What is KJ's problem?

[scroobal]

Bro, do read post #314 para 4. The control is indeed the issue.

I think you and Scroobal have also missed the bigger picture. The mechanism of pledging a loan to an institution like the IMF is not a big issue. The bigger issue is control of reserves and accounting of the reserves, which are in the hundreds of billions. That is one massive black hole that no one outside the inner circle can get a grip of. And that's pretty fukcing dangerous of SG.

 

[Thick Face Black Heart]

The Europeans have the resources but lack the political will to save the collective. We have reached the stage where the Europeans might act too late and infect everyone. So, we set up an emergency arrangement (that's why pledges and not immediate contributions) just in case we need to contain that infection. We're also sending a signal to Europe that we'll act to stop contagion but not to bail out a bunch of idiots. Note that US Treasury Secretary Timothy Geithner has said that Europe has the resources to fix its own problems and the IMF loans should only be viewed as supplementary. That's the public view of the IMF's most influential member! That's the US govt communicating with those idiots in Europe!

The problem with the European union right at the outset is trying to create a monetary union without a fiscal union, and doing it whilst mired in deep differences politically and in terms of economic productivity. Not to mention the huge discrepancies in the level of government prudence and responsibility with regards to long term budgetary planning.

Do you know some months before this discussion took place, I had a similar debate with GMS about what was the key problem facing the EU, and he said EU was very united politically? I stamped my feet and didn't know what to say ....

I met a hedge fund analyst last week who is in tune with the mkts on daily basis, and he said the euro still remains a fantastic short despite having already declined so much. I tend to agree. The europeans simply lack the will to do the necessary and Germany is up to their necks trying to turn the whole EU politically in their favour. No one is actually solving the problem, everyone is just trying to kick the can down the road. As the saying goes, paying later means paying more.

Our pledge to the IMF is the right thing to do, in my opinion. Firstly it is not a fantastically large amount. It is a prudent amount given the size of our reserves. Those who say we should spend more helping the poor are right. But that money can already be found in the current budget and the issue in this case is political will rather than political accountability, which is the essence of this thread.

So please allow me to summarize:

(a) As Scroobal has emphasized, the issue is the mechanism/control and the way the govt can allocate capital without having to explain or justify itself before a formal forum like Parliament. I think this should be taken further. Our real problem is the hundreds of billons OF DARK MATTER that is controlled by the PAP which is totally unaccounted for, entirely absent from the public record. It is extemely dangerous situation because you don't know what those rascals are currently doing with the money, how they got it, etc. If that DARK MATTER is what has been keeping our fragile SG economy afloat all these years, a sudden global crisis can unravel the very foundation of our country.

(b) We must play our part as global citizens to be sure, and there's always the international politics that we have to play to appease powers larger than us and keep our foot on the right side their boat.

(c) Real issue at the end of the day is political plurality and adequate representation in Parliament which is currently lacking. Because no matter whether you want to address the dirty politics with Indonesia or our local domestic economic decisions, you first need political representation to address them.

(d) IMF is not an investment vehicle, it is an institution dedicated to helping others and it will lose money from time to time doing so. Nothing new. What matters is that we understand what the IMF does, that it frequently rights off its debts, but still maintains a good track record of honouring its own payments to those from whom it borrows. This may of course entirely unravel in a global crisis big enough to wreck the whole world, but lets not jump too far ahead. The more immediate issue here is govt accountability in use of national assets and reserves.

 

[Thick Face Black Heart]

This is really not true. The EMH is an Efficient Market Hypothesis. It is not an Omniscient Market Hypothesis. A lot of the documented inefficiencies which apparently contradict the hypothesis are only observable from hindsight. At the time when they occurred, they were not recognized as inefficiencies.

Wasn't that my point? That there are inefficiencies in the mkt which contradict the EMH theory? Those inefficiencies don't last microseconds, by the way. They can last months. Look at NASDAQ from 1999 to March 2000. Or look at how the banks and insurance coys traded from 2006 to 2007. From the way AIG was making new highs in 2007 you'd never suspect a major collapse was ALREADY underway.

 

[Thick Face Black Heart]

Nobody missed the big picture,

The mechanism that allows the govt to make transnational pledges with our money is a subset of the same mechanism that allows them to shove our reserves into that black hole.

OK, pt understood.

 

[londontrader]

The problem with the European union right at the outset is trying to create a monetary union without a fiscal union, and doing it whilst mired in deep differences politically and in terms of economic productivity. Not to mention the huge discrepancies in the level of government prudence and responsibility with regards to long term budgetary planning.

