Wednesday, December 21, 2011

Religion, Science, and Politics

I believe in evolution. That alone makes me enemy of conservative Christian. Even though I count myself as a Christian, for the moral value it represents, I don't think Christian will welcome me as one of their own.

WSJ reported a story about a young Egyptian Christian being beaten up for refusing to convert to Islam. Another story about an Islamic clergy cutting off a man's ear for the same reason.

Compare to Islam I have much more affinity to Christians. Christians are civil and more tolerant of religious difference.

Monday, December 19, 2011

Europe - Dec 19, 2011

German Chancellor Angela Merkel and Bundesbank President Jens Weidmann urged Europe to stick to stricter budget discipline and forget about one shot solutions after financial markets judged that another EU summit had failed to resolve the Eurozone’s debt crisis. Speaking separately, they rebuffed pressure for the European Central Bank to intervene decisively to stop the crisis escalating. Merkel told the German parliament on Wednesday it would take years, not weeks, to overcome the debt problems but Europe would emerge stronger. Weidmann made clear his opposition to ramping up purchases of troubled Eurozone states' debt, saying he was "no fan" of the existing limited bond buying program. He also said the Bundesbank would only provide fresh funds for the International Monetary Fund to help fight the crisis if countries beyond Europe do so too. Weidmann told journalists the ECB's mandate prevented it from embarking on unlimited bond purchases and that experience showed this would inevitably lead to inflation anyway.

Sunday, December 18, 2011

Note to self

What is my next job?

After 5 years in my current job I have come to a point where every aspect of this job I feel competent and proficient. But I also come to a point where I feel very little learning and growth.

Client specific plan rules are all documented. If I remember anything I will likely forget it in a while. There is nothing inherently valuable in knowing these rules. You can always read them and review a few cases to a point you can do the job.

Can I be a CSM or PM? These roles are a step closer to the client so relationship and negotiation skills are a lot more important.

You can no longer be self-reliant. You will have to rely on others to deliver. That means management skills are more important than technical skills.

Can you manage the relationship?
Can you lead and influence the team to deliver results?
Can you find a balance between client's need and your company's cost?
How do you keep your team motivated and working for a common good?

This is a note to myself so I can measure my progress down the road. It is also a reminder why I move out of my comfort zone into a role that I have never played.

Friday, December 09, 2011

Ms Freeland called Obama's Kansas speech brave and honest in the sense that it avoided the easy explanation of inequality - campaign contribution, low taxes, and lax regulation. Obama speech explains the winner take all society by two forces: globalization and technology advancement. Companies can do more with less and capital can move out of a country in just a few clicks.

Obama and 99 percent

Monday, December 05, 2011

Evans urges Fed action

Chicago Fed President Charles Evans came out today in favor of more explicit guidance on how the Fed likely will react to changes in certain measures of unemployment and inflation. He calls for a zero fed funds target rate until the unemployment rate falls below the natural rate unless inflation is running over 3 percent. Evans states that the U.S. is in a liquidity trap, suggesting that it is OK to let inflation run above target in the near term. The Chicago Fed president sees core inflation remaining moderate, nonetheless, due to high unemployment and resource slack.

Thursday, November 10, 2011

Eric Rosengren called for fiscal policy action

Boston Fed President Eric Rosengren called for fiscal policy to take a more prominent role to boost the economy and for the Fed to continue to work to lift demand in the economy.

"But clearly the Federal Reserve cannot do it alone. Given the sobering macroeconomic situation, it is important that fiscal policy, controlled by the federal government and the states, do its part. It is also important for international policy makers to take actions that provide more stable world markets. But at the same time, in my view the Federal Reserve should continue to use the tools at its disposal to boost demand in the economy. And at the same time, we would do well to work on addressing any impediments to students getting the employment opportunities that will serve them, their communities, and the macroeconomy."

Wednesday, October 12, 2011

Charles Plosser speech on the economic outlook

"I dissented from both of these decisions. As I noted earlier, given that inflation was notably higher and unemployment lower than it was last fall when we embarked on our second round of asset purchases, it wasn't clear that further accommodation was called for. In addition, I believe these actions will do little to improve the near-term prospects for economic growth or employment, but they do pose some real risks. Policy actions are not free and should be evaluated based on the costs and benefits."

