Fight of the Century: Keynes vs. Hayek Round Two

"Capitalism is about profit and loss. You bailout the losers there is no end to the cost... The world is a complex." - Well rapped.

Source: EconStories

Pay Pals - European Bailouts

Source: Daily Chart

A Bipolar Hunt for Energy

In the recent hunt for energy, businessmen from China and the United States, two oil-guzzlers, are running around world to lock in their foreign oil supplies. Since such a bipolar hunt for oil resources is often assumed by a strict zero-sum vision of the world's natural-resources market, most politicians in the United States unanimously regard Chinese hunger for oil as a threat to its own security. In the meanwhile, Chinese state diplomatic and domestic economic cooperation with Iran, Myanmar and Sudan has challenged the United States' diplomatic hegemony.

However, beyond all goods and evils, each country is depending on foreign oil production for her own domestic energy demand. Washington and Beijing share a common interest in securing open sea-lanes to ensure their cargo shipment. China typically picks up secondary deals or moves into markets from which the US is absent. And a general consensus is that it would be irresponsible for politicians in Beijing to curb its oil supply. Henceforth, great demand for oil from both countries not only creates a global energy competition, but also plants a natural ground for cooperation between the two countries. If two countries would simply consider themselves as consumers in global oil market, a cooperative common pool between the two, such as International Energy Agency with China joined, would combine and maximize their bargaining powers by creating a market monopsony in the global market, which may strategically protect both interests in maintaining oil supplies steady, stabilizing international oil prices instead of competing privileged relations with oil supply countries. Such practice would transform a bipolar hunt for oil resources into a non-zero-sum game.

In order to achieve such monopolistic bargaining power, it is necessary to have farsighted leaders on both sides of the Pacific to adapt to rapid changes in the global distribution of economic and political power, not leaders who let such shifts push them into an increasingly acrimonious confrontation.

Jasmine Revolution Clinging to China? No

On March 12, Wall Street Journal weekend published an article named "Is China Next?" written by Francis Fukuyama, an Olivier Nomellini Senior Fellow at the Freeman Spogli Institute for International Studies at Stanford University.

In the article, Mr. Fukuyama agreed on a theory argued by Samuel Huntington noted in his classic book - "Political Order in Changing Societies" - that increasing levels of economic and social development often leads to coups, revolutions and military takeovers. Mr. Fukuyama argued that the theory has been proved by in recent toppled regimes in Tunisia and Egypt.

However, in the case of China, the recent probability of a burst of a similar Jasmine Revolution is close to zero. Mr. Fukuyama derived such a conclusion from the following arguments.

1. The growing middle class are gaining dramatic economic improvements from economic growth in China.

2. Central government in Beijing has been focusing on job creation and altering its policies to reduce income disparities.

3. Compared to dictatorships in the Middle East, a self-forced leadership turnover every decade in Communist Party ensures political innovations in Beijing.

4. The Internet censorship in China moderates social radicalism.

5. People's Liberation Army in China traditionally stands strong in its cohesiveness and loyalty towards the central government.

Time to Look Back

The cliché says, those who don't study history are doomed to repeat its mistakes. After snowballed by the financial crisis, we might want spend some time concentrating on the history of finance. The Ascent of Money, written by Harvard Professor Ferguson, covers the development of the world financial system and how a means of exchange and store of wealth become parcelled and packaged in subprime mortgage back securities and sold around the world. Recently, for those who do not have time to read through his 500-page book, PBS has adapted his book into a documentary series, also named The Ascent of Money. As what I agree with Prof Ferguson about, for a means of participating the future, the past is as good a guide as others.

Asset Allocation Backtesting Softwares

Asset allocation is a basic strategy an investor uses to distribute his investments among various classes of investment vehicles in order to hedge against the risk. But somehow for an individual investor, the approaches used to forecast forward-looking inputs for return or risk in the traditional mean-variance optimization are complicated and time-costly. To trade with the help of some asset allocation software is usually preferred.

I am currently using Windham Portfolio Advisor, which is comprehensive and the most user-friendly software I have used so far.

Pertrac Analytical Platform is one of the biggest competitors against Windham Portfolio Advisor. It has more pre-installed asset classes and data than Windham has, such as Nasdaq and all types of government bonds. But the default Pertrac Analytical Platform version comes without a Black-Litterman model, which requires to pay additional fee if needed.

For an individual investor who is looking for a good bargain on a tight budget, MvoPlus is a good choice. However, it does not have a Black-Litterman model or Monte Carlo methods, and requires users himself to import all the data. It can still be tempting at its price level, which is relevantly much cheaper than Windham or Pertrac.

But nothing can compete with Morningstar EnCorrr, the most fully-scaled asset allocation backtesting software in the industry. The whole package consists of Data Center, EnCorr Allocator, EnCorr Analyzer and other five portfolio tools. Considering how sophisticated it is, Morningstar highly encourages its users to take online tutoring courses.

Of course, there are a lot of fish in the sea. Besides all above, Zephyr Allocation Advisor, DynaPorte Portfolio Solution and other softwares can be wise choices for investors as well.

The SEC Blew the Bubble?

Ms Drucker wrote 'The SEC Killed Wall Street On April 28, 2004', which is an extraordinary piece of work. The five SEC commissioners anonymously voted a program which took away the supervision on the Wall Street back in 2004. The SEC deregulation let Big Five Banks leverage up on their methodology:

The broker dealers – Bear Stearns, Merrill Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers – were all keen to see their holding companies monitored by the SEC under a new Consolidated Supervised Entities (CSE) program.

... Once more, we return to the climber who is scaling the building without the safety net. To what extent did the added leverage directly lead to the end of the five giant banks? Bear Stearns sold its decimated stock to JP Morgan in March, on September 15, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America, and on September 22 Goldman Sachs and Morgan Stanley converted themselves into commercial banks. “I’d call it res ipsa loquitur – in other words the thing speaks for itself,” Ritholtz comments. “It’s no coincidence that since the SEC created the exemption, all five are now gone.”

... Cox himself admitted on September 26, 2008, that the CSE experiment had been “an utter failure”, as the SEC ended the program. Meanwhile, the remaining investment banks were flailing. The Chairman attributed the breakdown to the voluntary aspect of the arrangement, whereby the banks could opt in and out of supervision at will. He said, “The fact that the investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the CSE program, and weakened its effectiveness.” In ending the program, Cox was plainly stating that self regulation had fallen far short. “He was implicitly saying that the oversight of the regulators had failed,” says Daugherty.

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