US Debt Ceiling

Debt is the obligation to repay a borrowing. Ceiling is the top most limit. When you put the two together it becomes to top limit for the US government's issuance of bonds.

What would the effect of raising the debt ceiling be on the world?

Minimum wage and employment

What is the effect if minimum wage on employment?

Once again this draws on the laws of supply and demand. So with a minimum wage, even though the equilibrium of the supply and demand of the labor force might be at a lower rate, the wages will be enforced causing the demand to be less than optimal.

For instance the minimum wage is $20 when the equilibrium is $15. The $5 difference will cause employers to be unwilling to hire as optimally as the market dictates but to cut back on employment leaving some people unemployed. That will cause the unemployment to be higher than it is without a minimum wage.

As a result, most countries with a minimum wage have a good social payment plan in order to support those without the good fortune to be having a job.

I really should be learning how to put up a graph to better explain the situation. 

Time Value of Money

The formula below is to calculate the future value out of your current savings being compounded annually.

FV= PV (1 + i )^N

There are more complex formulas where your interest is compounded month, daily and so on. However, if you use this formula, it will just underestimate your future value leaving you with an amount a bit larger than expected.

FV is the future value of your money

PV is the present value of your money

i is the interest rate

N is the number of years it is invested

This formula also can be used in many different scenarios such as calculating how much would your future payments be worth today and so on.

In future postings, I would be including some excel worksheets that allows you to calculate it straight off and giving more indepth examples.

Until next time.

Inflation and Australia

Today's papers has reported that inflation is predominant across the board of items in the CPI (Consumer Price Index). This would not be a good sign for the RBA as one of their main objective is to target inflation and keep it at a certain band. If I am not mistaken, it would be 2%-3%.

This might affect their next decision to raise interest  rates. It is to be seen whether the RBA believes that the rise in inflation is big enough to force a rise in interest rates to slow the growth of money supply.

However, there are some other factors to bear in mind before taking that step. For instance, would that rise in interest rates affect a huge percentage of population who are already finding it impossible to repay their mortgages.

Carry Trade

Carry Trade involves 2 steps:

1) Borrowing or selling a financial instrument at a low cost. Eg. taking an interest free loan from the government (In the case where the government wants to stimulate a particular market)

2) Lending or purchasing a financial instrument at a higher interest as compared to what you borrowed. Eg. a special long term fixed deposit which gives you a 15% interest.

This allows you to gain 15% (the difference of the spread between the interest gain and the cost of borrowing)

However, it is good to bear in mind that this is not a arbitrage strategy because if the market works against your investment, you are bound to lose money. This strategy needs stable investments and borrowings that does not fluctuate wildly.

Carry trade can be executed in a few markets such as interest rates, currency and many more.

Highest interest

The highest interest on average I have found for a savings account in Melbourne, Australia so far is from Bankwest. They are offering an introductory 6.15% for the savings account for twelve months on their TeleNet Savers account. This is much better than the 4% on average earned in your accounts in other banks. The TeleNet Saver does not have any restrictions on withdrawals. However, it has a maximum of AUD5million.

Also they have a Regular Saver that encourages a regular savings between AUD50-AUD500 per month that yields 7% per annum. However, there is no withdrawals or else you will lose your interest for that month. It requires you to plan to make the most out of the interest if not you might be better off with the TeleNet Saver.

The final benefit from Bankwest is their Hero Account which is the everyday transaction account that gives you 5% on your money in the account. This is quite unique in my opinion as there is no other transaction account that I have found that offers interest on your money except if it is the other way round where you owe them money. It allows you to withdraw from CBA and Bankwest without fee. However, remember that it requires a monthly minimum deposit of AUD2000.

The Hero Account has a comparison account called the Zero Account where, as it is pretty self explanatory, it has 0% interest. The benefit of this account is that you are able to withdraw from other major banks without a transaction fee.

PS Bankwest is owned by CBA.

Interest rates and the currency

Interest rates is a monetary policy used by the government to control the supply of money. It affects the value of the currency. When interest rates rises, the currency of a country generally appreciates.

What is the logical behind this argument?

When interest rates rises, people save more as there is more incentive to keep the money in the bank and grow their capital. This is in contrast to a low interest rate where people take the money out to invest else where because if you keep it in banks, you might still get interest but it might not be enough to keep up with inflation. Also when interest rate rises, loans are less as the loans become more expensive to repay.

Consequently, there would be less currency floating in the market. As a result, it would mean that the supply have decreased. This would naturally cause the value of the currency to increase. And this holds true vice versa.

So if you have an insider tip that the government is DEFINITELY going to drop interest rates, quickly buy another currency and wait for the interest rate to drop to make a quick killing.

Credit rating

There a a numerous credit rating agencies in the world. To name a few, there is Standard and Poor's and Moody's. The agencies assign a credit rating to the issuer of a debt obligation using their assessment on the issuer's credit worthiness, which is the ability to fulfill the obligation.

As a result of the recent market crash, even countries are now being downgraded. How is a country involved in these ratings you might ask. The government bonds issued are the debt obligations of the countries and some major economies, such as Italy, have recently been downgraded. There is also talks about the US given a downgrade.