"Based on our experience with Operation Twist in the 1960s and with last year's QE2, the reduction in long-term rates from our actions in September is likely to be less than 20 basis points for the 10-year Treasury yield, which is currently only 2 percent."

"We also need to ensure that Fed policy remains credible. Economic theory and historical experience tell us that a central bank's ability to maintain price stability and promote economic growth hinges on its credibility. Actions that undermine credibility can put at risk the effectiveness of a central bank's ability to achieve its objectives. In my view, the actions taken in August and September risk undermining the Fed's credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery. It is my assessment that they will not. We should not take actions simply because we can."

Friday, October 07, 2011

Jupiter tonight

With a telescope I saw Jupiter and its four large moons tonight. The four moons are called the Galilean moons that were first discovered by Galileo Galilei in 1610, according to Wikipedia. I point the telescope to the east sky. It is an exciting scene for me. I feel somehow connected to Galileo, who is one of my heroes.

Wednesday, October 05, 2011

Mr. Kaku, a professor of theoretical physics at City College of New York

Einstein wrong? Impossible!

That was the reaction of physicists around the world last week when they heard that experiments in Switzerland indicate that Einstein's theory of relativity might be wrong. Since 1905, when Einstein declared that nothing in the universe could travel faster than light, the theory has been the bedrock of modern physics. Indeed, most of our high-tech wizardry depends on it.

Of course, crackpots have been denouncing Einstein's theory of relativity for years. Like many physicists, I have boxes full of self-published monographs that were mailed to me from people who claim that Einstein was wrong. In the 1930s the Nazi Party criticized Einstein's theory, publishing a book called "100 Authorities Denounce Relativity." Einstein later quipped that you don't need 100 famous intellectuals to disprove his theory. All you need is one simple fact.

Well, that simple fact may be in the form of the latest experiments at the largest particle accelerators in the world, based at CERN, outside Geneva. Physicists fired a beam of neutrinos (exotic, ghost-like particles that can penetrate even the densest of materials) from Switzerland to Italy, over a distance of 454 miles. Much to their amazement, after analyzing 15,000 neutrinos, they found that they traveled faster than the speed of light -- 60 billionths of a second faster, to be precise. In a billionth of a second, a beam of light travels about one foot. So a difference of 60 feet was quite astonishing.

Cracking the light barrier violated the core of Einstein's theory. According to relativity, as you approach the speed of light, time slows down, you get heavier, and you also get flatter (all of which have been measured in the lab). But if you go faster than light, then the impossible happens. Time goes backward. You are lighter than nothing, and you have negative width. Since this is ridiculous, you cannot go faster than light, said Einstein.

The CERN announcement was electrifying. Some physicists burst out with glee, because it meant that the door was opening to new physics (and more Nobel Prizes). New, daring theories would need to be proposed to explain this result. Others broke out in a cold sweat, realizing that the entire foundation of modern physics might have to be revised. Every textbook would have to be rewritten, every experiment recalibrated.

Cosmology, the very way we think of space, would be forever altered. The distance to the stars and galaxies and the age of the universe (13.7 billion years) would be thrown in doubt. Even the expanding universe theory, the Big Bang theory, and black holes would have to be re-examined.

Moreover, everything we think we understand about nuclear physics would need to be reassessed. Every school kid knows Einstein's famous equation E=MC2, where a small amount of mass M can create a vast amount of energy E, because the speed of light C squared is such a huge number. But if C is off, it means that all nuclear physics has to be recalibrated. Nuclear weapons, nuclear medicine and radioactive dating would be affected because all nuclear reactions are based on Einstein's relation between matter and energy.

If all this wasn't bad enough, it would also mean that the fundamental principles of physics are incorrect. Modern physics is based on two theories, relativity and the quantum theory, so half of modern physics would have to be replaced by a new theory. My own field, string theory, is no exception. Personally, I would have to revise all my theories because relativity is built into string theory from the very beginning.

How will this astonishing result play out? As Carl Sagan once said, remarkable claims require remarkable proof. Laboratories around the world, like Fermilab outside Chicago, will redo the CERN experiments and try to falsify or verify their results.

My gut reaction, however, is that this is a false alarm. Over the decades, there have been numerous challenges to relativity, all of them proven wrong. In the 1960s, for example, physicists were measuring the tiny effect of gravity upon a light beam. In one study, physicists found that the speed of light seemed to oscillate with the time of day. Amazingly, the speed of light rose during the day, and fell at night. Later, it was found that, since the apparatus was outdoors, the sensors were affected by the temperature of daylight.

