2010.03.02 There are multiple dimensions of forces that act in the market to drive direction. Some of them are more powerful than the others. Some are not affected by the others in some period of time. Some have delayed time effect. As the result, the consequence of changes could be in a pattern indifferent from random. To make the scenario more complex, each country's economy is also affected by the economy of other countries and the global policonomics. Most interesting and simple one is the central bank's rate. This rate sets the last resort borrowing money by the country's banks. It has been a perception via advocated by financial analyst and the economist that there is a tight and immediate effect. When its true surfaces, people a furious on the inconvenience truth. The credit cards charging the client on credit balance at 20+% rate is well known among the credit card users but the fact does not click. As the result, the perception preached by the government on using low interest rate to stimulate the economy is a myth. This is the cause of pushing on the string. Partly due to ineffectiveness of the central bank rate and partly because of the debt. The original purpose and intends of the design is lost in now because the rate is now controlled by the banks which take advantage of the low borrowing rate from the central bank and high lending rate to the customer. This raise the question that whether the bank shareholders benefit the situation. By revealing the bonus and salary to those collaborate the sales of the financial product, the benefit to the shareholder could be at a much less degree. As Australia leading the world increasing the rate, it does not mean other have to follow to defend their currency. In fact, they want the currency's value low. The rate hike is only a moderator used to avoid runaway economy. So there are a lot of room to stay put for some countries. On the other side of the argument is that the creditor will not be happy to see the value of their loan diminishing. This is only a simple observation. It is the booming consumer economy that leads to inflation and lower currency value. Only booming manufacturing economy could improve the currency's value. The creditor has to weight on the benefit of lower loan value if there is side benefit. China succeeded on using this formulae to bootstrap her economy. Can this on going? There is a good reason to go on because even China completes the development of the domestic economy, it may not be enough to maintain the country's GDP growth. For sure, the U$ foreign exchange reserve of many countries may seek better parking lot.
2010.02.13 How fast could the U$ fall? There is a direct relationship with the political influence by the shadowed U$ monetary empire composed of the Wall Street Czars, U$ report multination companies, IMF and the UN. This a closely knitted empire that its profit and existence is based on the influence of the American military, foreign policies and trade. When U$ falls, their wealth (incremental and accumulated) in U$ will be decrease. They could deploy their accumulated wealth to other currencies (including other countries' currencies, real estate, precious metals and artworks). However if the world do not have a stable economic and political healthy state, deflation and inflation will eat away their wealth in big way. During inflation, economic could divert the focus of demand to something other than their medium of wealth storage. During deflation, the value will just drop. To keep up the U$ value, loan is lending out in various way. The payback is either through favour or through buying back of the U$ loan to keep the U$ up. The American Government is the issuer of the currency but it is not the owner or beneficiary anymore. It is the moneylords. Cheap U$ gives them less power so a free fall is not just bad to the countries that hold U$ as foreign reserve. There is a perception that U$ is the safe heaven investors flock to when their is trouble. It is a mean to raise the value artifically by reeling in the U$ to keep up the value of the wealth. To be more precisely, the future income. Other than the Wall Street lender, the IMF drives the value of U$. If IMF's special withdrawing right is calculated in more than U$, it paths to the possibility that the IMF loan will be in other currency which reduces the control of the value of U$. In a way, a rapid falling of U$ may happen if the international debt of the PIGS defaults because the lump of money will have no more effect on the PIGS. Rather to let the influence vapourized, you do not reel in the loan of a guy who could bankrupt and leaves the lender nothing. Bankruptcy is a easy way to restart without the baggage. Brazil did that but not without price such as the control of the Amazon rain forest and many natural resources. The PIGS does not have that types of natural resources. Every time, when people believe U$ is going to sink to the bottom, other currency suddenly shows significant weakness that boost the U$ which has no real reason. EU is in a much better economic health than the American. It does not make sense for people to trust the U$ more than the Euro. However, whether it makes sense or not, there is no difference. You lend the money when it is low value and reel them in when it is high (naturally or artificially) to keep the wealth growing. The flooding of money to the world when the interest rate is low during high money velocity is sowing the seed to harvest at higher interest rate when the velocity of money is slowing down. But how to take advantage of the Greek crisis? You hold the loan to Greek and reel in others. But why U$ continues to fall in the past centuries?
2010.01.10 A lot of time, inflation has been regarded as the result of single driver because we see the price creeping up with the demand. The causes of inflation is the result of a large number of factors that related to the production cost of the merchandize, taxes, future demand, reserve and the economy. During the 1990s of Canada, she suffers unexpected energy inflation due to the introduction of the Good and Service Tax. During the period, there was no demand change. You may argue there was demand shrinkage because of fixed disposable income limited the total gasoline or other energy product consumer could bear. In many cases, inflation is driven by two major but not necessary determining factors. The first is availability which may or may not be related to supply. Availability is what clientele could purchase. Supply is what is in the warehouse. If the refinery output is limited, it does not matter how many barrel reserve in the ground. Similarly, you can have tens of thousands of Wii in the warehouse but very few in the store, the price of Wii could be marked up high. Nintendo has been alleged to use this tactic to maintain the high price and create pseudo demand. To some extend, inelastic merchandizes easily suffered from heavy inflation due to the necessity. In the America, houses are built at sub-urban to improve the quality of live. Transit system is too expensive to accommodate this life style. At the same time, the life style calls for multiple vehicle per family. As the result, the demand on gasoline becomes very inelastic. The demand of natural gas used to be well balanced. When the price is lower, the heavy industry switches to the NG rather than the distillate. The last couple of years the situation is not so due to unknown reason. This shows another factors in play: social and economic unknown factor. Sometimes, inflation is just a natural way how things play out. The government's control could be limited. However, excess monetary influence due to debt and demand of currency will accelerate the inflation. At the end of the Nineteenth Century, Chinese Qing Dynasty was using the bi-metal monetary system but inflation was high due to the debt settlement with the Western Invasion. Panic created in the society which caused people accumulated beyond normal demand.
