Markets have always been known for factoring the worst and they always make their bottoms much before the worse actually happens. Two golden rules to time the markets.
1. Buying just a day after the worst news comes, is the best way to time markets, to make money.
But you should sell before the next worse news comes. You might be trapped, if a long series of worse news keeps coming, wait for the series to end, keep buying more. Markets will rise highly at the end, without any good news.
2. If market is waiting for a news, the move of the market will be independent of outcome of the news. However, if a news comes unexpectedly for which markets are not waiting, the outcome depends on the news.
People look for indicator like Volatility, supports, resistance but believe me all these just don't work. Above two rules will help you more than any support or resistance level will.
Today, the markets have made their bottoms in relation to the mortgage boom and its bust.
The recession will soon look like over, obviously lot of macroeconomic numbers are going to come out to show worst might not be over, but do not get worried markets are ready for a rally.
Now, people will soon forget about Subprime crisis. This looks like the end to me.
But now the problem has just started which will surface again a year later, i will call it bust of the US consumption boom. But forget that, go long with a lot of money till November we will not see any signs of this crisis. Go short on gold for some time.
Tuesday, September 30, 2008
Monday, September 29, 2008
Banking boom
If you have been reading this blog, and believing in everything that i say, and are thinking i know about markets or i am intelligent, you are violating Rule 2 of "The Basics".
Some months back, a guy came to my office, he wanted my dad to lend him some money. That time market rates were going around 24% per year. He was ready to pay 28% and needed money for 3 months. My dad knew him fairly well so credit risk was limited. I thought right now its not our Oil demand season, our money is free, and guy in paying good rates, we should lend it to him. My dad told me another concept, if somebody is paying you a high interest rate on your capital stop lending to him, if whole industry is paying high interest rate, stop lending and keep your money in bank account. However, if you as an engineer calculate the interest using the interest rate, and make decision based on numbers, you are bound to fail.
In 1998, suddenly a boom came and everybody from IIT wanted to become a Software engineer. This boom busted in 2000, and then just 3 years later, nobody wanted to be a Software engineer. Infact, people said i will do any shit job, but i will not code in my life. Just 2 years after that time everybody wanted to be an Investment Banker. The world changed so many times, with booms and busts, that it was stupidity to be sector specific/ technology specific. There for the rescue, comes a manager, the good part about having an MBA is, now you can look for a booming industry, pass your time, put your managerial fundaes, your ideas will not matter since it is a boom the company will make profits anyway. When the bust occurs, switch, start looking for another booming sector.
I discussed with a senior of mine, who saw IT crash and losing his job in the US. After that he came back to India and went to IIMB. We both discussed over rules to identify your job is a boom.
1. You will be paid higher than other people of similar talent. Don't be mistaken, that your higher pay is because of your intelligence and experience.
2. Your company will hire more people than it actually needs. So, you have to work much less than other people with similar pay.
3. This higher pay will attract a huge number of assholes in the job rather than actually talented people. If you see lot of assholes around you, and think that how does this company makes so much money using these assholes, then the boom is near its peak. Identifying assholes in a corporate atmosphere is difficult, because their money changes your perception about them. You have to learn more on identifying assholes in your college itself. I am not going to write down rules about it.
4. Your company will suddenly out of nowhere feel the need of smart people. It will go to the best educational institutes to hire random people, with kind of talent it not at all needs.
5. You will see some people quitting the job for no reason at all. Especially these people will be part of upper management.
6. Your company will become extravagant initially, then it will talk about cost cutting.
Lodha builders, a Bombay based builder, went to IIMs last year to hire people and paid them more than what ITC did. I don't know why a construction company will ever need managers from IIMs, and that too in such a huge numbers. If they came to IIT for hiring civil engineers that would made sense.
Some months back, a guy came to my office, he wanted my dad to lend him some money. That time market rates were going around 24% per year. He was ready to pay 28% and needed money for 3 months. My dad knew him fairly well so credit risk was limited. I thought right now its not our Oil demand season, our money is free, and guy in paying good rates, we should lend it to him. My dad told me another concept, if somebody is paying you a high interest rate on your capital stop lending to him, if whole industry is paying high interest rate, stop lending and keep your money in bank account. However, if you as an engineer calculate the interest using the interest rate, and make decision based on numbers, you are bound to fail.
In 1998, suddenly a boom came and everybody from IIT wanted to become a Software engineer. This boom busted in 2000, and then just 3 years later, nobody wanted to be a Software engineer. Infact, people said i will do any shit job, but i will not code in my life. Just 2 years after that time everybody wanted to be an Investment Banker. The world changed so many times, with booms and busts, that it was stupidity to be sector specific/ technology specific. There for the rescue, comes a manager, the good part about having an MBA is, now you can look for a booming industry, pass your time, put your managerial fundaes, your ideas will not matter since it is a boom the company will make profits anyway. When the bust occurs, switch, start looking for another booming sector.
I discussed with a senior of mine, who saw IT crash and losing his job in the US. After that he came back to India and went to IIMB. We both discussed over rules to identify your job is a boom.
1. You will be paid higher than other people of similar talent. Don't be mistaken, that your higher pay is because of your intelligence and experience.
2. Your company will hire more people than it actually needs. So, you have to work much less than other people with similar pay.
3. This higher pay will attract a huge number of assholes in the job rather than actually talented people. If you see lot of assholes around you, and think that how does this company makes so much money using these assholes, then the boom is near its peak. Identifying assholes in a corporate atmosphere is difficult, because their money changes your perception about them. You have to learn more on identifying assholes in your college itself. I am not going to write down rules about it.
4. Your company will suddenly out of nowhere feel the need of smart people. It will go to the best educational institutes to hire random people, with kind of talent it not at all needs.
5. You will see some people quitting the job for no reason at all. Especially these people will be part of upper management.
6. Your company will become extravagant initially, then it will talk about cost cutting.
Lodha builders, a Bombay based builder, went to IIMs last year to hire people and paid them more than what ITC did. I don't know why a construction company will ever need managers from IIMs, and that too in such a huge numbers. If they came to IIT for hiring civil engineers that would made sense.
Saturday, September 27, 2008
India, golden bird ready to fly.
When US falls into recession, it will take Europe, Japan along with it. Effectively, whole developed world will fall into recession. Demand for money is going to go down. Demand for commodities is going to go down.
The demise of the biggest consumer of the world, opens a position of a consumer, which can consume more than it produces, to fill the gap in global growth. This consumer, should be politically stable, have immense potential to consume, its economy should be insulated from global recession.
Russia, being a primary commodity exporter, if commodity prices go down. It will also start feeling problems.
China, a country dependent on US exports. If those exports take a hit, China cannot sustain its current growth rates. But China is still a very good contender, but it has to change its focus from serving its greatest consumer, to serve its own people. These will need a shift in industries, such changes will take 3-5 years.
South Africa, a good choice, less dependent on both US and commodities.
Rest of Africa, no political stability, dependent on commodity exports.
South America, Brazil and Argentina, dependent totally on commodities.
Taiwan, South Korea dependent on US, but technology demand is going to remain robust.
Japan, already a fucked up shit.
Pakistan, politically unstable.
