Happy Birthday Israel!

May 14, 2008 by · Leave a Comment
Filed under: Middle-East Affairs 

Today is the 60th Anniversary of Israel’s declaration of independence, proclaimed on this day in the Tel Aviv Museum in 1948.

Israel is a modern marvel – 1/4 the size of Tasmania, with almost 15 times the population – 7.3 million people consisting of various Jewish, Arab, Circassian and other ethnic groups.

It has the 33rd highest GDP per capita at $25,799 – just behind New Zealand and just ahead of South Korea.

Despite many challenges that include having limited natural resources, and having faced the constant threat of annihilation from its neighbours, it has maintained a Western Democratic, pluralistic and multicultural society, with freedom of the press and an independent judiciary.

Some of its long list of achievements include:

  • 8 Nobel Laureates
  • Prominent contributions to Arts, Medicine, Agriculture, Natural Sciences and IT
  • A historic role in providing humanitarian aid to other countries

On this occasion, I take the chance to wish the people of Israel the best for the future. May they have the will and determination to deal with the challenges they face, and may they continue their excellent work in building their society and contributing to the world community.

Comparative Advantage for Everyone

One very interesting topic in economics is the principle of comparative advantage. This topic is traditionally taught in the context of teaching the justifications and benefits for International Trade between countries, even if one trading country could produce all of its desired goods at a cheaper price than its trading partners.

When I have asked economics students to explain it, I have found it to be poorly understood. I have come up with my own analogy to explain the principle. Furthermore, it also explains how this principle applies to individuals in everyday life. Here is my example:

Let’s say I have a day job as contract web developer for which I get paid $50/hr. After work, I can either eat out for dinner or buy ingredients and cook at home.

When I go out to eat, my favourite meal is a Thai stir fry which has meat, vegetables and rice, which I can buy for $10. The resturant takes care of all the preparation and cleaning. All I do it eat and leave.

When I eat at home, I might prepare something in the kitchen with frozen vegetables, beef and potatoes, and the ingredients for that will average out to $5/day over the course of a week.

On the surface, it seems that I am saving $5/day when I eat at home, but this is not the whole story.

In addition to the time spent shopping, I will also have to spend time to unpack and prepare the ingredients, wait for them to cook and clean up afterwards. Let’s say that the total time from preparing to washing up takes 1 hour.

What If instead of doing that, I worked for an additional hour per day and decided to always eat out?

I would earn an extra $50, spend $10 on the Thai meal, leaving me up $40 from my starting balance, and $45 ahead of cooking at home. Amazing.

I can extend this further to the Thai restaurant itself. Let’s say the owner/head chef wants to promote the restaurant by creating a website. She could either close the shop, read web design books and learn how to use HTML editing software, or she could hire me. The website the chef wants is simple – it just has the restaurant’s name, phone, address, a street map and the current menu.

I could hammer this out within 2 hours, for which I would charge $100. The chef is also clever, but she might take 5 hours as she has to perform software installation, read documentation and debug common beginner mistakes.

What should the chef do? Let’s say the restaurant serves 20 people per hour, and makes an average margin of $5 on each meal, the restaurant’s hourly income is $100/hr.

If the chef builds her website herself during restaurant hours, she would forego $500 in revenue. If she hires me, her total out of pocket expense is $100. Hence, she is $400 better off by hiring me to build her website.

For this example, we would conclude that my comparative advantage is in web development, and the restaurant’s comparative advantage is in preparing food.

This principle can be used to justify why a multi-talented business owner may be justified in hiring a graduate fresh out of university for clerical tasks, or why one would hire an accountant to do a simple tax return.

Of course this example makes a few assumptions. If I were in a permanent job, perhaps I would not have the ability to work an extra hour. Also, some people might in fact like cooking at home or spending time with family. Also, some Thai restaurants use excessive amounts of oil which could lead to weight gain.

How to Win the War on Global Warming

May 11, 2008 by · 2 Comments
Filed under: Science, Uncategorized 

This was the title of a recent special issue of Time Magazine

The moment saw it, I immediately recalled the climactic line from the movie Wargames, when the military computer Joshua discovers the futility of nuclear war and announces – “A strange game. The only winning move is not to play”.