2009.11.23 In last night's USD trading, it remained in the mid 75 range and holding for losing 10 bps. As it passed the midnight, the lost intensified to 50 bps or 0.6% at some point. The downward momentum is gathering. Gold and old response with double the changes; gold 1.3% and oil 2%. Even natural gas goes up 1.6%. The USD index's battle of highland 76 could finish. Now is the battle of 74. With the falling USD, stocks in U$ will be pushed higher to compensate the purchasing power. The domino effect of competitive devaluation will force many world currencies to devaluate. This is actually deflational to those do not devaluation or devaluate slower. With U$ in the process of dethroning, cross border trading profit will be highly unsecure due to foreign exchange or trade restrictions. To ensure profit and avoid any lost, margin and price will be marked up to accommodate the uncertainty. The artificial factor of uncertainty causes inflation. The small inflation of price premium will trigger a vicious circle of inflation spiral that leads to hyperinflation. All these fears have reflected in the world stock markets which are up more than 1% except Nikki.
2009.10.23 Are we seeing the rally of energy driven by the devaluation of the U$? This is a complex and compounded problem that exuberated by the disguising real demand with excess supply. With the strong and powerful propaganda machine, it can create mass influence. While a simple turning off a tab could fix the excess supply problem, it is dramatically described as filling up to the brim for all possible storage. There is a shut-in method better than storing. Arabian does that when they see the price is too low. According to the Wednesday EIA petroleum report, the oil is in excess and the gasoline is in shortage because the refinery is not at the high production capacity. Immediately, the oil price drops and the gasoline price rises. One day later, everything returns to up trend even with the USD Index bounced back above 75. Now, this morning, WTI returns to U$81 range while USD up 13 bps to 75.13. On one side of the mouth, the media says that Fed is holding down a weak U$ to create a competitive edge for American. At the same time, every entertainlyst says that all currencies are rushing to the bottom to competitively devaluate. If everyone is devaluating their currency, the commodity price will not rise. Exchange rate likes the buoyancy of the rubber ducks in a bath tub, if it we add more water to the tub, all ducks relatively at the same level. But the water level increases. The price of commodities in all these currencies go up; this is inflation.
2009.08.18 Many have good example to show how gold can preserve wealth in a reasonable period of time by comparing 100% gold backed currency to fiat money. Some hair splitting may be needed here. These 100% gold backed currencies becomes collectable items so this this not just the value of gold that it carries. The rareness of the item is also included. In another word, purchasing price is higher. Look at diamond, its price in term of gold is definitely much higher these days than 100 years ago at one or two magnitude. As the result, using gold to measure purchasing power is not precise. All materials are consumed to be less and less. Technologies provides alternatives and reduces some cost of production. As the result, deflation is injected to the system. In time, prices are inflated due to labour, material and many other dimension of inflation. Even gold price has to be inflated.
2009.08.09 Demand drives the price when it is fully elastic. The demand and supply equation does not and cannot start with zero,zero nor infinity,zero. Even commodities that has no demand price cannot start from zero because there is always a basic handling cost on top of the material. Therefore when we price a commodities it is not the cost of material but the cost of chain of supply which is the place inflation of labour, property and etc add to the end cost that may the price less elastic. For example, the distribution cost for many merchandizes could be the same that could make the cost become very sensitive or non-sensitive to the price depending on the ratio of the distribution cost and the material cost. More than just the cost, there is also return. Some merchandize could have high expected return due to the risk related. So roughly, the Price equation is: Price (Cost, Profit, Insurance). The term insurance refers to the sustaining cost of the business when the economic situation that is becoming unfavorable. The Cost equation will be: Cost( Material, Labour, Production, Transportation, Capital, Up Front Investment, Business, Capex, etc). The Profit equation will be: Profit( Return of Investment, Market Demand Potential, Risk, etc). The Insurance equation is: Insurance( Supply, Labour, Production, Business, Market Sustaining, etc). This quick analysis shows that material cost is not the only factor and all other could very possibly out number the material cost that makes the end product price insensitive (or inelastic) to the raw material price. Perhaps, in the real world, price elasticity is more a concept we have to employ but not a simple concept that can be used in a quick review. Microscopically, elasticity is all there but when you add up the pearl strain of cost, the equation becomes significantly complex. Without the proper analysis and identifying the proper relationships, perception could be wrong. This leads to a very important concept regarding the market fluctuation. The fluctuation is driven by two dimension. The supply/demand and the speculation. With the wall of money available infinitely from the government, price could go up and down at will. The old adage that you cannot manipulate the market could be outdated. However, another counterforce come to play when there is profit. When there is profit to be made by price rally, there is also the force to short it to get the profit on the downside. So what happen to the old simple supply/demand? It is getting murkier because of the paper commodities which is detached from the physical commodities. Gold has been a perfect example. Spot or physical gold price is somewhat 20-30% higher than the future or certificate price. In all economic books, the Southsea Bubble and Tulip Maniac have been labeled as the classic phony hoax that scammed millions of people. But how is this different from the fiat money and paper commodities? The demand and supply has been mistakenly mapped to the wrong market by the analysts: really consumer versus speculator. The speculators are, unfortunately, the major banks, government and central banks.