Yes, it was a political project from the onset. Some people wanted to create history and figured that we can have monetary union first and then work out the other details as we move along ie. fiscal union etc..
That's like saying we get married now and then work out if we actually like each other as we go along!

Then it was such a PR success that the politicians forgot about the gaps that needed working on. Instead, they started talking about "Enlargement" ie. adding more members - most of whom didn't have the right economic ingredients to qualify (so they cheat).

Do you know some months before this discussion took place, I had a similar debate with GMS about what was the key problem facing the EU, and he said EU was very united politically? I stamped my feet and didn't know what to say ....

Duh?
I gather Mr GMS doesn't spend much time in Europe

I met a hedge fund analyst last week who is in tune with the mkts on daily basis, and he said the euro still remains a fantastic short despite having already declined so much. I tend to agree. The europeans simply lack the will to do the necessary and Germany is up to their necks trying to turn the whole EU politically in their favour. No one is actually solving the problem, everyone is just trying to kick the can down the road. As the saying goes, paying later means paying more.

The markets agree with you and that analyst.

I met someone from one of S'pore's key investment agencies (you should be able to guess) who made a case for investing in "undervalued" euro zone assets. According to him, a certain old goat was pushing the idea. Hmmm, sounds like the kind thinking that went into that Citi investment a couple of years ago. It paid off (in the end) for some, but it was a roller coaster ride like no other!

Our pledge to the IMF is the right thing to do, in my opinion. Firstly it is not a fantastically large amount. It is a prudent amount given the size of our reserves. Those who say we should spend more helping the poor are right. But that money can already be found in the current budget and the issue in this case is political will rather than political accountability, which is the essence of this thread.

Couldn't agree more!

Real issue at the end of the day is political plurality and adequate representation in Parliament

There was some talk about having referendums (even if they are not binding). I think that sorting out the political imbalance in Parliament is the real issue. Many brave S'poreans have started the swing in the right direction. We just need to keep the momentum going!

What matters is that we understand what the IMF does, that it frequently rights off its debts,

Actually, it INFREQUENTLY writes off debts and can be very persuasive when collecting.
I've had a hard time convincing GMS about this even though the actual facts speak for themselves

 

[londontrader]

Originally Posted by londontrader

The draw on the reserves was not because the govt didn't the operational funds
The draw was to allow future govts to share the cost of these projects
Why? because they argued that these are asset enhancing projects and the current govt shouldn't pay for something that only future govts get to enjoy
got it?

Originally Posted by Thick Face Black Heart

Your reasoning would be right if there was power sharing in singapore parliament.

If the PAP is confident of forming the govt for the next 2-3 election cycles with overwhelming majority, then that won't be the reason.

It still could be the real reason because the same PAP team might not be present over the next few cycles
Leadership renewal at each cycle, remember?
So maybe the current PAP team didn't feel like taking a hit (on their operating budget = bad PR), in order to make a future (younger) PAP team look so good.
Just my guess!

 

[londontrader]

Wasn't that my point? That there are inefficiencies in the mkt which contradict the EMH theory? Those inefficiencies don't last microseconds, by the way. They can last months. Look at NASDAQ from 1999 to March 2000. Or look at how the banks and insurance coys traded from 2006 to 2007. From the way AIG was making new highs in 2007 you'd never suspect a major collapse was ALREADY underway.

You make a good point and I'll give you a real example ie. momentum strategies (trend following)
According to the EMH, they shouldn't work at all
But Momentum has been with us for years (not months)
Granger & Timmermann try to reconcile this by adjusting the traditional definition of the EMH, but it's still unsatisfactory
Excess returns to momentum strategies now live in the domain of "puzzles" and "anomalies"
EMH defenders see the historical record and calmly say "There must be some reason for this weirdness, but I can't yet put my finger on it"

 

[Thick Face Black Heart]

Yes, it was a political project from the onset. Some people wanted to create history and figured that we can have monetary union first and then work out the other details as we move along ie. fiscal union etc..

The idea of European federation is an old one, dating back many decades to the european steel and coal community.

It is a way for europe to remain relevant in the world. Another factor is the need to contain Germany which historically has been an aggressor. Germany was not opposed to this notion, as it realized that integrating itself with europe would be a formidable counter to its old foe, the soviets.

America has always seen europe as a buttress for NATO, which it controls. A collapse would not be in America's interest, and you're probably quite right in suggesting that america would save europe first before the IMF.

 

[aurvandil]

That's right, it could be blind luck ie. statistician's view
But why do the same people keep getting so lucky doing what they do?
If it's truly luck, shouldn't random people have a chance of being lucky?

