Michaelangelo's David was sent to the USA on a loan tour ....
After two years, David was returned to Italy ....
His Proud Sponsors were:
Thursday, 4 February 2010
Michaelangelo's David Tour de USA
Michaelangelo's David was sent to the USA on a loan tour ....
After two years, David was returned to Italy ....
His Proud Sponsors were:
Tuesday, 2 February 2010
The Real Picture Behind 'China Crisis'
There are basically two groups of investors in their opinion of China's economy. In one camp are those who are optimistic on the economy’s strength and its ability to thrive in an otherwise bleak global environment.
The most recent economic data release showed a sharp rebound in the Chinese export sector has further enhanced the positive sentiment
In the other camp are an increasing number who believe that China’s economic
miracle is nothing but a mirage and that 2010 will be a year of painful reckoning. Some analysts are claiming that China’s growth model is fundamentally flawed and the massive stimulus measures adopted since late 2008 have only intensified the economy’s structural imbalances, which will make the inevitable downside adjustment even bigger. The usual worrying features of the economy such as asset bubbles, “mis-investment”, an inefficient banking system, growing social unrest and corrupt governance - some are predicting an imminent economic crash and even social chaos. Some prominent hedge fund managers have reportedly even begun shorting the “China story” in recent months. Well, for every buyer, there has to be a seller... so the story goes.
Is the economy headed toward a sudden collapse, as expected by the “house of cards” camp? The answers to these questions obviously weigh heavy in investors’ decision making. There has never been a lack of skepticism toward the Chinese economy. Even 5, 10, 15 years back, there were the usual China-bashers and permanent-bears who have been proven wrong over and over again by the country’s enormous economic success and social progress over the past three decades. However, the question marks about the country’s fundamental growth model deserve careful assessment. The core argument of this bearish camp is that the Chinese economy is mainly driven by capital spending and exports, both of which have exhausted their potential. The economy is bound to slow sharply due to a lack of new sources of growth. Or is that the full picture?
While there is always a chance of a major collapse in any economy, I think China is going to chug along just fine. I do not think that China’s capital spending is excessive. China’s capital spending boom has mainly been driven by profit incentives rather than government direction. Those who think that China’s capital spending is terribly inefficient and will face an imminent crash will be proven wrong. If you take the data and extrapolate on internal capital returns on the country's projects - China's figure is very much in line with other developing countries.
Second, one may argue that the U.S. consumer sector has entered into a prolonged period of deleveraging, and that its demand for Chinese products will never recover to pre-crisis levels. However, an important fact is that China’s export market has become increasingly diversified. If you refer to the chart, even though the U.S. remains the largest market for Chinese overseas sales, its market share has shrunk from a peak of 22% in the late 1990s to 17% today. In fact, Chinese sales in some of the nontraditional export markets such as Australia, Latin America, Africa and the Middle East have experienced much faster growth in recent years than sales to other developed markets.
Meanwhile, China continues to reduce trade barriers with emerging Asian countries. At the beginning of this year, China and the 10-country Association of South-East Asian Nations (ASEAN) formally established one of the largest regional free-trade zones in the world.
Over the years, the Chinese authorities have worked to boost domestic consumption in an attempt to reduce the economy’s dependence on exports and capital spending. In this sense, slowing capex and exports should be taken as a positive sign, as it means that policy makers’ consumption-boosting initiatives have finally begun to bear fruit.
The Chinese authorities still have a lot of room to boost growth. Infrastructure in the country’s rural regions is still grossly insufficient and needs tremendous government input. Massive domestic savings and the very low public sector debt burden means there is a lot of financial resources the government can utilize to buy a lot of growth, similar to what they have done over the past year. This kind of growth-boosting campaign is of course unsustainable over a prolonged period of time, but China is among the few countries in the world that are most capable of dealing with a crisis scenario with extraordinary policies – and have a significant war chest to do it with.
Hence we should not see a crash or a major crisis of any sorts in 2010. Yes, the markets will have to experience some bumps here and there, in particular when Beijing tries to tighten the screws on lending and rein in liquidity a bit every now and then - but its for the betterment of the economy, not a noose around the economy's neck.
Currently, the authorities are beginning to tighten policies again. The risk factor is the country’s bubble-prone asset markets and potential damage to its banking system. Specifically, as a result of China’s massive household sector savings and highly pro-cyclical global capital inflows, Chinese asset prices are prone to boom-bust cycles. So far the extreme volatility in asset prices, such as the 70% crash in the domestic A-share market and housing price declines in some major metropolitan areas between 2007 and 2008, has inflicted little damage on banks’ overall asset quality, as the above chart would indicate clearly. This is because policymakers have maintained a significant buffer between asset markets and the banking system - banks’ mortgage lending practices have been very conservative, with a mandatory down payment ratio of 20-40% for real estate purchases. Banks’ direct exposure to the stock market is also negligible, as leveraged investments are not allowed.
Recently, the authorities announced that index futures, margin trading and short-selling in the A-share market have been officially approved. Even though it may take months for these instruments to be developed and deployed, and they are undoubtedly positive in terms of improving the efficiency of the domestic capital market.