India, with its ever growing population is the best country suited to fill this gap, it has immense consumption capability. It is less dependent on exports and more dependent on its own internal economy. India, a country dependent on commodities, most hurt because of high commodity prices and a high interest rates. If crude reaches 50$ and remains there for an year and India does not cuts on retail petroleum price, in such a scenario, Indian government will have so much money that it can fund all current infrastructure projects (for which it called for Foreign investment and Public Private Partnerships) on its own including road, railways and ports. It can lay a robust irrigation pipeline, which could possibly pass through every village of the country. Since, half of the world is also in recession, money supply will be so much that interest rates will come all the way down to 6% or even lower.
Lot of countries, moving their extra reserves to India will also mean Rupee appreciation which will make things even better. China will revive in this time, but due to political reasons we are much better contender than China, just because we are a democracy.
We consume, people park there excess money in India, so Rupee appreciates, and we get to consume more at a cheaper price. These factors are similar to factors which lead to US growth from 1980 till now. India will have a massive consumption boom.
It will be great to see, when your watchman will be buying clothes from a mall. Bullock and hand-pulled Carts will disappear from roads. A person with earning Rs.5000 will be able to afford much more than his bare necessities. You will see a mall, every 100 meters. Prosperity of farmers. Nariman Point will become Manhattan of India.
What does this mean for the stock markets ? I will say the mother of all bull runs will come.
A stock market does not need foreign inflows or FII money to rise. When they stop selling, we will see a rise. Stock market needs a buoyant economy which shows growth. How much are we going to grow ? I say 15% per annum in US dollar terms and at least 10% in Rupee terms.
It will also be an end to outsourcing boom, Indian IT will also suffer but India will have huge IT demand of its own after some years.
Somebody, told me that India has far too many problems to grow. My argument is when money comes, all the problems will automatically be tackled. When our politicians are going to dress up in expensive Gucci suits and drink Martini, words of wisdom will come out from their mouth.
Intelligence comes with money. Money comes with growth.
Indian economy is on a launchpad to growth, one it is launched, the growth trajectory is already set up by the rest of the world. Our stock markets will never see such a big correction for next 10 years. Earlier, growth was in selected cities, mostly because of the outsourcing boom. Now, it will be the time for every city to grow into a metro and every town to grow into a city.
Our population will become our biggest asset, we will fill the gap in global consumption after the demise of the biggest consumer. We have been taught to save every drop of petrol, save every drop of water. Now nobody will teach us savings, it will be the time for consuming, consuming more than we need.
But remember that this boom will also bust, for probably rise of Africa.
The demise of the biggest consumer of the world, opens a position of a consumer, which can consume more than it produces, to fill the gap in global growth. This consumer, should be politically stable, have immense potential to consume, its economy should be insulated from global recession.
Russia, being a primary commodity exporter, if commodity prices go down. It will also start feeling problems.
China, a country dependent on US exports. If those exports take a hit, China cannot sustain its current growth rates. But China is still a very good contender, but it has to change its focus from serving its greatest consumer, to serve its own people. These will need a shift in industries, such changes will take 3-5 years.
South Africa, a good choice, less dependent on both US and commodities.
Rest of Africa, no political stability, dependent on commodity exports.
South America, Brazil and Argentina, dependent totally on commodities.
Taiwan, South Korea dependent on US, but technology demand is going to remain robust.
Japan, already a fucked up shit.
Pakistan, politically unstable.
India, with its ever growing population is the best country suited to fill this gap, it has immense consumption capability. It is less dependent on exports and more dependent on its own internal economy. India, a country dependent on commodities, most hurt because of high commodity prices and a high interest rates. If crude reaches 50$ and remains there for an year and India does not cuts on retail petroleum price, in such a scenario, Indian government will have so much money that it can fund all current infrastructure projects (for which it called for Foreign investment and Public Private Partnerships) on its own including road, railways and ports. It can lay a robust irrigation pipeline, which could possibly pass through every village of the country. Since, half of the world is also in recession, money supply will be so much that interest rates will come all the way down to 6% or even lower.
Lot of countries, moving their extra reserves to India will also mean Rupee appreciation which will make things even better. China will revive in this time, but due to political reasons we are much better contender than China, just because we are a democracy.
We consume, people park there excess money in India, so Rupee appreciates, and we get to consume more at a cheaper price. These factors are similar to factors which lead to US growth from 1980 till now. India will have a massive consumption boom.
It will be great to see, when your watchman will be buying clothes from a mall. Bullock and hand-pulled Carts will disappear from roads. A person with earning Rs.5000 will be able to afford much more than his bare necessities. You will see a mall, every 100 meters. Prosperity of farmers. Nariman Point will become Manhattan of India.
What does this mean for the stock markets ? I will say the mother of all bull runs will come.
A stock market does not need foreign inflows or FII money to rise. When they stop selling, we will see a rise. Stock market needs a buoyant economy which shows growth. How much are we going to grow ? I say 15% per annum in US dollar terms and at least 10% in Rupee terms.
It will also be an end to outsourcing boom, Indian IT will also suffer but India will have huge IT demand of its own after some years.
Somebody, told me that India has far too many problems to grow. My argument is when money comes, all the problems will automatically be tackled. When our politicians are going to dress up in expensive Gucci suits and drink Martini, words of wisdom will come out from their mouth.
Intelligence comes with money. Money comes with growth.
Indian economy is on a launchpad to growth, one it is launched, the growth trajectory is already set up by the rest of the world. Our stock markets will never see such a big correction for next 10 years. Earlier, growth was in selected cities, mostly because of the outsourcing boom. Now, it will be the time for every city to grow into a metro and every town to grow into a city.
Our population will become our biggest asset, we will fill the gap in global consumption after the demise of the biggest consumer. We have been taught to save every drop of petrol, save every drop of water. Now nobody will teach us savings, it will be the time for consuming, consuming more than we need.
But remember that this boom will also bust, for probably rise of Africa.
Friday, September 26, 2008
Value of a Dollar ?
Majority always loses. Here is another example, when market go in worst depressions, it start with credit crunch, people lose faith in banking system, in stock market investment and keep their cash with themselves. This is effectively, they are long on CASH and short on every other asset.
At this particular time CASH loses its value. In worst depression, you will loose less if you invest in stock market, rather than bonds or cash. When majority runs for safety in bonds and cash, they lose value. How much value can cash loose ? See the image below
1923 Weimar Republic inflation: A German woman feeding a stove with Papiermarks, which burned longer than the amount of firewood people could buy with them.
What happens when dollar gets devalued ? In all currency devaluations in the past, we have seen high inflation in the countries. This is called Hyperinflation. Go through the link to read more about it. This is not a particularly uncommon episode in human history. It has occurred in the following countries, in the last 150 years. Weimar Republic of Germany 1920 – 23 (1/466 billionth of starting value), Zimbabwe 2003 - Now (6 quadrillionth of the starting value and continuing to fall), Former Soviet Union 1993 – 2002 (1/14th of starting value), Argentina 1975 – 1983 (1/1,000th of starting value), Austria 1921 – 23 (about ¼ of starting value), Bolivia 1984 - 86 (1/1,000 of starting value); Bosnia-Herzegovina 1992 – 93 (1/100,000th of starting value), Brazil 1960 – 94 (1 trillionth of starting value), Chile 1971 – 73 (1/3rd of starting value), China 1947 – 55 (1/10,000th of starting value), Greece 1943 – 53 (1/50 trillionth of starting value), Hungary 1945 – 46 (100 quintillionth of the starting value), Hungary 1922 – 23 (1/4 of starting value), Israel 1976 – 86 (1/16th of starting value), Japan 1934 – 51 (1/362nd of starting value), Poland 1990 – 94 (1/10,000th of starting value), U.S.A. (Confederate States of America) 1861 – 65 (1/90th of starting value, and then, by the end of the Civil War, the Confederate Dollar depreciated to zero).
