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Judy
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Points of contention
With all the furore over the financial crisis , variously known as the subprime and credit crisis, blame has been heaped on Wall Street. Let's be clear , this is not an apology piece for  Wall Street , money rarely needs an apology. However, the blame game should not forget that Main Street has a role in the game. Whatever some bloggers may think, easy credit should not and does not push people into reckless, feckless consumerism , credit "abuse" and ultimately debt. That Wall Street compounded the problem with its anything goes short termism is hardly surprising ; with the amount of brains (from the scientific to the financial) in the industry, we have esoteric synthetic investment products, "unmeasurable" asset prices and a failure in risk distribution strategies, all because one little component was missing, good sense; there is way too much money and the greed that chases after it for pure good sense to prevail, even brains are fallible.

The worry bugging some shareholders of banks on Wall Street is that their distressed assets might turn a neat profit when held to maturity.  Look, there's an easy way to prove your confidence; sign on to the  rescue deal only if there is a tacked on clause that provides recourse; i.e. the bank/institution can buy back the asset at a later date (before maturity, preferably at least 6 months) at price x (mid way between the value at which the asset is last recorded in the books of the company and a reasonable estimate of market value, i.e. what the authorities are willing to pay as present value ) with penalty charges (be they some notional interest charge on the taxpayers money used to bailout the firms or a straight charge on the assets) . Or they could prevaricate and watch the organization crash and burn with the said asset. Let's see if Europe has more sense.

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NPL NP/RD
No people, that was not some cryptic code or reference to some unmentionable nor was it some sms abbreviation. It just occurred to me , after reading posts on the same Bradsher article on Mr Pettis' and Brad Setser's sites, that the term that could potentially capture the potential financial crises that China might face in the coming years was NPL, non performing loans or more aptly, non performing or next-to-nothing return on debt investments.

On the level of commercial and state banks, China seems to have covered the bases well, by establishing loan caps and effectively limiting the credit growth trends. However the growing informal loan sector does not bode well nor does the recent scheme to issue debt to fund local government and SMEs. Will China trigger the next financial crisis some years or decades down the line?

For those who read Bradsher's article and have been regulars at Setser's site, you'll be well aware that China's exchange policy and continual investment /funding of what is essentially USA's debt has raised much speculation that the PBOC will suffer enormous losses due to the continual suppression of the RMB and the investment in a debt that's denominated in a currency that's been in decline. That the authorities seem to have no intention of budging from their current course and that disquiet over the [potential losses have been growing throws doubt over the PBOC's funding requirements . Not to mention the fact that the authorities are starting  to look like an obdurate trader refusing to close out a loss making trade in the hopes of it reversing or catching alpha when trends reverse.

Who knows it may work, after all, no one arguies with a central bank, what other institution could you call a market maker if not the central bank

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Busy
Haven't posted in quite a while, was busy with the job and thinking up new ideas. More specifically a personal advertising site that I hope to launch real soon. Probably not a new idea but hey, thought it up from scratch. Let's see what happens.

Interestingly enough, real glad the markets have been going the way I thought they would.

At least, no one else is gonna think I'm some kooky quirk, not that that's anything new?!
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Banks, hide -and-seek and materiality.
Bloomberg has a rather interesting article on off-balance sheet assets and various banks' efforts to maintain their status as such . This is rather worrying ; if they are determined to play hide-and-seek ; investors fears and doubts could multiply. Market analysts like to refer to the resultant sell off as overshooting due to fear and uncertainty. if the gender bias was not so skewed in the industry , analysts should recognize it as part of the female instinct. When your male half starts being evasive/furtive, he's up to no good you don't need to be a genius to know that!

 So what happens? Investors are spooked, erring on the side of caution since the banks obviously aren't, they sell , probably causing more negative sentiment. Hide and seek is cute as a kids' game , not when people armed with the best minds and most expensive MBAs are involved. 

Such news makes one wonder just what the accounting regulators are doing . Which organisation could possibly see a few billion much less a trillion off balance sheet assets  as immaterial.

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Current Music: Natasha Bedingfield - Unwritten

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What words say
Sometimes the words used by differing culture in reference to the same matter reflects subtle differences in politics and philosophy. Marxist writings has tended to refer to the middle class with approximations like bourgeoisie ,reflectring social rankings in terms of lifestyles, attitudes and economic possessions . The Chinese version  zhong chan jie ji refers to the middle class by productive capacity. The academics or literati are referred to as people of knowledge, replace the first 2 words with the chinese words for terror and you have the word for terrorists. The dangers of knowledge, hmm. 

Current Music: James Galway - Adagio from Spartacus (Khachaturain)

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Risk, perception and history

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!

 

 

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Thoughts of a sleepy afternoon
Attended an interview last week and in the course of discussing the usual issues, somehow the topic turned to back office ops and risk management. Unsurprisingly, most people think the aforementioned involves nothing more than stats and quants. That is a sad fact these days but one would have thought with all the lessons the present crisis has to offer , one invaluable lesson is that human interpretation and human decision making processes are an integral part of both ops and , dare one say, the most inexcusable part of the present crisis. Surely, part of the risk involved in all ops revolves around the risk of human misinterpretation and human misdeeds. Not suggesting that companies adopt profiling or aggressive monitoring but some form of both are clearly required; no amount of tests of control or audit would help if the humans involved are the ones creating misinformation or ignoring/misreading information. 


Above all, maybe financial institutions should reconsider those hiring practices which encourage short termism, but what would I know?

Watched The Thomas Crown Affair flor the nth time. Now that's mind numbing fun

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Trouble and potential

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.

 

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Current Music: Madonna- Say Goodbye, Duffy-Mercy

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Plan H

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.

 

 

 

 

 

Current Music: Freiheit-Keeping the dream alive

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Turning point

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!

 

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