Structurally, China’s economic performance will most likely continue to outpace that of the rest of the world. This warrants a more positive stance on Chinese assets over global benchmarks, especially as current valuations of Chinese assets are comparable to global and emerging market averages. Have a look at the chart above on China's valuations - its very reasonable still. From a cyclical point of view, it’s important to recognize that there is a disconnect between a country’s economic performance and its stock market. One does not need to be super-bullish on an economy’s immediate growth outlook to be positive on its financial asset prices.
Stock markets are highly sensitive to policy shifts, which is a lagging response to economic performance. Weak growth leads to policy easing, which is stimulative for the stock market. Similarly, strong growth normally leads to tightening policy, which bodes ill for equity prices. In some cases, good economic news turns out to be a headwind for stocks. Currently, China’s strong growth recovery is pushing policymakers to tighten, a critical juncture that is typically associated with heightened volatility in equity prices. While the Chinese A-share market will continue to struggle in the coming months, investors should not take this as a sign of pending economic troubles. These tightening measures are good problems to have.
p/s photos: Gu Chen
Sunday, 31 January 2010
The Volcker Rule
Despite the mostly good corporate earnings, with many beating analysts' estimates, couple with a surprising GDP perk up in 4Q2009, the markets had trouble turning around the bearish trend. Methinks it has a lot to do with the uncertainty with respect to the Volcker Rule. Although you will find pundits giving many other reasons for the current downtrend. The market got hints that Obama was mulling some banking reforms, and you could see the south ward bent from then onwards.
The NYT had a good article on the Volcker Rule, my comments in colour:
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New York Times / Dealbook: Obama is pushing hard for stricter financial regulation, promising in his first State of the Union address that he would not sign a bill that “does not meet the test of real reform.” This has left Wall Street wondering how much Mr. Obama’s regulatory proposal, known as the Volcker Rule, will cut into its profits.
The proposal, named for Paul Volcker, the former Federal Reserve chairman, would limit a bank’s ability to trade on its own account and would ban banks from investing in hedge funds and private equity funds. It could put an end to the huge Wall Street profit machines that emerged in the last decade since financial deregulation. Some analysts are already offering estimates about how costly the Volcker Rule could be. (Limiting banks' ability to trade on its own account IS GOOD, we are not going to see total prohibition, just a more sensible guide on exposure with respect to capital - now tell me that is not a good thing, but markets tend to discount absolute profits straight away... here we are talking about better quality and less volatile profits.)
In general, most analysts feel that Goldman Sachs has the most to lose if Congress passes some form of the Volcker Rule. David A. Viniar, Goldman’s chief financial officer, told analysts last week that the firm derives about 10 percent of its revenue from proprietary trading.
As such, Citigroup estimates that the Volcker Rule would cost Goldman $4.5 billion in revenue based on its 2010 estimates, translating to a $1 billion drop in profit. Analysts at JP Morgan Chase said the Volcker Rule would knock about $4.67 billion off Goldman’s future revenue stream, but they came to their projection a different way, estimating that the firm would experience a 20 percent decrease in its overall trading revenue.
Meanwhile, analysts believe that Morgan Stanley has less to lose than Goldman, as it shuttered most of its proprietary trading units after it was hit with huge losses in those divisions during the financial crisis. The firm has only two small proprietary desks left, one of which the bank is considering spinning off.
(Well, lessening the power of Goldman Sachs certainly cannot be a bad thing... seriously ... if they are allowed to do as they like and grow even bigger they can dominate the capital markets even more, in particular over the past 12 months where they showed their ability to bounce back a lot faster, but also because they read the markets well and largely avoided the subprime mess. In fact they made money from the mess. So, lessening the power that is Goldman Sachs is not a bad thing - if not, they can be a lot bigger too fast and we are back to the same thing of having something that is too big to fail.)
Factoring in losses from Morgan’s private equity and hedge funds business, Citigroup estimates the firm’s future revenue could decline 3 to 4 percent. Meanwhile, JPMorgan analysts estimate the firm could take a 15 percent hit to its overall trading revenue, about a $2 billion reduction in earnings.
JPMorgan, like Morgan Stanley, also got rid of most of its proprietary trading units after experiencing big losses, so it, too, is not expected to suffer as badly as Goldman on the trading front, but it will still take a hit from pulling out of its $7.3 billion in private equity investments.
Citigroup estimates that JPMorgan’s private equity business generates earnings of 15 cents a share for the bank. Meanwhile, analysts at Morgan Stanley estimate that JPMorgan would have a 3 to 5 percent hit to its earnings over time based on reduced trading and private equity investing.
Citigroup would likely take most of its hit from its proprietary trading units, as the firm is already in the process of getting rid of most of its hedge fund and private equity fund investments. Morgan Stanley estimates the bank’s overall revenue could be reduced 2 to 5 percent if it suffers a 5 to 15 percent decrease in trading revenue. Put in perspective, Morgan Stanley estimates that Citigroup could lose $134 million to $534 million from its bottom line in 2012, based on the bank’s making $3.5 billion after tax in trading that year.
Bank of America is expected to take minor hits from its private equity and proprietary trading businesses. Citigroup estimates that the bank has about $16.6 billion in private equity investments that it may have to get rid of, but that is small compared with its balance sheet. Citigroup estimates that Bank of America generates only 2 percent from that investment anyway, so the hit would be minor. Meanwhile, analysts at Morgan Stanley estimate that the bank’s bottom line would fall 3 to 5 percent through reduced trading activity and private equity investments.
