This is probably one of the most asked questions in the financial world today. Traders and investors are all so eager to find out whether the market will continue to sustain the incredible bull market since March 2009. Will it happen? I have a prediction. But you have a prediction, analyst in Wall Street have their predictions, big timers like George Soros, Jim Rogers all have their opinions. All these predictions combined can range from one side to the other, meaning no one is right for sure. But does it matter? I'll get to it a little later.
In this post, I am not fully writing about forecasting the financial markets or the economy in 2010. But as always, whenever I come up with something valuable to share I'll do it. I'm not sure how much more of these "educational" posts I can continue writing but with the world moving at a faster pace and in different directions more frequently than before, I'm pretty sure there's no end to learning. It's taken a few months of planning and compiling this topic in my head, trying to figure out how to summarise things so that it won't take much time and understanding to read. And for the ending, a short paragraph on the outlook for this year,
About 20 years ago, with job security, it was enough to provide people with comfortable lives. With a job, everything is taken care of. Flash forward to today, job security no longer gives you that comfort margin,it has shrunk significantly. In many cases your job/work is just enough for you to keep a minimum portion for savings and the rest for paying expenses, leaving you with almost nothing. Reason for this, wages has not kept up with inflation and the purchasing power of money has continued to tumble. In growing countries with negative real interest rates, placing money in money markets will cause people to continually lose out.Who are the ones least affected? The upper class. Here's why. Economics 101 taught us income distribution is determined by ownership of resources. The more resources you own, the richer you are. And because many people in the middle class lack any ownership in real estate, businesses or investments, they are unable to outpace inflation. The people in the upper class who own the majority of the resources are able to consistently keep ahead of inflation and in best scenarios PROFIT from it.
RELYING ON WAGES IS DANGEROUS
First of all, like I mentioned previously, a lot of what I have written is through reading and personal opinions. I don't expect anyone to believe me entirely.
I've just mentioned the huge enemy "inflation" that erodes the value of money. Now looking at the situation today, in terms of wages how many percent of the employees make the big bucks?I think I could relate to one of Rich Dad's lesson's ,the 90/10 rule. It says 90% of the money is owned by 10% of the people.I don't have the official figures, but I think it could be a very similar proportion if a number is put on the distribution of wages among the entire working class. What does this mean? In simple terms, all other factors constant, if you don't earn a high wage, you are financially at risk.
Now who earns to big bucks? Top management of course, directors, CEOs, outstanding individuals. Look at football for example, we are so envious of footballer's salaries as many of them earn at least $50k a week! We saw the best part of things on the front pages and we forgot to turn to the back pages. There are 20 clubs in the Premier League, let's say 15 clubs are able to pay those staggering wages and 5 clubs from the other 6 leagues in Europe can do the same. That makes a total of 45 clubs. If there are 20 players in a team, that makes 900 players in the world that could make those sort of money. How many people play football to make a living? If the 90/10 rule is true , there are 90000 people playing football for a job. But wait, all the people in South America, Africa and Asia only summing up to 90000 people? It is an underestimation. I think I won't be far off saying top 5% of the footballers make 90% of the money. This concept also applies in the corporate world, only the top few percent make the big bucks. Lesson of the day, it is a rat-race out there and you shouldn't put ALL your hope on making the big bucks.If you're in, congratulations, if you're out,it's time to do something about it.
THE LINE BETWEEN BEING POSITIVE AND REALISTIC
In life, you always have a draw a line at one point saying, that's the most I can do or that's the limit. This should not be confused as being negative. Continuing on the issue of making the big bucks. In reality, many of us work the hardest and do the best we can. We don't limit our success and should always try to do one better than before. We must always try to keep a positive attitude and that will get us very far. But even being positive in the real world also requires limits. There are things we must accept we can't do or have very small chance or succeeding. Again don't relate this to being negative or quitting because this is being realistic. We all have to accept the fact that not everyone is will get the big bucks in the future. I can always aim to become CEO one day but I have to accept the possibility it might not happen. That's being realistic. You can plan to study in Harvard from the age of 8 and there's a high chance it might not happen. In relation to wages, there's a possibility we might not get right up the pyramid or earn $200,000 a year.And if we lose our jobs, what happens? How do we pay the mortgage, bills and bring food to the table.Is there enough savings to even last you a few months?The idea I'm trying to bring here is all of us need a supplementary plan to help us generate other forms of income. The idea is basically is lowering the risk of depending on your monthly paycheck. Most of Robert Kiyosaki's books will help you on this.