Imagine this, you go buy some tomatoes from your sabjiWala and he says that will be 50 billion rupees. This is what happened with a lot of countries in the past. Look at the Yugoslavia, 50 billion currency note, this was printed and used for real by the people of Yugoslavia in 1994.
So the rule is, if currency of a nation is devalued, it experienced Hyperinflation. So, if dollar goes down, all commodities should go up. This is right, since it will make commodities cheaper for other nations. This was the reason why a commodity run up also started, when dollar started losing value in 2002. Crude oil for example, increased from 10$ to a peak of 147$ in July'08.
But, i fortunately saw a big flaw with the statement above. I made a concept during Physics preparations for IIT JEE. The concept was, always start approaching the problem from the most fundamental law, never approach it with a formula. Consider this problem,
So, what is the fundamental law of the market ? Price is dependent on Supply and Demand.
Earlier, whenever currency devaluation lead to hyperinflation, or continued rise of commodity prices, were for economies which were too small to effect the Supply and Demand equation of the rest of the world. If the greatest and the biggest economy, faces currency devaluation, and it cannot afford those commodities, then nobody else can. US falls into recession, it will take half of the world along with it. Prices of commodites have to come down for world's supply-demand to match.
Fairly convinced with my idea, i started looking at the rise of crude oil. I went short on crude oil at 120$ in May'08, thinking crude is reasonably expensive at 120$, it will peak around 130$ and go down below 100$.
But when crude prices rised to 130$, some stupid hedge fund manager, pension fund manager, and other assholes of the world, looked at rising inflation. So as a hedge against inflation, they started buying a basket of commodities. Which in turn increases the price of commodities, and also the inflation, which leads to more stupid fund manager, jumping into buying commodities for hedge against inflation. This is clearly a boom, if price of a asset is a reason for its further price rise, it is a feedback spiral. I went more short at 135$. Bloody crude reached 140$. I faced severe margin pressure and thought about cutting my positions because every newspaper was shouting that crude will reach 200$, but then the basic rule came to my mind, always go short on newspaper investment ideas. So, i decided that instead i will stop picking my brokers phone when he asks for further margin on my short positions. I forgot the law, that market will far overreach equilibrium, when it is in a trend, so i went short too early.
Crude peaked on July15'08, at a price of 147$, it crashed by 37% to below 100$, in just two months. I made money. Took my broker out for dinner, because he did not asked for margin from 140$ to 147$.
Last post, i talked about going short or staying away from US dollar, any stocks which gets their earnings from US (Indian IT and Pharma stocks). Here is another trade,
go short on crude oil. Once, US dollar loses its value, US will fall into deeper recession, there will not be an hyperinflation scenario, commodities are also going to lose value, because the biggest consumer is going down. I am betting on crude oil below 50$. I will keep my short positions open till 70$.
Another trade, when US falls into recession, lot of other economies are going to feel the heat, cash is going to lose value, banks will face pressure to remain solvent. At that time Gold glittlers and comes to rescue, go long on Gold.
But Gold will remain a volatile shit, because its a commodity, it has to follow path of a commodity by going down, but Gold is special, it is the only invesment people run to when economies go down, recessions looms in.
Best trade will be, Go long gold and go short on an equivalent amount of crude oil, at the same time. This saves you from a lot of risk, especially currency risk, volatility risk etc.
Crude around 100$, all other commodities also 20% below their peaks of July'15. By next mar-july, India will start to see negative inflation. So, RBI has to cut interest rates. I forsee, interest rates cuts starting from decemeber. When all commodities will reach significantly low levels. I will write about The Story Of India, in my next post.
At this particular time CASH loses its value. In worst depression, you will loose less if you invest in stock market, rather than bonds or cash. When majority runs for safety in bonds and cash, they lose value. How much value can cash loose ? See the image below
1923 Weimar Republic inflation: A German woman feeding a stove with Papiermarks, which burned longer than the amount of firewood people could buy with them.
What happens when dollar gets devalued ? In all currency devaluations in the past, we have seen high inflation in the countries. This is called Hyperinflation. Go through the link to read more about it. This is not a particularly uncommon episode in human history. It has occurred in the following countries, in the last 150 years. Weimar Republic of Germany 1920 – 23 (1/466 billionth of starting value), Zimbabwe 2003 - Now (6 quadrillionth of the starting value and continuing to fall), Former Soviet Union 1993 – 2002 (1/14th of starting value), Argentina 1975 – 1983 (1/1,000th of starting value), Austria 1921 – 23 (about ¼ of starting value), Bolivia 1984 - 86 (1/1,000 of starting value); Bosnia-Herzegovina 1992 – 93 (1/100,000th of starting value), Brazil 1960 – 94 (1 trillionth of starting value), Chile 1971 – 73 (1/3rd of starting value), China 1947 – 55 (1/10,000th of starting value), Greece 1943 – 53 (1/50 trillionth of starting value), Hungary 1945 – 46 (100 quintillionth of the starting value), Hungary 1922 – 23 (1/4 of starting value), Israel 1976 – 86 (1/16th of starting value), Japan 1934 – 51 (1/362nd of starting value), Poland 1990 – 94 (1/10,000th of starting value), U.S.A. (Confederate States of America) 1861 – 65 (1/90th of starting value, and then, by the end of the Civil War, the Confederate Dollar depreciated to zero).
Imagine this, you go buy some tomatoes from your sabjiWala and he says that will be 50 billion rupees. This is what happened with a lot of countries in the past. Look at the Yugoslavia, 50 billion currency note, this was printed and used for real by the people of Yugoslavia in 1994.
So the rule is, if currency of a nation is devalued, it experienced Hyperinflation. So, if dollar goes down, all commodities should go up. This is right, since it will make commodities cheaper for other nations. This was the reason why a commodity run up also started, when dollar started losing value in 2002. Crude oil for example, increased from 10$ to a peak of 147$ in July'08.
But, i fortunately saw a big flaw with the statement above. I made a concept during Physics preparations for IIT JEE. The concept was, always start approaching the problem from the most fundamental law, never approach it with a formula. Consider this problem,
So, what is the fundamental law of the market ? Price is dependent on Supply and Demand.
Earlier, whenever currency devaluation lead to hyperinflation, or continued rise of commodity prices, were for economies which were too small to effect the Supply and Demand equation of the rest of the world. If the greatest and the biggest economy, faces currency devaluation, and it cannot afford those commodities, then nobody else can. US falls into recession, it will take half of the world along with it. Prices of commodites have to come down for world's supply-demand to match.
