Phorgy Phynance

Archive for the ‘Economic Darwinism’ Category

Zai jian Bernanke

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It’s official.

On September 22, 2007, I said in Bye bye dollar (emphasis added)

I wasn’t particularly excited about the surprise 50 bps cut in both target and discount rates for the general long-term prospects of the US economy, although on a selfish level it was certainly good for my career stability. As far as I’m concerned, it is open season for Bernanke bashing. Greenspan bashing has been accelerating as well. Besides, if things really get bad with the USD, we’ll just move to Hong Kong or something :)

One of the things that I learned from Al Wojnilower was that the US economy could certainly keep chugging along for as long as the USD was the world currency. As he liked to repeat often, having the USD as the dominant world currency is like having an “American Express card with no limit”. One of the things that keeps the USD as the world’s currency is its position in sovereign reserves as well as the fact that oil is priced in USD. As far as I can see, both of these factors are beginning a worrisome decline.

With sovereign reserves continuing to diversify away from USD and Saudi Arabia refusing to cut rates in lock step with the US marks a real turn in the outlook for the USD dollar, and consequently the ability of the US economy to continue chugging along.

Then on October 31, 2007, I said in Xie xie ni Bernanke (emphasis added)

I just wanted to take a moment to say thank you to Mr Bernanke and the FOMC. I work in finance and these rate cuts are really great for my career sustainability. Without you’re gifts to the markets (at the expense of the USD, the long-term US economic health, and those who were responsible enough to actually save money instead of gambling), I don’t know what I’d do. I’m just glad that when this irresponsible monetary policy finally catches up to you that I have the option to move to Hong Kong.

With that backdrop, I am extremely excited to announce that I begin my new job in Hong Kong on November 23!

The move is both personal and strategic. Mrs Phorgy is from HK and we have a very large extended family there. Also, the asset management firm I’m working for is based in China. This is by far the most excited I’ve ever been about a new career opportunity. The people I’ll work with are phenomenally smart and lean towards being more quantitative (many with PhDs). For example, the PhD advisor of one of the guys who interviewed me was Nobel laureate Robert Engle.

The asset management industry in China is growing at a phenomenal pace and I am truly excited to be a part of that. As far as why a move to HK if I am concerned about the USD? I suspect in five years, it will seem far less mysterious as it becomes increasingly difficult and unpopular for HK to maintain its peg to the USD. Asia is definitely moving to an “Asian Bloc” and when that happens, the need and desire to peg the HKD to the USD will fade away.

The next 10-20 years will be transformative and I’m glad my daughter will grow up speaking both English and Mandarin. Speaking of which, it has been too long. Here is my princess:


From what I saw on my trip to China, it is obvious the reverse brain drain is well under way. Zai jian Bernanke!

Written by Eric

November 11, 2009 at 4:13 pm

Bernanke sucks even worse than I thought

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Last Wednesday, I gave my call for monetary policy in the US and Eurozone

The Fed SHOULD hold rates, but I’ve lost all faith in the fed and they are just puppets for Wall Street.

My call:
ECB holds at 4%
Fed drops to 4%

So I was a bit shocked when the Fed only dropped rates 25 bps. I would have preferred 0 bps, but if you’re going to cut, cut enough to make some impact. A cut of 50 bps makes more sense the 25 bps even though if they had brains it would have been 0 bps, i.e. either do something or not. Don’t be a wet noodle.

So Bernanke doesn’t want to be Greenspan, eh? That much is clear. He is trying every tool in the chest other than lowering the Fed rate, but how on earth is this global bank bailout going to do anything other than bailout some new found buddies on Wall Street?

You should not really be surprised. After all, they are just as human as you and I. I’m probably better educated than most in the Fed anyway (as scary as that may sound).

Here is my advice to Helicopter Ben. The sooner you realize that some on Wall Street deserve to be insolvent, the better. Hold rates where they are (or even raise rates). Trashing the dollar isn’t really in anyone’s interest. Let the inevitable recession come over us. We’ll live. Trust me. We’ll even come out on the other side stronger. Leaner. Meaner. Greener.