(The reforms would include barring these banks from funding or seeding hedge funds. This incestuous relationship is one that is full of conflict of interests, and will usually result in "insider information trading fomenting", riding on coattails of mega trends, thus enlarging volatility.)
But all the analysts warned that their estimates were based on factoring out earnings from the banks’ wholly owned proprietary trading units and not taking into account trading the banks perform to facilitate client trades.
If the Volcker Rule is narrowly defined to count just trades done purely with the bank’s money, then the analysis would likely be correct. But if the Volcker Rule is broadly defined to encompass all trading that might put the firm’s balance sheet at risk, the banks could face higher costs.
That’s because 90 percent of the banks’ proprietary trading activity is linked to trades made on behalf of clients as the banks make markets to facilitate trades, Goldman recently said in a note to clients.
For example, Morgan Stanley and JPMorgan are large commodity traders, so they take on a lot of principal risk on behalf of clients because of the illiquid nature of that business. If the Volcker Rule is broadly defined to encompass that kind of proprietary trading, the two firms would have to stop performing that service, translating to a big loss to their bottom lines that would be far above analysts’ estimates.
If broadly defined, firms like Goldman and Morgan Stanley could simply give up their bank holding company status and operate without the government safety net — even though both have said they have no plans to do so. But for banks like JPMorgan, Bank of America and Citigroup, which have huge retail banking operations and cannot give up their banking charters, the Volcker Rule fallout could be very expensive in terms of lost profits.
Of course, the Volcker Rule may look very different once Congress gets its hands on it. It is not yet part of either of the financial regulatory packages in the House or Senate, and much will depend on committee hearings on the proposal in the weeks to come. The Senate is expected to take up the issue on Tuesday.
– Cyrus Sanati
------------------I believe the markets have tried their best to discount a worst case scenario for the Volcker Rule, hence downside will be limited from here. Seriously, the corporate earnings figures coming in have been pretty good and the 4Q09 figure tells us a lot of things are panning out better than expected. You may get the markets focusing on some other issue temporarily, but they will always go back to earnings and growth and jobs. Unless you are talking about a bubble or a financial crisis, the markets won't be down for long. The Volcker Rule is not a crisis or a bubble of any kind, its the right things to do to rein in excessive risk taking and bring about better quality earnings, and getting banks to do what they were SUPPOSED to do. Its good, but knee jerk wise, they have wiped almost 5% already and that is already too much no matter how you cut it.
p/s photos: Macy Chan Mei Si
Thursday, 28 January 2010
Must Watch This: The Blind Side
In our cynical world and hardened hearts all around, it was gratifying to watch a movie that lifts our senses. Its a feel good movie but never milks the audience for tears. What makes this so wonderful is its a true story. The other bit which makes it so enticing was that it was based on the book by my favourite author Michael Lewis - yes, the same guy who wrote Liar's Poker, Moneyball and The New New Thing.
Sandra Bullock was amazing in the dramatic role and should finally win the coveted Best Actress Oscar this year. Remember to wait for the credits as they will show photos and video snips from the real life family members of the characters. Quinton Aaron was spectacular too as he brought sensitivity and allowed us to empathise with his character.
The story was all the more amazing as it wasn't just Sandra's character that did the right and noble thing, but that all of her family members got on board as well - and that is not a common thing.
Its a very good movie when it not only entertains but it makes you think about our value system. What is charity, what is empathy, what one person can do to completely change the path and destiny of another, why so many of us only have good intentions but is cowered by what others might think .... Its a very very good movie.
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Review From Inquirer: ADAPTED FROM MICHAEL Lewis’ 2006 true-to-life book “The Blind Side: Evolution of a Game,” the film “The Blind Side” tells the extraordinary story of an impoverished young boy who is adopted and subsequently brought up by a wealthy couple to become a potential star in the National Football League. Although initially perceived as a rags-to-riches story, the film effectively positions itself as a heartfelt yet humorous drama, minus the common themes and elements found in most inspirational stories.
Michael Oher (Quinton Aaron), a homeless African-American young man who comes from a broken home, is adopted by Leigh Anne (Sandra Bullock) and Sean Tuohy (Tim McGraw), a wealthy white family who helps him develop his true potential and character. Oher’s presence in the household leads to several self-realizations by the Tuohy family, including their two children, Collins (Lilly Collins) and Sean “SJ” Jr. (Jae Head).
At the same time, the teen, while living in his new environment as a student and football player, faces an entirely different set of challenges to overcome. With the help of his newfound family and teachers, he works hard to hurdle the obstacles in his life and become a professional offensive left-tackle.
Genuine, nontraditional
In many instances in the film, you may feel the story of an African-American boy being taken in and raised by a wealthy white family may seem too good to be true. But it is this reason—and the fact that character relationships in the movie center around a poor yet innocent young man—that makes the film more magical than the book. One of the factors that make the film special is that Oher, played by Quinton Aaron, is undeniably likeable. Aaron’s seemingly pure and innocent demeanor onscreen enables us to connect with him more in the film than in the book. His relationships with his new family and his genuine amazement at his new environment are believable.