2009.08.06 USD Index is again the centre of attention. In a brief moment, it rose above into 78 but settled below into the 77 area in the evening. As soon as that rally visible, all commodities sped. WTI fell to U$70.18 but rebounded to U$71.94 EOD. Gold was at high point U$974.30 at the morning but finished to U$962.90 EOD. All industrial metals 3-4% after a weeks strong upward movement of 15-30%. The market is in a very high energy state. The high the energy the higher the entropy which is the physics' name for black swan. This also makes many unimaginable things happens like USD Index has a rally of 70 bps. Like the expression, if you cannot stand the heat get out of kitchen. Is all rules fly out of window? No. They are all inside but with new set of parameters so we have to read them differently. All rule holds just more volatile. So fundamental may be the only tool that can let us see through the fog of war which could be deployed by the banks, the brokers, the exchanges or the government if you believe in conspiracy theory. Will the devaluation create rally? Most probably because everyone will do the devaluation trick so the purchasing power will be kept in balance.
2009.08.03 There may be a lesson for today's USD Index down fall. In the afternoon, gold up a meager 0.1% v.s. USD Index drop of 0.8%. U$ is devaluated today. No doubt about it. The market rally. Dow Industry up 1+%. WTI up +3%. Other futures up vigorously: cocoa +2%, coffee +4%, natural gas +10%, sugar +5%. Spot industrial metals are just active: aluminum +4%, copper +5%, nickel +6%, zinc +6%, lead +5%. If gold is the reference currency, its price in term of U$ should be reflected. Of course there is always a delay. Like the rally from U$250 during the early 2000 to the current price of U$950. It is a rally of about 4 times. It is a catch up since 1980's U$850 interday high from about U$120. So in about 30 years, gold went up about 8 times. How about the U$. It may not be down 85%. Someone could justify that. So what makes gold or stock rally? If the devaluation of currency is reflected by the corresponding rise of price, this equation does not add up. There are some terms have to be added to this equation. This is inflation. Cost to produce gold just like any merchandizes, effected by the inflation of labour, time, material and degradation of the ore. Although modern machinery is much more capable in the last 30 years of revolution, like the peak oil theory, cheap minerals are exhausting; not finishing. The major drop of USD Index today no doubt will create a heavy wave ripple in the pond of market. Many hot button is pushed. The jump of many commodities could be higher than what they deserve. Tomorrow may be even more volatile. Just like the price of oil is now trading a spread of U$10. Someone is going to be sleepless tonight.
2009.07.15 When U$ falls, it is not necessary to have every thing afloat; stocks and commodities. Currency fluctuations are determined by many factors and can be as simple as seasonal adjustment. If there is any change, the corresponding change usually close. For example, U$ goes up 0.1%, GDP could go down 0.1%. This is not what happened to the commodity and stock market. Everyone is guessing the direction of U$ and this translated to multiple of amplitude; more often it is more than 10 times. This is also not unique. In fact it is very common during war time for merchandizes. When the currency of a country falls a bit and the political situation or war deteriorates, commodities will just shot up because the supply could be cut any time. There is also the speculative action involved. The stock market at this moment behaves like a casino more than anything and the direction is not really random. Many stocks or ETF has lost their relationship with the underlying assets. When this happen, the rule of engagement has been rewritten but not published. So how to play the game? No or extreme cautious.
2009.07.08 In the current of money, exchange rate is acting like a valve. It plays a vital function to direct the flow. This valve is bidirectional. The flow direction is determined by the pressure, current account balance. At the same time, the exchange rate will act like the regulator to increase or decrease the flow direction. Under certain economic and political situation, the valve could become a pump that move the money in a specific direction which could be in or against the resultant pressure. Exchange rate is actually a convertor from one matter to another matter (currency speaking). So during the conversion, there is consumption if the law of thermal dynamic is used or no consumption if law of matter is applied. In the case of currency, the conversion has a broker which could either the bank or the exchange dealer. This middle man will consume the wealth being converted. So the total sum is the same but there is a small valve which leaks the currency passes through. The more exchange performed, the more reduction in wealth. Companies that have to move money back and forth will suffer so the money management has to limit the number of passes through the valve by creating reservoir which can reduce the movement.
2009.07.03 Inflation/deflation is not necessary to be just the effect of currency value change. The effect of these factors change with time. You cannot use the same yardstick to measure at any period of time. Labour cost is frequently consider a major contributor of inflation and deflation. When the labour cost increase, the effect is inflation and when the cost of labour decrease the effect is deflation. Consider the Ford's famous Model T. It was price at $825 in 1909 then $575 in 1923 when built using assembly line. At this price, it is more than one year of salary of Ford assembly line worker. Now, a Ford assembly work can easily buy a few Ford basic model Fit for one year of salary. So this is the deflation aspect that is not affected by the labour inflation. This case is not precise and not representative. The reason is that the cost of a Model-T was lower than any other automobile of its time but was still a very expensive item. It was expensive as a fraction of an average home. Now, not too many could afford a car cost about a fraction of an average home. However, in some other scenario, the inflation comes from the quality of life. The minimal requirement is raised. The cheapest model has no sales. For example, the first Hyundai sold in North America Pony was about U$3,500 in 1984. It had no air condition, no automatic transmission, no power window but came with a steering wheel and four tires (no spare). In just 10 years, the cheapest Accent is about U$11,500 but with many more extra. This is about 9% yearly compound which is way higher than the official inflation rate or may be a ted higher than the unofficial inflation rate too. Although the Accent may be more expensive but for sure no one will buy the Pony any more even it is available. The classic people's car Volkswagen Beatle is another example. This die hard small gem initiated by Adolf Hitler until the '90. It was extremely popular among the Bohemian but it has to be evolved to the contemporary Beatle which is a few times more expensive. We all complain about bread. If we going to pursuit the organic life, you can bet that the organic bread will not be cheaper because it represent a higher quality of life. It will cost more. What happens when you could not afford, you have to lower your standard of living. So here comes the deflation. While Bernie is trying his best to avoid deflation, the qualify of life in America has to be lowered. This type of deflation could not be avoided with reflation because the bank is grabbing the TARP fund and not passing on to the consumer. KRE (regional bank index) is performing poorly and remaining in downward trend. This indicates the Midnight massacre killed all the credits available to the people. Spending is coming to a gridding halt. Without the tap open to the consumer, reflation could not be successful. While U$ is losing ground, import inflation is not happening. America is facing the double doses of deflation. This is a much tougher problem than the starting problem.