Fairly convinced with my idea, i started looking at the rise of crude oil. I went short on crude oil at 120$ in May'08, thinking crude is reasonably expensive at 120$, it will peak around 130$ and go down below 100$.
But when crude prices rised to 130$, some stupid hedge fund manager, pension fund manager, and other assholes of the world, looked at rising inflation. So as a hedge against inflation, they started buying a basket of commodities. Which in turn increases the price of commodities, and also the inflation, which leads to more stupid fund manager, jumping into buying commodities for hedge against inflation. This is clearly a boom, if price of a asset is a reason for its further price rise, it is a feedback spiral. I went more short at 135$. Bloody crude reached 140$. I faced severe margin pressure and thought about cutting my positions because every newspaper was shouting that crude will reach 200$, but then the basic rule came to my mind, always go short on newspaper investment ideas. So, i decided that instead i will stop picking my brokers phone when he asks for further margin on my short positions. I forgot the law, that market will far overreach equilibrium, when it is in a trend, so i went short too early.
Crude peaked on July15'08, at a price of 147$, it crashed by 37% to below 100$, in just two months. I made money. Took my broker out for dinner, because he did not asked for margin from 140$ to 147$.
Last post, i talked about going short or staying away from US dollar, any stocks which gets their earnings from US (Indian IT and Pharma stocks). Here is another trade,
go short on crude oil. Once, US dollar loses its value, US will fall into deeper recession, there will not be an hyperinflation scenario, commodities are also going to lose value, because the biggest consumer is going down. I am betting on crude oil below 50$. I will keep my short positions open till 70$.
Another trade, when US falls into recession, lot of other economies are going to feel the heat, cash is going to lose value, banks will face pressure to remain solvent. At that time Gold glittlers and comes to rescue, go long on Gold.
But Gold will remain a volatile shit, because its a commodity, it has to follow path of a commodity by going down, but Gold is special, it is the only invesment people run to when economies go down, recessions looms in.
Best trade will be, Go long gold and go short on an equivalent amount of crude oil, at the same time. This saves you from a lot of risk, especially currency risk, volatility risk etc.
Crude around 100$, all other commodities also 20% below their peaks of July'15. By next mar-july, India will start to see negative inflation. So, RBI has to cut interest rates. I forsee, interest rates cuts starting from decemeber. When all commodities will reach significantly low levels. I will write about The Story Of India, in my next post.
Thursday, September 25, 2008
Rise and Fall of US
When boom continues and runs in its full pace, everybody thinks smart, intelligent and hard-working people of America created America in its present form.
I will show you how an upward spiral created America in its present form, at the cost of growth in Japan.
Imagine, a two-people economy. Adam and Eve live alone in an island. Both use gold coins, as a currency between them, both have 5-5 gold coins each. The score board, or the number of coins with each of them is also written along with the trade.
Eve wants an apple. Adam gets it an get a gold coin for it. Adam/6, Eve/4
Adam wants sex, a gold coin changes hands again. Adam/5 Eve/5
Now, Adam decides to keep all his earned gold coins with Eve. He will take it from Eve whenever he needs them.
Now Adam want sex, takes a gold coin from Eve and give it back to him. Adam/4, Eve/6.
But Eve this time demands 10 Apples. He gives 10 gold coins to Adam, Adam gets 10 apples, and leaves his 10 gold coins with Eve. Adam/14 Eve/(-4)
Adam wants sex. Adam/13 Eve/(-3)
Eve 10 Apples. Adam/23 Eve/(-13)
Adam wants sex. Adam/22 Eve/(-12)
Eve 10 Apples. Adam/32 Eve/(-22)
Adam wants his money back. The boom busts. Adam/10 Eve/0.
Adam kills Eve, because the fucking bitch gobbled up his 22 gold coins.
Eve consumed a lot. She was like America, consuming on borrowed money.
This is precisely what happened to America and was a reason for its growth. All countries, all petrol exporting nations, Japan, China, India kept there hard earned money in US dollar denominated treasury bonds. All developing countries are very happy to have dollar denominated huge forex reserves, and US felt even happier to spend it.
This faith in dollar as a currency and United States as a nation. For Japan it made sense, because they were getting better interest rate then there own country. But how stupid was this act for all other nations, they could have got better interest rates in any other nation. India could have spent that on improving its own infrastructure, which was its biggest bottleneck.
An economy which is alive because of consumption. Consumption is the biggest contributer to their GDP. Obviously, everybody will consume like Eve, if they always get the 100% money back on that consumption.
No doubt, US showed potential of becoming the best economy till 80's i admire US for its growth. Then investments happen, they consumed and actually became the best economy. Every country was happy to produce more than it consumed and look at their swelling forex reserves. America was happy to consume more than it produced and look at their swelling deficits.
This led to formation of a big massive credit bubble in US economy. Warren Buffet lived through it and made fortunes. But you must respect the rule 2, of The Basics. To judge on Warren Buffet brains, you must wait till the bust.
What has changed, which led to bust of this boom. Obviously, some countries like Adam, asked for their money back. It all started with IT crash, after IT crash, US reduced interest rates to avoid a recession. Then WTC attack occurred, the economy went down again. Further interest rates cuts, and interest rates reached 1%, and were left like that because election were just an year away and people were happy buying dream houses for 1/6 of the EMI as rates came down from 6% to 1% in less than 1.5 years . This started a mortgage boom which busted in 2007. Countries for better interest rate started moving there forex reserves into Euro. Some even made their own Sovereign Wealth fund to buy equity in other countries.
When will other countries ask for their money back ? Or pull there money from dollar denominated US treasury. This will happen if US continues to be in a longer recession.
US is all set to be in a long recession, because last time interest rate cuts started a mortgage boom. Now there is no other boom left which could show growth for the US. In the time of recession, if US cuts on its consumption, it will have to suffer even more. And since it is a recession, US cannot consume at the same rate as it did earlier. Only option to boost its economy is using a war, which it cannot afford to do with such mounting deficits. Other option is it develops some groundbreaking revolutionary technology, like transmitting human beings or getting oil from moon.
I hope i convinced you to move all your assets away from US dollar. Stay away from all stocks which get their earnings from US. Stay away from outsourced US jobs for a long-term career. Stop thinking of moving to US. I also want to bet with Warren Buffet, that he will not be in list of top 10 richest persons within next 5 years.
This fall of US, also means rise of India. I will write about it in my next post.
I will show you how an upward spiral created America in its present form, at the cost of growth in Japan.
Imagine, a two-people economy. Adam and Eve live alone in an island. Both use gold coins, as a currency between them, both have 5-5 gold coins each. The score board, or the number of coins with each of them is also written along with the trade.
Eve wants an apple. Adam gets it an get a gold coin for it. Adam/6, Eve/4
Adam wants sex, a gold coin changes hands again. Adam/5 Eve/5
Now, Adam decides to keep all his earned gold coins with Eve. He will take it from Eve whenever he needs them.
Now Adam want sex, takes a gold coin from Eve and give it back to him. Adam/4, Eve/6.