Bullock as Leigh Anne, on the other hand, is able to effectively flesh out a role in which she strikes an amazing balance between a feisty iron maiden and a loving and compassionate mother to a complete stranger —all capped with a convincing accent. But in the film, Leigh Anne’s relationship with Oher goes beyond the premise of a white person rescuing a black man from poverty and despair, which viewers may also perceive.
Their chemistry and bond onscreen result in an authentic mother-and-child relationship which you can easily identify with. What’s truly unique about this film is that it has no clichés or traditional scenes usually found in inspirational and rags-to-riches stories. There is no true villain in the story as the main conflict is Oher’s struggle to overcome his weaknesses, and eventually succeed in life.
While loaded with drama as in the book, the film is genuinely funny, too. For instance, the sudden yet snappy quips of “SJ” are welcome breaks in between Leigh Anne’s emotional self-realizations. As a result, you do not tend to be completely drowned by its heavy drama.
Overall, “The Blind Side” is truly a film that strategically plays on your emotions and genuinely makes you feel good as the credits roll.
Sandra Bullock was amazing in the dramatic role and should finally win the coveted Best Actress Oscar this year. Remember to wait for the credits as they will show photos and video snips from the real life family members of the characters. Quinton Aaron was spectacular too as he brought sensitivity and allowed us to empathise with his character.
The story was all the more amazing as it wasn't just Sandra's character that did the right and noble thing, but that all of her family members got on board as well - and that is not a common thing.
Its a very good movie when it not only entertains but it makes you think about our value system. What is charity, what is empathy, what one person can do to completely change the path and destiny of another, why so many of us only have good intentions but is cowered by what others might think .... Its a very very good movie.
------------
Review From Inquirer: ADAPTED FROM MICHAEL Lewis’ 2006 true-to-life book “The Blind Side: Evolution of a Game,” the film “The Blind Side” tells the extraordinary story of an impoverished young boy who is adopted and subsequently brought up by a wealthy couple to become a potential star in the National Football League. Although initially perceived as a rags-to-riches story, the film effectively positions itself as a heartfelt yet humorous drama, minus the common themes and elements found in most inspirational stories.
Michael Oher (Quinton Aaron), a homeless African-American young man who comes from a broken home, is adopted by Leigh Anne (Sandra Bullock) and Sean Tuohy (Tim McGraw), a wealthy white family who helps him develop his true potential and character. Oher’s presence in the household leads to several self-realizations by the Tuohy family, including their two children, Collins (Lilly Collins) and Sean “SJ” Jr. (Jae Head).
At the same time, the teen, while living in his new environment as a student and football player, faces an entirely different set of challenges to overcome. With the help of his newfound family and teachers, he works hard to hurdle the obstacles in his life and become a professional offensive left-tackle.
Genuine, nontraditional
In many instances in the film, you may feel the story of an African-American boy being taken in and raised by a wealthy white family may seem too good to be true. But it is this reason—and the fact that character relationships in the movie center around a poor yet innocent young man—that makes the film more magical than the book. One of the factors that make the film special is that Oher, played by Quinton Aaron, is undeniably likeable. Aaron’s seemingly pure and innocent demeanor onscreen enables us to connect with him more in the film than in the book. His relationships with his new family and his genuine amazement at his new environment are believable.
Bullock as Leigh Anne, on the other hand, is able to effectively flesh out a role in which she strikes an amazing balance between a feisty iron maiden and a loving and compassionate mother to a complete stranger —all capped with a convincing accent. But in the film, Leigh Anne’s relationship with Oher goes beyond the premise of a white person rescuing a black man from poverty and despair, which viewers may also perceive.
Their chemistry and bond onscreen result in an authentic mother-and-child relationship which you can easily identify with. What’s truly unique about this film is that it has no clichés or traditional scenes usually found in inspirational and rags-to-riches stories. There is no true villain in the story as the main conflict is Oher’s struggle to overcome his weaknesses, and eventually succeed in life.
While loaded with drama as in the book, the film is genuinely funny, too. For instance, the sudden yet snappy quips of “SJ” are welcome breaks in between Leigh Anne’s emotional self-realizations. As a result, you do not tend to be completely drowned by its heavy drama.
Overall, “The Blind Side” is truly a film that strategically plays on your emotions and genuinely makes you feel good as the credits roll.
Wednesday, 27 January 2010
What A Speechmaker ... What A Leader
As I am writing this, Obama is only halfway through his State of the Union address. At a time when Americans have kind of lost track of Obama's vision and "change" mantra, they have a kind of disconnect to the whole thing. At a time when the media cast doubts over Obama's plans to tax the banks, impose new regulations to control them, at a time when Main Street thinks the government is losing its fight to reprimand and teach Wall Street a lesson ... it wasn't easy for Obama.
I have posted on how and why Obama is such a great speechmaker - you can learn most of it, but you cannot learn how to connect. He is not only charismatic, he does not seem artificial at all. In the end, you trust him more because he connects all the dots of your concerns.
Obama's speech is genuine sounding, he made sure that he connected to the everyman in smaller towns, just count the number of small towns he mentioned. He also did not gloss over the realities, that he knows things are not all that rosy, that things put in place are working and that all should be in the same boat.