I state my view straight up with no sugar on top. Global Warming Alarmism is Bullsh**. It is the greatest scientific embarrassment of the 21st century. I have not yet seen any evidence that proves that human activity has had a significant impact on Global Climate.

Children are having nightmares about disappearing polar bears and living in underwater cities. Billions of dollars are being spent on promoting monopoly money (carbon credits) and the whole thing stinks.

Amongst the most recent stupidities, the great polluting nation of New Zealand has announced that its Kyoto Protocol liability will exceed $1 Billion. Our own Government plans to spend $2.3 Billion of the budget windfall on fighting climate change.

In the process or whipping up this world frenzy, I have seen the following fundamental scientific and logical errors:

  1. Lack of falsifiability in weather predictions
  2. Combining measurements obtained using inconsistent methods, e.g. those used to produce graphs of historic temperature, ice thickness
  3. Mapping a relationship between variables by curve fitting instead of creating a correct model of the underlying process
  4. Retrospectively adjusting models to fit experimental data after abherrations are found
  5. Violating Occam’s Razor
  6. Confusing causation and correlation

To my knowledge, these are the only things that have been proven:

  • We have more Carbon Dioxide in the atmosphere today than we did at the turn of the century, largely attributable to industrialisation
  • Global temperature was in a downward trend between 1940 and 1970 and since then has been in an upward trend.
  • Animal migration and breeding is linked to the weather in a certain area.

I include the following websites that do a far better job of explaining the specifics:

http://junkscience.com/Features.html

Basic Greenhouse Equations ‘Totally Wrong’

I expect a barrage of criticism, so I preemptively will answer the following questions:

What about the Polar Bears stranded on ice?

This is a myth that originated from a widely published photo. Polar bears can swim.

What about the Movie, “An Inconvenient Truth”?

A High Court judge in the UK found that the contains 9 scientific errors covering many of its key points concerning attribution of certain events to anthropogenic climate change.

What about the “Scientific Consensus”?

Science is not a popularity contest. The only valid science comes from the application of the scientific method – you need to have a testable hypothesis.

In any case, there certainly is not a scientific consensus. The following links on Wikipedia describe the controversy and scientists who oppose the “Mainstream Assessment”.

What about the IPCC report?

Short answer: the contributors who disagreed had their opinions suppressed.

OK Mr Skeptic, then, do you believe that CFCs harm the Ozone Layer?

That was genuine science. The ability of CFCs to break down Ozone was experimentally proven, and the presence of CFCs was detected in the upper atmosphere.

In fact, the evidence was so convincing, that the Montreal Protocol that phased out the use of CFCs was ratified by more countries than the UN Declaration on Human Rights.

What has made Global Warming Alarmism so popular?

These are my guesses:

  • Economic rivalry between Europe and the USA
  • A convenient distraction for the UN to cover up its failure to act on Human Rights Abuses throughout the world
  • A way for the Left to attack Capitalism
  • A sure-fire way to attract research funding for academics who otherwise struggle for money

I will update this article with more comments at the next convenient opportunity.

The New Seven Deadly Sins

May 11, 2008 by · Leave a Comment
Filed under: Religion, Science, Uncategorized 

In March, the Vatican official Gianfranco Girotti, head of the Apostolic Penitentiary, named the new mortal sins in an interview with the Vatican newspaper, L’Osservatore Romano. .

In response, I have created my own alternative list of virtues and corresponding sins:

  1. Critical Thinking vs Blind Faith
  2. Logic vs Rhetoric
  3. Win/Win Negotiating vs Zero-sum (Win/Lose) Negotiating
  4. Lifelong Learning vs. Ignorance
  5. Good Hygiene vs Bad Hygiene
  6. Financial Literacy vs Financial Illiteracy
  7. Consistency vs Hypocrisy

This article was sitting on the back burner, and I didn’t want it to get too stale. This list isn’t in any order. I plan to add comments about each when [if] I have time. Your comments and criticism are welcome.

