Banks of New York

Upcoming... A movie about banksters creating problems not only in new york but all over the world.

Starring Lehman De Caprio, Fannie Diaz & Daniel Day-Stearns. Directed by Goldman Scorsese.

Based on a true story... Keep your fingers crossed folks!!!

Something is wrong with Game Theory

When Banana 1 & Banana 2 are faced with 2 choices of strategies with payoff of either (5,5) or (20,10) , What would they choose?

A rational person would say a payoff of (20,10) is better. Why not, since both are better off. However, wealth is relative. I may have a net worth of $100, but it is not an absolute measure unless I know a population of 100 has a net worth of $10 each.

Base on efficiency, (20,10) is good. Base on equity, Banana 1 is twice as rich as Banana 2. So Banana 2 has in fact become poorer.

Wait, we have not accounted the standard of living. Suppose a GDP per capita in a developed country is $10. This means that Banana 1 can afford luxuries better than Banana 2.

In the long run, there will be a huge disparity between the rich and the poor. If the payoff of (20,10) continues, whereby the demand of goods by the rich increases exponentially every year. While the poor demands are constant, thus meaning that overall, prices will increase, doesn't it makes the poor much poorer in real terms?

I'm not an advocate of Karl Marx and socialism. But capitalism and its advocates have clearly stepped outside the boundaries science. It is a social science, not a natural science.

When Black-Scholes created their formula of derivative pricing, it was mathematically flawless, but LTCM still collapsed. It was that they did not take into consideration of the "Arts" of social science.

The recent sub prime is a clear example on how flawed financial models are. Through diversification of mortgages and after securitisation, they become AAA rated. Only through a black swan event did hell broke loose.

Even Warren Buffett, in an article from Bloomberg today, says that looking at the balance sheet wouldn't tell you about Coca-cola. It is the product.

Well, I have deviated from the main subject again...

OOOBAMA

Obama sees US$ strong, no single world currency

This headline from reuters stunned me for a second and made me burst into laughters. This is clearly an intellectual joke, I hope. He said that the dollar is extraordinarily strong. Yes, true indeed, despite its worthlessness.

As the days goes by after he got on office, the probability of him being a flop gets higher and higher. In fact, I think he actually is.

I believe he will be right when GDP rises again, with high inflation it will be.

Remember that in the elections, his speech was clearly for all the common people. But now, his actions are clearly for the ideals of being a global superpower and for the elites.

This clearly shows an agenda that he got to know after assuming presidency.

'by moving from an era of borrow and spend to one where we save and invest.' - Obama
Where are they going to get the savings? How many decades do they need to reduce their debts? Invest in financial instruments? Maybe America can teach China what are 'provisions for doubtful debts and bad debts'. God Bless America

Bailouts, pumping of liquidity - Realistically

What people don't understand is the conflict of interest between the government and the people. The wants of the people are not the same for the wants of the politicians.

During the USA presidential elections, if you saw the statistics, the majority of funds for Obama was from the city of New York. Realistically, no money donated was without strings attached. Realistically, politicians are more concern with a rich person than a homeless person in the street. Realistically, the politicians ultimately have their own interest at hand - to stay in power.

So, how would a bailout of AIG have helped the american people? Realistically, the reason quoted sounds convincing but is fundamentally not. The reason that it is too big to fail, and that it would cause a collapse of the financial system is purely a scare tactic. The trade-off of not failing is the taxpayer's money. Even if it was bailed out, the unemployment rate would still increase and GDP will still decrease in a rapid downcycle. So the real reason must be that it was too big to fail for the politicians and the elites.

How would a pumping of 1.25 trillion dollars help to ensure credit flow and thus an improvement of the economy? The common people will not get a single benefit. Instead, the taxpayers are the ones paying to support the capitalistic system after they took excessive risk knowing that they will be bailed out. They were incentivised to do so.

If you notice, whenever there is a crisis, the government will definitely help the capitalist. It acts as a middleman in channelling funds from the people to the capitalist., like a ponzi scheme. It is a cruel fact that we pay attention the most to those that gives us the most benefit. But it is a consolation that we can control our focus to the people that needs our help, if we have a heart.

Since the start of civilisation, with different ways of organising people, from feudalism, communism, capitalism, each has been replaced by the later. Capitalism will not be an exception. In my opinion, as the rich and poor disparity widens and grows exponentially till the middle class diminishes, you will see a civil war with a scale as large as the whole world. It is inevitable and is only a matter of time.

Even the once great Rome, the great Qing Dynasty that did not believe that they were perpetual, fall into the abyss.

World War III

I think we shouldn't dismiss this probability of war. I first heard this idea from Barton Biggs, when he published his book in 2007 or 2008.

There seems to be trends showing some signals of an increasing probability. This may become the next non-financial Black Swan event.

A particular signal is the rapid deglobalisation occurring in the world. After decades of globalisation, where everyone depends on each other for growth, a war is a disincentive. However, signals such as the increase in political stances to the left wing are rapidly revealed in the news. One, such as Malaysia cutting work permits by 70% may be a small issue. But massive indicators such as "Buy America" could lead to serious protectionism between nations.

The political tensions between USA and China is increasing becaue of their borrower-lender relationship. The US has been attacking China on their currency valuations. Meanwhile, the US is borrowing more money from China. The US cannot borrow forever but it has to. I do not believe that they can head back to decrease their total debts.

If China stops lending to US, the US can have a massive devaluation of their currency, thus decrease their worth of liability, or, be officially insolvent. This will spark tensions unseen for decades.

Other than these countries, all other countries are also heading to protectionism.

Beware.

Silk - Ryuichi Sakamoto

Market Sentiments

The bad news are decelerating and seems to be in a consolidating phase. There is a possible 2 months bear rally via covering shorts and short term trading opportunity.

If news starts to get marginally better as the days goes by, prepare for the incoming increase in inflation which the market is going to price in, in advance due to government's quantitative easing seeping to the real economy.

If the rally really persist, and if in Oct, there isn't any new lows, or if it hit a double bottom, it is an indicator that the market has bottomed. Equities should trade sidewards for a few years similar to the Dotcom bust that traded sideway until the start of the new bull market from 2004-2007.

Singapore Stock Market

After the S-shares have fallen drastically due to management discrepancies and scandals, the decrease in value shows how much premium we have placed on the s-shares as we still believe in the China growth story. The best time to buy is when there is a discount due to these type of scandals and negative news. Since all these news are somehow priced in the shares, the exact value of the negative news is unknown.

However, we must remember that not all shares are the same. There are gems lying around on the cheap being affected by their counterparts. Those that have the money to invest should take a trip down to their office, factories and shops to get a feel of their businesses.

Why not go back to Gold Standard?

Going back to gold standard is suicide because of the complexity of the financial system. This can cause massive deleveraging and an increase in asymmetric information. Imagine that derivatives are in trillions (Derivatives backed by underlying assets that is backed by dollars that is backed by gold).

Countries with the most gold will have a monopoly on earth.

US gold reserves are worth US$250 Billion, having a debt of US$10 Trillion++. If gold standard is adopted, massive deleveraging will occur. Put it in a T account and you get insolvency. Imagine US$1 in 1930 is worth US$22 today assuming 4% inflation.

The reason why Gold Standard was dropped was because it was rigid back then in 1930s. So current adoption will kill both good & bad financial innovations.