Life As It Goes By

The financial crisis is over now. At least for the bankers. They have the best of years for the past few years. Having received record bonus in the year 2007 before the tumbling of stocks in 2008, which triggered the flow of funds from governments to help them save the free fall. Amazingly, like perfectly crafted plan, the stock market returned to the levels before the crisis towards the end of 2009. The bankers were thrown another lifeline: another chance to bag big money. Once in a lifetime opportunity, some must have felt. Where can you find someone who will give you money to gamble, take back exactly what he or she has lent you and ask no share of your winnings even though they are 2 or 3 times the amount you have lent? There is no way they are going to let go of this chance…

Disappointed? Why should I? I have finally found a certain future for myself. No matter how smart the governments are, they are just politicians. What do they know about making money and controlling the financial systems? It belongs to the exclusive club, only for the most intelligent men. The past 3 years have shown who are made of better materials. Even in the post crisis, the bankers still dare to show hand to the guys in the White House or Westminister. Never once there is a need for them to be on their kneels to beg. Saying sorry in the public costs so much little to the amount of dollars they will get from the bonus. It doesn’t take a financial analyst to see how worthwhile the deal is. Only the fools at the top of the nations think repentance is on the way.

The end is fixed. A sad ending for the bankers is a mission impossible. Sarcastic I may sound here but helpless is the louder voice in me. There is nothing anyone can do to change that. No, it’s not the duty of the God to punish those who take profits for the risks taken. It’s the choice of the governments to pick the jobs of the bankers, rather than the general public to save. Their fears of greater failures have provided the answers to why they made such a choice. And now to save their own jobs, they are thinking of ways to raise taxes (or incomes to the governments) for the majority while keep taxes on sensitive items such as stock markets and currency stimulant.

I have decided not to wait and see anymore. No more disappointments. Now it’s the time to jump on the bandwagon. Join the banks or you will regret for life. Be on the winning side. The line is clear.

A few days ago, Japan Finance minister reassured the position of the US dollar in the world by giving it Japan’s endorsement. It openly states that Japanese yen is not a candidate for the USD replacement. Remaining contenders are Euros, Yuan (unlikely too, as the Chinese has proposed a “basket” approach, rather than a single currency approach) and Special Drawing Rights, SDR from the IMF.

Question is  which one of the above carries the weight that the US dollar holds. It is true that the US currency has devalued though current trading value doesn’t truly represent that (those betting against or for dollar must be having lots of fun now). Having defeated the gold and slowly changing from paper to plastics or electrons, the US dollar has a presence which no other contender do have. As I learn from my ex-boss, history always play a part on the current development. All the constraints we see now could be the effects of the past. The US currency has deep roots.

To replace it, its rivals shall have to begin from the roots. The reason why you can use US dollar in  places where there is no access to the local currency, is because the huge foreign reserves of the US currency worldwide. The person who takes the USD from you can easily find someone else to exchange something for him. In a sense, it’s like gold.

Not only that, many things are priced in USD. One notable example is oil. It is almost impossible to value the current price of oil. If it is to correctly represent its worth, the price of oil will be too expensive for everyone and immediately, another round of world inflation will occur.

It is not possible to replace US dollars in one day. One has to prepare enough pulp or bakelite for the world consumption. Maybe the EU has such capabilities. However, they are not really united on this front. Till today, it still amazes me to see the existence of European Union. Who would have imagined that the colonial powers have gathered and cooperated, after seeing the centuries of wars among them. Have they lost their desire to dominate the world? It’s really hard to say. One thing is for sure though. Too many minds together can be as constructive, and as destructive as they can be.  Adding to that, are the diverse cultural background and historical contraints.

What about Yuan? China has been the topic of the new millennium. It is like it has been away for the past millennium. Its growth is envied by all though typical for all developing countries. The uniqueness about China is its ability to produce, not just for its own billion of consumers but also for the other billions in the rest of the world. Its value proposition is undeniably the best around the world at the moment. However, despite its actual age, China is still relatively young as an economical power. There are still many stages for it to reach before it fulfills its potential and matures. By this, I mean, when the China economy sneezes a bit and the whole world’s economy shakes. Then, the yuan and China are ready.