But Eve this time demands 10 Apples. He gives 10 gold coins to Adam, Adam gets 10 apples, and leaves his 10 gold coins with Eve. Adam/14 Eve/(-4)
Adam wants sex. Adam/13 Eve/(-3)
Eve 10 Apples. Adam/23 Eve/(-13)
Adam wants sex. Adam/22 Eve/(-12)
Eve 10 Apples. Adam/32 Eve/(-22)
Adam wants his money back. The boom busts. Adam/10 Eve/0.
Adam kills Eve, because the fucking bitch gobbled up his 22 gold coins.
Eve consumed a lot. She was like America, consuming on borrowed money.
This is precisely what happened to America and was a reason for its growth. All countries, all petrol exporting nations, Japan, China, India kept there hard earned money in US dollar denominated treasury bonds. All developing countries are very happy to have dollar denominated huge forex reserves, and US felt even happier to spend it.
This faith in dollar as a currency and United States as a nation. For Japan it made sense, because they were getting better interest rate then there own country. But how stupid was this act for all other nations, they could have got better interest rates in any other nation. India could have spent that on improving its own infrastructure, which was its biggest bottleneck.
An economy which is alive because of consumption. Consumption is the biggest contributer to their GDP. Obviously, everybody will consume like Eve, if they always get the 100% money back on that consumption.
No doubt, US showed potential of becoming the best economy till 80's i admire US for its growth. Then investments happen, they consumed and actually became the best economy. Every country was happy to produce more than it consumed and look at their swelling forex reserves. America was happy to consume more than it produced and look at their swelling deficits.
This led to formation of a big massive credit bubble in US economy. Warren Buffet lived through it and made fortunes. But you must respect the rule 2, of The Basics. To judge on Warren Buffet brains, you must wait till the bust.
What has changed, which led to bust of this boom. Obviously, some countries like Adam, asked for their money back. It all started with IT crash, after IT crash, US reduced interest rates to avoid a recession. Then WTC attack occurred, the economy went down again. Further interest rates cuts, and interest rates reached 1%, and were left like that because election were just an year away and people were happy buying dream houses for 1/6 of the EMI as rates came down from 6% to 1% in less than 1.5 years . This started a mortgage boom which busted in 2007. Countries for better interest rate started moving there forex reserves into Euro. Some even made their own Sovereign Wealth fund to buy equity in other countries.
When will other countries ask for their money back ? Or pull there money from dollar denominated US treasury. This will happen if US continues to be in a longer recession.
US is all set to be in a long recession, because last time interest rate cuts started a mortgage boom. Now there is no other boom left which could show growth for the US. In the time of recession, if US cuts on its consumption, it will have to suffer even more. And since it is a recession, US cannot consume at the same rate as it did earlier. Only option to boost its economy is using a war, which it cannot afford to do with such mounting deficits. Other option is it develops some groundbreaking revolutionary technology, like transmitting human beings or getting oil from moon.
I hope i convinced you to move all your assets away from US dollar. Stay away from all stocks which get their earnings from US. Stay away from outsourced US jobs for a long-term career. Stop thinking of moving to US. I also want to bet with Warren Buffet, that he will not be in list of top 10 richest persons within next 5 years.
This fall of US, also means rise of India. I will write about it in my next post.
The feedback spiral.
I will start with an example about confidence and performance of a hard-working person.
Performance of person boosts his confidence. Confidence of person boosts his performance.
This can be taken as a classical example of a feedback loop. This is story of Uncle Sam.
He performs well in his job. He gets good results and great bonus. His confidence boosts up. More confidence leads to even better performance. His confidence becomes over-confidence. His performance gets even better. This is the feedback loop working in making a positive spiral. Both his performance and confidence reach very high levels. Now Uncle Sam is the best performer, everybody thinks he is intelligent and hardworking. This is a boom.
Now, for some reasons his performance remain subdued because of an illness for 5 day. He performs terribly in his job, confidence goes down. After this time the illness is over. He again starts performing better and confidence again reach good values. Performance and Confidence, just had a minor correction but reached new peaks again. This is similar to a market correction.
Now, consider a case when this illness continues for a little longer, say an year.
Performance is down because of illness. Confidence goes down a little. Performance suffers because of confidence. Confidence goes down even more. Performance suffers more. Confidence become under-confidence, performance literally crashes. Uncle Sam is not even confident, if he can work anymore ever. His performance and confidence both goes to subdued levels. He looks like an asshole to everybody else. Uncle Sam is depressed and stops working. This is a bust. This is called market crash.
This feedback loop exist everywhere. Human nature is like that. Everybody likes it when it works in making a positive spiral. But when things remain subdued for long period of time due to some reason there is a significant risk that positive spiral never begins again. And things unwind in a negative spiral and end terribly.
Some economic examples are here.
One bank declared bankruptcy because of subprime mortgages. This leads to a credit crunch, because everybody is worried which bank will go next, so nobody offers credit. This credit crunch makes it difficult for banks to borrow when they need money. Leading to further bankruptcy and a worse credit crunch. Such spiral will continue in the negative direction and credit crunch will even worse until and unless this negative feedback loop is broken by a government intervention.
Another example, is the housing market, if house price fall more than unusual, people default on their loans. At this time, banks should keep giving more loans, but banks will take a decision of going slow on housing loans. This hinders people to buy houses, leading to further fall in house prices. Further defaults. Further tightening in load dispersal. Further price fall. Further defaults.
Whole globe faced similar risk just some days before. If US would not have decided on bailout,
more banks will go insolvent, credit crunch get even deeper, credit availibility threatens housing loan, car loan, education loans and industry loans. Industries stops working, leading to unemployment. The whole economy slows down, if credit is not easily available.
US has done good to save their economy by a 700B$ bailout.
This bailout is nice because it will take down the US economy slowly. If US economy would have collapsed, it will take all the economies along with it. But the problem has not yet ended, economic policies have to manage the impossible trinity. US cannot just manage this impossible trinity, the interest rate, the currency and the inflation.
If US keeps interest rates low for a long period of time, people move away from dollar for higher interest rate in some other currency. If dollar depreciates, chinese goods and Oil become expensive in US, hurting there economy GDP and purchasing power of individuals. Leading to high inflation.
If US inturn raises interest rates, the growth of the economy already at a brink of collapse, slow down and risk of collapse increase again.
US has no choice but to keep interest rate low, so dollar will continue to depreciate in a long run.
In next 5 years, we will see lower acceptance of dollar as a safe currency. Which currency will people keep their forex reserves in ?
The problem which leads to fall because of formation of a negative spiral with US economy. This same problem also leads to formation of a positive spiral with Indian economy.
I will write about what made US, the greatest economy after all. What made Warren Buffet, look intelligent and make a lot of money living in a boom. What created a boom, called US.
What will lead to its relative fall to other economies and losing its superpower status.
Performance of person boosts his confidence. Confidence of person boosts his performance.
This can be taken as a classical example of a feedback loop. This is story of Uncle Sam.
He performs well in his job. He gets good results and great bonus. His confidence boosts up. More confidence leads to even better performance. His confidence becomes over-confidence. His performance gets even better. This is the feedback loop working in making a positive spiral. Both his performance and confidence reach very high levels. Now Uncle Sam is the best performer, everybody thinks he is intelligent and hardworking. This is a boom.