2009.07.02 The effects of deflation and inflation are well known. Some of the causes of deflation and inflation are understood. The acceptance of inflation along side with deflation is hard because deflation and inflation are regarded as the two sides of a coin. In fact they are mingled and intertwined. American is now enjoying the pain of both. By pushing a weaker U$ to improve export is not a complete solution to revitalize the American economy. The side effect is higher import cost. With China being coerced by American Congress to give up low cost manufacturing but without languish the manufacturing to other lower cost countries which suffers during the credit crunch by no capital to pick up the demand. Until the credit crunch is eased, American will have no substitution of Chinese deflation imported. Within the country, saving may not be really increase. The measure may reflect the lowering of the debt because not enough money to buy. Americans remain the notion of spending. However with the cost increased, the only way to maintain live is to buy from block store such as Wal-Mart and Circuit City. Radio Shack has been the big promoter of importing deflation but the profit did not pass to the consumer. The way Wal-Mart operates to force deflation from China may come to an end because of higher quality of life in China along with high cost of manufacturing. China government is very much willing the sacrifice the low cost manufacturing in order to improve the GDP. When the Western report tens of thousand factories closed per month, they are seen some trickle established by the international global companies' OEM contracts. With the disappearing of imported inflation, Americans' local inflation continues to develop because people have to buy cheaper house, cheaper car and cheaper toys. Apply has lower the iPod and iPhone are the prime examples. It will not finish the credit crunch unwind until spending habits are changed. It will not finish until wealth allocation to a privilege group such as financial and green works are stopped. No illusion and no wealth reallocation. During this period, if the EU does not do the QE, demand for American export will be in vain because the U$ remains artificially expansive. China will continue her capture of the market. The SCO, Shanghai Cooperation Organization, will represent China in Near East and Asian Russia. The WEF will be the platform for Sino-European economic cooperation. With the slow down in America, China has refocus her investment in Canada. It is not to say China giving up US but applying pressure to American during the money hunger period to soften Congress. The multi-moves to dethrone U$ will have its effect seen soon. The dethrone of the U$ has a significant impact on the world money mechanics. U$ is the container for the trades. The container carriers the commodities which is wealth. It is believed that U$ has the stability and the capacity to the store the wealth. When the containers has to be replaced, new containers have to be appointed whether it is SDR or RMB or Euro or GBP or Yen. During the process, there will be a shortage of the container because old one is not reliable and the new one has yet to be identified. Can we use multiple contains? It happened before when the world was much far apart. The Mayan used one currency of trade, the Arabian used another. But they don't trade. In a world that trade among countries multi containers system will be a temporary bridging solution and it will happen until once again it is settled on one. Like the Spanish silver corn was succeeded by the GBP, was suceeded by the U$. China may use Russian to propose a wide accepted container while Chinese allies will use RMB. This political agenda will mean to be a leash to control the allies. This leash is lashing out.
2009.06.19 Market movement could be driven by many forces. Other than the earning power, the underlying assets can change the value of the company. The indicator of the former is the P/E. During a deflationary environment, the E will drop. So the P/E will rise. This is not saying P/E is a bad indicator. It is not the only indicator. Valuation could also be possibly performed on the future earning. One typical application is the earning from a mine after development and gone into production in the future. Obvious, the earning before production may not be impressive. There is also other aspects we can assess the value: the underlying asset. Canadian banks are famous for their power to increase fee. This is tremendous earning power that give magnificent growth of Canadian banks in the past. Can this be continued with smarter consumers and quasi-monopolized fee raising down the road will be interested to watch. Other than the intangible asset values, may be we could focus more on the tangible assets. There are two major concepts we have to differentiate: devaluation and inflationary asset value change. Both concepts deal with the value of currency and the end result are not the same. When a currency devaluates, the asset value does not have to increase in term of the nominal currency. The price has to be driven by demand and some other factors. If the demand does not change then the price usually maintain. Currency devaluate is not deflationary but it could have deflationary effect when consumers have to make a choice. The choice changes the demand. When a currency is devaluated, the sales of lower price item could increase. For example, the devaluation of currency will raise the price of imported goods. When these goods are the essential core spending, the discretionary disposable cash would be reduced. Or the ability to pay a larger mortgage could be reduced. Houses of higher value may have lower demand than the lower price house. (Sidebar: When the house sales increase, it is not necessary the recovery of the housing market. Rather it could be the consequence of reducing the demand in some submarket and transfer the demand to a lower submarket. The purchase of higher market segment was held back due to the reduction of purchasing power.) If the asset has demand and the value can be evaluated in other reference, the value of the underlying asset could be increase. For example, oil is priced in U$. When U$ relatively depreciated to the basket of reference currency, the oil price will increase. This is the devaluation increase in nominal price. It is usually responsive and noticeable. In another scenario, it is not the purchasing power of a currency that changes. But due to the shortage of supply, the labour inflation, raised cost of manufacturing, cost of sales and increase of many costs, the price of such item will increase. This is the inflationary appreciation. The obvious examples are paintings and antiques. Another aspect of inflationary appreciation is the change in quality of life. A child who satisfied with a paper folded car will have no demand of the famous Match Box because it is not accessible to this child. With the quality of life improving through higher income, the demand for Match Box could increase when you measure the inflation in terms of toy car by category. Thus the price of Match Box could increase due to the inflationary effect.
