Rob Cheng's Blog
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23Nov
2008
How Global is the Bubble?

We keep on hearing that the current economic crisis is global in nature. That is to say, that each and every country in the world will suffer along with the United States. To be honest, this entire premise seems false to me. Surely there would be winners and losers as this economic crisis unfolds. Plus on top of this, the US is the largest debtor nation in the world. Surely the lenders will survive the crisis better than the debtors.

The chart below takes a peek at the interest rates around the world. The first thing that I notice is that there is a huge spread in interest rates from various countries. Their appears to be high interest rates in countries that are expanding such as China, Russia, India and Brazil. And then the balance of the countries have extremely low interest rates such as Japan, US, Europe and Great Britain. This chart is critical for understanding the economic crisis since artificially low interest rates are the root cause of the bubbles.

First, I took a look at the French stock market. The reason was to do a sanity check on the relationship between the dollar/euro, and the Dow Jones and the French stock market. As almost any investor knows, when interest rates go down, the stock market accelerates. The reasons are quite simple. Investors are constantly looking for higher returns, and as interest rates drop, the stock market spikes. This simple fact is one of the key underlying dynamics of the US financial crisis. The chart below shows clearly that the French market has experienced two bubbles and the timings are eerily similar to the Dow Jones bubble in the United States. Looks like at least to some degree that the Euro’s monetary policy was tied to US financial policy.

Next, let’s look at housing prices in Great Britain. Holy crap! In just 10 years, British housing prices have more than tripled from a low of £60,000 to a high of close to £200,000. Yes, the US had a housing bubble but in the same period of time, US prices did not even double. In this regard, the bubble is much more severe in Great Britain than the United States.

Looks like Europe may well be going down the tubes with the Americans. I was chatting with a friend in Europe last week, and he remarked that a European economist was worried that the entire Euro system might collapse in the next two years. Yikes.

Below, you can find the performance of the Brazilian stock market, known as the Bovespa. To be honest, I was not expecting to see a bubble on this chart because Brazilian interest rates are the highest in the free world. With such high interest rates, why invest in the stock market if you can make 13% risk free? But lo and behold, there is a bubble! It does not have two peaks like the French, British and US stock markets, but there is one big pronounced peak. The good news is that it is correcting quickly. Since last 2007, the Bovespa has already lost more than 1/2 of its value. It makes sense to me, with high interest rates, there is less money to drive up prices, and less money to prop them up on the downside.

And last but not least is China. China like Brazil has experienced a bubble, but it seems to be only two years in length and it appears to be almost over. Of all the bubbles that I have analyzed the Chinese bubble looks to be the smallest. Now this is making sense. China has become the world’s bank, lending money to other nation’s at a record pace. Heck, China funded the American war in Iraq. China’s monetary policy has been almost perfect. China’s problem was exactly the opposite of the United States. China has been trying not to grow their economy too fast. Their fear was that if the economy grew too fast, that inflation would grow out of control.

But here’s the big news. In the last two months, Russia and Brazil have raised interest rates! One more time, they raised interest rates in the last two months. This at the time when America, Europe and Japan are lowering them to zero as fast as possible. I believe that interest rates are the key to monetary policy. When trying to correct a bubble, there is only one solution – raise interest rates. Raising interest rates contracts the money supply, and money moves out of higher risk ventures such as the stock market and mortgages.

Living down here in Brazil, I can tell you that the interest rates are real. I go to my bank once a month to check, and I am realizing well over 1% interest rate a month risk free. As the Brazilian stock market has fallen off a cliff, I just sit back and collect my interest. It is awesome, and it is truly the nest egg that I have always wanted to build.

I am going to be moving more money down to Brazil. The dollar has been rising lately against almost all major currencies, and in my view, this is the perfect time to be selling dollars.
22Nov
2008
The Fruits of Brazil

I really love living in Brazil. One of the major reasons are the many fruits that can only be found in Brazil. Here is my list of favorites:

1. Agua de Coco. This is the water inside of the coconut. After I run in the morning, I drink about 1.5 liters of agua de coco during the cool down period. It tastes so good. Plus it is very good for you. Agua de coco is high in sodium and pottasium, and very low in calories and fat. When in the United States, I could not find agua de coco anywhere, so I usually drink GatorAde or PowerAde. I actually think that agua de coco is a superior and natural energy drink. It sounds corny but agua de coco truly quenches my thirst, where as GatorAde just satisfied the thirst. Here’s my tip for agua de coco. Never drink at room temperature. It must be cold and the colder the better.

You also can get it on the beach. There they take a large knife to the top of the coconut, and then you drink it through a straw. Note: if the beach is crowded, quite often the coconuts will not be very cold and it is a little less than satisfying.

2. Açaí. This is a fruit about the size of a grape, and the pulp is mashed and frozen and shipped throughout the country. You can buy it in any super market. It is also a favorite at the many juice stands throughout the city. There is only one word for this drink/slurpee, delicious. Lately, I have been making it at home. Here’s my recipe. Take two packages of frozen açaí, and smash them gently with a small hammer. I use the side of a meat tenderizer. Be gentle because you don’t want to break the package just smash up the frozen stuff. Then put it in the blender until the açaí is small and a little dusty. Then throw in a banana, and mix it with the açaí. Take it out of the blender and place it in a bowl and mix in two tablespoons of guaraná syrup and granola to taste. Then start eating! Just thinking about it now, makes me want to go to the kitchen and make another one.