Reputations may rise and fall. But in the end, this is a victory for science. No theory is carved in stone. Science is merciless when it comes to testing all theories over and over, at any time, in any place. Unlike religion or politics, science is ultimately decided by experiments, done repeatedly in every form. There are no sacred cows. In science, 100 authorities count for nothing. Experiment counts for everything.

Mr. Kaku, a professor of theoretical physics at City College of New York, is the author of "Physics of the Future: How Science Will Shape Human Destiny and Our Daily Lives by the Year 2100" (Doubleday, 2011).

Sunday, October 02, 2011

Housing is the main channel for monetary policy

"Falling home prices have not only impaired the capital of many financial institutions, but in a very real sense have disrupted the transmission of monetary policy"
says Eric Rosengren, Boston Fed president.

In normal economic times monetary policy is highly effective in reviving economic growth. When interest rates are lowered, consumers are given incentives to buy cars and homes. Demand for homes with 30 years mortgage are especially sensitive to interest rates. A pick up in home buying can create so many jobs that the economic recovery becomes self-sustaining.

This time is different. Banks are sitting on piles of foreclosed home or real estate owned(REO). Bank's lending standard for home buying has tightened significantly. The Fed's policy to set short term interest rate at zero did not stimulate home buying. New home sales fell to 295,000 SAAR and new home inventory to 162,000 record low since 1963.

Thursday, September 01, 2011

experts disagree on financial transaction tax,,15354395,00.html

Interesting read. It's probably never going to settle one way or another.

Saturday, July 09, 2011

A Summary of the Financial Crisis 2008

It has been 3 years since the financial crisis happened. I want to summarize my understanding the the causes so that I can reference back and remember this lesson.

Financial institutions relaxed lending standard in pursuit of market share and fee revenue.

The saving glut from China's industrialization means liquidity everywhere.

Borrowers used the easy credit on housing: "flip that house" in pursuit of quick riches.

Securitization and derivatives murky the water for risk assessment in the investment process.

Non-performing loans forced financial institutions to write down their assets. Investors start to withdraw their credit. Fire sale in order to raise liquidity. Other institutions marked down their assets to the market. Fear contagion spread.

Government response: Federal Reserve open discount window and purchase asset backed securities; Lower the fed funds rate to zero. Fiscal response - Congress passed 800+ billion of stimulus. About one third in tax rebate/reduction, one third in construction/projects, and one third in extension of unemployment benefit.

Consequences: 7.8 million people lost their job due to recession. More than 2 million homes foreclosed. Federal deficit runs at $1.4 trillion a year. The shock wave rippled through every corner of the world. The economic loss is greater than any natural disaster in history.

Tuesday, April 19, 2011

FDIC could have saved unsecured creditors 76 cents on the dollar

IF Dodd-Frank Wall Street Reform Act was in place, FDIC can execute a structured sale of Lehman Brothers. General unsecured creditor could have recoved 97 cents on the dollar, compare to current bankruptcy preceeding which would recover 21 cents on the dollar.

WSJ has many opinion pieces advocating for the bankruptcy process as the main resolution mechanism, and argued against FDIC or any other agency involved in resolution. I am questioning the motives of these opinion pieces. In a financial crisis it is obviously in public interest to have an orderly resolution of institution failure like Lehman. Why would someone wants a court resolution instead? Maybe these pieces represent the interest of bankruptcy lawyer or vulture investors.

Sunday, April 10, 2011

Financial Crisis Obeservations

In a panic - financial crisis - people want to have more cash at hand. The future becomes uncertain for everyone. This means money is scarce, and its value relative to financial assets and consumer goods rise significantly. You can observe this from high bond yield, low stock price, and deflation.

High bond yield plus deflation imply high real interest rate. Credit contraction translates into output contraction. A big wave of unemployment will hit the economy soon. This is the tsunami after the quake.

Friday, April 08, 2011

Shadow Banking System

This is an article by the Federal Reserve Bank New York. It talks about the financial crisis 2007-2009 and the shadow banking system. A good reference to come back to.

Monday, March 21, 2011

When the Fed starts to sell its treasury holding

Treasury yield is going to be higher after QE2 ends and the Fed starts to sell. The Fed's current plan is to start selling 7/1/2012 at a rate of 300 billion a year for a little bit more than 4 years.