It is a memory-less system. If you have been lucky 10x before, the probability you will lucky on the 11th time is the same. Simple coin tossing experiment to illustrate. Suppose you have a thousand coins. You toss each coin 100 times. In the process you find 1 coin which is unusually "lucky" because it came up heads 90x out of 100. Have you found an anomaly or was it just luck? The memory less property of games have been fooling gamblers for years. If you go to the casinos, you will see lots of people at the baccarat tables chasing banker "dragons" or player "dragons".

Why am I still around? Because I enjoy it & don't fancy a cushy retirement in the South of France (at least not yet)

I have a soft spot for Monaco

Talking about the SIMEX Pits brings back fond memories of the colourful characters in those days (I don't just mean the jackets)
Like Richard Loke (you might be familiar)

Haven't heard that name in a long time. Remember locals and how front running with your kakis order filling for the institutions was the easiest and surest way to make money. If you were a quant back then, you didn't have to bother with models to make money. All you had to do was do some "magic" with that primitive clearing system on the floor and download everyone's trades.

 

[aurvandil]

Not quite. It is a very small nuance which trips many people up.

Both example you have quoted are cases in point. With the benefit of hindsight, both are clear inefficiencies. At the point when the market was chasing up valuations however, most market participants did not recognize them as such. They were therefore acting rationally and intelligently based on existing information.

For the dot com boom, there was the genuine belief that clicks would replace bricks and mortar. There was therefore an attempt to value cyberspace like commercial real estate. It was only when empirical evidence emerged that cyberspace was not not like commercial real estate that the market collapsed.

For the 2007 collapse, it was the quants and rating agencies which fooled everyone. The quants convinced the world math had conquered risk. By mixing and matching junk together, they fooled the world that they had created gold. The rating agencies concurred with them and graded whatever crap they created as gold (AAA). It was only when empirical evidence emerged that what they created was not gold that the market collapsed.

Wasn't that my point? That there are inefficiencies in the mkt which contradict the EMH theory? Those inefficiencies don't last microseconds, by the way. They can last months. Look at NASDAQ from 1999 to March 2000. Or look at how the banks and insurance coys traded from 2006 to 2007. From the way AIG was making new highs in 2007 you'd never suspect a major collapse was ALREADY underway.

 

[aurvandil]

The classic rejoinder to the "puzzle" and "anomolies" is that these occur for specific strategies for specific assets at specific times. Using momentum strategies as an example, these have been found to work for specific assets and specific times. It is not universal. Applying the same strategy, you can find specific assets and specific times where they failed.

This brings us back to my earlier coin tossing example. The identified "puzzles" and "anomalies" could simply be a function of blind chance. The only way you can use an anomaly to disprove the EMH would be to find a strategy which worked for all assets all of time and which everyone was aware of it. To my knowledge, such an anomaly does not exist.

Closer to home, the colorful characters who pass off as experts on CNA have come up with their own local anomalies. For example, "the Chinese New Year effect" and "the Christmas effect". People can be so gullible.

You make a good point and I'll give you a real example ie. momentum strategies (trend following)
According to the EMH, they shouldn't work at all
But Momentum has been with us for years (not months)
Granger & Timmermann try to reconcile this by adjusting the traditional definition of the EMH, but it's still unsatisfactory
Excess returns to momentum strategies now live in the domain of "puzzles" and "anomalies"
EMH defenders see the historical record and calmly say "There must be some reason for this weirdness, but I can't yet put my finger on it"

 

[Thick Face Black Heart]

Actually, it INFREQUENTLY writes off debts and can be very persuasive when collecting.
I've had a hard time convincing GMS about this even though the actual facts speak for themselves

Haha ... you nailed GMS on much earlier when you said he sticks to his argument despite the facts.

A layman like me who gets financial news from the tabloids can be forgiven for thinking the IMF routinely writes off loans. I mean, you open the papers, and you always read this chap is begging IMF to forgive something, or that chap is complaining that IMF's terms are too harsh.

My defense is I'm no financial analyst and no degree in econs or finance, but GMS has 2nd class upper. As cass888 put it, he thinks his 2-1 is same as KJ's 2 1's!!!

 

[Thick Face Black Heart]

Would have to disagree.

The housing bubble and subsequent collapse was not "knowable only on hindsight". It was there in front of everyone's face as early as 2005 when newsweek printed "Home $weet Home" essentially celebrating America's newfound prosperity. Many experts had already written and spoken about the mess that lay ahead. The Bank Credit Analyst had already pre-warned, and Martin Barnes was especially dire about it.