We have to remember that the media is still largely controlled by Republican-leaning people. In one simple sentence, Obama's contentious tax on big banks gains huge acceptance - when these banks asked for bailouts, and in less than a year are preparing to reward themselves with a huge bonus pool... Obama's tax on them does not seem so bad, especially when it is going to support a jobs bill to create jobs and sustain lending to small businesses.
He did not alienate the Republicans but will put them up to be on the same side to lift the US out of their difficulties. More importantly, Obama has showed all that HE is still very much in CONTROL, that he is still on top of the matters that concerns all, and that he is still addressing the major issues effectively, decisively and continuously.
He punctuates his speech with strong convincing ideas, logic and persuasiveness that is hard to shake off. Well, you can cast a lot of market doubts on Obama government's thrust to reform banking, ability to create jobs, the ability to lift the economy out of the doldrums, and the ability to maintain a stricter fiscal prudence to eliminate deficit ... in one fell swoop, Obama has literally dusted all those concerns off with aplomb and credibility. He reminded all on the cohesiveness of his government's every step and that all actions are working towards many bigger visions for all Americans. I think all market shorts will be running to cover their positions FAST...
Yes, I am in awe again ... this speech is even better than those he made in the past ... even when you know he has the gift of gab, even when you know he is already charismatic ... you still go away feeling you can trust him even more in spite of his natural abilities (which many may use to deceive and con others with).
p/s photo: Choi Ji Woo
I have posted on how and why Obama is such a great speechmaker - you can learn most of it, but you cannot learn how to connect. He is not only charismatic, he does not seem artificial at all. In the end, you trust him more because he connects all the dots of your concerns.
Obama's speech is genuine sounding, he made sure that he connected to the everyman in smaller towns, just count the number of small towns he mentioned. He also did not gloss over the realities, that he knows things are not all that rosy, that things put in place are working and that all should be in the same boat.
We have to remember that the media is still largely controlled by Republican-leaning people. In one simple sentence, Obama's contentious tax on big banks gains huge acceptance - when these banks asked for bailouts, and in less than a year are preparing to reward themselves with a huge bonus pool... Obama's tax on them does not seem so bad, especially when it is going to support a jobs bill to create jobs and sustain lending to small businesses.
He did not alienate the Republicans but will put them up to be on the same side to lift the US out of their difficulties. More importantly, Obama has showed all that HE is still very much in CONTROL, that he is still on top of the matters that concerns all, and that he is still addressing the major issues effectively, decisively and continuously.
He punctuates his speech with strong convincing ideas, logic and persuasiveness that is hard to shake off. Well, you can cast a lot of market doubts on Obama government's thrust to reform banking, ability to create jobs, the ability to lift the economy out of the doldrums, and the ability to maintain a stricter fiscal prudence to eliminate deficit ... in one fell swoop, Obama has literally dusted all those concerns off with aplomb and credibility. He reminded all on the cohesiveness of his government's every step and that all actions are working towards many bigger visions for all Americans. I think all market shorts will be running to cover their positions FAST...
Yes, I am in awe again ... this speech is even better than those he made in the past ... even when you know he has the gift of gab, even when you know he is already charismatic ... you still go away feeling you can trust him even more in spite of his natural abilities (which many may use to deceive and con others with).
p/s photo: Choi Ji Woo
Tuesday, 26 January 2010
My #1 Black Swan In 2010
While the whole black swan thing sounds interesting, how are we to make a conscious effort to incorporate it into our analysis? Let's look again at Taleb's thesis:
... the existence and occurrence of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations. Taleb regards almost all major scientific discoveries, historical events, and artistic accomplishments as "black swans"—undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War 1, and the September 11 2001 attacks as examples of Black Swan Events. To a large extent, the subprime crisis is another prime example of a Black Swan.
"What we call here a Black Swan (and capitalize it) is an event with the following three attributes. First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable. I stop and summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."
Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan Events and are exposed to losses beyond that predicted by their defective models.
Taleb's Ten Principles for a Black Swan Robust World
Taleb enumerates ten principles for building systems that are robust to Black Swan Events (my comments in brackets):
- What is fragile should break early while it is still small. Nothing should ever become too big to fail. (We cannot allow financial firms to get so big that they cannot be allowed to collapse on its own. We cannot allow a domino effect owing to firms getting too big. Big financial firms need to be broken down into smaller units. In that respect, Obama is taking a leaf from Taleb's book by trying to reform some of the banking practices - consumer banking to be separated from investment banking. IBs to have a strict guideline on leverage to be used for proprietary trading and deal management.)
- No socialisation of losses and privatisation of gain. (US banks, insurance firms and automakers are prime examples of this. Malaysia and many other nations have been guilty of this as well. If companies were badly managed, they should be allowed to fail.)
- People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. (The funny part was Taleb putting in the phrase "and crashed it", because if a person drove a bus blindfolded and did not crash it, that person must have very special abilities and hence can be trusted to further drive buses. This rule of thumb points to decision makers who have acted recklessly, e.g. CEOs of many mortgage companies; the rating agencies; even Greenspan ... to be never considered for a similar position. In Malaysia, so many CEOs have proven themselves to be inept, thankfully most were not reckless, but still we need to be more vigilant to engage suitable performers and not to always give greenhorns a go at the top job without a good track record managing smaller units.)
- Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks. (This one is key. We always give incentivised bonuses to managers based on profits or ROE. Take the investment bankers, their bonuses are linked directly to profits generated, and not accounting for the amount of risk and/or leverage deployed. I give you an even better example, which financial firm in the US had the best ROE in 2007 .... you'd never guess it, its Lehman Brothers. We have to rethink how we reward employees, not just in profits generated but also on "safety measures" i.e. no time bombs being created - hence we should include a hefty penalty on cost of capital and leverage deployed on profits generated, plus I would want bonuses tied more closely to "net margins improvements" and staff turnover ratio.)
- Counter-balance complexity with simplicity.
- Do not give children sticks of dynamite, even if they come with a warning. (Many local councils, even government bodies have been left holding lots of derivative contracts which puts their firms at a very high risk, without a proper assessment of the gravity of the exposure. Even firms like Citic got trashed. More regulations should be put in place on the kind of contracts companies can enter into, maybe some firms should never be allowed to even enter into any new fangled instruments unless board approval has been obtained. Accounting rules should have more detailed reporting standards enforced on all companies who have entered into these derivative contracts, so that investors can better assessed the risks.)
- Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence". (This one, I do not agree with Taleb. When consumer confidence is dented to a pulp, we need to have the "spender of last resort" come in to keep the velocity of money going. Confidence is a huge thing, the lack of it translate to risk-aversion. Governments and regulating bodies are not there to always maintain a bullish market, but they are there to ensure that things do not get whacked to both extremes of the pendulum. You have to restore confidence when things got so hairy following the subprime crisis, if not, the social cost could be too enormous to recover from.)
- Do not give an addict more drugs if he has withdrawal pains. (Taleb must be quite against the amount of bailout funding given to firms. I do agree certain firms have gotten too big to fail but there were many that should be allowed to fail.)
- Citizens should not depend on financial assets or fallible "expert" advice for their retirement.
- Make an omelette with the broken eggs.
Why is this a black swan? Most people assume that Japan should not have a strong currency. Its zero interest rate policy has not been working but most will assume that it may go back from 90 to 100 at the most vis-a-vis the USD. The biggest catalyst has to be the mega government deficit that Japan has. Japan being Japan is doing tai-chi on that issue. The tons of fiscal stimulus pumping over the last few years have not budge the economy. The budget deficit is unsustainable.
S&P: The outlook on Japan was revised to negative on diminishing economic policy flexibility, and ratings were affirmed at AA/A-1+. At a forecasted 100% of GDP at fiscal year end March 31, 2010, Japan’s net general government debt burden is among the highest for rated sovereigns. The ratio of gross government financial debt to GDP is already around 170% on a general government basis (i.e. central and local government and social security funds) and is the highest by far among developed countries (OECD average was 75% in 2007). Moreover, the policies of the new Democratic Party of Japan (DPJ) government point to a slower pace of fiscal consolidation than previously expected. Combined with other social policies that are not likely to raise medium-term trend growth and with persistent deflationary pressures, Japan’s net general government debt-to-GDP ratio may peak at 115% of GDP over the next several years.
Many think that the yen carry trade is done by big hedge funds, but there are a substantial number of Japanese individuals who have borrowed in yen to invest overseas. A weaker yen will reverse that trend.
The key here is many think Japan's fiscal deterioration is a given but also note that Japan has a AA long term rating. A catalyst could come from a few rating agencies downgrading Japan, or Bank of Japan engineering (or allowing) the yen to fall. A major catalyst should be if/when they decide to make a landmark decision on how to tackle their outstanding debt. Its a time bomb because the yen's un-natural strength is largely due to the subprime mess but is dragging Japan into a recession if its allowed to continue. The shock could be exogenous (e.g., a rating agency putting a major AAA-rated country on negative watch) or endogenous (e.g., failure to match supply and demand on a major sovereign issuance). These fears actually emerged on several occasions in 2009, but were not amplified by massive sell-offs as occurred in 1994, despite far higher volatility this time around. The actual catalyst may not even have to come in a downgrade of Japan's ratings, it could be triggered by a major downgrade of another country's sovereign rating.
In 2009, downgrades and debt auction failures in countries like the UK, Greece, Ireland and Spain were reminders that advanced economies are not immune to being reprimanded for "poor fiscal fundamentals This year, the "pervasive negative big issues" should be: a weak economic recovery and an aging population, translating to a focus on the increase of the debt burden of many advanced economies, including the U.S., UK, Japan and several eurozone countries.
The weaker yen should happen because Japan does not have foreign currency debt, and the "devaluation" would not hinder their debt absolute value. Key implication of all estimates of Japan's debt is that without increasing the national tax burden (i.e., tax and social security costs)—which is relatively low compared to other major countries—it is impossible to sustain public finances. Unfortunately, raising taxes would curb already weak domestic demand.
Wafer-thin interest rates make it cheap to issue bonds, but the Japanese have decreasing incentive to invest in Japanese government bonds. If Japan must start selling more debt to the foreign market, interest rates may rise to attract any investors. If the market demands an interest rate of anything more than 3.5% then Japan will not have the [tax] revenue to service its debt. Even without a weak economy, Japan's debt numbers are set to get worse because of its aging population and underfunded public pension fund.