El-Erian thinks current growth rate hasn't reached escape velocity. A higher interest may cause US economy to contract again and people calling for QE3. Will there be a permanent monetization of debt? The biggest losers will be countries holding large dollar reserve, such as China, Japan, UK, Brazil, and Taiwan, because the purchasing power of the US dollar will be diluted.
US Public Debt

The Fed will probably consider the growth rate and escape velocity before selling. If growth rate is still slow by 2012, the selling may be done at a slower pace. That will have the same effect - a permanent monetization of debt.

Saturday, March 19, 2011

Why do I think Goldman is responsible for the crisis of 2008

Goldman is a main buyer of Washington Mutual's Option Adjustable Rate Mortgage for repackaging into securities. Most Option ARM has a growing loan balance and borrowers usually default when home prices drop. Goldman must have known the risk of this product as evidenced from their buying protection from AIG. But they continue to buy these mortgages in bulk, repackaging and selling them to other long term investors such as pension funds and insurance companies. They probably also used their reputation and sophisticated model to influence the rating agencies on the securities they repackaged to get a good price. Their attitude toward these securitization is that as long as someone else is buying we don't care about the long term sustainability of the product. The same logic obviously doesn't apply if you are buying a car or an airplane. I see what Goldman did as a textbook case of moral hazard. Why would the expert of risk assessment not caring about the risk involved? Because that expert (read Goldman) intended to transfer it to others to make a handsome risk free fee income.

Option ARM:

FDIC sue WaMu executives:

Investment - the Buffett Method

1. Look for highly profitable companies that generate cash.
(What to buy? A company with positive cash flow.)

2. Decide if the company's profitability is lasting. Look at its product and long term edge.
(New technology brings efficiency but the edge is fleeting. Destructive creation is continuous.)

3. Wait for the tide: when the business cycle turns grab the ones you have wanted for a long time. (When to buy? In the early Spring of a cycle - when snow just started to melt)

Thursday, February 17, 2011

On Social Security

Social security is not just an investment vehicle, it is also an insurance scheme. The insurance portion is that annuity is paid until beneficiary's death, but not a month more. So people who die early subsidize those who live a long life. The law of large number says when the participant of an insurance scheme increases its variance will be reduced, so there is efficiency to be gained from mandatory participation – a smaller variance implies smaller surplus to absorb negative shock. With government as the sole administrator there is also savings compare to private insurers building multiple administrative system and staff for just a portion of the population. Since safety is at the heart of social insurance, pursuing superior investment outcome isn't desirable as it inevitably involves risk taking and will have winners and losers. The goal of all social security is to provide a basic safety net, not a luxury retirement, hence there is a cap on pay that is subject to payroll tax. There is also a small degree of wealth transfer – lower income people will see social security replace a higher proportion of their pre-retirement income, but higher income people will also see a larger check. The bottom line is that society will always have losers, who don't save enough when they are young, squandered their money in bad investments, or become victims of a crime. Social security system is to provide that basic safety net so as to eliminate the need for charity helping senior citizens struggling financially perhaps in the street. Without government mandate individuals cannot by themselves form such an insurance pool, especially considering the ones who need it most is likely the ones refuse to buy in the first place.

Saturday, February 12, 2011

In debt to Keynes

The recent experience of the Great Recession 2007-2009, the ensuing fiscal stimulus package from government around the world, and the Fed's unprecedented monetary policy response, reminds me how much intellectually in debt we are to Keynes. There is no doubt in my mind that without these government effort the world would have plunged into a prolonged depression. Living standard around the world would have fallen so much that hardship and poverty would have been everywhere. This was what happened in the Great Depression. The amazing thing to me is the lack of opposition to these fiscal and monetary policies, other than a few rare but notable exception such as Robert Barro of Harvard. Economic policymakers around the world understand that in a severe financial crisis government should err on the side of doing too much, not doing too little. The mainstream laissez-faire attitude toward market evaporated in a short period of time. Governments around the world coordinated their effort. Policymakers know government directed investment will not be optimal or efficient, but if they don't reverse the tide of the confidence crisis, the loss in output and employment will be huge and ten times more wasteful than the relative inefficiency of public investment over private investment.

