor to buy bond than bond rate will need to go up.

But if there is an anticipation of Bond market crash which mean Bond rate will go down, how would that help to push STI up ? Could it be due to that big fund see that STI is way undervalue compare to other Asia stock index so they would come to play up the STI and to make last round of money before they pull out to let the stock market crash ? Or the crash of Bond will not happen so soon due to QE3 therefore Bond rate will still go up and this in turn help to push up the stock market ?

James Tai

Hi James,

just wanted to share my views in greater detail.

yes, in my opinion, very few people NOW share the same opinion with me that U.S. Bond Market will crash.

Currently, times are still good, so there's likely a Last Rally in Global Stock Markets....only by end year 2011 or year 2012 when it becomes clear that U.S. economy is NOT exactly recovering, then Ben Bernanke would have no choice but to launch QE3 or whatever they want to call it, to stimulate the economy...

however, becos by that time people might begin to have doubts about U.S. ability to borrow more and more money, QE 3 might lead to the Bond Market Crash...when bond market crash, Yield (interest rates) go up, and this is bad for stock markets as interest rates go up means companies' borrowing costs go up, or less profits, it's also bad for consumers who will have less money to spend and thereby trigger a Vicious cycle...

So the U.S. government bond market likely to Crash, triggering a Global Stock Market Crash...and triggering the Next Global Financial Crisis...

[Ax]

Dennis.. actually after the crash... do you think the US will ever recover? or they will be japan... down for decades... after all they have been dominating the world for the past century.. I do not doubt the enterprising spirit of americans... afterall they fall and they rise again..

[Dennis Ng]

Dennis.. actually after the crash... do you think the US will ever recover? or they will be japan... down for decades... after all they have been dominating the world for the past century.. I do not doubt the enterprising spirit of americans... afterall they fall and they rise again..

One possible scenario is for U.S. to gradually lose its World Super Power status...but it'll be sometime before China can catches up with U.S. since the current size of China's economy is only about half that of U.S.

China also has its own problem, its problem might be before they can overtake U.S. (in about 10 to 20 years' time), they might already face an aging population (like what Japan faces)...

U.S. might go into a lost decade like Japan...but the possible problem is instead of mild deflation (which Japan went through)...slow economy coupled with slow fall in prices....U.S. might face Stagflation....slow economy coupled with High Inflation...

[alvin]

I believe China will take over US but it is not going to be so soon.

One important benchmark that I think is about innovation.

Look around the world, US is still the no one country in coming out with new ideas and products. While China has been growing because of industrialisation, US has already moved on to knowledge based economy (e.g. iPhones, iPads, social media). They are contesting in areas where no one has been to. And China and India can only follow suit. Apple designs products, manufactures in China, and sell it to masses. Who do you think get the most money? China can only come out with imitations or replicas. They do not have the research and innovative culture YET. One day they will.

In my opinion, as long as US lagged in innovation, they will stop leading the world.

[Dennis Ng]

I believe China will take over US but it is not going to be so soon.

One important benchmark that I think is about innovation.

Look around the world, US is still the no one country in coming out with new ideas and products. While China has been growing because of industrialisation, US has already moved on to knowledge based economy (e.g. iPhones, iPads, social media). They are contesting in areas where no one has been to. And China and India can only follow suit. Apple designs products, manufactures in China, and sell it to masses. Who do you think get the most money? China can only come out with imitations or replicas. They do not have the research and innovative culture YET. One day they will.

In my opinion, as long as US lagged in innovation, they will stop leading the world.

Hi Alvin,
if I'm not wrong, China now already overtaken U.S. in terms of new patents or inventions. Can someone verify this info?

However, despite this, my view is it will take 10 to 20 years for China to overtake U.S.

[jamestai]

Hi James,

just wanted to share my views in greater detail.

yes, in my opinion, very few people NOW share the same opinion with me that U.S. Bond Market will crash.