3. Maracujá. This is a bitter fruit about the size of a wrinkled pear. For lunch, we make it into a juice mixed with water and lots of sugar to remove the bitterness. Nice and refreshing.

4. Pineapple. This is of course not unique to Brazil, but in my experience some of the finest pineapple in the world is from Brazil. The question at hand is whether the pineapple is sweet and juicy. From my experience in both the United States and Brazil, Brazil wins hands down. Not all pineapples are good, but the probability is very high in Brazil (~80%) that you get a sweet and juicy pineapple, where as in the US I would guess the number is a lot less than 50%.

5. Caipivodka de Morango. This is one of my favorite alcoholic drinks in Brazil. It is easy to make but not available in the US. First you mash up some strawberries very fine, and then put them in the blender. Liberally throw in vodka, and serve over ice. Note: it normally comes with sugar in it, but I request it without sugar and put in sweet-and-low at the table.

I also have a list of fruits that are better in the United States. Oranges and sweet corn (in season) are a lot better in the US.
6Nov
2008
Portuguese Vowel Sounds

Here’s a trick that I figured out to speak Portuguese with less of a foreign accent. It goes back all the way back to elementary school. Do you remember when you were learning your vowels, and we learned that there are 5 vowels and each vowel has two sounds, long and short?

Well in Portuguese (and also in Spanish), each vowel only has one sound. So therefore, rather than 10 vowel sounds in English, Portuguese and Spanish only have 5. The trick if you are an English speaker is to throw out the other vowel sounds because they do not exist in Portuguese. See the table below.

Vowel English
Pronunciation		 Portuguese
Pronunciation
a ă, ā ŏ
e ĕ, ē ā
i ĭ, ī ē
o ŏ, ō ō
u ŭ, ū ū

Here’s a little example that me and some friends were discussing over dinner one night. The word entendo (I understand). My friends were pronouncing the word:

ĕntĕndō


And the more correct pronunciation would be:

āntāndō

One last point because the phonics are confusing because of where you want to accent the syllable. In general, when a word has no accent marks, then the accent should be placed on the second to last syllable. This is also key for proper pronunciation, and makes the first long a sound a little lighter than the second one in the example above.

Note: I am no expert on Portuguese, but hopefully someone will find this helpful.
3Nov
2008
The Bubble Recovery

One of the greatest travesties to this bubble is the incredible American deficit under the Bush administration. The deficit has ballooned by over $5T in a scant 8 years. We can all agree that this is highly fiscally irresponsible, but the question remains, “Where did all this money go?”

After all, Bush is a Republican, and the funds certainly were not spent on liberal causes such as welfare and education. Given the record price at the gas pump, the funds were not spent on alternative energies, or more energy efficient cars. In fact, I think that we can look back at the success of the Humvee as a unique product of the Bush administration.

So show me the MONEY. By all estimates, the war in Iraq has cost $500B, but let’s be generous and assume that all the money has been squandered and there is no economic return on the American economy. Furthermore, let’s round it up to $1T. So there is still $4T unaccounted.

The chart above explains a large portion of the Bush’s incredible $5T deficit. One of the first things Bush did as president was honoring his campaign promise to give huge tax cuts to the wealthy. This was signed into law in June 2001.

The impact was swift. Government tax revenues essentially fell off a cliff during Bush’s first term. Bush’s rationale was that the tax cuts would trickle down to the rest of the economy and create jobs. This chart suggests the opposite. If jobs had been created, then revenues would not have fallen. In fact, they should have gone up. Bush’s tax cuts to the wealthy did not create jobs. In fact, these tax cuts have substantially increased the deficit and perhaps was one of the underlying contributors to the bubble.

The Nikkei 225 is the Japanese version of the Dow Jones 500. This chart chronicles what is commonly referred to as the Japanese Asset Price Bubble. In addition to the run up in stocks, it was accompanied by a tremendous run up in real estate prices. Some places in Tokyo were being sold at over $100,000 a square foot. A square foot is the size of one floor tile, and it was selling for the price of an entire house. Sound familiar?

Once the bubble popped in 1989, the Japanese Federal Reserve continued to spur the economy by lowering interest rates and printing more money. These actions were ineffectual, and interest rates hit zero. Can you believe it? They were essentially giving away money and there were no takers. The credit crisis would not abate.

The last straw was when the government began to buy out failing banks and businesses creating what became known as zombie businesses. This era in Japanese history is known as the lost decade. Historians blame primarily the Japanese Feds insistence in lowering interest rates and bailing out failed institutions.

If you have not already figured out where this is going. We are repeating each and every mistake that happened in Japan beginning in the mid 80’s. We made the exact same mistakes as the Japanese that caused a stock and housing bubble. And now we are replicating their errors in resolving the problems. The end result for Japan was the lost decade, and perhaps the US is in store for a similar fate.