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The Increasing Income Gap

Bloomberg.com reports a couple of days ago:

Workers of the world are demanding a bigger share of global prosperity, and this year they may get it.

Political shifts in the U.S., Europe and Asia increase the chances that 2007 will bring labor higher pay and stronger job protection after five years in which its share of economic gains fell. ``The pendulum of economic power might well begin to shift from capital back to labor,'' says Stephen S. Roach, chief global economist with Morgan Stanley in New York.

While that's good news for workers, the result may be a squeeze on corporate profits and stock prices, economists say. Roach, for one, foresees ``a very challenging and difficult environment for global stock markets,'' with heightened risks of protectionism, accelerating inflation and higher interest rates.

While I concur with facts - that the incoming gap is increasing and that countries are taking measures to tackle the problem, I disagree with Roach's conclusions. In my opinion, the trend will continue for some time. Even if workers' wages are increased, say, 10% in 2007, the absolute wealth difference between the rich and the not-so-rich will keep becoming bigger.

Part of the reason lies in the fact that the global economy is doing great. People with extra money to invest are getting very high return on their investment. Most workers don't have much left for investment after bills are paid.

The fundamental reason for the wealth gap however is what is profoundly changing the world right now: the globalization. In today's global market, capital wins over labor. The globalization is increasing the size of the market by a wide margin. For example, Yum Brands, the ower of KFC, is opening new restraunts in countries that were not accessible just several years ago. Most profits go to its stock holders, most of whom are financial institutes and wealthy individuals [Yum Brands' stock increased from 20s to 60 in three years]. Does KFC's workers benefit from this? Absolutely no! They still makes just above the minimum wage. Will the company, hence the stockholders, make more money in 2007 and beyond? Most certainly yes as they are just starting to penetrate the emerging markets. Will the restraunt workers' income grow with the that of the company? Not a chance!

The above is also the reason why it was the Dow Jones Industrial Average, not another index, broke its record in 2006. The Dow 30 companies are big, global companies many of which have higher overseas revenues than domestic revenues. They grow more than purely domestic company.

On a more grand scale, the large MNCs are also winning over smaller local companies in foreign countries. They have more money set aside for advertisement. I noticed that it is the big MNCs who are paying big bucks doing commercials on TV in China. Local companies, most of which are new companies just trying to establish themselves in a very competitive market, cannot compete with them in ad budget. The end result? MNCs are gaining market shares at the expense of locals.

In summary, in today's globalization, people and companies with capitals are by far the biggest winners. The workers? The good news is that they do have a job (US unemployment rate is very low). The bad news is: they are falling way behind in the absolute term. And the gap will become even wider in 2007 and beyond! I don't think it is fair, but I don't know if anybody can change it near term (without a radical movement).

By the way, it is not the first time that Roach has been wrong.

With A Great Year Behind, I Am Cautiously Optimistic About 2007

The past year has been a booming year for investors all over the world. Of the major markets that are under my watch, the Asian markets led the pack and the US market was a laggard, which was only up about 13.6%, or 15% including dividend. Interestingly the return is close to its historical average for the last few decades. Considering the relatively low expectations held by most of the Wall Street analysts at the beginning of 2006, the sustaining high oil price and the uncertain housing market, last year's return can be viewed nothing short of being remarkable.

There are many reasons behind the bull markets. In my opinion the most important are

1. Emerging markets are so strong that all boats are being lifted.
1. Providing markets for US products.
   
2. The globalization is working in full swing and US is benefiting the most from it:
1. Almost unlimited supply of cheap labor is keeping the prices down and inflation low, offsetting the high oil price.
2. US is becoming the provider of choice for technology and finance, both carrying very high-margin.
   
3. Asset bubble: I think the US is experiencing a bubble of financial assets. Too much money is available to chase limited real assets in the world. The low interest rates are not attractive enough for asset managers. This is good for stocks as long as the bubble lasts.
   
4. No catastrophic events (war, flood, etc.) in 2006.
   

These factors are causing record-breaking profits for US corporations. In fact the P/E ratio for the S&P 500 ratio is lower than 15 on average, which hasn't been seen since 1994. In other words, stocks are cheap even with four years of consecutive gain in the market indices. Investors are feeling comfortable about the market: the volatility level is at the lowest in more than 10 years. This kind of optimism and the abundance of cash available in corporates and private equity funds are also driving M&A and MBO deals at record-breaking level.