Currently, times are still good, so there's likely a Last Rally in Global Stock Markets....only by end year 2011 or year 2012 when it becomes clear that U.S. economy is NOT exactly recovering, then Ben Bernanke would have no choice but to launch QE3 or whatever they want to call it, to stimulate the economy...

however, becos by that time people might begin to have doubts about U.S. ability to borrow more and more money, QE 3 might lead to the Bond Market Crash...when bond market crash, Yield (interest rates) go up, and this is bad for stock markets as interest rates go up means companies' borrowing costs go up, or less profits, it's also bad for consumers who will have less money to spend and thereby trigger a Vicious cycle...

So the U.S. government bond market likely to Crash, triggering a Global Stock Market Crash...and triggering the Next Global Financial Crisis...

Hi Dennis,

Thanks for the explanation. Just to make sure my understanding is correct, that mean now USA is using QE2 to buy the bonds from the open market the main objective is to keep the bond yield (interest rate) low. Therefore this help the stock market to go up because since the investing in bond would give lower return than stock so most investor will invest in share.

To attract people to invest in bond, the bond yield will need to go up but this would be bad news for business and economy because that's mean interest rate will go up. When this happen, USA might want to come out with QE3 to try to buy more bonds from the open market to keep the bond yield low, but by that time people may already lost confident in USA and QE3 will not help to achieve it's objective. So bond yield may continue to go up and this is bad news for stock market.

James Tai

[Ax]

Hi,

http://www.bbc.co.uk/news/science-environment-12885271

The answer is not yet.. but estimated at 2013.

Yes. Ipads.. I think people like Seth Godin.... Tim Ferris... not to mention tons of others.

Hm... actually we all learn in history textbooks that china emperors.. culture has been around for a very very long time.. i do think that its part of the chinese culture, if not, human nature.. why each dynasty rise and fail.. rise and fail....

if china is able to change, it would definitely catch up n overtake the tortoise? Just a matter of where and when?

The young Chinese are definitely much much hungrier... much hungrier than the Americans... (and I think Singaporeans too).

[Ax]

Oh forgot to say something... I have realized.. by actually saying something in the forum... people will start to contribute.... i think more people get to gain that way?

just something for people who think of posting but dont know what to say...

thanks to all who have contributed..

[jamestai]

Found some answer here on relation between bond and stock market also an interesting recent interview with Jim Roger on why he think that USA is heading for big financial crisis.

http://www.arabianmoney.net/us-stocks/2 ... ck-prices/

http://www.arabianmoney.net/gold-silver ... kets-down/

http://www.arabianmoney.net/us-dollar/2 ... us-dollar/

James Tai

[ein55]

Due to similar crisis as oil in 1980-82, bond yield was max (15% for 10 yr T-note) when interest rate was peak at that time. With oil crisis effect, it is 15% peak which may not be real (not by real force of market but under gov intervention). Without oil crisis effect, the max bond yield shd be only around 8%.

This historical peak in bond yield of 15% has created a potential for bond yield to drop over the past 30 years, average about 2% drop in average of 5 year market cycle. So, it drops by about 2% x 6 (assume 6 market cycles of 5 years) = 12%, till about 2-3% in current market cycle. There is a good chance for reversal because technically 2-3% yield cannot drop by another 2% till nearly 0% bond yield in next market cycle, therefore the only way is for bond market to reverse 30 year mega cycle, moving up by 1-2% yield in each market cycle, till max of 8% (average yield without effect of oil crisis in 1980). However, although there is no severe oil crisis this time, but there is a more serious US bond credit and QE1-3 effect (sudden loss in bond market support when QE is stopped), so if we use the last major crisis (1980-82) as ref, bond yield goes up by 5% in 1 year, this can be a good ref for degree of bond market collapse.