Now, for some reasons his performance remain subdued because of an illness for 5 day. He performs terribly in his job, confidence goes down. After this time the illness is over. He again starts performing better and confidence again reach good values. Performance and Confidence, just had a minor correction but reached new peaks again. This is similar to a market correction.
Now, consider a case when this illness continues for a little longer, say an year.
Performance is down because of illness. Confidence goes down a little. Performance suffers because of confidence. Confidence goes down even more. Performance suffers more. Confidence become under-confidence, performance literally crashes. Uncle Sam is not even confident, if he can work anymore ever. His performance and confidence both goes to subdued levels. He looks like an asshole to everybody else. Uncle Sam is depressed and stops working. This is a bust. This is called market crash.
This feedback loop exist everywhere. Human nature is like that. Everybody likes it when it works in making a positive spiral. But when things remain subdued for long period of time due to some reason there is a significant risk that positive spiral never begins again. And things unwind in a negative spiral and end terribly.
Some economic examples are here.
One bank declared bankruptcy because of subprime mortgages. This leads to a credit crunch, because everybody is worried which bank will go next, so nobody offers credit. This credit crunch makes it difficult for banks to borrow when they need money. Leading to further bankruptcy and a worse credit crunch. Such spiral will continue in the negative direction and credit crunch will even worse until and unless this negative feedback loop is broken by a government intervention.
Another example, is the housing market, if house price fall more than unusual, people default on their loans. At this time, banks should keep giving more loans, but banks will take a decision of going slow on housing loans. This hinders people to buy houses, leading to further fall in house prices. Further defaults. Further tightening in load dispersal. Further price fall. Further defaults.
Whole globe faced similar risk just some days before. If US would not have decided on bailout,
more banks will go insolvent, credit crunch get even deeper, credit availibility threatens housing loan, car loan, education loans and industry loans. Industries stops working, leading to unemployment. The whole economy slows down, if credit is not easily available.
US has done good to save their economy by a 700B$ bailout.
This bailout is nice because it will take down the US economy slowly. If US economy would have collapsed, it will take all the economies along with it. But the problem has not yet ended, economic policies have to manage the impossible trinity. US cannot just manage this impossible trinity, the interest rate, the currency and the inflation.
If US keeps interest rates low for a long period of time, people move away from dollar for higher interest rate in some other currency. If dollar depreciates, chinese goods and Oil become expensive in US, hurting there economy GDP and purchasing power of individuals. Leading to high inflation.
If US inturn raises interest rates, the growth of the economy already at a brink of collapse, slow down and risk of collapse increase again.
US has no choice but to keep interest rate low, so dollar will continue to depreciate in a long run.
In next 5 years, we will see lower acceptance of dollar as a safe currency. Which currency will people keep their forex reserves in ?
The problem which leads to fall because of formation of a negative spiral with US economy. This same problem also leads to formation of a positive spiral with Indian economy.
I will write about what made US, the greatest economy after all. What made Warren Buffet, look intelligent and make a lot of money living in a boom. What created a boom, called US.
What will lead to its relative fall to other economies and losing its superpower status.
Wednesday, September 24, 2008
Last Traded Price
People have very weird perceptions about price. They even think how can the price change every second. Here is a small story inspired by TV thriller Prison Break which explains you what is Price ?
A prisoner comes to prison with diamonds worth 100 M$ hidden inside his stomach. He takes all of these out in the prison, puking or shitting diamonds everyday. He had 100 pieces of diamonds, each worth a million dollar. Now, he was bailed out of the prison, he could not take those diamonds outside, so he sold it to all the fellow prisoners.
Since he needed money urgently he sold diamonds for 200k each, and took money from their relatives bank accounts after going outside. This is what is called an IPO or Intial Public Offering. Each diamond is worth a million $. This is called "Valuation".
Michael Scofield also found this discount incredible. He consulted his brother and decided to take a loan and buy as many diamonds. He also thought he will break the prison in 4-5 days and in just 5 days, he will get 500% return on his investment by selling diamonds for a million dollar each. He will sell diamonds for million each, return back the loan, and live happily with rest.
Now prisoners all together applied for 500 diamonds, all prisoners were allotted only one-fifth of what they applied. They all had diamonds worth a million by paying just 200k for those, and they are going to get out of the prison and sell it and die rich.
Michael Scofield who applied for 100 diamonds, got just 20, he took at 4 m$ loan, but since he was a prisoner, his credit history was pretty fucked up , so most of the banks refused him loans.
But some WallStreet's, high-risk-high-return bank lend him 4m$ at an interest rate of 5% per day ( Prisoners really have fucked up credit ratings). Scofield being an engineer calculated
he took 4m$ in loan, to buy 20 diamonds, if he takes 4 days to get of prison, interest payment will be another 80k$, still it is a neat investment. He will make 20 million by selling diamonds, and still it is a neat profit.
Now Scofield prison break failed, he could not get out after 4 days. The bank, asked him for interest payments. So he had no other choice other than selling his 2 diamonds at 400k to fellow prisoners who did not get any diamond initially and give banks the interest and pay back the loan by selling rest of the diamonds and still have neat profit. He quoted 400k as the price to sell 2 diamonds. Last traded price of diamond is 40k. This is effectively the market listed price after the IPO.
Now his prison break plan again failed after another 4 days, so he had to sell 2 more diamonds, but this time no other prisoner had 400k to pay. So he lowers down his price, to 200k and decided to sell 4 diamonds. Last trade price is 200k now.
His prison break plan again fails after 4 days. Now nobody has 200k to pay for diamonds. So he quoted his price as 100k and offers to sell 8 diamonds. Now, IPO which opened at double the offer price has slipped to half the offer price. Last trade price is now 100k. Now if you look at the the price, all prisoners have lost half of their money.
Now, everybody realizes that Scofield, is the most intelligent person in this whole prison. Why is he selling his diamonds and half the price ? People start speculating that diamonds might not be real, and people start panic selling it for 50k. About 50 prisoners (who do not even know about the rumour) realized that, they put in 200k for the diamond, now it is 50k. Thats a loss of 150k. They also think that diamonds might go down even more, because price is going down every 4 days. So to cut down the losses they also sell their diamonds for 50k.
Obviously for all 50 sellers there were 50 buyers too. Scofield escaped from the prison he sold rest of his diamonds for Million dollar each. People suddenly get to know that Scofield actually sold them for million dollar. So, now the price of diamonds start rising inside the prison next day people started offering 100k for diamonds, some people who purchased at 50k and did not know about the Scofield news, sold it for 100k and 200k, and now people quoting 750k, but none of them got any diamonds.
So, the idea of last trade price, and marking your portfolio to it , and think about losses is wrong. If you are an individual, you do not need to mark to market your loss/profits. If you know the value of your stock/asset, you should not get worried when somebody starts to sell it for 50% down. You should firmly believe in your stock. Because it is impossible to predict when will somebody start selling the stock that you own for 50% lesser price. So if you know that valuations of the daimonds were a million dollar, you should be more than happy to buy it for 100k and should not worry when the price reaches 50k. A that point you should be thinking to buy more. But remember that, somethings might happen which might change that million dollar valuation to a smaller number.