Baring sudden events, I am seeing the same strong market forces in action in 2007 and am cautiously positive about the US market. After all the stock prices are cheap.

On the other hand, certain events could make the market tumble. Among them are:

1. Political instability in emerging markets such as China and India.
2. A escalation of war in middle east.
   
3. A free fall in dollar.
4. A housing market collapse in US.

Of course there is always something that could go terribly wrong but nobody can predict. Managing a portfolio in this kind of uncertain environment can be a very challenging task. What's the probability for one or a combination of the things to happen? I would probably put it at about 50%, in other words a pretty high number. But again that was true also at the beginning of 2006. Of the most important things that I've learned during the last couple of years is to stay positive. Below are things that I would do,

1. stay in the market;
   
2. hedge the bets;
3. do the homework: sound practice of stock analysis is still the key; and
   
4. pray for the good luck (not!).

In other words, do the usual things that I am supposed to have been doing already. Without major negative events, I see S&P 500 break a new record during the earlier months of 2007. The index is only 8% from its previous high set in 2001. How much weight does this "prediction" carry for my own decision making? Exactly Zero! Why? This is what I believe:

You Don't Predict What's To Happen. You Manage Based On What's Happened.

My number one goal should be to guard against a big loss, while trying to achieve my usual objective: to outperform the benchmark index. Is it possible to match the super performance of the past year? Very unlikely as the plate is getting fuller but I really shouldn't care about it either: it wasn't my objective to be up over 50% to start in 2006 and it shouldn't be an objective either now that we are in 2007!

Happy Investing.

StumbledUpon: Playing with Fire - The 10 Tcf/year Supply Gap

From EnergyPulse, Andrew Weissman, Editor-in-Chief & Publisher, EnergyBusinessWatch.com, writes about the coming crisis in US gas supply and comment on why there hasn't been any urgency to deal with the problem. Among the reasons:

1. Accelerated depletion of existing gas reserves that are not being replaced by new findings;
   
2. Too much natural gas has been used for power generation;
3. Out-dated prediction tools and under-funded government research organizations.
   

Whom Goldman Sachs Has Been Hiring

I cannot verify it, but it seems that the investment banks are hiring a lot of math and IT people from other countries, more than those majoring in economics and business, including MBAs. [One possible explanation: they may have hired many other business majors, but theose people are Americans.] [Source: Wenxuecity.com and MyVisaJobs.Com]

高盛在2005年一共申请了477的h1b visa, 在所有的top h1b visa sponsors中排26位. 这477的申请分布如下, 注意, 数学专业125个, Business专业只有49个:

Occupation_Group Goldman Sachs & Co.
IT 175
Math 125
Economics 120
Business 49
Manager 7
Others 1

...

学好数理化, 走遍天下都不怕,直到今天,到了美国, 对个人还是颠簸不破的整理. 对企业, 用好数理化, 是在数字时代的竞争中立于不败之地的手段. 虽然, 我觉得这数理化的理化二字, 可以改成信统, 信息技术的信，统计的统, 包括了对信息的编程和统计分析. 这才是真正意义上的数字化生存. 数字化生存，就是数学的生存．过去这二十年, 数理化的基础研究专业在中国成了最被人看不起, 最没人上, 录取分数最底的专业, 大家都一窝风的去读财经MBA等热门专业, 会迟早让国家和个人付出代价.

Facts: Energy Industry in PNG

Source: CIA - "The World Factbook"

Oil - production:	50,000 bbl/day (January 2006 est.)
Oil - consumption:	18,000 bbl/day (January 2006 est.)
Oil - exports:	NA bbl/day
Oil - imports:	NA bbl/day
Oil - proved reserves:	170 million bbl (2005 est.)
Natural gas - production:	140 million cu m (2003 est.)
Natural gas - consumption:	140 million cu m (2003 est.)
Natural gas - exports:	0 cu m (2001 est.)
Natural gas - imports:	0 cu m (2001 est.)
Natural gas - proved reserves:	345.5 billion cu m (2005)

Cisco Bids to Control IPTV

Link: Cisco bids to control IPTV :

Cisco has virtually re-invented IPTV services by dropping key elements of the IPTV experience – VoD, network PVR, fast channel change and packet re-transmission – down a layer into the network layer, sitting on Cisco routers and servers in the network.

It's said this technology would improve the bit error ratio that is a common problem in all current IPTV solutions.