With this in mind, the devaluation of a currency does not necessary means a devaluation rally in stock market. On the other hand, inflation may boost a subset of the stocks.
2009.06.01 USD Index is descending slower. It even bounds back quite a bit. If the Plunge Protection Team is at work, they work really hard. They are not only saving the U$ directly, they also have to attack the rising commodities. As the result, all commodities fall except base metals. They rise from palladium's 1.7% to copper's 5.9%. Amazing.
Dow Industry has change horses today. City and GM is tossed out. Traveller and Cisco is in. Dow Industry, according to Dow Theory should be manufacturing something that the transportation will move. I cannot see how the Traveller's insurance could generate significant that could influence the business of transportation. Cisco could be because it sell iron but still minimal in comparison with automotive industry. DJI does not care Dow Theory so they choose what they feel fit. Now some may beg the question on how good is Dow Theory now.
2009.02.24 Money volume (i.e. total money in all available form and state) will grow when a country expands the economy. It also grows when the economy deteriorates but this is fuelled by inflation. If we define DOW as the purchasing power, we would be surprise to see the purchasing power may not increase during a deflation cycle because of the adverse economic conditions. Deflation can be driven by reduction of demand which drives down the price, such as the period of July 2008-? the demand destruction led to the break down of the commodity prices. If we keep the definition of DOW as purchasing power (one dimension of many) the volume of money may not decrease as illustrated by the period of 2009H1. Deflation seems to have a strong hold (the reason may not be just destruction of demand in case of energy because EIA indicates an increase in consumption). This brings another concept that requires study: what is purchasing power (PP). Price can not be the only dimension. The desire and willing to buy have to be taken into consideration. If we consider increase in money supply is the equivalent of increase flow pressure for SOW then there will be a rupture point when you have too high pressure will not increase the flow but breaks down the system. It seems the world economy is facing this situation because no body has the will to spend. These ruptures would need repair before the system is restore the flow. So rather than pumping the money, the money should be stored in reservoir (i.e. personal saving). The banks pocketing the money from the central bank is not function as the reservoir. It is leaking of the conduit which reduces the flow pressure. Perhaps it is necessary to repair these leaking first. What happens to bailout? Bailout is just another form of leakage. More the bailout, the more loss of pressure. Bailout does not improve the flow because it does not drive the creation of wealth (productivity). Nothing changes; efficiency or volume of production.
2009.02.14 What motivate spending? The answer is what are the explicit formula that depict the flow of the money. Lets examine this from bottoms up. Psychological, social, economic, political and personal preference factors are playing in this equation. However, we always see people buy things that they may not want but simply can buy them. So what is overriding the personal preference? The person must afford to do it and it is not against any social and political factors that preventing it at least without disclosure. Psychological factor is a very powerful and can be irrational which is led by the state of conditional. Americans have been conditioned to spend to promote economy since the World War II. After 3-4 generation of education, thanks to the consumer producers, this mindset is imprinted since born starting with the first disposable diaper. The psychological factor can override the economic factor, as the result the Home Equity Withdrawal becomes the norm of life. People has built their enjoyment over the tower of debt. TV advertisements and financial advisers are doing the hard selling on how to unlock the "wealth" in the home equity. They are even promoting the equivalent of home buying pyramid scheme that using the equity from first house to buy the second. The assumption is the overinflated potential gain. Similarly, credit card has conditioned card owners to live on credit which is snowballing so that credit card company can profit on the absurd profit. In this specific scenario, the money flow is accelerated by the interest rate and the promotion of using the credit card. On top of this, credit card company also using fixed extreme low short term interest rate (sub-prime) to lure people to use additional line of credit which they could afford during the low interest rate honey moon period but not after. The SOM flows from retail consumer to the corporate then to the corporate financial beneficiaries. The process is like juice squeezing machine started with a slow but firm action from one end and the puff comes out from the other end. The SOM moves from tributary to main river. Once you join the club, you will have a difficulty the shake it. The effect is that the DOW on a personal level has been decrease because you have to pay the interest. What happens to this at a country level? Obama Government is going to issue T-Bill to fund the troubled assets and creates mega infrastructure building project. This is the slogan. Base from the Bush Government, it was the same slogan but in different package, trust me and give me the money. At the end, there was no wealth creation. This means at the country level, the volume of money (i.e. money supply) has increase but the wealth remains no change so the DOW has decreased. When DOW is decreased the potential of money movement will decrease because the force to interact has reduced. So we did not see any improvement of the credit easing. Now the whole cycle repeats again. Cash hoarding by organization (banks, individual and country) is one form of creating wealth but the effect is diluted by the supply of money, i.e. reduction of purchasing power through the inflation. The inflation, hoarding and money pumping could be the financial Bermuda Triangle. If this vicious cycle is not broken, the impacted economy will slowly be frozen, the end result of K-wave winter. The social confirmations are the unemployment and social unrest as predicted. The question now we have to study is how to defrost the K-wave winter? Can it be done at global level or it has to be done at individual economic ecosystem? Perhaps things should be started from small ecosystem and expands to larger ecosystem then the last step is global. It is like the nuclear reaction, it has to be started with a few before we reach a sustainable continuous state.
2009.02.09 Central bank's discount rate is one form of interest rate. Central bank uses it to regulate the flow of money is a well know fat. Fed's target rate is now so infamous that we know the interest rate has a limit because it can go to zero only. However, there is not just one interest rate regulate the money flow. There is another interest rate that can control the macro money flow while the central bank's rate affect mainly the flow between banks. The other rate is set by the economic ecology which drives the industry's loan, the retailer's credit and the consumer's credit card unpaid carry over interest. When this rate increase, the flow restricted. More than that it also can reduce the DOW without changing the volume. More study is required.
