Simon's Simple Solutions

Infation or Deflation: that is the question.

2010-03-21T18:56:00.000-07:00

The whole deflation inflation debate is terrible interesting. Simplistically it is astounding that the debate is about two apparently opposite outcomes. One sort of simplistic argument that I have not heard made often goes like this… In a world where the majority of new money is conjured up by bankers when they make loans how can central bankers engineer inflation when the value of the assets backing the loans are falling in value? The reason this question is interesting is that when banks loan money into existence they do so at a leverage of 10 times. This means the banks are wiped out when the assets backing their loans fall by 10% plus whatever the borrowers initial equity was. When the loans are written off it creates a huge deflationary force.

To me the force seems assymetric to the downside. I could give reasons why but it would be very boring. Marc Faber who predicts hyper inflation uses the argument that you can have inflation in a weak economy just look at Zimbabwe. There are of course many differences between Zimbabwe and advanced western nations. Among them being the level of indebtedness. I imagine the average Zimbabwian did not have a mortgage on his house or massive credit card debt. These things don’t exist in poorer nations. Weimar Germany likewise probably was not a society of highly indebted people. My guess is it is much easier to generate inflationary pressures in a low Debt society than in a high Debt society.

Solution to world water shortage

2010-03-10T00:45:00.000-08:00

I've been thinking about this for awhile. I have been thinking about a giant flexible tube suspended in the sea full of fresh water from a large river mouth somewhere like the say the Indus river leading all the way to somewhere that has not much fresh water like across the Persian gulf to Oman.

When I say large I mean large like say 500 meters in diameter. After all the area of a circle is the square of the diameter so bigger is better.

The tube would be fabricated out of some very tough lightweight material that was also extremely inexpensive. <-humor.

Now I have always imagined the tube to act like a kind of intestine and push the water along the pipe in some way like peristalsis. But I have never had any ideas about how this would be achieved. Tonight I had an idea. My idea is that there should be valves made with be flaps of material spaced at say two or three diameters or some optimal distance. The tube would be tethered at these points. In between there would be lines leading to the surface attached to buoys. The action of tides lifting the buoys would tend to bend the tube forcing water through the valves along the tube.

Of course the number of problems to be solved is huge. Would the tidal gradient be sufficient over a kilometer or so? Would not currents destroy the tube? How is the tube primed to begin with? What happens at either end? What kind of material would be strong enough and cheap enough? I don't have the answers and I'm not likely to find them but someone might. I just like the basic idea of possible a way to move large amounts of fresh water a long way cheaply.

what-the-pboc-cannot-do-with-its-reserves

2010-02-22T13:43:00.000-08:00

Very interesting and important post from Micheal Pettis.

What is Excess Liquidity Good For?

2010-02-22T00:49:00.000-08:00

Here is a weird thing about the carry trade. When central banks provide more liquidity than is need to supply the domestic market with its need for a medium of exchange, (thats liquidity right? the medium of exchange), the remainder can be used to purchase foreign goods or make investments on foreign shores.

That's the origin of the term carry trade. It used to be gold that had been freed up by the advent of fractional reserve baking that was used. After all who would trust paper from a foreign state?

So theoretically all this excess liquidity gets used by the banks to speculate in foreign markets. They just don't need it domestically. Now these are the too big to fail banks that when their speculations land them in the crapper get bailed out by the government effecting a transfer of wealth form the citizens who save to the naughty banks who speculate.

If I were a Japanese saver, and they are renown for it, I would be hopping mad.

Whats Next?

2010-02-08T15:21:00.000-08:00

Finance is so weird. The massive imbalances are obvious to everyone and yet there is huge debate about how they will resolve.

I will try to give my 2 cents worth.

The root cause of the problem are the huge foreign reserves built up by over productive undervalued currencies, and for arguments sake I will lump China and Japan together in this even though their bubbles have occurred many years apart. Both China and Japan have beaten American manurfactures successively on the head. What has kept the American economy going is the steadily lowering of interest rates which I think somehow replaces labor with capital although I don’t understand this. Anyway what is easily understood is that GDP and employment have been kept up in America by using other peoples money (Japan and China) to consume and build. This was enabled by lowering interest rates and facilitated by the creditor nations through their willingness to lend at those rates.