Having set such a difficult condition, it appears that there is no contenders that can really qualify and we are back to the same spot. We may need more than just a major change. A change that may take decades. Is it worth it? But if we were to keep status quo, we are devaluing our own money in relation to the current world currency of US. If we set appropriate values for our monies, we will face widespread inflation. It seems out of the 2 options, the first is a safer approach. Just like the choice taken by the Japanese minister… The Americans have promised that there won’t be a repeat of the financial system failure we just witnessed. I am thinking how long will this be? End of President Obama’s term? A decade? 2 or 3? The next generation will forget about this naturally and the effects for this time around is not as catastrophic (so who will remember this hard).

If you had bought and sold shares of AIG and Citigroup over the past year,you would not have expected their prices nowadays. Still a distance away from their prime (especially Citigroup), the 2 highly debated stocks have now shifted the bar from SELL to HOLD and now to BUY. Those who had ridden through the high and low deserve to earn a medal or some recognition, at the very least for the confidence they have shown in their choice. They gambled well, almost winning at the very last. Big winners, however, are those who have anticipated these early this year and were busying snapping up the shares.

So you see, this is a true game of fear and confidence. Forget about the fundamentals. Forget about the numbers on the balance sheet. Just remember guts. If you dare to bet against the majority, you stand a really big chance to win it all. And what does this make you? A more daring wagerer which is what the US government is trying to groom now. Here is how you should go about it. Set up a financial institution now (be patient with the gambling first). Obtain government funds to provide loans to those who need it. Be it consumers who need to pay their monthly installments or businesses which need some cash to tide over this crisis. Make some decent gains from the difference in interest. Use this gain to make investments such as buying AIG shares, foreclosures and smaller companies. Do it in a big way just like how you would gamble. When you run out of funds, request from the government and fill it back up again. Post the decent gains in your balance sheet and write-off whatever loss you have gambled away. Remember, just keep a huge turnover figure. Make sure the figure is really huge and grows at an amazing rate. The goal is to be so huge that the government can’t let you fail. Then, they will pool in more funds. Of course, they may take your CEOs away and limit your bonuses. Sit back and relax. The gambles you have made should pay in time to come and they should grow greater than what the government had put into your company. Then, you pocket the remaining (with nothing down in the first place, how’s that?).

No matter how well the politicians play the role of regulators, they still look like idiots when dealing with financial or economic matters. You can’t really blame them; it’s just not their cup of tea. They do share something in common: the guts to gamble big. Team Obama, banging on the success of their earlier policies, is pushing more reforms such as the health care and only to be seriously challenged by the Republicans this time. The fact about how the budget deficit will blow up into previously unreachable level provides enough brake power. From the economic point of view, the only government income are derived from taxes (maybe now from the investments they have made in “national” companies). In any form, taxes are unlikely to appeal to people. It’s like taking the freedom of a soul. However, there is not too much good in printing tons and tons of money without taking income of any form. Some of the states are already suffering from their poor budget management. Raising taxes might be the only way out for some of them. Let’s face it. The government is now sucked dry by the financial sector of the economy.

Again, it’s a question of fear and confidence. If you are confident, you would forsee that businesses would pick up and stock market would hit through the roof again. Then, the income and capital gain taxes would bring in the necessary income for the government. This is perhaps why the stock market has to be as where it is now. Hope is what everyone wants. But the truth is financial sector is not the whole of the economy. It’s just a part of it. Stock market, according to some, is a good indicator of the performance of the economy. A more accurate prediction were to consider the performance of housing sector as well as unemployment rate. Anyway, current performance shown in the stock market received much help from the ailing government. This is perhaps where the fear sets in. If the government had spent on its budget on the financial sector, where can they find the budget to spend on the other sectors? Cutting on expenses in other budgets would help much. What is gone is gone. The TARP funds were meant to avert the Great Depression. The remaining funds (God knows how much) have to be divided among the rest of the economy, as well as the “must-have” expenses such as defense (or war, in this case) and education. This leads to the most feared question, will the government go bankrupt? How do we define that? A few governments have bankrupted before (usually because they can’t repay the loans or government bonds issued) and there are always a limit set to where they feel they can’t go on anymore. What would be the limit in the case of the US government? Definitely, it has to be more than trillions of dollars. Otherwise, they would be bankrupt by now.

Oil and housing prices threaten to rise now that investors with profit on hand (from the stock market) are scavenging around for better, sound investments. The world is actually quite limited though. If it’s not the stock, bond or housing markets, it got to be the commodities. Everyone is so desperate that they would go for anything. Recently, the cheese in Parma like wine in France would be traded. It was told from the newscaster that it is for the benefits of the both sides. And what exactly are the 2 sides? The producers and traders. Yup, you get it right. It’s not you or me, the bloody consumers or tax payers who save the asses of these traders. So this is how they pay back to us: pushing the prices of commodities to the limit, making our lives tougher with high inflation.  What would the government do about this? Or what did they do in the last 2 years? Nothing. Nothing for us. So, please tell me, how can I feel confident at all?