CASH FLOW AND CAPITAL
If you have alternate forms of income, cash flow will be definitely be better and raising capital will be easier. I asked myself, if I needed money to buy a real estate, is there another way do go about other than a bank. In a business there are two most common ways of raising capital, debt or equity. If I as an individual is trying to avoid a lot of debt and is unable to issue equity, what other choices do I have? Assuming we are on our own, I simply haven't found a feasible way for financing other than debt. When you are in need of money to fund a lucrative investment you'll realise if your bank account does not have that amount, you got no way. Unless its a piece of real estate, the bank may be unwilling to lend you any money. This means you're on your own and you got to find a way of making more money. And I suggest is the need to build a base of assets producing cash flows as soon as possible. The positive cash flow will give you the more opportunity and freedom depending on the size of your base. The bigger picture, if your base grows to a certain level of size and is able to consistently generate stable cash flows, financial freedom is awaiting you. Definition of financial freedom? The ability of not requiring to work another day in your life. Well to reach financial freedom requires a lot of additional work and effort. And one more important factor, it requires time. How much of it depends on your performance. Some people take 15 , 20 years and even more. And in many cases, some take till retirement age. And this brings me back again to my brief mention of time value of money. The longer time the time you have, the higher the time value of money. Every day is time value, banks pay you interest on your deposits right on the exact date, if they were to accidently pay everyone 1 day earlier, they would have lost a lot of money. If you are 20 years old and haven't started investing, its not bad news, you've got a lot time ahead of you. But the fact is, you started at the age of 15, you money would have gained an additional 5 years of time value. Warren Buffett started at the age of 12 and he said he wished he started at 7.It might not seem a lot now, but when you reach a age maybe 10 years before retirement, that 5 years would be priceless.
Well, suddenly I've thought of something else to write on my next post. Robert uses this word to distinguish rich and the rest. It took me sometime to really understand what he meant. So I guess I'll leave it to the next post. Now for an outlook for this year.
Bull Market or Bear Market?
I've learned in the past that both market conditions are out of my control and so I've got to work with it. Knowing this factor, it means the rest is down to myself. For this year, if the bulls were to match the all time highs of 2007, it would require the same degree of push like in 2009. But my opinion, choppy recovery with the danger of inflation would test central banks in the world to raise interest rates. I won't doubt the Dow will push through 11,000 or even 12,000 by the end of the year. In between, I'm seeing a few periods of consolidation but an overall trend of an increase. Commodities and energy prices will have a positive year meaning inflation has caught up again. Danger of a bear market? A huge downtrend below 9000 is not likely and I believe the bulls have not done all the dashing yet. Authors Stephen Leeb and Donna Leeb's oil indicator suggest that if oil prices does not break $100/barrel, there is little danger of a bear market. In Australia, interest rates will continue to rise approximately near 5% which is considered neutral stance. A weakening Dollar will lend support to higher commodity prices and the All Ords will no doubt break 5500. In Malaysia, the gradual lifting of sugar and petrol subsidies will bring inflation to higher levels. The removal of subsidies which I believe will happen before 2014 will be excellent in the long run. I'm not sure how the govt. will decide how to award subsidies in the coming months but it is a move in the right direction. In the coming years GST will also contribute to additional cost to the people. But liberalisation also does a country well, AFTA (Asean Free Trade Area) will bring the cost of many goods down, softening the blow of inflation. We would even see cheaper cars in the coming years and this would be a wake up call to the inefficient portion of the country. The move to promote efficiency and liberalisation will definitely be a good move in the long run. So the final word, an upward trend but cautious growth.
~deyao~
