US vs Japan Dec 26th 2008

A Federal regulator in California allowed IndyMac Bank to pre-date capital infusion before it went bankrupt. It is suspected that his office may have allowed other institutions to do the same….. We need regulators to regulate regulators!!!

It is proposed that cows should bear carbon taxes for emitting 4 tons of methane gas a year. Are we that desperate to fix our deficits?

An article in last week’s Barron’s drew a close parallel between Madoff’s Ponzi and the social security, Medicare programs. If a ponzi is essentially making the future investors pay for the returns of the present investors, how is the Social security and Medicare programs different?

Investing in stock markets is becoming increasingly about investing in bubbles and I am frequently asked when and where will be the next bubble? Right now we have a cash bubble that the Fed is trying to burst with zero interest rate policy. With huge amount of dollars along with other currencies being printed, the next bubble will be even bigger. We as a society have lived long beyond our means with negative savings, cheap loans and high leverage that we can not bear any pain of loosing our comforts. Afraid to go into depression when our life style curtails, we require stimulant after stimulant to be constantly stimulated.

Lot of comparisons are drawn between U.S and Japan’s recession. We are certainly not like Japan in many ways and should not be too quick to draw parallels. After all economics is social science and should not be applied like the universal laws of science. While there are some similarities like the aging population, we will behave differently from the Japanese to the stimulus in many ways. I certainly hope so for our sake.

One of the universal laws that can be applied to money is that it goes where opportunities for growth and returns are. The 0% policy failed to stimulate Japan as low cost yen found its way to other countries where it found better growth and return opportunities. This phenomenon is commonly called the “Carry Trade”. The future consumer growth and investment opportunities will be relatively higher in the developing world and dollar will see its way to these countries but there will be a lot of opportunities here in the U.S to stay. Our baby boomers are still resilient and love to work and spend. These will be their golden years and they will make it so. And the U.S is still the center of research and development and innovation that attracts investments from all over the world. With likelihood of some of the excess low cost dollars moving to the developing world, chances of hyperinflation should also dissipate. However its not only U.S that is dropping its rate close to zero, so are other developed nations in Europe and also Japan. Their currencies will compete with U.S $ in the new frontier but I think U.S $ is much better placed in winning as many of these developing countries are pegged to $U.S and therefore the $ carry trade will limit the currency risk. I just hope that this is the likely scenario not a wishful thinking. Nevertheless one thing is likely to be certain in this scenario; The developing world may get a boost that will be much bigger than the one they got from low cost yen.

Have a great new year.