Now it looks like this process is coming to an end and I think that we should not look to the past twenty years as a guide to what will happen now because there are too many differences. Globalization is now pretty mature. Accordingly and to make my argument as simple as possible the world should be considered as a single economic unit and now I’m heading in the direction of Reinhart and Roghoff sp? although I have not read their book. But consider this. The savers of the world the Chinese and Japanese have nice looking credits on their investment statements. BUT the statements ultimately represent loans made to their governments. In the case of Japan much of the loans made by the people to the government were spent by the government in Japan to prop up the economy for the past decade or so. In the case of China the loans made to the government have been used by the Peoples Bank of China to buy US treasuries in order to maintain their currency peg.

So globally what we have is a situation where vast amounts of private savings have been entrusted with domestic or foreign sovereign debt programmes and probably all somehow leveraged 10x. Well! you might say what is so unusual about that! And I would say nothing except that the debts are so large and are sustainable only at low low interest rates. I would ask what happens if there is a crises of confidence in sovereign debt?

Remember how subprime was going to be so easy to contain? Lets hope that the emerging sovereign debt crises in member countries of the EU IS contained! The possibility of a global sovereign debt crises is to horrible too imagine. We won’t be merely worried about capital gains or losses on our bonds. Return of funds in a stable currency may be of a greater concern. Crikey now I’ve got myself all worried again.

Feel free to correct criticise or enlarge.

China's Foreign Reserves

2010-02-05T15:08:00.000-08:00

Right let's see if I can get this straight as it seems like a very important concept to understand. China's foreign reserves are netted out on it's central bank balance sheet by a corresponding debt. How has this happened?

First thing that happens is China produces widgets that America likes and sells them profitably to. In return the widget maker is given US dollars which he sells and purchases Yaun with. The important point here is that because the widget which was created by labor has been made profitably it results in a net increase in demand for Yaun which would normally cause the Yaun to rise and assuming the US does not do better in it's trade with any other countries the $US dollar would be inclined to fall.

The China central bank notices from it's elevated perch that the profitable manufacturers are driving up the value of the Yaun putting the breaks on it's economic growth. In order to prevent the Yaun from rising it sells Yaun and buys US dollars. But since it did not make anything in a profitable way it must create a corresponding debt on the other side of the ledger or print money to purchase the $US.

There you have it. I think.

Of course there are other processes occurring at the same time. Such as money formation at the regional banks in the form of debts and credits to fund the manufacturers expanding factories. Artificially low interest rates to tax effectively tax savers and help capitalize banks. And using similar methods to the federal reserve to expand it's balance sheet and encourage lending as part of it's fiscal stimulus measures.

Here is a better explaination fo China's foreign reserves by Hua Qiao from

http://mpettis.com/2010/02/never-short-a-country-with-2-trillion-in-reserves/#comment-4827

Chinese exporters sell to US consumers for dollars. China, through the PBOC and SAFE (State Agency of Foreign Exchange), controls the Yuan by being the only market agent for that exchange, currently pegging the Yuan at 6.83 for every dollar. So for every $1 tendered, the exporter gets 6.83 RMB deposited into his bank account.

PBOC takes the dollars, transfers them to CIC or some other investment entity, and invests them back into vehicles in the west, typically treasuries. They could sell the dollars in the world market for some other currency. They could buy physical assets with the US dollars. But China has to date, bought principally US Government debt.

Back home in China, the PBOC must effectively print more RMB to cover the deposit, increasing the money supply. If they want to offset the inflationary effects of that increase, they issue sterilization bonds which they require the banks to buy. They were pretty much doing so up until 2008 when they stopped.

So, are these foreign exchange assets wealth? Probably not the right question to ask. Clearly, the reserves are an asset that China, as a country, can use to project its influence on the international stage. But that asset comes at the expense of improving Chinese citizen’s lot at home. If the increase in RMB supply is not sterilized, then inflation will eat away at the value of those deposits the exporters and hardworking laborers have stuck at the banks. If the sterilization bonds are issued, then the government is essentially directly borrowing those deposits from their citizens to “invest” overseas.