2009.02.05 To understand the behavior of money we need to understand money qualitatively. Money is not exactly wealth in the modern day because they are fiat and has not reserve (you cannot really use fiat to backup fiat). It is a an embodiment of wealth. It is not storing it but it is a lump that can behave like wealth which has a relationship similar to weight and mass. When the money is in a hard status, it contains more wealth than in soft status. In the good old day when money is backed up something, the quality of money is easy to understand. The inflation just blow up the volume but the wealth it contains does not change. This means the density of wealth (DOW, strange coincidence) is lower. This leads to another observation, when interest rate is applied to a lump of money, the DOW (can be measured as purchasing power) is lowered. Debt has a negative effect on the wealth (not money). As the result, the volume of money increased but the DOW lowered. The world is not running the printing press 24 hours around, this is creation of money but not the wealth. Therefore, the DOW will continue to decrease. DOW should have a characteristic of muson that glue the heavy particles in the atom's nucleus. When the DOW falls below a critical level, the money will disintegrate or vaporize which was the famous Weimar case. When the money's status gets harden, the DOW increase. It will exhibit the same quality like backed up by material.
2009.02.02 Money velocity is co-related to the interest rate. The relationship is strange. The higher the interest rate, the flow of money many not be reduced but the volume is . Interest rate eats away the volume. When the money disappeared, its momentum reduced not because of velocity but the mass. This is a very simple explanation on dispensable income reduction in a higher interest rate environment. May be there is also a reduction of money velocity too. If both are in action, then the money mass (MM) is reduced. Interest rate is tied to different SOM. Therefore, the impact from one stream to another stream has to go through a gateway. When the mass is changed, the net flow through the gate is changed. It is important to assess where is the MM gone caused by the interest rate. If this hypothesis is true, the only way to grow MM will be negative interest rate. On the other than, this could be achieve by reduction of tax.
2009.01.31 Money velocity is considered as a single entity in the financial ecology due to its complexity and difficulty of measuring. The accuracy of measuring it is due to the complexity and varsity of attributes. As the result it is measured as the sum of the underlying current. If we examine the velocity of money as the atmosphere, then each layer of air would have different speed. We are not model the velocity of money (VOM) exactly as the atmosphere but using the analogy to show at different distance to the core, the velocity could be different. In the actual model, there will be multiple spheres that locate next to each other. First lets examine what are the basic stream of money (SOM) and their velocity. At a very large grain, there are money stream between central banks (CB) (buying foreign CB's T-bond such as China buying American's Treasury Bond). Then there is streams of money from the CB to the merchant bank (not to the retail banking level). Other than the money from the CB, there are money from the government to the whatever such as the Trouble Asset Relief Program (which is dubious and phoney). Then there are streams of money among the banks and the consumers either as deposit, loan, credit card usage or simple just a withdrawal. The next layer will be the merchant to merchant (peer to peer) flow of money which could go through a bank such as letter of credit (LC). At the same time we have the stream of money from the consumer to the retailers. The final stream of money would be the flow between consumer such as the allows for the kids. Fed and many CB has increased the pressure of SOM(CB,Bank). However, we do not see any improvement of SOM(Bank,retailers). Among the consumer SOB(consumer,vendor) is slowing down so does SOM(consumer,consumer). To increase the flow we have to increase the pressure or increase the diameter of the pipe. More important is to remove the blockage of the downstream flow.
2009.01.23 Previously, we identify that inflation is the trend of the economy because we must pay high price for get more scarce commodities without any doubt. It is slowed down by technology as new material substitute is created by science. For example, the labour force to farm is first lowered the cost by the introduction of mechanical cow. In time, the cost is up again because the fuel price is getting more expensive. When new material is introduced, before it passes the canyon of acceptance, its cost is generally high. Gasoline was considered as luxury when there were a few gas station around until we had the mass production that was driven by the popularity of Model-T. So the price cycle of material is always started high then goes to trough at mass production. This is just like the K-wave cycle when it hit the summer. At fall, as the availability becomes less and less (not just because of political), the price is going up. We may experience a few pocket of abnormally but everything ended up extremely expensive in the winter of K-wave cycle. Yet, one particular class of material is just linear and erratic. This is labour. Labour follows a very complicated cycle or cycles. In different condition, it behaves in such a way that no other material could compare. The first model is the normal cycle that we all get used to. Labour starts at a level of low because of sophistication has not developed. This is non-skill labour. In time, non-skill labour of any kind will evolve to skill labour of some for that drives up the cost. For example, porter at the old days at the wharf might carry 50 Kg at the beginning. You needed time to perfect the skill to carry 100 Kg or even 200 Kg. When I was young, I watched the porters at the wharf to unload rice from the cargo ship linked to the wharf with a bouncy and narrow plank. Young guys before mastering the skill would not able to take on the work. You could also see some carry one 100 Kg bag some 150 Kg or some just 50 Kg. The more you can carry, the more you are award. On that front it is linear. However, it is not anyone can walk that plank, so there is a premium. This kind of premium, like another other material, was replaced by the invention of conveying belts and frontend loader. So the labour cost is kept level or not a steep climb because you still need some form of labour while the availability is low. So this is a very normal supply and demand curve driven inflation. In a second scenario, we are going to examine a strange cycle that shows inelasticity of demand. The higher the demand, the higher the price. Looking back at the beginning of the dot-com boom, no body is really care about how you do the cyber-space. This is the first case that scarcity does not mean high price. As the dot-com bubble inflating, massive cyber-engineers flood the market. You would imaging their salary would drop like a stone. No, the more they are, the more they are wanted because you can help to inflate the bubble. it could be argue that the demand was high so that the cost had to match. But that was vapour-ware demand. No real cyber business was viable after years of dot-com bubble busted. Wii and iPod tried to use scarcity to create the illusion of high demand and created a price premium. They were successful. When we factor the labour into inflation cycle, it is not a simple exercise. It creates a small universe of its own. The dual cycle property of the labour price cycle does not have a clean way to identify which cycle it would use. Labour's dual price cycle property may not be unique but it is interesting to find out which other commodities may have similar property. The importance is its implication on law of supply and demand. It would allow us to challenge the law of supply and demand.