Change is coming and it’s uncertain that who would really benefit from it. We are still learning to adapt to it now. Just like how we saw personnel being questioned by Senators publicly, even in front of the television. Tough questions were being thrown at the “defendants” (if I may call them that) and answers were given. At the end, no actions are required. It’s for the better understanding of the situation and hopefully we can all learn from these painful experiences. You want to know what do I think of this? Complete waste of time. I am not catching another of this anymore. Unless I am hooked again with the reality shows, it’s out of the question for sure. What did it mean when Mr Bernake said he hated the decision to save the “Too Big to Fail” companies and he had done so to prevent a systematic risk from occurring? If the only person who can make the decision felt it that way, what else can we do as commoners? Yes, we should think of ways to help those in finance sector. Without them, we can’t survive. I don’t see any traders paying for my meals or offering me jobs. Instead, I have to thank them for not taking these away from me. I think the Fed is the biggest systematic risk and my greatest fear. It doesn’t want to protect the consumers like us. Instead, it is working with the wealthy to enslave us. With this, I rest my case as this game is too much for me.

Here we go again. The billion dollar question, are we at the end of the recession? Recently, the markets have got really heated up and all of a sudden, recession no more. The first thought that came to my mind was bankers must be busy cashing out their profits now, having booked a record Q2 earnings for themselves. This could save the whole year. But who really want the bull’s run to end? The DJIA has risen from 6,440 to 8,799, a whopping 2359 or 36.6% jump! Everyone who I know is in the market for the past few months is putting up an all-smile face right now. Making money in this worst expected recession makes one feel like god.

I could only explain that this must be the great work done by the Obama administration. The government injection had brought forth an enormous impact on the economy. There is a saying that the performance stock market is an indicator for the economy. It seems like the measures have worked tremendously well, just like the right antidote to the subprime poison. How could they not work? Based on Keynes’ teachings, government spending (like an invisible hand) has a multiplier effect. By pumping few hundred billions of dollars, you would expect trillion of dollars in return. The difference is that these funds are currently spent on a handful of financial institutions. Of course, these funds could be used to invest in the markets. Where else can one find with better returns. There got to be someone out there who might have tightened their belts but with lots of money to spare. Not to forget, there are other government monies around as well. In some of the Asian stock markets such as Hang Seng and KOSPI, things are almost the same as in 2007.

These signals give hopes of recovery and raise overall confidence at the same time. This is natural because if you are not going down, then you must be going up (just like how high and low tides work). The only concern is, will the prices for goods i.e. inflation then go up too? This is what the worried economists warned about: the W recovery. If this is according to what the economists expected, then we would be reaching the end of the first “V” of the “W”. We should prepare for the dive. That would be the case if you are one of the believers.

The thing is economic indicators (there are more than 50 or even 100s of them) are not always forward-looking. It’s true that the reason we use indicators is that history repeats itself and hence, by detecting the trends similar to the past, we shall be able to predict what is to come. However, this is also a self-fulfilling prophecy. Just like in a casino, you can see people scribbling the results of each bet on a piece of paper, hoping to find a winning pattern, whereby the odds (or probability of winning) for each game is the same. Indicators such Consumer Confidence Index have their own limitations. I mean, what does really the index tell us? I feel that the economy is picking up but I am preparing for the worst. So, am I confident or not? It is really subjective and of course, one can overcome this by selecting a large sample size (but then you face the problem of getting focus groups). Well, a wise way to go to get a collection of indicators and try to paint an overall picture. Even so, these telling signs should give an idea of what is going on. You still have to make your own judgment.

As for what I think of current situation, I feel that a turning point might be coming soon (in next 1 or 2 quarters) though the likelihood of going up is equally there. I am more for a “W” kind of recovery, if not “V” + “U”. I believe the government policies are effective and for a certain period of time, stabilization should be sustainable. After that, the reactions to these policies should come. Either the economic growth drives the prices up or the short-term effects of resource re-allocation has lost or expended over time. Interest rates might go up depending on how governments want to act. Those affected by the previous recession will then feel the stress and may shrink their outputs again (however, this is also a simple line of thought as government should also be available for these businesses). When the prices pick up the momentum, I feel the same would apply to the housing sector. Recent gains in stock markets should bring greater long term benefits if they are transferred to housing markets (where there are great bargains). This would help to raise prices further. The need for raw building materials might not be that great as new housing doesn’t look convincingly cheaper than the existing ones.