The Case for Public Ownership of Infrastructure

May 8, 2008 by · Leave a Comment
Filed under: NSW Politics, Uncategorized 

Disclaimer: This post is not designed to be a conclusion, but to draw attention to a few things that I feel have been overlooked in the media. I am not a natural writer, so please forgive the structure of this post – I just want to get my ideas out.

The term Natural Monopoly refers to industries where it often considered impractical to have multiple providers. Utilities such as Railways, Power Lines, Water, Sewage and in the past Telecommunications have traditionally been called natural monopolies, but more and more, we see these notions being challenged.

Technological advancements such as Fibre Optic cables and spread spectrum wireless communication have opened up Telecommunications to many competitors, and there are few people who long for the days of Telecom Australia.

The establishment of the National Electicity Market in 1998 and the interconnection of all Southern and Eastern States (every state except WA and NT) started paving the way for private participation in Electricity generation. In NSW, all generators are still publicly owned at the moment.

The other utilities, more or less, still fit the definition of natural monopolies.

Funding
Goverments have a great advantage in that they can raise money by issuing bonds. Government bonds pay lower interest rates than enterprise would have to pay if they borrowed the money from banks or issued their own corporate bonds.

Funds can also be raised by issuing new shares via an IPO, but it likely to receive a cold response unless investors are convinced that there are realistic earnings expectations.

Hence, it is significantly cheaper for a government to fund the construction of expensive infrastructure.

Indirect Profits
Privatised infrastructure can only make money through the direct operation of the infrastructure, i.e. by pricing electricity, water or rail tickets at a healthy profit that is considered acceptable to shareholders.

With public infrastructure under government ownership, the government can still make a net gain, even if the specific infrastructure operates at a loss. If the infrastructure enables economic and population growth, it will lead to increased taxation revenue.

For example, a new power plant could increase the productivity of miners who extract metals from ore (indeed, BHP’s Olympic Dam mine in South Australia is expected to consume half of the state’s supply following its expansion).

New railways could reduce transport bottlenecks, easing labour movement, reducing unemployment as people are more easily able to get to areas with opportunities.

Profitability
Private enterprise wants profits from day 1, or at least as early as possible. There is little incentive for private enterprise to expand infrastructure to an area that is not currently experiencing growth, or may not experience growth for an extended period – e.g. 10 years.

As we have seen here in Australia, Telcos have been reluctant to provide service in the bush and the government has been forced to consider legislation to compell them.

In fact, this can worsen an existing situation where people will move away from an area with poor infrastructure and increase the burden on infrastructure elsewhere, leading to urban sprawl, traffic congestion. As someone who enjoys the convenience of working in the Sydney CBD and having a short rail commute from the East, I would not jump at an employment opportunity in North Ryde, for which I would need to buy a car, fill it up with expensive petrol and maintain it.

Operation of Infrastructure
I am not sure what is the best way for infrastructure to be operated, but here are my thoughts:

Operate Publicly
This is where the government is responsible for everything, including hiring employees. One could expect all the associated problems traditionally associated with government ownership, such as low productivity work culture, and frequent threats of union action.

Lease out the infrastructure to private enterprise
Potential private operators would issue tenders to operate the infrastructure for a given period of time, and would be responsible for day-to-day operation.

The advantage of this is that a bad operator can be evicted and replaced. The disadvantage is that the private operator has low incentive to improve the infrastructure. Any expensive upgrades or technological enhancements would have to be approved and funded by the government.

Other Issues
In order for Public Ownership to succeed, the following would preconditions would have to be met

  • We would need intelligent bureaucrats who know where to put the infrastructure
  • The bureaucracts would have to perform a sensible Cost-Benefit Analysis to ensure that there is a net gain.

Examples of poor analysis – the NSW Cross-City Tunnel and the Airport Link for which ticket/toll prices were considered unreasonably expensive by Sydneysiders. They were only patronised by a fraction of the expected number of commuters, and both facilities have gone into receivership.

Public-Private Partnerships
If handled correctly, these could possibly work, but recent history have shown the State Governments to be have been incompetent negotiators working against their constituents. Both the the failed NSW Cross-City Tunnel and the Airport Link were Public-Private partnerships.