FX reserves are an asset, just like anything else. However, they represent a redistribution of income/wealth. China is sort of rearranging its national balance sheet. So the Chinese consumer cannot enjoy the fruits of his labor as much as he should because his cash is stuck in low yielding deposits and some of the foreign goods he would like to buy are prohibitively expensive because of the undervalued RMB and also the import duties on foreign goods. Try to buy a REAL set of Ping golf clubs, or a foreign produced car, or imported perfume, foreign vitamins, or foreign makeup or foreign wine here.

As long as you have a pliant population, who you can feed a constant flow of propaganda that their country is well off, the government is working hard for them and tomorrow will be better than today, then they tolerate the hidden costs and the forced savings.

The New Normal....not good

2009-10-15T20:34:00.001-07:00

It all boils down to the fact that if a lot of people are getting rich and are not producing anything then the production economy MUST be paying some how. Lets count the ways.. no lets not there are too many.

This is the failure of capitalism. It has put the ability to destroy productivity and get rich at the same time into the hands of the finance industry. Is this good? not really. What can be done? I don't know. But if someone comes up with a way to defeat them and improve the lot of the productive sector they will deserve to get very rich indeed.

Back to Reality

2009-07-23T19:55:00.000-07:00

In my opinion the latest rally is very much unlike previous rallies. I agree that a correction is certain but an off the cliff correction? That outcome is losing credibility. Now I might be the perfect contrary indicator but then again I might not. The chances may be exactly 50:50.

However I am beginning to think that something has fundimentally changed. The change in my view is at the Fed. I am beginning to think that the smile on Bernanki's face may have to do with things he knows and the rest of us don't. After all we do not really know what he has been doing except in a general way do we?

For example take the 500 Billion in currency swaps that the Fed has on it's balance sheet. Where exactly did that money come from? The US was not exactly replete with liquidity at the time those facilities were arranged. OK there was a flood of money returning to the US in the "flight to safety" hence the need for the swaps.

Anyway by making those swaps the Fed has demonstrated that without a doubt it is the central bank and lender of last resort to the entire world. Or at least potentially so, certainly with regard to the 14 nations that were the lucky recipients.

The point of the swaps was to improve global liquidity. Is it possible that this and other actions have actually improved global solvency by currency debasement on a truly magnificent scale? Worth thinking about in view of supposedly irrational market action around the world. Is it possible that the market is actually being quite rational on this occasion. Is it possible that some sophisticated recipients of massive liquidity from the Fed are better informed about this process than the rest of us? Endless questions.

Audit the fed. Actually abolish the fed it sucks that action on wall street can cause the world to spin.

My Very First Simple Solution, I call it Simon's Simple Sock

2009-05-21T14:47:00.000-07:00

See previous post as to why this is the first.

Last night I observed my wife browsing images of shoes sold on line and I thought who on earth would order a shoe they could not be sure would fit. And I wondered if there was not a way to match foot to shoe without foot and shoe being in contact. Viola! the solution appeared in my mind. Simon's Simple Sock!

What you need is a tight stretchy lycra sock with small sensors closely spaced all over it. The sensors triangulate their position from three reference points. For example the toe, some where up the ankle, and somewhere half way in between the the first two. The sensors are all hooked up to a long cable leading to a USB port on your computer. Software generates and analyses the contours of your foot. A dynamic sequence of shapes may be generated by walking around in the sock or even inside similar shoe that is comfortable.

The data is stored in a file and compared with the data generated by a person or machine that wore the sock and fit the shoe generating a similar file which would be stored on the website of the shoe vendor.

A shopper determined to purchase a shoe that did not fit or would be uncomfortable could be warned where pain was likely to start and accept that they were purchasing a shoe with a low comfort rating for them.

There you go! Simon's simple sock for on line shoe shopping. You heard it here first.

My sympathies to the partners of compulsive shoe buyers.