Not all black swans are negative events, and in this case, I think the yen can go back to 120 level, literally overnight. When that happens, we will have a chain reaction:
- Japanese stock markets will boom as exporters benefit immediately and companies can be a lot more competitive
- A sharp rise in FDI both short and long term into all types of Japanese assets
- Many Japanese exporters have come to terms with the strong yen over the last 10 years by expanding overseas. The net effect of this yen weakness will reverse the trend and cause more Japanese companies to reinvest in Japanese operations and manufacturing
- BOJ will start to raise interest rates, which will be a good thing really all around
- Exporters in same competitive categories in other countries could see a temporary sell down in their shares
p/s photos: Angelababy
Monday, 25 January 2010
The Hype Surrounding Black Swans
No, we are not talking about the beer. Investors who read a lot would have come across the quite audacious yet thought provoking book by Nassim Nicholas Taleb. You can summarise the book with the line: The Impact of The Highly Improbable.
The Nobel Laureate Daniel Kahneman proposed the inclusion of Taleb's name among the world's top intellectuals, citing "Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events."
Consider these factors: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives. We amble through life, in our careers, personal life, investing, etc... and these are punctuated by "black swans" - the humdrum would not kill you or make you rich and wealthy, its the black swans that turns everything around, be it in relationships or investing.
The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations. In other words, we do not see the big picture but base our decision making process on what has happened in the past.
For those of you who attended my talk, I have spoken on how most of us make decisions: anchor & adjust. That in effect is one way to make sure we will never see or predict black swans in our analysis. When you anchor & adjust, you fixate on what happened recently and make your guesstimates from that point of reference. When Malaysia's GDP growth last year, say was 3%, to predict GDP growth the following year, we would anchor at 3% and make adjustments according to how we view FDI, unemployment, currency, interest rate differentials, blah-blah... Hence 99% of the predictions would be plus or minus 100-200 basis points from 3%. A black swan effect would be tantamount to something like two major banks collapsing in Malaysia overnight, and the resulting GDP growth was a contraction of 8% - now, that's a black swan effect - most did not see it coming because they never figured in our calculations.
Its not just in investing, you can be dating a girl for 5 years and planned to marry next year, and wham, she turned into a lesbian - turning your world upside down, what a black swan.
It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans. Consider the significant events, the technological changes, and the inventions that have taken place in our environment since you were born and compare them to what was expected before their advent. Look into your own personal life, to your choice of profession, say, or meeting your mate, your sudden enrichment or impoverishment. How often did these things occur according to plan?
Taleb appeared to be vindicated against statisticians in 2008, as he reportedly made a multi-million dollar fortune during the financial crisis of 2007–2008, a crisis which he attributed to the failure of statistical methods in finance. Universa, where Taleb is adviser, made returns of 65% to 115% in October 2008 in its approximately $2 billion “Black Swan Protection Protocol.”
While most human thought has focused us on how to turn knowledge into decisions, ... if you follow Taleb's reasoning, we should be more interested in how to turn lack of information, lack of understanding, and lack of “knowledge” into decisions. That is because the world is always a place where information and understanding are lacking in most areas. Knowing that we will never be able to grasp all critical issues is important. The question of "what if" carries with it graver consequences when we know how to ask "what if" properly.
The LTCM collapse, with two finance gurus in the company (Nobel prize winners no less), was very Black Swannish. Using standard deviations and pricing models, they try to extract price differentials when certain factors move in a certain way. They looked at correlation between various asset classes and instruments. Well, the best minds could not explain when things that are supposed to correlate, starts diverging in a big way.
Our system of rewards is not adapted to black swans. We can set up rewards for activity that reduces the risk of certain measurable events, like cancer rates. But it is more difficult to reward the prevention (or even reduction) of a chain of bad events (war, for instance, the recent subprime crisis is a major example).
When our system of risk-reward is not geared towards detecting, spotting or preventing black swans - that put everything at risk. We can get into a very theoretical debate on black swans, but for us who are in investments, how does Black Swans apply to our senses?
The impact of black swans has been enhanced many times over due to the globalisation of markets, as well as financial firms getting a lot bigger and international (and fewer of them as a result). You can be owning very safe stocks with splendid dividend yields in Timbuktu, but due to over speculation in certain asset classes in Eastern Europe, or a maniacal over leverage by some Icelandic banks, you could have a cascading effect which hits at banks, markets, confidence ... leading to a de-rating of emerging markets, smaller currencies ... i.e. risk aversion, nobody wanting to own stocks. Hence your so called blue chips could be halved in value, to no one's fault.
The Black Swan thing should alert us to reflect that we really CANNOT adopt a buy and hold forever type of investing mentality. The markets are so different now, many things are the same, but there are critical nuanced differences now. Black Swans in investing will usually be found in over-leveraged situations, bubble type situations in certain asset classes, sovereign debt defaults, the collapse of a major financial firm, ... You may be just investing in stocks, but now you have to read and follow closer on what's happening or bubbling in other areas as well. Their bubbles will affect you in the end.
There are things we cannot control, that is external to us. We need to stay tuned to potential black swans, even though we may be laughed at initially. Take any industry or markets, think of a few really "upsetting things" can whack them out of the water - these are your potential black swans, then you start ticking things off in your research and analysis to see of any of these potential black swans are about to morph into something sinister.
