#-Lens

The gold price has been down, US dollar has been up while the stock markets around the global is tanking. It is a rare moment of fear. Usually the gold price trade oppose to the stock market. The stock market goes up, the gold goes down, vice versa. Not now. It is a state of panic. Investors are fearful, they want cash. Assets abroad are dumped, causing the huge drop in foreign currencies and stock markets aboard. Next is the stock market in US, all the investors, retail or fund are holding their asset in USD, treasury. Not even in gold! But is going to T-Bill a flight to quality? With the size of US debt, it is probably not. The only assurance is that no one in the right mind would let US to default. The world cannot afford to.

It is time to listen to Buffet: Be fearful when others are greedy, and be greedy when others are fearful.

I recently posted two jobs on RentaCoder to get two WP plugins for a project I am co-founding with a friend. The experience has been great. I posted the project, within hours, I got good responses, and I was able to pick one of them. My first project was completed to perfection within 1 day. Impressive. Although one thing troubles me. I have to set a max price, but often I am not sure what is ongoing market prices. All my bidders bid around the max price I set, that makes me think I have set a price either too high or too low. It would be nice if the platform could suggest a price or let the bidder to do the job. The market is not efficient here.

House Value over the last centuries:

(source: http://3.bp.blogspot.com/_wFWqWIH-WFU/SPnTDZ-G-pI/AAAAAAAAGLw/EmInfXSfe00/s1600-h/housing_projection.jpg)

S&P 500 return since 1950:

(source: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=20800&t=01004553487438585767)

I saw the first chart today, and immediately want to find a comparison chart. I always been told by many people that investing in real estate is good, safe, low risk, and good returns. I had my doubts, but I am unable to convince my friends that equity is a better choice. Now I can convincingly say so.

The first chart is the house value over the last century adjusted for inflation. Clearly, over the last 100 years or so, the house price barely grow, even at the height of the last housing bubble, you would made 200% return. However, if you invest the same amount of money in S&P 500 in 1950, your capital would grow by 10 times + dividend. (shown in blue line on the second chart.) The reason I excluded dividends is that we can compare it to the housing price, since it did not include rent income. Had we invested the dividend, we would gain 100x, shown in the red line. I doubt that re-invested dividend income would gain as much return.

George Liu
george.j.liu@gmail.com

This cartoon is on Economist this week:

It is a real danger! The worst of this crisis is not recession, but reverse of progress! The world has set its march towards market economy for awhile, and this crisis might jeopardize it and put the entire world's economic growth for the future in real danger.

The root of the problem is not capitalism, but unregulated market and wrong executive compensation plan. CMO, CDO, and CDS are real financial innovations that bring more liquidity into the financial market. CMO in market will allow more people to access credit. But the perfect tool can be used wrongly like nuclear power. We have to regulate and price those derivatives properly going forward, but capitalism as a whole should be blamed for this problem. It is all too easy politically to blame everything on capitalism. Popularism might rule, and that is the real threat here to global economic health!

George Liu
george.j.liu@gmail.com

So far, the crisis has mostly remained in the financial realm. Increasingly now, I see signs of the spillovers. First it is the story of people cannot get car loans and credit cards in US. The car sales figure seems to confirm that. It has fall from the sky since much of it depends on credit.

Now numerous start-ups have lay off large number of employees. They depends on funding to survive and grow. In a tight credit cycle, they may be the first affected company, and surely enough all of them are preparing for the winter. (Hopefully not a nuclear one) So what is next? Housing, car, start-up, private buy-out, M&A, and etc those credit intensive activities are already slow. Consumer spending seems have been down a lot as well, probably result of a combination of depressed wealth, loss of job, and tight credit card.

But big things haven't come yet. Firms haven't come under threat due to tight credit cycle. When we see that start happening, we are in real trouble. Buffet declared its time to buy right now, but I am just not sure how long a time horizon we must have to be profitable. It is a winter, but will it be a nuclear one?


George Liu
george.j.liu@gmail.com