Forest Fire

What should the smart people do regarding the financial system?

This is a burning question that everyone has in their minds. Is bailout good? Jim Rogers and Austrians alike will say no. I will throw you the word unknowledge. Majority of the people (I guess) will say that if we don't bail them out, we will suffer badly (whatever).

So I was talking to this teacher today and I explained to him about my forest fire analogy. He was mentioning to me that actually people do try to stop forest fires. They will burn down a ring of trees that is further away from the main fire. This isolate the inner burning trees and also prevent them from spreading to the good trees outside. Perfect sense!

I thought that this was pretty awesome. Two things that we can draw here.

1. Identify the end of the bulk of dry leaves.

2. Burn them first.

But by doing this, you need to hit yourself at the back of your head and say: you can't stop the fire that is burning now. This has always been my line of thought. But I guess it is easy to say but difficult to believe in.

Identifying the end of the whole bulk mess is also another difficult task. I mean, what are the good banks/financial institutions left? I really don't know. Hopefully someone can enlighten me. Maybe Lazard Frères & Co will rise to the top of the industry again.

Burning down a ring of weaker trees is also another tricky question. How to burn banks? I suppose you have to let some go bankrupt.

But ultimately, to fight against a super huge fire, you have to use fire. I know this sounds freaking fuzzy, but it's pretty cool isn't it? Common sense tells you to use water but during a super huge fire, where do you find the huge supply of water?

Desperate times call for desperate measures. Use fire against fire. I like it.

Mysterious Gold

I really like this bunch of people. Do check out here to know about them. I will provide a short write up about them though.



Basically, there is this group of people who went into research on gold deposits all over the world. They ask lots of questions about gold to authorities but are constantly rejected all the time with fuzzy answers.

So the story of the mysterious gold goes like this.

1. Central banks are holding lots of gold.

2. You don't earn money holding gold. So you loan them out.

3. You loan at 1% interest to banks called bullion banks.

4. They borrow these gold and sell them to get cash and buy bonds that gives them 5% interest rates against their 1% loan payable (accounting!!)

5. Yup, these gold are what we wear on the street.

6. But they have to manage their risk properly against gold price so they have to hedge by buying some gold futures.

7. Well, step no.6 is an ideal scenario. Humans being humans, like to try funny stuffs. We see them all the time.

8. Basically, there are many more reasons. But I only find one that is particularly interesting. The authorities are not very transparent about gold lending activities. They don't reveal the figures.

9. From this, there is a possible double counting error. Banks will count that they are still owning the gold. The market people will count the amount of gold they have when in actual fact, these gold are the mysterious gold that are supposed to stay in the vaults. Get what I mean?

10. However, so what if this is true? It could be my next life time because the truth is out. This is very important. It is exactly this situation that make me think for quite some time and I think I can see the picture now. My inspiration comes from Bank of England. Sterling pound is dead. But does that mean that US dollar will be good? If not, then what will be good?

I think the world currencies will be in a mess. No one will like any currency in my honest opinion. Everyone will look back at gold and this is when the shortage will be realised by the whole world because demand is going to drive the truth out and it will be an upward spiral.

Hope this doesn't sound like any self fulfilling prophecies. I just feel that such stuffs make sense to me.

Oil 101

I didn't have much time to write a lengthy one. But I think talking about oil is pretty important today. I remember my friend asking me to buy oil right now because he thinks that oil is cheap. I feel that there is a lot more into what's going on in the market and the oil story is pretty complicated.

My logic for oil is pretty simple. I always advocate on understanding the general environment (environmental analysis... whatever).

In my opinion, if no one likes oil, oil will not go up. No matter what's the fundamentals are like now. Of course, in the long run, people will begin to realise its fundamentals that's why most people like to buy and hold as long as they get the big picture right. In addition, people are ignoring the supply side in my opinion. Oil looks freaking cheap (not to me though)!!! But let's not anchored our mind on $140 a year ago. There are few things to look out for.

1. A good huge selling of oil. It will be great if oil hits $20.

2. The next time it crosses $50, it is time to buy oil. I have no doubt for this. Just that it might take some time before it crosses $50.

3. To some extent, I feel that Treasury bubble has to burst first before oil will come into play. Of course, don't forget that I'm a very faithful gold bug.

Speaking of gold, I shall talk about gold lending activites during mid week post.

A Mind Of Its Own

These few days I have been talking to some professors regarding some macro economics of today and in particular about commodities market. As usual when I talk about commodities market, I will mention Jim Rogers stand and seek the professor opinion. I hold a high opinion for this professor though.

Professor R said, "I'm not trying to be arrogant, but in my opinion, Jim Rogers is at most beginner level in the economics scholarly realm."