Raw materials might be used for the infrastructure building programs and if they are imported, it would help the Baltic Dry Index. As for finished product exports or imports, the currency plays an important part.

Thus, if things are looking good, why would I still think that there will a dive in the market after this? My instincts just tell me that things are not really the way the indicators are telling (i.e. I stress again earlier). Just like a person who went on dieting and had some results on slimming down. You can’t really expect the guy to get fat again immediately by stuffing him all the food. It takes time. Now, it’s like the body has adjusted to lower volume of food and it may fail to function well if there is a surge in the intake. It’s just the organic part of the policy implementation.

The economy has contracted much in this 1 year and it seems like, in the modern trends, things will come and go in quick succession. Imagine the current DJIA, who will think of it reaching this point a few months ago. The momentum may keep going till the nature takes its course. The artificial demand created by the government stimuli shall be met by the actual supply. And when this demand vanishes, the supply needs to be shifted to the right equilibrium again.

I hope the economy will continue to grow but I would love to see it going through another round of correction. It will be better for those wounded in this round. Otherwise, there will be no mercy for them. Bigger gaps will be created and faster pace will be set from here. It’s still pretty much in God’s hands, I reckon.

I find it hard to accept when I saw people in the TV, holding up boards stating it’s the death of capitalism.

Merriam-Webster explains capitalism as an economic system characterized by private or corporate ownership of capital goods and … An economic system is a system that he production, distribution and consumption of goods and services between the entities in a particular society. It is the method used by society to produce and distribute goods and services (Source: Wikipedia). It is also a part of the social system.

Hence, we can treat capitalism (market economy) as something on the same level as communism and socialism (both are of planned economy). Perhaps democratic should be used in place of capitalism to reflect the relationship among the three. Yes, one can link capitalism with freedom together. The lack of regulation provides the freedom to the economy and the opposite applies too.

What we see today in the States is the abundance of regulation. Necessity is the reason brought forward for it. I believe President Obama would opt to be more democratic if he’s given the choice. Given the state of things that he was put in charge of early this year, I would say without hesitation that a good job has been done so far. Amazingly, an expected, great depression has been averted. What’s more, the tide seems to be moving to the opposite direction, giving a sense of hope for economic recovery.

I still remember him saying something about change. Wasn’t really prepared for such a huge one. Will lives be changed permanently? I think so. Even though it’s remarkable to see how the US government manage to salvage such a financial & economic crisis, one has to be even more impressed to see how they live on with trillion dollars of debts. And only the United States of America has the ability to do so. The Russians had defaulted before and they are not the only ones. A similar “technical” reset for US may be healthy for the long term.

However, the US dollar carries too much burden. A slight sneeze shakes the world markets. The world needs some “used to” for a cheaper Dollar. Once it is ready, it would look for options. Debasing the US currency will not only lighten the loads for US but also holds the value of the goods and services.

Second reason why a reset would not happen is probably the loss of pride as a leader and the priviledges that come with it. Never before has the pride been at such low levels before. The world is already pointing the finger at the US for what has happened. The lost trusts will take a longer time to recover now. Ties have to be mended and more assurance has to be given.

This is probably why the need for so much regulation. The US administration has to deal with too many issues at 1 go: turning the wrongs to rights, setting barriers to future mistakes and finding ways to the tunnels of light. And all these in a short period of 4 years before the next in line takes over. By the way, sympathy is scarce nowadays. People are running out of patience for what the government can do for them.

One delightful result, out of the half year’s of efforts, perhaps is the level of confidence in the Americans. They begin to believe the worst is over. The government stimulus did play a big part in filling up the holes, making it looked like nothing has happened before. Keeping the jobs has helped tremendously. With pays coming each month, people has the prospensity to spend or even save in times like this. This is the most important.

The anger level has subsided much as well. They are more ready to move on the next level of anger management: to face with their problems bravely. It’s true that those b***tards in the financial sector created all these. Let this be a big-time lesson on greed itself.

Coming back to capitalism, it’s no way walking near its grave. It is the de facto system for economies around the world, especially with the collapse of the communist systems. It only comes to show again that the old, wise concepts of Keynesian economy prove to be economic crisis resilient. Controlling the money supply in a “free” manner doesn’t provide much help. In fact, pegging the currency against other major ones (via swaps) gives more stability.