Privatisation is Not for Everyone

May 6, 2008 by · 3 Comments
Filed under: NSW Politics, Uncategorized 

We’ve been hearing a lot about privatisation lately with the Iemma government’s determined plan to privatise the NSW electricity sector (Iemma powers ahead with electricity sale) despite widespread opposition within his own party.

I personally oppose the creation of private monopolies. Consumers realise no benefits from capitalism without the presence of healthy competition.

Another event took place that is likely to steer this debate further:

Today in the media, it was reported that the New Zealand government reached a $555 million deal with Toll Holdings to nationalise its railways. They were originally government owned, but had been privatised in the early 90’s under a previous government.

According to the article, under private ownership, the railway lines have been poorly maintained and many services reduced or cancelled, so the government saw no other option but to repurchase.

Bank Shares

Earlier today, I was asked whether I thought Australian Bank shares are a good investment in current market conditions.

For the sector as a whole, I expect Capital Gains to be subdued for the next few years as our economy is slowing, interest rates are high and people are borrowing less (or paying back debts). Profit growth will be very small, however I do not expect any cuts in dividends.

For individual banks, the situation is not so clear. ANZ has been in the news due to having increased its provisions for bad debts, as well as the OPES Prime fiasco. NAB has also copped some flack due to exposure to the US mortgage crisis. SGB and WBC have done better, both reporting strong single digit earnings increases.

I am not going to make a call, but I can tell you how I would start my analysis – I would examine each bank to determine the proportion of income from each of the bank’s activities, e.g. Retail banking, business lending, wealth management/financial advice and others. Also, I would look at the proportion of income earned in Australia and the proportion earned overseas. I can then make my own judgement on the future prospects of each activity.

Commonwealth Securities provides research from Aspect Huntley on its website. The above information can be found under the ‘Analysis’ tab.

Be cautious about PEG estimates provided online. These are purely guesses made by the research company’s analysts. It is better to read each bank’s earnings guidance in their annual report and use your own critical thinking skills to see what assumptions lie behind them.

For me, banks are now an income investment, as they pay large, stable, fully-franked dividends. I have been holding ANZ and NAB since last year. Do not consider this a recommendation.

Registration enabled

May 4, 2008 by · Leave a Comment
Filed under: Announcements, Uncategorized 

Registration is now enabled. Once you register, you can comment on any article.

No Free Wifi for Sydney

ABC news has just informed that Morris Iemma has aborted the plan to provide free wireless internet access in the Sydney CBD and a few other areas.

I first read about this in MX in 2006, just before the election, and I knew the plan was total BS and a fake election promise to fool the naive.

‘Undervalued’ Capital Notes

Someone I know recently went to an investment course conducted at an evening college.

The presenter pointed out a number of ASX-listed debt securities (often called Capital Notes) that are trading below their Net Present Value (NPV), by between 5-12%. I was asked for my opinion.

For those that don’t know what these are, these are much like bonds – they are normally issued by public companies, e.g. banks/insurance companies to the public in order to borrow large amounts of money, e.g. to facilitate expansion.

Each bond/note that is issued has a given face value, e.g. $100. They pay a certain interest rate periodically for the duration of their lifetime, i.e. 8% per annum for 10 years,  after which the bond matures and the face value is paid back.

The underlying value of a bond at a given point in time is the Net Present Value (NPV) of its future cashflows. We take each pending payment (interest income and the face value paid upon maturity), discount them back to today’s dollars using current market interest rates and then sum them together to produce the NPV.

This is why when the RBA raises interest rates, the value of bonds falls, and if interest rates fall, the bonds rise.

OK, here’s a far better written explanation from Investopedia:

http://www.investopedia.com/university/advancedbond/advancedbond2.asp

OK, so does this mean that if a bond/note is currently being traded below its NPV, that it is a risk-free investment? The answer, as always, is in the fine print.

I checked out a couple of product disclosure statements. I noted the following:

  • One product gave the company the right to indefinitely delay maturity of the bond.
  • One product stated that in the event of the company getting into financial trouble, note holders would rank above shareholders, but below other debtors.
  • Some have other conditions that make returns dependent on the movements of the company’s normal shares.

Such conditions may potentially pose risks and should be factored into your investment decision.

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