Summary

2009-05-21T14:37:00.000-07:00

I started this blog because I wanted to record all the "silly" ideas I get somewhere. The trouble is I got seriously side tracked by the emerging financial crises and my interest became understanding macro economics finance and trading.

My feeling is that the new global trends have now emerged so its less difficult to understand what's going on. In a nutshell in my opinion so called decoupling is now occurring in earnest. The US economy will follow a trajectory similar to Japan's lost decade and the BRICS led by China will emerge as the new economic power houses. I don't know what will happen in Europe.

This does not mean the end of my inquiry into the markets and economics.

Where to now?

2009-05-03T17:18:00.000-07:00

Just eyeballing the charts shows that there is a huge space between where an orderly bear market would have gone and where this one went. In other words symmetry seems to imply that this short covering rally could go on a lot longer. Also the impetus for the down legs has been coming from the banks and the banks can now hide there losses for a good bit longer.

I see this rally continuing as the real economy improves and then deteriorates again in a less steep downward direction. After last years massive moves and the recent rally the market could just consolidate in this area gradually working higher in small steps causing more and more pain to the bears.

I think the thing that could cause the next leg down might be accelerating unemployment figures and social welfare costs. Increasing government cost and decreasing tax receipts will cause the administration to turn on the banks and say no more. A look at seasonal charts to see when this might occur could give a handle on timing for the next leg down.

International Reserve Currency

2009-04-14T03:22:00.000-07:00

My feeling is that People’s Bank of China Governor Zhou understands what as happened and believes that China’s export growth model is unsustainable, as it clearly is given it’s target markets no longer exist. That is why he has suggested a managed international currency such as the SDR. He is looking forward not backward.

Governor Zhou writes;

“And when a country’s currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.”

This may have no relevance but here in New Zealand our central bank was concerned about inflation and the high rate of growth in house prices. It tied to slow these down by increasing interest rates which just didn’t work. All it did was encourage currency speculators to buy our dollars and push our currency value up. The banks never had any trouble lending the money out although they are probably having second thoughts now.

The high interest rate - high currency problem caused our exporters major pain at the same time. So the hopeless situation arose where the most worth while investments were unproductive ones like housing loans and auto loans etc.

The central banks monetary polices were ineffective and in many ways exacerbated the problem. rising interest rates encouraged currency inflows and reckless lending.

If a controlled international reserve currency allowed exchange rate policy (read interest rates) to be more effective in adjusting economic imbalances this would be a terribly good thing in my opinion.

Magnificent Screw Ups

2009-03-31T01:22:00.000-07:00

In my view if you want a truly magnificent screw up hand a job over to the “smartest men in the room”. The truly smart would say no to the job understanding its responsibilities. The “smart ones” will figure out how much they can extract and walk away from an unimaginable mess.

I do believe that engineering inflation may prove to be a somewhat difficult task, simply because of the rate of credit destruction and the lack of opportunity for credit creation.

I’m sure some means will emerge but I think we may have to see some truly spectacular efforts first. Of course the spectacular efforts will need dire reasons. Therein lies the rub.

Macro Economics... Don't You Just Love It?

2009-03-19T01:59:00.000-07:00

This macro economics thing is brilliant! It's really really important and yet you don't need to do any hard maths, you can do it all in your head! A bit like theoretical physics which is also fun.

So Mr B. wants asset prices to stop falling. So he makes money really cheap and then promises to print it. Basically he's saying... You don't want your money to become worthless? Then you better buy something solid with it pretty quick.

Well that worked! The dollar dropped gold popped. We are back on the old familiar course are we not? A dropping US dollar means greater global liquidity and rising asset prices at least for the next few days or weeks perhaps. That means bank stocks rise and their capitalization improves enormously as the doggy doo in their sieves and spives starts to look better.

It's all good no?

Wait on there an minuet... If you have a 200k mortgage and you are able to save only 5k a year its still going to take you 40 years to pay it off and if you are 35 or more that is pretty grim is it not?

I know about the 5k thing. For quite a while I though I was doing well saving even that much. Come to think of it I still think it's not that bad going.