I like this statement a lot. At least he has a stand and is willing to stand against a professional in the finance industry or at least on wall street. The reply for me is way too easy. I could have just said, "Well, he is a billionaire?" But I didn't. I began to think about it and I totally agree with this statement. It might just be true that Jim Rogers is a newbie at economics (scholarly level).

I think through a lot and I reflect back on what I have learnt about this market. Stock market is not just any market where you trade stuffs. It has a mind of its own. Ben Graham calls it Mr. Market. I call it Mr. WTH (just kidding). In a way, how often have we seen the fact that the market is diverging away from its fundamentals for no reason. I got burnt badly trying to short a market that is simply shooting the roof back then in september even when all economic data fall within my expectation.

Dot com had a mind of its own. Housing had a mind of its own. All economists will tell you that it should not happen. Greenspan did it, Ben Bernanke did it. They are all great economists in the world but they can't explain certain things in the market. In addition, Noble prize winners failed with LTCM because the market stays irrational way longer than they can stay solvent.

I am not saying that we should throw away our economics knowledge. I want to emphasize to you that you have to always remember economics is economics and stock market is stock market. They are two different things that we are talking here and they don't go hand in hand usually.

Because

You will always see things like "News are freaking bad, Market goes up 2 percent."

Word Of The Week

Just a really simple and short post. I met this professor today and he told me about a word which his professor coined it in the past. It is "unknowledge"

Knowledge - what we know about the past, today and possibly future.

Uncertainty - what we don't know that will happen in the future

Unknowledge - unknowledge is not knowing what is happening now

So actually, unknowledge is worse than uncertainty! Holy!!!

I find this very interesting. In a way, one can say that we live in an unknowledge financial world. We don't really know what is happening now and everybody is acting that they know what is happening. Economists don't really know what is going on but they have to make some stuffs out because their rice bowls depend on what they say. I can't seem to find a quote about this but it is very true.

Even more interestingly, I went to see another professor and to my horror, he gives the exact statement that I find amusing.

He said, "I believe that economists have learnt greatly from the past and will know what they are doing right now." So, I question him that what happens if we stay stuck for 10 years and he exclaimed, "What 10 years! At worse it will be 2010, some economists even say that we can recover in june."

I really wish to throw the word unknowledge into his face.

The Market Never Changes

I will start by replying that comment first. It is really nice of you to reflect back on what you have said. Hopefully, I can give you a good reply. Btw, I'm from IIC, are you from IIC also?

Interestingly, you said that "If all things go right, I forsee another steep fall before the upwards wave begins."

Well, you didn't really justify why another steep fall. But yes, I definitely agree that commodities have to go up. In a way, I like what Jim Rogers said about commodities.

1. If the recovery was to take place and the economy turns better. Commodities will first come out of the hole much earlier than stocks. For example, if Toyota's business is picking up, it will first be reflected in platinum prices because they will have to buy more platinum first in order to produce cars. By the way, platinum is used for catalytic converters in cars. Platinum prices will shoot first before Toyota prices shoot because it takes time for the cars to be produced, it takes time for the salemen to sell their cars. It takes far less shorter time to buy platinum.

2. Actually, I think demand concern is overblown. In a way, it could just be an excuse for a correction. In the market, sometimes fundamentals are just distorted. Even though the facts may be there about demand and supply for commodities, prices may just stay low for a period of time for no reason. I feel that supply side issues are totally ignored (I don't know why, maybe people are short sighted). Again, no one is going to open new mines. No one is lending farmers to buy more fertilizers and plant more agriculture. I remember reading somewhere that if oil prices stay this low, some producers cannot meet their margins. By my minimal knowledge, supply for such cannot be increased fast enough to meet demand when the demand picks up. Hopefully I'm correct about this.

3. To sum up, I just don't understand why will people want to buy stocks with no fundamentals at all. Commodities have their fundamentals. Stocks? So, I feel that people should re-think their "value investing" to some extent because in any case, if the economy is to pick up, commodities will be shooting up first rather than stocks.

Hope to hear from you soon. =D

The Same Old Market


Well this is the best I can find. A 30 year chart on Treasury bonds yield. Actually it seems to me that we have a crazy bond bull market as well that stretches back to late 1981. The highest point (highest yield) was in late 1981 and yields corrected in some ways before bond prices continue its crazy bull run. Exactly the same as stocks, and we have a very fast leg down this time round. Remember I talk about acceleration phase in price behavior. Somehow it is de ja vu isn't it. We see that in the stock market and now we are going to see that in the bond market. But how far more do we need to see in this leg down before it finally corrects, I'm not sure about it. I'm a lousy trader. I bought put warrants when HSI was 22000, not at its all time 31000 high. So I think it is alright for the market to show us the pressure before we do anything.

Again it reminds of a fact that the market never changes because the people that participate it ever change. Life's like that.