The 0% APR on Al Wojnilower’s American Express Card is about to expire and we’re likely not going to be able to roll over into a new one. But that’s alright. This country is still full of smart innovative people. Even if/when Citigroup defaults on its first interest payment, we’ll get through this. In every Econ 101 book I’ve ever glanced at (and tossed back on the shelf in fright), you see the words “business cycle”. It is natural. Recession are natural. Embrace it. Don’t let complacency take us beyond the point of no return. Make us work for a living. Don’t let us expect to be able to hold a job if we’re not giving 110% of our effort to be cost effective employees. We’re in a global competition with some super smart, super aggressive entrepreneurs and innovators in China and India, yet we’re feeding our lazy kids into diabetic obesity. This competition cannot be won through politics or military strength, it has got to be won through hard work, creativity, and dedication.

Ok. Why did I go off on that rant again? 🙂


Written by Eric

December 13, 2007 at 9:10 pm

Still talking about subprime

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Occasionally, I like to poke my nose in and see what my old comrades are up to over on NP. It seems the infamous thread is still alive and kicking.

However, it appears they are still talking about subprime. When are they going to realize that subprime was merely the first symptom of a massive global credit/asset bubble to surface? In economic terms, the dollar amount involved in any Treasury Dept bailout will be insignificant. However, when you multiply that amount by the insane leverage financial institutions have in, mostly off balance sheet, exposure, then things make more sense. Don’t be fooled. No policy maker cares about subprime borrowers. They are desperately trying to keep one, if not several major banks, afloat. Sorry Citigroup. The music has stopped.

Financial markets have a long way to go down still. The US economy will get whacked in a historical fashion, but we won’t be knocked out by any means. There are still strong sectors in our economy that will benefit from the coming “onshoring“. Pain is a good teacher and I, for one, will welcome the exorcism of complacency that is eminent.

Written by Eric

December 4, 2007 at 11:14 pm

The new corporate trend: “onshoring”

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Ha! What did I tell you? It is wayyy past my bedtime and I should be sleeping (especially since I’m sick and feel like I’ve been run over by a truck), but just stumbled on an interesting article from one of my favorite economic development blogs: Design Nine. He points to an article in the

Recall that in the midst of all the market doom and gloom, I recently said:

I’m actually ironically optimistic about the outlook for suburban and rural economic development. A weaker dollar will make outsourcing less attractive. That will bring manufacturing jobs back home. I can imagine a boon in suburban and rural development. Just imagine if communities developed decent broadband via fiber-to-the-home/business. Suddenly, there will be attractive jobs and living standards in affordable places.

I admit that the quote is a bit misleading because Andrew Cohill has influenced the way I think about things, but still timely I think. Here is an excerpt from the article:

Small-town America: The new Bangalore?


Onshoring, in fact, is becoming trendy.

Some U.S. companies recently have pulled back from India to set up shop in rural areas where access to high-speed broadband connections isn’t the problem it was just a few years ago and where lower real-estate prices and wages are attractive.

Note that the key to onshoring is an investment in telecommunications infrastructure. In particular, fiber-to-the-home. It is quite sad to see so many municipalities rest their hopes on wireless broadband. That will only end in tears as the reality of wireless broadband becomes apparent. Any community that is not investing now in fiber will lose out on an important opportunity that is now beginning to present itself: onshoring. As Andrew will tell you more eloquently than I could, an intelligent investment in a communities future MUST involve a combination of both fiber and wireless and I would put wireless as a distant second. I can explain in gory detail why wireless will fail if you like (I did my PhD in the subject), but for now need to hit the sack.

Go onshoring! Go USA!

Written by Eric

December 4, 2007 at 12:50 am

Another proponent of economic Darwinism

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Just a quick note from MarketWatch before I hit the sack…

17 reasons America needs a recession

Here are some of my thoughts on the subject.