All Equity research guys will talk about valuations. So the valuations for diamonds is a million dollar. But last traded price fluctuated all the way down to 50k. If you think you made a loss because somebody else is selling the stock that you own at a much cheaper price, it is wrong.
Learning about valuations is nice, but to win in the markets, you must also be able to predict when that somebody will come to sell the stock at 50% less, so that you can buy it at that time.
A prisoner comes to prison with diamonds worth 100 M$ hidden inside his stomach. He takes all of these out in the prison, puking or shitting diamonds everyday. He had 100 pieces of diamonds, each worth a million dollar. Now, he was bailed out of the prison, he could not take those diamonds outside, so he sold it to all the fellow prisoners.
Since he needed money urgently he sold diamonds for 200k each, and took money from their relatives bank accounts after going outside. This is what is called an IPO or Intial Public Offering. Each diamond is worth a million $. This is called "Valuation".
Michael Scofield also found this discount incredible. He consulted his brother and decided to take a loan and buy as many diamonds. He also thought he will break the prison in 4-5 days and in just 5 days, he will get 500% return on his investment by selling diamonds for a million dollar each. He will sell diamonds for million each, return back the loan, and live happily with rest.
Now prisoners all together applied for 500 diamonds, all prisoners were allotted only one-fifth of what they applied. They all had diamonds worth a million by paying just 200k for those, and they are going to get out of the prison and sell it and die rich.
Michael Scofield who applied for 100 diamonds, got just 20, he took at 4 m$ loan, but since he was a prisoner, his credit history was pretty fucked up , so most of the banks refused him loans.
But some WallStreet's, high-risk-high-return bank lend him 4m$ at an interest rate of 5% per day ( Prisoners really have fucked up credit ratings). Scofield being an engineer calculated
he took 4m$ in loan, to buy 20 diamonds, if he takes 4 days to get of prison, interest payment will be another 80k$, still it is a neat investment. He will make 20 million by selling diamonds, and still it is a neat profit.
Now Scofield prison break failed, he could not get out after 4 days. The bank, asked him for interest payments. So he had no other choice other than selling his 2 diamonds at 400k to fellow prisoners who did not get any diamond initially and give banks the interest and pay back the loan by selling rest of the diamonds and still have neat profit. He quoted 400k as the price to sell 2 diamonds. Last traded price of diamond is 40k. This is effectively the market listed price after the IPO.
Now his prison break plan again failed after another 4 days, so he had to sell 2 more diamonds, but this time no other prisoner had 400k to pay. So he lowers down his price, to 200k and decided to sell 4 diamonds. Last trade price is 200k now.
His prison break plan again fails after 4 days. Now nobody has 200k to pay for diamonds. So he quoted his price as 100k and offers to sell 8 diamonds. Now, IPO which opened at double the offer price has slipped to half the offer price. Last trade price is now 100k. Now if you look at the the price, all prisoners have lost half of their money.
Now, everybody realizes that Scofield, is the most intelligent person in this whole prison. Why is he selling his diamonds and half the price ? People start speculating that diamonds might not be real, and people start panic selling it for 50k. About 50 prisoners (who do not even know about the rumour) realized that, they put in 200k for the diamond, now it is 50k. Thats a loss of 150k. They also think that diamonds might go down even more, because price is going down every 4 days. So to cut down the losses they also sell their diamonds for 50k.
Obviously for all 50 sellers there were 50 buyers too. Scofield escaped from the prison he sold rest of his diamonds for Million dollar each. People suddenly get to know that Scofield actually sold them for million dollar. So, now the price of diamonds start rising inside the prison next day people started offering 100k for diamonds, some people who purchased at 50k and did not know about the Scofield news, sold it for 100k and 200k, and now people quoting 750k, but none of them got any diamonds.
So, the idea of last trade price, and marking your portfolio to it , and think about losses is wrong. If you are an individual, you do not need to mark to market your loss/profits. If you know the value of your stock/asset, you should not get worried when somebody starts to sell it for 50% down. You should firmly believe in your stock. Because it is impossible to predict when will somebody start selling the stock that you own for 50% lesser price. So if you know that valuations of the daimonds were a million dollar, you should be more than happy to buy it for 100k and should not worry when the price reaches 50k. A that point you should be thinking to buy more. But remember that, somethings might happen which might change that million dollar valuation to a smaller number.
All Equity research guys will talk about valuations. So the valuations for diamonds is a million dollar. But last traded price fluctuated all the way down to 50k. If you think you made a loss because somebody else is selling the stock that you own at a much cheaper price, it is wrong.
Learning about valuations is nice, but to win in the markets, you must also be able to predict when that somebody will come to sell the stock at 50% less, so that you can buy it at that time.
Identification of a boom and bust
Anything prosperous going on in an economy for a longer period of time is a boom. If any economy is growing at an steady rate, it is a boom. One will obviously say that, we are growing because of our hardwork of people of our country and brains of some of our top leaders. But according to rule 2 of "The Basics", you have to wait till bust to check how much brain they have. Don't just conclude on the brain now.
What feeds the boom : The confidence among investors in the boom, feeds the boom. Obviously thing about investor confidence is, it tumbles with stock markets and goes to highly negative values when stock market has fallen more than they initially anticipated. Here, there is always a chances that slight more fall and the whole system collapses. This simple thing is called "Systematic Risk to the system".
Then comes the role of government. Some governments are intelligent enough to realize that they live in a boom, and if we do not interfere, it can bust. So whenever there is mass disbelief in the system, it imparts belief. Often this belief is imparted by spending money or cutting interest rate, market as a whole is not stable when it enters the negative period, because of existence of the downward spiral or the domino effect.
To read more on how severe these downward spiral have been go through these links.
1. Great Depression
2. Asian Financial Crisis
3. Japan's Lost Decade
These recessions were because of reasons that everybody believed in free markets, they thought government should not interfere in matching Supply and Demand. They thought markets will reach equilibrium.
During Great Depression, the German currency Mark lost so much value that it would take 2.4 trillion Marks to get a US $, which lead to terrible food crisis in Germany when their currency became worthless. You would need a bucket full of Marks, to go buy a loaf of bread. Since, you cannot afford the bucket anyway, so that money and the argument are even more useless.
Markets reached towards better conditions for human beings, but only because of the World War when people came together, economic activities started and then the boom begins again for another bust.
It should also be learned that stock markets should not be blamed for a bust. All busts start with an stock market crash, because it is one of the earliest indicators of non-healthy economy. But stock markets is just a indicator, the reasons for the busts are far inside the human nature and existence of a feedback loop.
Obviously, now economist know a lot about such crisis, but i will give you reasons why they are still inevitable. Now, such crisis will not be fast in time and intense with extremities, but they are not inevitable.
I will write about this feedback loop of prosperity and poverty in my next post.
What feeds the boom : The confidence among investors in the boom, feeds the boom. Obviously thing about investor confidence is, it tumbles with stock markets and goes to highly negative values when stock market has fallen more than they initially anticipated. Here, there is always a chances that slight more fall and the whole system collapses. This simple thing is called "Systematic Risk to the system".
Then comes the role of government. Some governments are intelligent enough to realize that they live in a boom, and if we do not interfere, it can bust. So whenever there is mass disbelief in the system, it imparts belief. Often this belief is imparted by spending money or cutting interest rate, market as a whole is not stable when it enters the negative period, because of existence of the downward spiral or the domino effect.