2009.01.17 Money velocity creates the driving force of economy. Take supermarket as an example. Their gross profit (sale minus purchasing price) margin is at low single digit. It is very different from others high price items such as diamond, automobile or fine art. To pay for all the total cost, the gross margin's net profit has to be amplified. To do that we keep the net profit % fixed but increase the base of multiplier which is the total sales in the store. Say the goods on the shelf is replenished 5 times, the net profit will be amplified by five times. This applies to the GDP. To have the GDP grown, money velocity must be high. Examining the supermarket case study again, the price of good does not increase as the velocity increase. There is a potential that when the net profit hit a certain level the price could come down due to two factors. The first is that the volume purchase is high enough to either trigger another discount level or from some cheaper source which demands for high volume. The corporate is willing to share the profit with customer to increase customer base. (This is not to say forfeit the profit but use use lower price to increase the base for a higher profit.) The lowering of the price become deflation. When the profit drops due to cost of good sold increased, the price of good on the shelf will be increased. This becomes inflation. Cost of purchase has a co-relationship with the cost vector (such as energy, labour, finance, transportation, equipment, etc) associate with it. This cost vector's variables are not just input to the equation but also the output of itself in other goods. Here is the network relationship of the cost vector. Continue our thought experiment, we can come to the conclusion that increase money velocity does not always means inflation. However, when the resources are limited, then the consumption will increase the scarcity of the commodity which, by law of supply and demand, will increase the cost from to same source unless other source could be found. Modern science continuously surprise us by creating different manufacturing process and material to replace the existing one usually at a lower cost. (The sugar process to manufacture ethanol is a very bad example. Using soy bean to manufacture plastic for cloths, bags, upholsters, and building materials is a good example; let's do not argue on the total cost involving environment pollution here.) Our case study is not finish because in order to increase the base for good sold, the goods must be ordered before they are bought by the customer. The supermarket may have one time the money for the first round but they must pre-order a few more round before they have the money in the current account to pay the supplier. In another word, in order to get the money moving in the supply chain, a money potential has to be created to flow the money (customer -> supermarket -> supplier): this is the push model. To make this happen there is a negative money flow (supplier -> supermarket -> customer). Supplier send the good (a money proxy) to supermarket. The supermarket does not received the money from any committed customer. It has to hold the good in credit form for the potential customer until the transaction happens. Supermarket is the meridian of two ends. If it does not have the credit, nothing will happen. The credit creates the money flow potential but this force does not have exactly same space dimension of the supply chain. It is above it. If we look at the equation it has all the parameters of the supply chain with some additional parameters such as interest rate, loan due, covenant and size.
2009.01.11 Does complexity theory mean everything? No, but we can park what we cannot solve in explicit or implicit solution in this domain. If we relax the computation in complexity theory to thinking process it is a very advantage to move the application of the theory forward. The objective is to create a way to repeat our thinking process safely and accurately. Since thinking process is never precise the description must have a lot of flexibility. The outcome of the complexity theory analysis could only be limited to the vector of the outcome we prescribe. It is like the output from a fuzzy logic system will be the set of value we decide but not above. Beyond the vector or dimension it is the black swan event. It may also experimentally include some grey event for those we sort of knowing but could not put the finger on it. The core of the ancient Chinese symbolic calculus (CSC) has been misunderstood by many as fortune telling because it's root. Like Yi Q'ing. Its origin was from reading the positive and negative side of object (usually coins) or finding the remainder from a fixed number of straws to get the sign of future. The practice of voodoo magic was sublimed to a notation and computation system for events and outcome. It has operators of transformation to allow the user to think in a systematic but not limited way. The standard transformation are the prescribed thinking pattern but the combination of additional factor (signs from the environment) will introduce the variance factors. This kind of symbolic calculus approach is not just used in Yi Q'ing but also applied to the Taoism's five element theory. This branch of calculus may or may not related to Laotze but lets look beyond the names and focus on the meat. The evolution of CSC is merging and diverging. Every time a new theory added, a new branch created. For example, the adding of the nature to the theory created the branch of Fung Sui. The widest domain can include the five element, the Yi Q'ing, gods, numergram and many others. The theory becomes so rich that it becomes mysterious. Condense it, it looks a the changing process with a set of guiding principle. The details are scattered among a small number of scholar or others. Much knowledge was lost due to either selfishness or worry about leaking god's acts. Hopefully, someone could have the money and the energy to revive this ancient treasure.
2009.01.04 To capture the study effectively, NetLogo will be tried to see if it could do the job effectively. The software is available from http://ccl.northwestern.edu/netlogo/.