Is it time to panic? If the US gets downgraded, it would mean that the agencies, having done their assessments feel that the US might be unable to meet its debt obligations. It is quite a bad sign. Logically it should not affect the whole world but a major economy, there would be an impact on the other countries. 

To conclude, it is good to prepare for the worse where there might be a double dip but keep in mind that every economy is cyclical and there would be opportunities all along the way. Be a dilligent investor and the opportunities might be yours.

The Candlestick

The candlestick chart, a japanese invention, is a combination of the line-chart and the bar-chart. It is used to give the summary of how the financial instrument performed in a particular day. Technical analysis can be done using the candlestick.

The bar-chart being the body indicates the opening and closing prices of the financial instrument. In the classical case, it the body would either be black or white. Black indicating the opening price is the top of the bar and the closing price is the bottom of the bar. It means that the financial instrument closed lower. White indicating the opposite. That being the case, a person long in a financial instrument would want to have white bars. In modern times, the colors can be different, for instance red(closing lower) and green(closing higher).

The line-chart would indicate the highest point and lowest point in the trading day. It is a good indicator of how much the stock can fluctuate during the day.

Below is an example of a candlestick chart for practice. Do you notice which day the prices fluctuates alot?

Economics

Supply and Demand

Economics is a fundamental part to finance. It is as crucial as water is to living beings.

Supply is the amount of goods that is available to consumers and demand is the the ability to purchase a good at a given point in time. When suppliers and consumers go to the market play, these 2 powerful forces collide to get a market price for a good.

Today we will see the effect of oversupply and undersupply, keeping everything else constant.

When a good is oversupplied, it will cause the good to lose value, hence the suppliers will reduce the price to ensure everything gets sold. For instance, in the recent housing bubble in many parts of America, there was an oversupply of houses. This lead to the destruction of prices of the houses.

When a good is undersupplied, it will cause the good to gain in value. The suppliers will increase the price as there is limited supply of goods. It is the case where not everyone can get a slice of the cake. An example would be a recent case of flooding in Australia that destroyed majority of the banana plantations. It caused the prices of the bananas to hike about 3 times the normal rate.

If anyone is able to predict the economy and trade according to its strengths, that person would be a millionaire many times over.

To lose or not to lose

In the past decade, a few significant events happened that would definitely change the world today. I would be focusing on a couple. The first is the stock rally up until 2008. This is caused by the greed of people believing that there is a free meal everywhere. It made "investors" become over-optimistic. Then comes the crash. It is when everything started to unwind up until today where, even though experts say we are out of it, we are still feeling the effects in many areas of life.

There is 1 important factor to be emulated that can make you in a better position than most. We need alot of discipline and patience to make it work though. The factor to take into consideration is the preservation of capital. This means that we should not invest in anything that can guarantee high returns but also can make losses. We should invest in a financial instrument that can guarantee the preservation of capital invested even though the returns are lower than other financial instruments.

There is a psychological study that proved that the happiness derived from a 100% increase in wealth is at a much lower level than the sadness when you have 100% decrease in wealth. Hence, it would be more painful to lose money than make money through investments.

To ensure a good nights sleep, we should all do a bit of research and ask the right questions before investing to ensure our capital is preserved.

Analysis

Analysis in finance can be divided into 2 : technical analysis and fundamental analysis.

Technical analysis is the process of forecasting the direction of prices of a financial instrument through the study of past market data. Most of the time, this process would involve a graph containing huge amount of data.

Fundamental analysis is the process of analyzing financial statements and the major aspects of the business, such as its management team, to forecast the price. This uses historical as well as present data. It would definitely be more in-depth as compared to technical analysis.

Both methods has its pros and cons. The industry players also uses both methods with success.

For the average person, my advice would be to learn both up and put it to practice with a small amount of funds, which you are willing to lose, to ensure you find the method that would work for you. For those who are not capable of using any capital then you should play with some free accounts online using both methods and building your strategy.

Compounding Interest

Compounding interest is generating interest from previous interest. It is how your money generates quicker than you have expected in the long run.

For example, when you keep your money in the bank at 7% per annum, for a $100 savings, after the first year you would have $107. In the next year, the $107 would be at the same 7% bringing it to $114.49 and not $114. This would give you an additional $0.49. This may look small but in bigger sums it makes a difference. Also it would get larger as it continues to be compounded.

This is the basics of compounding interest and could work in your favor when saving for a long term goal.

10% Rule

To start off any finance deals, we would need to have money. Hence this first post is a method anyone can implement to get the small sum needed to start off with.

The 10% rule (cited "The richest man in Babylon")

The first step is to make yourself useful by offering your service to anyone who can pay you a salary.

Then, you need to save 10% of your salary every month before anything else. This step is vital because if you do not start off here, you might not have any left at the end of the month. You might give yourself excuses like "Oh I will just save next month, which is coming up soon" and the excuses will go on and on.

The best way to save the 10% these days is to open an online savings account linked to your normal bank account and have a automated transfer on the day of your salary payment.

Start saving today!