In a sense, financial markets have been going through the modern equivalent of the enlightenment; the attempt to classify, measure and solve all matters by quantifying them . The reliance on quantitative methods and most notably models to deal with complex instruments has been an integral part of events which led to present troubles. The quant fan would probably jump in at this point to defend quants by saying that the major failing of methods and models hinged on the fact that the data and limits were too restricted. That is a big failing of all models; too little data, too many limitations and it is very accurate but hardly realistic ; too much data, too many permutations and variates and it becomes too general with a larger margin of error. I'm no luddite, love gadgets too much for that but models are an aspect of technology and science that I'm wary of. Simplistically put, a function of many models is to predict potential movements and changes in variables in relation to the instrument in question from historical data and projections. No doubt they are useful as a guide of sorts but what's discomfiting is how strategies and accounting figures are based on them. Approximations of reality are not reality. When reality clashes with projections , the people involved seem to be unwilling to face reality. Just look at some of the instruments lately and the plethora of excuses coming from the banks.

At least one aspect of the risk matrix involves perception. Perceptions of risk are in part affected by the factor of time, in the long run, risks are greatly diminished. But Keynes puts it best when he says that in the long run, we are all dead. Human perception is limited by the individual's span of time and subjective experience. That's why historical data is valued because it forms an extension of knowledge and experience. Even in this there are potential problems. By extending timelines, points of significance may be diluted. Besides , patterns and trends encourage a false sense of security in events being repeated with clockwork precision; pushing aside all consideration of disruptions to the pattern and the very idea of randomness. By focussing on points of similarity and patterns, important points of difference are ignored and differencess are sometimes the most important element.

In the markets there are, at times, huge differences between theory, logic and reality. The first 2 assume that humans operate with rationality the 3rd/last includes the element of human irrationality and subjectivity . We wouldn't be human otherwise!

Was watching China Money Mind from Monday's telecast. Estimated time lag of 1, perhaps 2 weeks lag from the Chinese telecast. Basically the expert interviewee , Dr Ye, was reporting most of the same stats as Brad Setser and Mr Pettis was some weeks earlier, the 70b growth in reserves seems pretty much accepted. What was different was the PPI which stood at between 16% to 22%. Even more alarming was the highlighting of a contradictory situation in China where hot flows (usually manifesting itself as increased liquidity and increased loans to various concerns) and the lack of liquidity ( apparently, banks are tightening liquidity and even the private loan markets are not providing sufficient loans even when the rates offered are at 22%. ) co-exist. This puts the China situation at odds with the manifest symptoms of the Asian financial crisis. The inability of local companies to repay loans denominated in foreign currency was one of the visceral elements of the 97/98 crisis. China in 08 faces a different situation, the weakness of the US $ and caps on RMB loans seems to have prompted banks to go round regulations by arranging for loans in US $, because the PBoC has been so invested in US treasuries and by that count so vested in US assets and the dollar means the country is trying to gain protection from movements in the US$, whatever the direction. Should the US $ recover, the gains from US$ assets would prevent the Asian crisis from resurfacing, if the US$ continues its slide , well, there's always the export market, cheaper loans and climbing reserves. Those with cause for worry? The people who have poured money into China, overheating and relatively illiquid investments (be they property, factories or disguised investment funds) make for bad exit option environment.

Writing Conversations with L , not verse, had enough of that ages ago, might give preview on this site when it's complete, watch the space.

Here's the 3 minute summary of my business plan/proposal which is looking more and more like a business idea poorly developed . There is already a port on the west of the island and a mainland link (bridge) on the north. Taken together with its own regional airline, the island would be an ideal logistical hub for southern China but more importantly, it could serve as the ideal stopover/transit point along a trade route between Southeast Asian nations, perhaps even India or South Asia) , through China and ultimately to Australia/ the Americas. Going with the free port idea, it could gel well with the industrial park (small by most measures) ; not the usual manufacturing focus but perhaps along life sciences and agricultural lines,the bottomline: not anything that could worsen pollution and threaten the lucrative resort business. The combination of trucking, shipping and air transport would work best if infrastructure were improved, warehousing facilities established and the value chain better structured. Considering that Mr S has an existing stake in the regional airline, he could very well stand to expand interests and potential profitability. Security concerns are well addressed by the naval base/nuclear sub base, amongst other security facilities. Security comes with the vested interests. This might well do for the island what its special economic zone status had promised but not quite accomplished.

Events driven funds are always looking for the turning point, not merely as execution points but also as early indications of when perhaps they might consider executing trades . Perhaps one of the biggest question regarding turning points is when the bubbles in the Chinese economy are going kaputt. Some might argue that they already have, but the hot money inflows data refutes this. Sure there are huge fluctuations but nothing on a "the end of the world is nigh" scale. Along that line of thought, it's not hard to make the jump to the conclusion that the first signs of trouble will be when the inflows peter out (momentum) or when they switch in direction, that is, the numbers start looking to be going in the opposite direction. Perhaps there will be those who argue that that is too late, the tide has turned, but for events driven funds, the betting is by proxy and you're riding on the wave created by others. Wait for the wave.

Disclaimer: any laughable mistakes are attributable to the mind fantasizing about a gammon ham, egg mayo, tzatziki stuffed baguette, starving!