But back to the macro economics thing. GDP= 14 T give or take. Aggregate debt to GDP is 3.5 times giving total debt TD = 49 T. Banks are leveraged about 10 times so actual deposits are about 4.9 T. So there is say 44T of Credit that has been taking a serious hit in the form of losses and write downs. What would be interesting to know is how fast that amount is decreasing. Then we would be able to compare the stimulus the Treasury and the Fed are providing with the bush fire they are battling.

Is .3 or.6 or.9 T in quantitative easing a fire hose or a garden hose in comparison? Or was the intention of the proposed easing a head fake for Mr Market?

Three percent of 44T is 1.3T. Don't ask me why three percent, it just a guess, but that would be quite a high loss for a bank wouldn't it? That kind of makes .3 or .6 or .9 Trillion seem a decent amount in comparison.

Sorry to bore you while I think it through.

Great Depression differences than and now

2009-03-15T16:07:00.000-07:00

A major difference is the absence of the gold standard.

But the total Debt to GDP ratio is higher now than it was then isn't it?

And how can the FED "print" the amount of money that is required to "beat" the rate at which credit money is being destroyed?

I'm sure there are complex forces at work and the out come is far from certain.

I guess its a bit like paddling a kayak near the edge of a waterfall at some point the current will become swifter than you are able to paddle meaning that unless you can make it top the side of the river no matter how hard you paddle you will be going over. That point would be the tipping point.

Have we already reached it or not?

Using the river analogy the FED in this case has slowed the current as much as it can by lowering interest rates to near to zero.

The challenge then is can the FED keep the interest rates that low?

In that context it would seem that if the major creditors to the US keep buying US debt and not selling it, the FED can keep interest rate low. If on the other hand the market for US debt gets jittery interest rates may rise causing those battling debt burden to have to paddle harder. Ultimately should the US treasury overtly print money the value of the US dollar will plummet.

Inflation would soar. Interest rates would soar. And so would many equities and esp commodities and gold.

An important first clue would be a massive rally in gold and a fall in the US dollar. This is what everyone is watching out for.

Whats with this term savings glut?

2009-01-10T19:21:00.000-08:00

I just don't like the term "savings glut". It's really an oxymoron. How can you be a glutton for savings? To save requires characteristics opposite to the of gluttony. The glutton was the American/Western consumer.

Why did developing nations save? To secure their future surely? We all want to be able to save it helps us get ahead in life or to make a necessary investment such as for education health or business.

Developing nations do not typically have much of a social safety net. Savings become imperative to provide a personal safety net.

Did western consumers have to borrow? They did not. I borrowed to buy a house that I did not expect to increase at all. I thought I'd payed too much in 2000. It doubled. I still wanted to be debt free and in fact was troubled because every other house had also doubled making the transition to a larger one more difficult.

Every where you look there has been a credit feeding frenzy. The Chinese also borrowed to invest in the stock market or to engage in American style capitalism. Many became rich.

Now many more are becoming poorer. It may be a natural processes at work but it seems wrong to me.

The Great Big Currency Bath

2008-12-17T13:42:00.000-08:00

This rally looks horrible. It looks exactly like the one that ended in May and the one that ended in August.
The out look for future earnings is awful. Who are going to be the buyers this time round? The Government?

The Government debt is horrible too and promised to get much worse. The smart money people are the people who still have money. The people who have it are getting fewer and fewer and smarter and smarter. They long since gave up listening to the FED or any other marketing agency.

As for currency there is so much uncertainty about how that is going to pan out. I propose a very large wide range trade as opinion ebbs and flows in the gigantic international Bath with liberal quantities splashing out at each end. THose left with money when the spashing stops will be the lucky ones.

Hey I like that analogy. Think of Trichet and Bernanki as two infants in a Bath playing with the resonant frequency of sloshing water and seeing how much they can empty out each end.

Fractal Discussions about Economics

2008-12-11T12:24:00.000-08:00

The rest of the world is a large place and demand can occur from anywhere within it.

One of the things I find interesting about discussions about economics is that they can be kind of fractal in nature.