Do not take things at face value, learn to ask better "what if" questions even when they appear to be silly sounding. Beware of leverage, beware of things like "value at risk" because nobody really knows VAR in reality.
p/s photos: Gu Chen
The Nobel Laureate Daniel Kahneman proposed the inclusion of Taleb's name among the world's top intellectuals, citing "Taleb has changed the way many people think about uncertainty, particularly in the financial markets. His book, The Black Swan, is an original and audacious analysis of the ways in which humans try to make sense of unexpected events."
Consider these factors: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives. We amble through life, in our careers, personal life, investing, etc... and these are punctuated by "black swans" - the humdrum would not kill you or make you rich and wealthy, its the black swans that turns everything around, be it in relationships or investing.
The central idea of this book concerns our blindness with respect to randomness, particularly the large deviations. In other words, we do not see the big picture but base our decision making process on what has happened in the past.
For those of you who attended my talk, I have spoken on how most of us make decisions: anchor & adjust. That in effect is one way to make sure we will never see or predict black swans in our analysis. When you anchor & adjust, you fixate on what happened recently and make your guesstimates from that point of reference. When Malaysia's GDP growth last year, say was 3%, to predict GDP growth the following year, we would anchor at 3% and make adjustments according to how we view FDI, unemployment, currency, interest rate differentials, blah-blah... Hence 99% of the predictions would be plus or minus 100-200 basis points from 3%. A black swan effect would be tantamount to something like two major banks collapsing in Malaysia overnight, and the resulting GDP growth was a contraction of 8% - now, that's a black swan effect - most did not see it coming because they never figured in our calculations.
Its not just in investing, you can be dating a girl for 5 years and planned to marry next year, and wham, she turned into a lesbian - turning your world upside down, what a black swan.
It is easy to see that life is the cumulative effect of a handful of significant shocks. It is not so hard to identify the role of Black Swans. Consider the significant events, the technological changes, and the inventions that have taken place in our environment since you were born and compare them to what was expected before their advent. Look into your own personal life, to your choice of profession, say, or meeting your mate, your sudden enrichment or impoverishment. How often did these things occur according to plan?
Taleb appeared to be vindicated against statisticians in 2008, as he reportedly made a multi-million dollar fortune during the financial crisis of 2007–2008, a crisis which he attributed to the failure of statistical methods in finance. Universa, where Taleb is adviser, made returns of 65% to 115% in October 2008 in its approximately $2 billion “Black Swan Protection Protocol.”
While most human thought has focused us on how to turn knowledge into decisions, ... if you follow Taleb's reasoning, we should be more interested in how to turn lack of information, lack of understanding, and lack of “knowledge” into decisions. That is because the world is always a place where information and understanding are lacking in most areas. Knowing that we will never be able to grasp all critical issues is important. The question of "what if" carries with it graver consequences when we know how to ask "what if" properly.
The LTCM collapse, with two finance gurus in the company (Nobel prize winners no less), was very Black Swannish. Using standard deviations and pricing models, they try to extract price differentials when certain factors move in a certain way. They looked at correlation between various asset classes and instruments. Well, the best minds could not explain when things that are supposed to correlate, starts diverging in a big way.
Our system of rewards is not adapted to black swans. We can set up rewards for activity that reduces the risk of certain measurable events, like cancer rates. But it is more difficult to reward the prevention (or even reduction) of a chain of bad events (war, for instance, the recent subprime crisis is a major example).
When our system of risk-reward is not geared towards detecting, spotting or preventing black swans - that put everything at risk. We can get into a very theoretical debate on black swans, but for us who are in investments, how does Black Swans apply to our senses?
The impact of black swans has been enhanced many times over due to the globalisation of markets, as well as financial firms getting a lot bigger and international (and fewer of them as a result). You can be owning very safe stocks with splendid dividend yields in Timbuktu, but due to over speculation in certain asset classes in Eastern Europe, or a maniacal over leverage by some Icelandic banks, you could have a cascading effect which hits at banks, markets, confidence ... leading to a de-rating of emerging markets, smaller currencies ... i.e. risk aversion, nobody wanting to own stocks. Hence your so called blue chips could be halved in value, to no one's fault.
The Black Swan thing should alert us to reflect that we really CANNOT adopt a buy and hold forever type of investing mentality. The markets are so different now, many things are the same, but there are critical nuanced differences now. Black Swans in investing will usually be found in over-leveraged situations, bubble type situations in certain asset classes, sovereign debt defaults, the collapse of a major financial firm, ... You may be just investing in stocks, but now you have to read and follow closer on what's happening or bubbling in other areas as well. Their bubbles will affect you in the end.
There are things we cannot control, that is external to us. We need to stay tuned to potential black swans, even though we may be laughed at initially. Take any industry or markets, think of a few really "upsetting things" can whack them out of the water - these are your potential black swans, then you start ticking things off in your research and analysis to see of any of these potential black swans are about to morph into something sinister.
Do not take things at face value, learn to ask better "what if" questions even when they appear to be silly sounding. Beware of leverage, beware of things like "value at risk" because nobody really knows VAR in reality.
p/s photos: Gu Chen
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