So, the golden rule is: in time of boom, use “Reaganomics” and in time of crisis, use Keynesian economics. Regulation has to be in place to ensure that things don’t go out of bounds. If not, it would be what is happening now. But then again, the Americans have a funny way of doing things. It seems like they prefer to go in bigger circles each time (From Glass-Steagall Act to Gramm-Leach-Bliley Act). This definitely qualifies for a big part of our lives.

Too Big to Fail? Overused terms in this financial crisis? Does anyone care to explain what this mean really? What is too big (what is really the yardstick to that? Number of employment? Or market capitalization? Or “interconnectedness” in the financial system)? and what is to fail (how to gauge the possibility? how sure is one that it would happen?)?

The biggest insurer of the world, AIG, has bagged more than US$150 billion of government charity at this point of time. Is that the price for not failing? Or is that the reward for getting so big? GM follows closely behind in the queue.

The question is what if… what if the “too big to fail” fails? Here is the counter, “is that possible?” Apart from the US government withdrawing all the help, what are the chances of this happening? A good example of this happening is probably the latest word in town. Bailout payouts for AIG has been distributed to the other financial institutions that are in trouble but kept mum. In other words, these funds won’t really used for solving AIG’s problems (part of which is the payment to these institutions). Will these companies stop extracting funds from AIG? Who, in the right mind, would reject such help in the name of the other? At the end of the day, it’s about who has the better terms in the contract. My guess is these contracts are drafted for emergency use such as default of payment or foreclosure, rather than normal insurance or financial investment. Making payments for such claims would take away what’s available for other types of claims. Pray to God that there won’t be another 9/11 or any disaster in near term… (See what I mean? Even if the Government is willing to help, there would still be a scenario whereby no help can be rendered.)

Of course, this is an exaggerated, lopsided hypothesis. Fear is the last thing that is desired in the state of the world now. More questions would only raise more doubts which in turn reduce confidence and improve the fear level. The US government is taking great bets on recovering this crisis, turning the tides. Aggressive, confident and courageous as always, policies and measures have been taken in a way that no one in such situations have ever taken. Many others have followed suit. The effect though not immediate is starting to show. The brakes have been applied and things are slowing down. Ripple effects can be felt in widespread areas. It seems that the climb upwards will take some more time. This is the time when the winner shall be determined. If one fails to hold on and keeps falling, everything will go tumbling down to the bottom. Then, this will be the time when the big can fail…

The headlines, “Merrill Lynch’s bonuses made 696 millionaires”, hit the world at a time when everyone in the world searches for money while at the other corner, it read “California could lay off 10,000 state workers”. It’s amusing to see how coincidence plays at hand. 10,000 job cuts are to save US$750million this year, $50 million short (from 700 millionaires) though. If I were the US government, I would take back the bonuses and use it to save the jobs in California, at least for the year.

And I would continue the investigation on other investment banks that have fallen, i.e. Lehman Brothers, Bear Stearns and so on. Check the bonuses and benefits in any form they received for the last 2 years and total it up to see if the amount matches that we have lost so far in the subprime crisis. I won’t be surprised if that figure misses by a bit.

I have heard from my friends in financial sector that they would want to retire in 40s and most of their predecessors had done that. Now, I truly understand. I mean the public used to lose money in the stock markets to those smart alecs who got away each recession or crisis with deep pockets. Simply, put the money earned into properties and bonds (Fed’s favourite tool) and make sure you cash-stripped for the crisis. In the boom times, there you go! Everything blows up in value and deeper pockets are created.

The thing is, now, for those who don’t invest money in the stock market got affected as well. Because of company bonds, which companies borrowed from the public through the facility set up by investment banks (who earn commissions at no risk), these companies has to make monthly repayments and in times of poor sales, they would naturally fail to fulfil these. And the only way out is to cut jobs.

Knowing this, you may feel as frustrated as I do over the injustice. I felt like posting words like F*** the bankers and blah blah blah. But I also know that I can’t. In times like this, the richest people are not the governments, lawyers or judges. Yes, you know who the bastards are. I have no more money to defend any case. I have not read Friedrich Hayek’s The Road to Serfdom (which is in my book collection and definitely reading list) but I have feeling we all are taking that path now. Forget about the freedom capitalism promised. It just a big circle back to the same destination. Well, there is still time. Join the financial sector after the crisis (since there are still no criminal laws created for such criminal acts) and make your way up the ladder before the next crisis. You will be rewarded lifelong freedom.