They can be incredibly broad and simple or incredibly detailed and complex and still reach the same conclusion.

The Boomer Bust

2008-12-10T18:07:00.001-08:00

I've had a theory for a while now that goes like this.

There obviously needs to be an intergenerational wealth transfer. The boomers are essentially selfish so they'll try to keep as much as possible for as long as possible.

Unfortunately their market is much smaller then their supply. We saw equity heights reached as boomers flooded through the system bebinning in 1980's. We will see equity lows as boomers roll out the other end.

Why the lows? Because the market is younger productive people who are earning but can't afford the Boomer asetts. The prices must drop. Especially because the boomer boom was massively credit fueled.

Of course massive wage price increases would achieve the same thing.

US Carmakers

2008-12-09T13:08:00.000-08:00

He's a metaphor, The Carmakers are like your aged and ailing granny. In their youth they were the greatest in the world they spawned, if thats the right word, many many children and established a highly competitive and innovative society, their children had children and the society grew and prospered. Now they are in the twilight of their days but they deserve recognition for what they have achieved and to be well tended and nursed and comfortable in their twilight hours.

One of the tenants of civilized society is care for the young and old. Unfortunately our society is held hostage by the banking Marfia. They have persuaded us that either we keep them alive or we all die.

A Thesis about US bonds

2008-12-04T14:57:00.000-08:00

Investing is about the correct allocation of capital. If stock are going to zero that is not the place to be. You may need your capital to start an new business and employ those who are out of work and have no money. Even if its just running a poor house.

A thesis re; Bonds. Global sell off in equities, commodities and real estate. Dollar hegemony therefore you receive dollars. What to do with your dollars when every asset prices is falling and the Dollar is rising? Keep your dollars in a safe place. Hence treasuries go to zero.

What happens next? Sell off continues much longer than anyone thinks cause that just what happens refer to Soros and reflexivity. Dollar goes much higher ( a bad thing) but notice how gold holds up. Out look for debtor nations gets worse and worse. Central banks efforts to stimulate result in lose of confidence in currencies. Equities rally because there is no where else to put your money. Gold rallies as the dollar sell off finally reccomenses. Worsening economic indicators cause the wave five sell off to finally start. Gold and Silver skyrocket.

US Defaults or currency hyper inflates. A new global currency regeim is established which includes partial baking with gold and maybe other commodities and land. The purpose of the new currency is to finance massive renewable energy and farming projects and infrastructure developments.

OK it just a thought. I hope it doesn't happen quite that way but history does have a habit of containing massive upheavals somewhere along the line.

Energy and Economy

2008-12-04T01:11:00.000-08:00

I did not see a financial crises coming. What was obvious to me was that in a growing global economy supported by oil as its primary energy source the end of increases in production would cause great disruption.

What I didn’t understand was that global growth was being sustained artificially by credit expansion aimed at unproductive enterprises. Housing and Banking. Now we have a situation of large oversupply of goods and services.

So we hit peak oil all right but we hit it early due to an overstimulated global economy. There are now severe headwinds to global growth. Dept that needs to be paid down. Retiring Baby Boomers. Economies in India and China that are focused on markets in Europe and US that will not reappear any time soon.

Western nations are the ones that consume the most oil by far. India and China were catching up but mainly on the coat tails of indebted western consumers. That dynamic is now finished. The central banks will do their utmost to jolt the patient back to life but they may not succeed this time.

Should interest in credit be reestablished and credit growth and economic growth resume with any strength the immediate consiqence will be sky rocketing energy prices. This will effectively be the governor on global growth until debt is paid down and alternative renewable energy sources are developed.

This will take a long time. At the same time there will be cultural and technological changes. Changes that will alter peoples interests and ambitions. Changes that may see demand for oil never actually exceed supply for a long time.

Learning in the Context of the Internet

2008-12-03T13:21:00.000-08:00

Before the credit crises really took flight and the market was still down only 15% or so there were some interesting discussions about education and learning in the context of the internet age.