What changed the mind of policymakers since the Great Depression of 1930s? Over the past 80 years there is an onslaught of attack on Keynesian thinking. Friedrich Hayek called Keynesian thinking as “the road to serfdom”. Milton Friedman once said: “the great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.” Politician on the right is always calling for a smaller government. But I think deep down they understand Keynes is right on the cause of the Great Depression. They know Keynes is right on government response to financial crisis. Keynes wasn't advocating a central planning government in the sense of communism. He is saying, when you have massive unemployment as high as 25 percent of the population and rampant poverty, it is less wasteful to use the government investment on whatever endeavor than do nothing. Infrastructure building creates job. Scientific research creates job. Even pyramid building creates job. And after that pyramid or monument is built, private consumption and investment will return to normal. Isn't this what just happened since the last quarter of 2007?

Standing today in 2011 when economy is on path to full recovery, we are all in debt to Keynes. Without his insight and compelling argument policymakers around the world might have the wrong action and we would have been doomed for a generation. We shall never forget this important lesson.

Tuesday, February 08, 2011

Saving and Spending

Mom's personal finance strategy has always been "denying herself". She has crimped her consmumption her whole life. Is her frugality rewarded? Or just squandered by others? She doesn't have many friends, because she spent her whole life working and saving. Maybe it is time to be generous.

The hardest part of economic decision is that you have to not just save wisely, but also invest and spend wisely. How to spend your wealth takes as much effort and planning as how to build it. Do you spend it on travel, dinning, and making friends? $100M gift to the public library? $1B gift to eradicate malaria? It is no easy task to spend it wisely.

Saturday, January 29, 2011

China and Japan's economic development path


Michael Pettis pointed out several important things:

  1. Chinese development is unbalanced, heavily depend on export and investment.

  2. Chinese economic re-balance toward more consumption and less investment is essential for its own continued prosperity and will benefit not just China but economies worldwide.

  3. A Chinese slow down in its GDP growth rate does not mean worldwide contraction. It may boost economic growth in other parts of the world by two ways: a higher level of Chinese consumption and a higher export share for countries other than China.

  4. Chinese economic development model is very similar to Japanese, with probably a 20 to 30 years time lag. So China is on a cross road similar to what Japan faces in the late 1980s.

I think all these points are well argued and the history of Japanese decision could be a useful guide. I also think these arguments are mainstream in the US policy circles. Here is an evidence:

There are several interesting theoretical questions being raised here by others. One concerns Say's Law and the Keynesian view: Does supply creates demand? Or Demand creates supply? I think a modern version of Say's Law should be: When a person finds a job he/she will have demand for consumption: housing, car, furniture, etc. Keynes's idea is that government spending/investment will create jobs, which in turn creates private consumption – a more sustainable demand. If we consider the economic development strategy in a poor country such as China in the early 1990s or Japan in the early 1960s or the US sometime in the 19th century, the obvious truth is that household income is very low and aggregate demand is very weak. This low income is due to weak productivity that is true to any country pre-industrialization. There is a chicken and egg problem in the poor country: low level of productivity (supply) caused weak demand. That weak demand also creates an environment that suffocates productivity growth – no customer even if you build a super efficient factory with government funding. Japan and later China decided that they can rely on richer country's demand for their economic growth. First they will use their low labor cost and government funding to build factories for export. This will create jobs and savings in the household. Government and banking system will channel this saving back to the rich country (read US), so that rich country consumers can leverage their stronger balance sheet for more consumption and investment. This translates to more export for Japan and later China. I think it is a successful model for rapid industrialization. I also think this gives the US cheap financing, and cheap imported consumer goods, both fostered the unprecedented prosperity. Without Japan and China there is no doubt that interest rate will be a lot higher and consumer goods a lot more expensive in the US. Just imagine what would happen if China and Japan withdraw their combined 2 trillion dollars deposit from the US treasury. The US will also have to devote a much larger work force to low value added manufacturing, a high opportunity cost. My conclusion is that supply and demand are just like chicken and egg – it is meaningless to debate which one comes first. Keynesian idea is useful in the Great Depression of 1930s and the Great Recession of 2008. It is also useful in constructing Japanese and Chinese industrial economy when they were poor. Now that China is rich it should consume more and let other countries have a chance to industrialize. The Say's Law is also true: demand expansion through borrowing is unsustainable, regardless it is from consumer or the government. A healthy economy depends on the growth of high pay jobs. High pay job is a form of supply. It is also a source of demand.