2009.01.04 Interest rate has a number of parameter that governs its value at a specific time. The change of it of same vector (parameter set) will review its trend. This is the cross section or the projection of the function to the time (year over year) plane. The interest rate function can be defined as:
SafetyFactor(durationOfLoan) = SaftyFactor(period(begin,end), regionalPoliticalStability(begin,end), worldPolicticalStability(begin,end), regionalSocialStability(begin,end), worldSocialStability(begin,end), regionalEconomy(begin,end), worldEconony(begin,end), regionalFinancial(begin,end), worldFinancial(begin,end))
InterestRate(period) = InterestRate(period-1, sector, sectorTrend, economicTrend, durationOfLoan, safetyFactor(durationOfLoan))
2009.01.04 Notation. What we are dealing here is the computation of a value depending one a number of parameters and can depend on previous experience. The sequence or series notation convention uses the operation (i.e. multiplication, summation, integration etc) to relate to the previous term of the sequence. In this discussion, we do not know what the computation is and how it should be, we have to create a short hand to represent:
For the meantime, the following is the grammar for sequence:
<sequence> ::= <sequenceName> <order> <agent vector>
<name> ::= any alpha numeric including the character of "_" for readability
<sequenceName> ::= <name>
<agentName> ::= <name>
<order> ::= "("<order description>")"
<order description> ::= <order> | <order> "," <order description>
<order> ::= { <agentName> | <agentName><limit> }
<limit> ::= '[' {<singleValue> | <lowerBound> | <upperBound> | <range>} "]"
<singleValue> ::= valid value for the limit
<lowerBound> ::= <singleValue>":"
<upperBound> ::= ":"<singleValue>
<range> ::= {<singleRange> | <singleRange> "," <range> }
<agentVector> ::= "(" { NULL | <sequence> | <sequence> ( "," <sequence> )+ } ")"
2009.01.02 Financial system is built on substance. It is like Newtonian physics. You cannot create mass out of anything else except mass. On the other hand, it is also of sum of zero game. Action and reaction are always equal and opposite. When one has no saving (mass), one could not spend. Financial engineer could create credit out of loan. This is what government is doing. The nature of credit and loan like magnets: to make them stable and separate, tremendous effort must be used. Interest is the medium that keep them apart. The more the absolute value of the loan, the higher interest should be to ensure the load is not called. However, if the absolute value of the credit is reduced (the value), the imbalance is created. Even you merge the loan and the credit, the equation is not balanced. This will create a ripple effect to the rest of the world. Consider this micro-economy as an individual, the integration of all these micro-economies could be out of control if the total sum is not close to zero. The balance will require another counterforce at another dimension. What will this dimension be?
2008.12.31 Consider the money system contains a variety of particle. Each type of particle has its colour, i.e. characteristics. The pile is not an inverted cone but a sub-atomic or galactic space. These particles reside at different location of the system at different energy levels at different speed. Particles of the same type do not have to be located at the same energy level. Some can be in orbit and others could be in spinning state at a region. Particles at different or same orbit/region can interact with each other. The sum of the energy vectors (not scalar) represents the resulting energy level of the system measured outside. The sum of energy level exceed a level would exhibit inflation. Below a certain level is deflation. However, individual particle can be at an energy level above or lower than the vector summation of a region at a very dynamic range. More, at different locale, sum of the energy vectors could be substantial different from the neighbours. When the energy dissipate, the particle could be moved to another orbit/locale at lower energy level. Dissipated energy could be absorbed by other particle and to the ambient, like the cosmic radiation that cannot produce positive economic output. More particles or wave can be added to the system by injection with different energy level. When the system is in stable state, injection of new particle/wave would increase the system's excited state. At a point, the system could enter the metastable critical state. The consequence could either an implosion or explosion (black hole formation or supernova ). In the case of an explosion, the particle will depart the centre of the system at high speed until slowed down by the ambient (money standing sideline or migrate to other countries). The creation the isolated German economy after the World War I is an example. The subsystem can also become so dense and chaos that orbit may not exist; just the one in America for the last 20 years. Energy level could also be at supercool level that the particle does no movement (like the Communist Russia). If implosion occurs, a superheated soup or a supercooled condensate may happen. Although spatially disperse, particles will interact. At some point without any external force particles will form orbits (industrial specialization) and gaining energy. Africa (excluding Egypt and South Africa) economy may be in this state which is evolving with much less influence from the outside. The current state of American economy seems like a pulsar: still shine in some direction but any money throw at it will never have any effect to increase the output because the money will be absorbed by the black hole at the centre.
2008.12.30 In Newtonian world, matter could not be created or destroy. In Einstein world, matter can convert to energy. From Big Bang, matter, time and space created from nothing. In money world, money used to be created from physical collateral. Fiat money is created from 'Trust me'. If we use the zero sum principle, there must be a anti-fiat created along with the fiat money. That is debt. I can use the money I do not have to buy a car by borrowing it from the bank. Interest rate becomes the coefficient that defining the potential energy between by debt and the money I spent. The potential energy distorts the space (my live) and creates a gravitational influence. When the money is created by a country, the gravitational influence is balanced by political power and military power. The more debt you create, the bigger black hole you have created. When interest is no more able to be paid, the debtor passes the horizon of the event and falls into the black hole forever. During the struggle, the object will radiate brilliantly as part of the swan song. Sometime, it is being misunderstood as the birth of a star rather than the swan song.
2008.12.28 Can we have a unified theory for inflation and deflation? Paraphrasing this is: can we use a single way to describe the phenomenon of inflation and deflation? I think the use of potential energy and velocity of money can do the job. When money moving too fast, it is inflationary. When money moving too slow it is deflationary. It has the vivid image on how we spend the money. We can also visualize the money like the grain of sand in the sand pile of complexity theory experiment. When the money with high potential energy (gravitational) piling up and the triggering fall of the last grain of sand at the peak will trigger an avalanche to the lower potential energy. At the lower potential energy level, the probability to move will be low. As the result, the energy to move is lower and the velocity of money can become standstill. This picture depicts the hyperinflation before the deflation. Within the inflation, there is also a deflation. The hyperinflation is created by adding too much sand. At the end, if nobody adding more sand to the pile, there will be no movement. To add more sand to the pile, money has to be printed. This is why paper money is important; it can be created out of thin air. Paper money has the miracle function of regulating the velocity of money, i.e. the money supply. As of now, we have a lot of money that has low (tight purse) or no (dead debt) potential energy. To re-energize the economy, government is trying to energizing the sand pile.