Good night and have a Happy Thanksgiving!

Written by Eric

November 21, 2007 at 10:28 pm

Another word for hedged… leveraged

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Market turmoil is still quite fascinating to me and I still believe the current environment will be one for the history books and I’m still trying to take as much as I can from this learning experience.

My professional work experience is in fixed income. For two years, I was very “plugged in” to the markets and was meeting regularly with some of the greatest thinkers out there, but now I’m more of a pure “quant” and most of my news comes from blogs, web news, etc. Unfortunately, I’m not yet spending as much time with the traders as I’d like (but that should change soon I hope). Most of the major news sources, e.g. Bloomberg, seem to concentrate more on equity markets than credit and fixed income. I pay more attention to the Dow now than ever before. That is why I am so perplexed by the stock market. I thought stocks were supposed to be easier than bonds, i.e all the smart guys are in fixed income, right?

So while the credit markets seem to be imploding, stocks are doing just dandy. Maybe people are taking cues from the market cheat sheet?

Anyway, I’ve blabbered quite a bit on this blog (and at my former employer) expressing my opinion of CDOs. I even managed to upset quite a few people while expressing my opinions as well. No regrets though. I’m happy to have this hugely public diary, both here and on NP, to later look back and see how I did in regards to thinking events through. Occasionally, I still like to poke my nose in over at NP and I see kr is still giving out the occasional nugget. Here is one of his latest:

A few thoughts:
– If you took all the writedowns at a single med-to-large bank rather than seeing them across the street, you could have reduced that entity’s equity to ZERO. For instance, MER has only something like USD54bn of mkt cap and USD39bn of book equity.
– If the view is that there will be another round of writedowns in the same amount as Q3 then you will have banks desperate to raise equity (i.e. it is not just the monolines). Who would buy that equity right now? Prince Alwaleed for example has floated his own holdings so I see him more as seller than buyer for example. I don’t see guys like JC Flowers or Cerberus well positioned for this job – in retrospect, even Barclays/RBS have not been with respect to ABN, as can be seen by the action in their share price and cost of jr capital.
– Another possibility would be the downgrade to BBB like the Japanese banks, with all the implications that brings with it. I.e. serious change in business model. That has contagion and macro effects. One example is that flow trading of financials has cost people a lot.
– I think investors will call foul on the FAS157 Level-3 assets, and it will hit guys like GS seriously as their L3 reporteds are a big multiple of their mkt cap.
– There was a funny comment in this month’s BBG mag about “nobody really knows how desks are hedging the CDO assets.” That is bull – the answer is that most people were NOT HEDGING AT ALL, BECAUSE THEY COULDN’T. Stuff was originated to sell, and the exit has vanished, or, it was originated to live forever on a trading book even though people tried to avoid saying that, and there is no decent MTM approach so instead banks are showing huge volatility, mostly to the downside.
– Implications of SIV / CDO / CP demise are pretty vast. There seem to be an increasing amount of trade receivables on the market, b/c there are no conduits to fund them… means corp cost of cap is going up in unexpected areas.

My hunch is that the fed cuts on the 11th b/c liquidity is dropping again, especially with year-end. It is out of control – specifically Ben’s control. It looks like political support for the various subprime fixes has stalled. What I think is that liquidity of all things financial (i.e. non-corporate) is going to get weaker and cause a full-on crisis for a market-traded institution. The talk about Citi cutting their div is one tremor, trading activity in Barclays is another, and the fact that even AFTER all the reported loss numbers, people still don’t feel comfortable, is yet another.

I think vols are still cheap, maybe looking to buy some.

