2008年11月7日 星期五

Obama won election + England cuts rate 1.5%

Obama and changes
Obama had ran a inspiring campaign and touched some of the fundamental problems of free market capitalism. Many of his ideas I happen to agree. He talked about an economy will fail if it fails to benefits the working class. Free market capitalism has a big defect of creating wealth inequality. The rich class tax on the poor through interest rate. Let's hope he will stick to his words and address these problem when he become president in January.

Bank of England had slashed rate 1.5% yesterday
Are they mad? Is there any credibility left in these corrupted central banks? This is a perfect example of the corruption in the system. Central banks have collectively become a hedge for corporations. Corporations are using central banks to push up there stock prices when the economy is going down.

Credit crisis and Rate Cuts
What central banks have been refusing to acknowledge is that it is the artificial rate cuts are worsening the credit crisis. All hail BoE bold rate cut, we are going to see a massive credit crunch in England in coming months. They are going to pay for their ignorance. Supply and demand teaches us if there is a price ceiling lower that the free market price , there is going to be a shortage. That is, lowering target interest rate is acting as a price ceiling for money, and the artificial rate is massively under the real rate in a free market, therefore we have a shortage (excess demand) in money. Simple.

2008年10月24日 星期五

Forex Discussions

Let's talk about the recent development on the forex market.

Rapidly Rising US dollar
Less than a month ago, EUR/USD was trading slightly below 1.5 and currently the EUR/USD pair is trading at 1.2579. A 16% decline in a matter of weeks. EUR/JPY is even more volatile, it declines more than 6% today! Spectacular move indeed.

Why is US dollar rising?
Commentators are saying this is because Europe and developing markets are facing the worst of this financial storm and is going to face a more severe recession. Another reason they suggest is that as the US federal reserve rate is already lying at 1.5%, so it cuts must be, to be assumed, lower than the rest of the world. These may have some truth but I think there are other more influencial reasons.

In a practical level, this can be explained by the US hedge funds manager and selling whatever they can to raise US dollar. In the early part of the year, they had earn good return investing overseas. Their collective decision is to choose the denial approach and buying into the believe that their country is somehow safer. They choose to safe face on their past decisions and "sell the winner" is the approach they take.

Let's look at the bigger picture. The world is deleveraging. The central banks are printing money. As money supply increases, price of money goes down and interest rate goes up, however, central banks had just make a united move to cut rate. Smell fishy, doesn't it? Economic science tells us no matter what they do, interest rate must go up.

USD going up is just the prelude.
As the central banks prints money, their existing creditors wouldn't be happy. They don't want to get paid with the new paper coming out of the printer. Print money in itself reduce the real of money. It is a partial default act. So how to make your creditor to accept the printer money? It would be nice if you have a gun on his head right?

Economy will find a way as water will find a crack
Now we are seeing the start of central bank collapses (Iceland, Hungary, Argentina, Pakastine). Several other currency are falling agressively vs USD forcing them to raise rate, like Denmark and Hungary (Denmark hikes lending rate to defend currency). Hyperinflation is already starting in those countries and this is going to intensify and spread to other bigger countries. This will effectively kill US export industry and forcing US to lend more to finance itself. Tax revenue will dry up as corporate America loses money and unemployment stack up. Think the national debt is big now, think again. It is going to accelerate, double itself every few months, until it is no longer sustainable and then......hyperinflation. Different route, same result. That's the beauty of economics.

So long. Dow future is falling 400+ points off the fair value, FTSE is off 7%+ and DAX is off 9%+. It is going to be interesting. Till next time.

2008年10月23日 星期四

Conviction + Wealth Creation is a lie

Current Market -

Dow +105.61up+1.24%
Nasdaq -7.50down-0.46%
S&P +6.78up+0.76%

Oil +2.39 69.14
Gold -7.70 715.00

VIX 66.58

Why starting this blog?
Some may considered I am early to the camp some may considered I am late to the camp. Today, I have, for the first time, come into believe that we are set on path to Financial Armageddon. To better record, this (to be) historic event, I have decided to start this blog.

Through the years, we have been told that investing in a balance portfolio can provide a higher return than inflation. What if that's not true? Portfolio theory suggests that a market portfolio requires a higher return comparing to inflation rate. This is because it has to justify the systematic risks it posses. This systematic risk will one day realize. This is a certainty given a long enough time frame. When this systematic risk starts to materialize, this will create such a force that so powerful that no one can stop it. The will suck up all credit until all the excess return is given back.

Greenspan confessed today that he is "shocked" by the magnitude of the current financial crisis.

Wealth Creation is a lie
Imagine we are living on a bubble. We got paid monthly, well, we think we do. The digits on our bank statement suggests so. During the last 10 years, we saw the value of our portfolio went up, we feel like we are richer. We saw our house value went up, we can get new credit with the appreciation, we think we are richer. Dow goes up, everybody is happy. They call it wealth creation.

Are we really stockpiling purchasing power for products as our portfolio is suggesting? The truth is, there is no product readily available. We had been raising social multiples, making illusions to ourselves that we were able to claim our products in a later date. We are slowly finding out our this future contract (paper money) we are holding is having a high chance of defaulting. The available money is vastly exceeding the productivity this world can ever provide.

As biblical Armageddon suggests, there are signs to be seen before the JD. There are abnormal things happening in the financial market right now. Think about it.

3 preludes in The Financial Armageddon.

1) I have been wondering for days now why the volume is so thin despite the Libor had come down so much. At Libor suggested, the interbank lending rate is now lower indicating that banks should be more willing to lend to each other now. So why that volume is so low? Why we have only a one day rebound? I had believed that as the credit crisis eased, we should have a meaningful rally and the rally should be big, may be a 2000 point rally which, in the same time, bring down the VIX to the 30 range. Obviously, this didn't happen and it is yesterday that I admit i was wrong. Dow was down 700+ points only recover late day and still ending down 500+ points (http://articles.moneycentral.msn.com/Investing/Dispatch/market-dispatches-102208.aspx). This is not normal.

2) Gold has been dropping aggressively. Commentators has claimed this drop is a result of a delevaging of the long gold position which institution had taken. This is not normal as we have seen central banks has been aggressively printing money, inflation that it will invitably cause, in itself, should have provide some support for gold. Also, we have to consider the abnormally high VIX index we have recently observed. As gold is traditionally a fight to safely asset, this make this move extra abnormal.

3) The most dramatic move in currency market in recent year comes on the strong side of US . dollar. This is certain a supprise for people/companies, as we have seen in Hong Kong, major company had been forced to the verge of bankrupcy only have wrongly invested in instructment that is on the wrong side of AUD/USD pair. But, wait a sec, shouldn't the USD be falling? US is at the eye of the credit storm and had been an poster boy on loose monetery policies, plus is currently massively printing money to finance the $700 billion bailout plan. This is certainly abnormal.

Please feel free to leave your comments and ideas.

So long, till next time.