For normal recovery and reversal of bond market (good for stock market),
max bond yield =
3% + 2% (average for bullish stock market) + 1% (assume market cycle reversal, 1% for each market cycle)
= 6%

For sudden collapse of bond market (bond yield may goes up by 5% more), it is bad for stock market because the money from selling of bond market may not goes to stock market because investors have lost confidence, likely will hold in cash. This is similar to recent minor collapse in commodity for oil/gold/silver, by right lower price is better for stock market, but because the correction is too sudden, even the stock market is also affected.

For bond market to collapse, it is possible only when all the major holders of respective countries' gov (eg. Japan, China.... including Singapore) also follow to sell in a short time. Logically, it is unlikely because if each country rushing to sell, the world economy will collapse. It is very likely G7 or G20 will work together to stablize the US bond market (similar to the last Japan's earthquake for G7 to buy Yen when the world is selling). Even if US gov stops printing money, it will not let bond market loses support overnight. Instead, it could introduce another similar measures with diff name to pump in money but will be less compared to QE1-2, so that US bond market can gradually remove the support of Fed Reserve.

A more likely scenario is that most countries (whole world including US) will gradually reduce its shares in US bond (China has make this move in the past 1-2 years), but not suddently (like those private fund managers)so the bond yield will increase gradually, but not surge suddenly, if possible, rate on par with stock market bull run in the next 2 years (naturally, selling of bond goes to buy shares, then world economy will not be affected). Unless it is out of control, otherwise it is unlikely US will choose a measure to let bond market collapse over a few months.

When bond yield goes up slowly, interest rate will also goes up gradually, same as stock market, untill all reaching a saturation point to reset the market cycle.

So, the key challenge for Fed Reserve is to find the right balance to control the bond yield upward rate. If the rate of increase can be managed, it is actually healthy for the world economy (including stock market). Similar to US$, rate of falling is gradual over the years, whole world can still accept it. For gradual increase in bond yield, corporates will have time to digest the change, able to accept higher but gradual interest rate.

If the bond yield rate cannot be controlled, not only US, but the whole world economy will collapse. So, logically I believe G20 will have a backup plan to prevent this from happening or minimize its impact. As for us, as Dennis pointed out, we will exit before it happens, not to take any risk.

[ein55]

The key to keep the economy stable and varies in normal market cycle:

"Not to have any sudden BIG change"

because this will affect the confidence of people. Gradual change is preferred. I believe most gov (including US) is playing the balancing game of keeping the fire of economy burning but monitoring to make sure if it is not overheated.

A few examples:

1) Even for a very stable bank, if everyone is rushing to queue up to withdraw money, it can collapse. Same experience for AIG, at one time, many people wants to cancel the policy. Again, confidence and support given by respective country or IMF or G20 is very crucial, which was how the world ends the last crisis with gov support.

2) Property market: to avoid over-heated (upward rate was too fast), tax is imposed, but this is positive because the tax is just nice to slow down the growth but does not causing collapse or major reversal of property market. It is a compromised rate beneficial to most people (both buyers & sellers). This is the same for bond yield, if increased gradually over a long period, it will be stable and sustainable.

3) Same for interest rate, even if it goes up but at gradual pace (if bond yield goes up slowly), investors and businessmen have time to react, able to accept the growing cost to take the loan. If interest rates goes up from 1% to 4% overnight, many people will collapse before market collapse.

4) Same for gold/silver, why it can grow a few hundred % over 30 years, partly because the rate of change is gradual but steady (until the last few months). So, if gold and silver grow at slower pace, it can set new price record each year because each resistance broken will be come strong support over time, but if the surge is too sudden, highly speculative, then the short term fall is very logical as in past few weeks.

5) US$ - depreciation by about 5% each year, still within the tolerance level of investors, esp when "everyone" knows it is going to depreciate, then it is not a surprise. When it is not a surprise, market won't react drastically.

Similarly, about over 90% investors actually think bond market will reverse (may not collapse, but long-term trend will reverse), so when it really reverse, it is not a surprise, so it may not have strong reaction. Only when the rate of reversal is too much, then it will become a surprise for them, then they will react to sell to cause further surprise.