All the while I was complaining about CDOs, I was coming at it from the angle of a “quant”, i.e. thinking about how to model CDOs and how those models are used in risk management, asset allocation, etc. Too bad I didn’t understand more about the legal/accounting aspects of CDOs. The term everyone has now heard of is SIV. I was blabbering about off balance sheet leverage and fair value accounting, but didn’t realize that the entire CDO market was (to a jaded eye) a big play on accounting in addition to the obvious play on ratings agencies. If I had known about SIVs, I might have been able to do more to help some who may have now lost a lot of money. Maybe not. That’s all in hindsight. But what am I missing now? Where is the next weakest link? How are corporations hiding off balance sheet debt? Has anyone looked at “Level 3” assets in corporate, i.e. non-financial, balance sheets? Are they as scary as the big banks?

I’ll say it again… this is not a subprime issue. Subprime contagion does not explain the current environment. Subprime was just the first to blow. We are experiencing the blowup of a global fixed income bubble. In fact, some would say we’re experiencing a general global asset bubble.

Who’s going to get hurt? Financial institutions for sure. Anyone who depends directly on the value of paper assets.

Who’s going to win? People whose wealth depends on physical assets.

I’ve already lost all hope in Bernanke. He is not going to let his monicker “Helicopter Ben” go by the wayside in a “time of need”. Bernanke is going to lower rates and weaken the USD until oil exporters are forced to break the peg to the USD and inflation skyrockets. I predict that all these gloom mongers about home prices dropping by 30% will turn out to be wrong in nominal terms even if they are correct in real terms. In other words, home owners are going to be saved by the dropping value of the USD. All those on Wall Street who were so gleeful every time rates dropped are suddenly going to feel the pain when the value of their paper securities go up in smoke.

Watch out for the “happy stage of inflation”, i.e. wage increases. It will be interesting to see what the world will look like when oil is priced in EUR and the USD is no longer the world currency. Fortunately, I still have faith that we’ll come out of the current mess stronger as a country, but there will certainly be pain felt at the higher end of the wealth spectrum.

I’m actually ironically optimistic about the outlook for suburban and rural economic development. A weaker dollar will make outsourcing less attractive. That will bring manufacturing jobs back home. I can imagine a boon in suburban and rural development. Just imagine if communities developed decent broadband via fiber-to-the-home/business. Suddenly, there will be attractive jobs and living standards in affordable places.

Maybe a weak dollar is what this country needs, i.e. a good kick in the pants. Pain is the best teacher, right?

[Edit: PS, the title of the post was inspired by a great article on Financial Armageddon, but I never got around to explaining why, but have a look and it might be obvious.]

Would a rate cut really help?

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What is the Fed going to do on September 18?

With the latest news coming from the NFP report, I think even the staunchest opponents to a rate cut are starting to capitulate. Except me!

I still think the Fed should hold tight and resist the pressure to lower the rate. Sure, that would likely lead to a recession, but the alternative is worse in my opinion. In fact, I don’t even think recessions are all that bad. They are “normal”. What is not normal is flooding the markets with cash every time there is some expectation of a slowing economy. For the past 7 years, that has worked out because China, India, and other nations were able to absorb inflation as they exported deflation.

Things are different now. China is no longer exporting deflation as they begin to deal with their own inflationary pressures. Meanwhile, Europe continues to see inflationary pressures. I’m not too surprised the ECB decided not to raise rates in light of liquidity fears, but think they’re doing a good job keeping the focus on inflation.

Lowering the rates now will not necessarily help, as Roubini so eloquently pointed out, this is not merely a liquidity crisis, but a credit/solvency event as well. Throwing money at a turning credit cycle will only delay the inevitable. Ask Japan about that.

Recessions are not always bad and I, for one, would welcome the strength of leadership it would take to accept that. The longer term risks that would be exacerbated by a rate cut should be weighed heavily. Bernanke has navigated in such a way that I can only admire so far, but a rate cut now would be quite disappointing to me. Economic Darwinism is the only way to longer term prosperity. Complacency has been the downfall of more than one empire and we risk going further down that road. Pain is the best teacher. Ok. That is enough with the cliches for now 🙂

Written by Eric

September 9, 2007 at 12:56 pm