To read more on how severe these downward spiral have been go through these links.
1. Great Depression
2. Asian Financial Crisis
3. Japan's Lost Decade
These recessions were because of reasons that everybody believed in free markets, they thought government should not interfere in matching Supply and Demand. They thought markets will reach equilibrium.
During Great Depression, the German currency Mark lost so much value that it would take 2.4 trillion Marks to get a US $, which lead to terrible food crisis in Germany when their currency became worthless. You would need a bucket full of Marks, to go buy a loaf of bread. Since, you cannot afford the bucket anyway, so that money and the argument are even more useless.
Markets reached towards better conditions for human beings, but only because of the World War when people came together, economic activities started and then the boom begins again for another bust.
It should also be learned that stock markets should not be blamed for a bust. All busts start with an stock market crash, because it is one of the earliest indicators of non-healthy economy. But stock markets is just a indicator, the reasons for the busts are far inside the human nature and existence of a feedback loop.
Obviously, now economist know a lot about such crisis, but i will give you reasons why they are still inevitable. Now, such crisis will not be fast in time and intense with extremities, but they are not inevitable.
I will write about this feedback loop of prosperity and poverty in my next post.
The basics
Lets start with the basics. I made some rules which made me understand markets better.
1. Every market boom will be followed by a bust. It is not possible that markets reach equilibrium on the booming phase, it will far overreach equilibrium on positive side and bust terribly to get away from the equilibrium on the negative side. The bust will be followed by another boom.
2. Everybody in general is an asshole.
This is an important rule and how to differentiate between an intelligent person and an asshole.
People who earn significant money, doing anything, any shit thing, start to think that they are intelligent and not assholes.
In any boom, when people are earning money, you will find every asshole turning into an intelligent person. And when the bust occurs, every intelligent person will look like an asshole.
So whenever a boom ends with a bust, and you hear what were so many intelligent people doing, how can they not anticipate this terrible bust, you already have the answer. All those intelligent people were actually asshole, and since they were making a lot of money at the time of the boom, you thought they were intelligent. At the time of boom, you will say that CEO is an intelligent guy and when the boom busts, you will say, that asshole CEO.
So, money changes the way you look at people and it is about how much money you make.
3. Majority will always loose in the market. Never follow people advice, never invest from ideas of magazines and newspapers which have a huge reader base.
Explanation : Somebody asked me, should i store soybeans in my warehouse, will i get a better price some months down the line ? I told him yes, he stored some soybeans, and made good money on his investment.
But now, i told the same thing on television, so everybody stored soybean, so there was a shortage right now and prices jumped, but some month down the line there was oversupply and prices crashed terribly.
So, just because this investment idea was floated on a television, it turned out to be a terrible investment. Always go short on television, newspaper investment idea after 3-4 months. Those ideas create a short boom but mostly ends with terrible bursts after some time.
I made decent money by reading 4 month old news papers. I never understood why people need news to make money. I am the last one to get news, some times i get them after 4 months.
I used to watch serial on DD1 in 90's called Kisan, they suggested what should farmers grow to fetch good money on their crop and along with other crop care fundaes. But whatever they suggested, became bumper crops in the next sowing season, leading to heavy losses to the majority of the farmers.
Majority will always loose, in a market place when price is decided on the basis of supply and demand. If prices are going down, remember that majority have bought or are long on that asset. If price are going up, majority does not have or are short on that asset.
4. Rules on identifying these bigger cyclical booms and busts which last for 3-5 years and change the macroeconomics around them will be part of my next posting.
1. Every market boom will be followed by a bust. It is not possible that markets reach equilibrium on the booming phase, it will far overreach equilibrium on positive side and bust terribly to get away from the equilibrium on the negative side. The bust will be followed by another boom.
2. Everybody in general is an asshole.
This is an important rule and how to differentiate between an intelligent person and an asshole.
People who earn significant money, doing anything, any shit thing, start to think that they are intelligent and not assholes.
In any boom, when people are earning money, you will find every asshole turning into an intelligent person. And when the bust occurs, every intelligent person will look like an asshole.
So whenever a boom ends with a bust, and you hear what were so many intelligent people doing, how can they not anticipate this terrible bust, you already have the answer. All those intelligent people were actually asshole, and since they were making a lot of money at the time of the boom, you thought they were intelligent. At the time of boom, you will say that CEO is an intelligent guy and when the boom busts, you will say, that asshole CEO.
So, money changes the way you look at people and it is about how much money you make.
3. Majority will always loose in the market. Never follow people advice, never invest from ideas of magazines and newspapers which have a huge reader base.
Explanation : Somebody asked me, should i store soybeans in my warehouse, will i get a better price some months down the line ? I told him yes, he stored some soybeans, and made good money on his investment.
But now, i told the same thing on television, so everybody stored soybean, so there was a shortage right now and prices jumped, but some month down the line there was oversupply and prices crashed terribly.
So, just because this investment idea was floated on a television, it turned out to be a terrible investment. Always go short on television, newspaper investment idea after 3-4 months. Those ideas create a short boom but mostly ends with terrible bursts after some time.
I made decent money by reading 4 month old news papers. I never understood why people need news to make money. I am the last one to get news, some times i get them after 4 months.
I used to watch serial on DD1 in 90's called Kisan, they suggested what should farmers grow to fetch good money on their crop and along with other crop care fundaes. But whatever they suggested, became bumper crops in the next sowing season, leading to heavy losses to the majority of the farmers.
Majority will always loose, in a market place when price is decided on the basis of supply and demand. If prices are going down, remember that majority have bought or are long on that asset. If price are going up, majority does not have or are short on that asset.
4. Rules on identifying these bigger cyclical booms and busts which last for 3-5 years and change the macroeconomics around them will be part of my next posting.
The New World Order.
The motivation towards writing this blog is to help people understand, why market changes can effect their life, and have long term repercussions on their jobs and career. I want them to identify, when they are living through a boom. I want them to be prepared for the bust. I want them to believe in the financial system, but not too much. I want them to understand that best of financial system can collapse. I want them to atleast not loose everything when such a collapse occur.
By markets i will mean currency, commodities, stock, real estate and all other sorts of financial assets of of all countries taken together as one system.
The current changes in the markets and the economies of the world, show that something beautiful will happen for some countries, and something terrible for others.
The others, include the biggest and prosperous economy of United States of America. A new world order, will be decided by economics and not war. The first time in the world the power shift will happen without a war. Things become volatile for setting up of a new order, this a basic concept of atomic physics or any sort of evolution. The volatility in the markets for last 7 years have made a golden bird shining that is ready to fly.
By markets i will mean currency, commodities, stock, real estate and all other sorts of financial assets of of all countries taken together as one system.
The current changes in the markets and the economies of the world, show that something beautiful will happen for some countries, and something terrible for others.
The others, include the biggest and prosperous economy of United States of America. A new world order, will be decided by economics and not war. The first time in the world the power shift will happen without a war. Things become volatile for setting up of a new order, this a basic concept of atomic physics or any sort of evolution. The volatility in the markets for last 7 years have made a golden bird shining that is ready to fly.
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