I can happily say, that since about August 07 when I found the website for a guy, Brain Shannon, who was posting really useful trading videos on You Tube under How To and DIY, linking to this website, that I now know all about VIX, TED, Libor, CDS, ABX, SIV, TARP, QLD, QID, Fuld, Jim, Marc, Ben, Roubini, Krugman, Galbraith, Dick, Tom and Barry.

And I’ve never been any where near a business school.

Actually all I know is that I have a lot more reading to do before I will really know anything. But I do know who I’m going to read.

OK it cost me some time cause I’m a working man but it sure hasn’t come close to an ivy league business school fee. Yet.

Who can spark a sustained recovery?

2008-12-02T13:12:00.001-08:00

Sure there is side line cash but is it the sort that will fuel a sustainable rally? Not in my opinion. It is speculative cash that is part of a large game. It is not motivated by long term gains in productive enterprises, it is about out playing its counter party. It wants only to be on the winning side be that long or short.

Earnings are the key to attracting the long term holders that will spark a sustainable rally. With the world economy on the ropes and the largest consumers in the world tapped out, as Nouril Roubini, says who is going to be the consumer to create the earnings? The government?.

Storm clouds? Sow some seed.

2008-11-27T14:38:00.000-08:00

Some bad news today. Five Kiwi's dead in a plane crash in France and a terror attack on the Taj Mahal hotel in Mumbai.

It was a large Air New Zealand plane and it would have killed a lot of people if it had been full. It wasn't, only five aboard. That's a lucky break, but very sad for those affected.

The Mumbai attack has serious global stability implications. If you believe journalists from Strafor it has the potential to set off a major confrontation involving three nuclear powers. US India and Pakistan.

Is the world more vulnerable to conflict during an economic slow down? Yes of course.

Is this natural human response to stress a good one? No of course not. It just makes a bad situation exponentially worse.

What would a good international response be to this situation should it show signs of escalation out of control? To help those who are hurting most. Redirect a little of the money being funneled to those dirty fat bankers who caused this mess and send it into Pakistan. Make a little economic stimulus happen where its needed most.

Politically this would be totally unacceptable as it would be seen as rewarding the culprits for their audacity. It would however undermine the support base of the desperate people who are responsible.

The trick would be to find a clever way to achieve the outcome without the appearance of appeasing the source of the violence.

Nationalization Finance and Energy

2008-11-25T17:43:00.000-08:00

The continuing nationalization of debt is a huge trend. Where does it lead? What are the implications. Is nationalization in general where we are going. Whats next? Energy reserves and production? To me finance and energy are inextricably intertwined since debt can be seen as a demand on future labor which must be fueled either by calories or BTU's. Life is in fact a competition for energy. Money is effectively a form of stored energy. Who will finance future energy projects?

I'm Dense about Dollar Hegemoney

2008-11-25T15:57:00.000-08:00

I must be dense it's taking me so long for me to fully realize the significance of dollar hegemony. Of course the US won't default. It's their currency they owe money in they can just print it!

Financial crises ....sell assets ...which currency do you receive? $US...dollar appreciates even though arguably the center of the problem started near the New York Federal Reserve.

This is so weired ...I mean how often do you get a situation which repeats like this one might? The trade which has just broken down is short $US long commodities. That seems to be just the trade to reset. Maybe just gold at first but later all commodities again....

Its a gift isn't it?

Financial Physical Systems Parallels

2008-11-25T13:49:00.000-08:00

The chart posted of recent market volatility looks like the seismigraphic output of a very large earthquake. Financial storms seem to superficially have interesting parallels to some physical systems like earthquakes.

They are extremely difficult to predict

The normal low level cyclical graph (small wiggly line) suddenly becomes greatly amplified (big wiggly line)

Lots of damage ocures to brittle structures, (think leveraged institutions)

Ductile structures suffer less damage, (think primary productive enterprises that have a cash buffer)

Failure in one area can lead to a progressive failure in the entire system.

For example a falling crane strikes the corner of a concrete car parking building causing punching failure in the corner column. The force of the top deck landing on the next deck down is sufficient to set of a similar failure in adjacent columns resulting in a progressive failure until either the entire building is flattened or a discontinuity in the system is reached and the progression stops. (think banks lending to each other and using the loans as equity). Actually the twin tower failures were similar also.

A kind of measure that would help mitigate or eliminate the risks of large progressive failures would be deliberate discontinuities in the system, like a fire break or a seismic gap.

Another measure would be having a professional body charged with maintaining the stability of the system. Such peoples education and primary concern would be, like engineers creating stable durable structures. Not the enrichment of themselves or their clients. Reward would be like any other profession based on recognition of achievement in design and technical excellence.

Monday In New Zealand

2008-09-21T18:44:00.000-07:00

Here it's Monday. It will be Monday in New York by tonight. The Australian Stock market delayed its opening today by 30mins. Short selling has been banned completely. This bodes badly for the near future for stocks and the economy.

It's like the whole world has said we can't operate any more. We are like a finance company about to go belly up. They think all they need is a little more money to keep things going and it will all get better. they are wrong. There may well be a temporary recovery but the next down leg will be much worse than it might have been. No short sellers means no covering rally.

Gold has bounced indicating a renewed commodities run and high inflation expectations. Fortunately the NZ dollar has also rallied meaning I don't have to think about doing anything until it starts to weaken again.

Mid September 2008

2008-09-15T17:48:00.000-07:00

Currencies

Yen NZ dollar carry trade continues to unwind. Should be very good to hold yen vs NZ dollar for time yet as the yen is showing resilience relative to the US dollar also.

Commodities

I'm not sure where they are going from here. The finacial crisis and credit unwind need to complete before renewed strength here. Even gold is weak and may get weaker. Cash is king for now in this deflationary environment. If the central banks get on top of the credit contraction by "printing money", that is, making money so cheap that it would be hopeless to have it, rapid inflation will become evident first by renewed strength in commodities.

Personal endeavour

I'm thinking about a prefabricated "skinny shed" for farmers. Need to move on it as spring is in full flight and the use is storing hay. Hay harvested mid to late spring.

2008 Begins......

2008-01-29T14:20:00.000-08:00

Well....Ok I suck as a trader. I left a trade unattended over the holiday period. It had a target that was far to optimistic so I got stopped out. The end result being that I can not trade this year without adding capital. I'm not going to do that because of the amount of time I waste checking on even one small trade when I could be earning real money at my job.

I'm still very interested in markets and trading and the process of learning about them has been very worthwhile. I should be able to apply the principles to longer term decisions I make in my everyday life. And of course I know know where to look to find out whats really going on in the world.

2007-12-06T13:19:00.000-08:00

I'm following the Alphatrends Blog which is a very good technical analysis web log. Every day I look at Brain Shannon, the author's Blog and then have a go at speculating using the SaxoBank minitrader trading platform. I limit myself to the ASX index and only buy one position at a time. This limits my total loss to $350 and I only need a bit more than this to keep trading.

I use alphatrends, a blog by technical trading guru Brain Shannan, as a learning tool and that I think is exactly how Brian intends it to be used. I really don't know what motivates him but he seems to be the nicest guy and really enjoys engaging with the markets and other participants and helping those who are interested to improve their trading abilities.

My actual job is a design engineer. I use the trading I do as a form of entertainment to help make the long hours at work more interesting.

I've always been interested in trading. I think my interest stems from the mid eighties when it seemed so glamorous to be a stock broker. Since playing with the trading platform I've learnt how incredibly difficult it is to actually make money at it. As with anything difficult it's well worth learning a bit about.

I find the knowledge I gain from Alpha Trends helps me with my other business activities and keeps me in touch with what's happening in the wider world. Things that influence the economy, like the financial markets, have an effect on everyone and it pays to have a feel for whats going on.

2007-12-02T15:22:00.000-08:00

My simple solution for today is: make sure you have coffee and cream in the cupboard before you go to bed. This avoids the obvious disaster that is not having morning essentials ready to start the day.

2007-11-29T18:17:00.000-08:00

If I were lucky my simple solutions would be as simple as setting up this blog.