My guess why the stock market chugged on for so long, was because pensions and mutual funds kept putting client money to work in the market due to "investment mandates".

Similar scenario for the dot-com bust in 2000. If you examine market breadth in the final 12 months before the final NASDAQ 5000 peak in March 2000, it was exceedingly narrow. The smart money was already getting out of the mkt. The only reason why it continued to rally so much was because of leadership by a handful of names that the retail crowd was crazy over. Algorithmic trading also contributed, as well as forced short-covering by those who knew the disaster that lay ahead but timed the mkt wrongly.

The knowledge of pending disaster was always there, but many participants failed to act on their knowledge due to either lack of discipline, investment dogma, career risk, or any combination of factors.

In the end, the bubbled ended not because new facts were uncovered that proved earlier hypotheses wrong, but because the mkt simply exhausted itself. All bubbles end that way -- by sheer exhaustion. Nothing to do with facts.

Both example you have quoted are cases in point. With the benefit of hindsight, both are clear inefficiencies. At the point when the market was chasing up valuations however, most market participants did not recognize them as such. They were therefore acting rationally and intelligently based on existing information.

For the dot com boom, there was the genuine belief that clicks would replace bricks and mortar. There was therefore an attempt to value cyberspace like commercial real estate. It was only when empirical evidence emerged that cyberspace was not not like commercial real estate that the market collapsed.

For the 2007 collapse, it was the quants and rating agencies which fooled everyone. The quants convinced the world math had conquered risk. By mixing and matching junk together, they fooled the world that they had created gold. The rating agencies concurred with them and graded whatever crap they created as gold (AAA). It was only when empirical evidence emerged that what they created was not gold that the market collapsed.

 

[aurvandil]

Nothing wrong with the interpretation of things below. It however uses a different paradigm from the EMH. If you want to evaluate the EMH, you have to use the paradigm behind the EMH. In lay person's terms, these are commonly know as the assumptions of the model. You cannot force fit another paradigm in and then declare a hypothesis is not working.

Under the EMH, let us assume there is an inefficiency. This inefficiency is not widely known. As a result of this, there is a pricing anomaly in the market.

Over time, news of the inefficiency starts to spread. While it gets known to a large number of people, it is not immediately recognized or accepted as an inefficiency. As it goes against convention, there will be many who doubt its validity. There would however sufficient interest in the inefficiency to generate more research into whether the inefficiency is real or false.

Over time, the research bears fruit. A constant stream of empirical evidence supporting the validity of the inefficiency enter the market. Over time, a tipping point is reached. From not believing in the inefficiency, the market accepts the findings the inefficiency is real. This results in a sudden and violent crash.

Here it should be noted that the difficulty in identifying inefficiencies and profiting from them is that at any one point in time, there are hundreds if not thousands of hypothesis of supposed inefficiencies in the market. While some will turn out to be true, there will be many others which will turn out to be false. It is only with the benefit of hindsight that you can accurately identify the true inefficiencies from the false.

The knowledge of pending disaster was always there, but many participants failed to act on their knowledge due to either lack of discipline, investment dogma, career risk, or any combination of factors.

In the end, the bubbled ended not because new facts were uncovered that proved earlier hypotheses wrong, but because the mkt simply exhausted itself. All bubbles end that way -- by sheer exhaustion. Nothing to do with facts.

 

[londontrader]

As cass888 put it, he thinks his 2-1 is same as KJ's 2 1's!!!

That's cute!

 

[londontrader]

The classic rejoinder to the "puzzle" and "anomolies" is that these occur for specific strategies for specific assets at specific times. Using momentum strategies as an example, these have been found to work for specific assets and specific times. It is not universal. Applying the same strategy, you can find specific assets and specific times where they failed.

The EMH has it's roots in General Equilibrium Theory
Therefore, If momentum strategies work, as apparently they do, why is there not enough capital applied to them so that the excess return goes away? Excess returns to momentum trades may indeed be "specific", but for the moment momentum trades are much too "alive & well" to be stuffed in the closet together with the other anomalies.
That's why young economists are trying to make a career from answering that question.
Even the staunchest defender of the EMH has to admit that "Momentum" is a serious problem that needs a proper answer (yet unavailable). Any proper academic economist will not disagree with this statement, whether he believes in EMH or not.

BTW, the usual approach taken by staunch defenders of EMH, is to simply IGNORE momentum in their discourse with like-minded colleagues. Pretty much like how the PAP IGNORES arguments (it can't yet win) against it's policies.

This brings us back to my earlier coin tossing example. The identified "puzzles" and "anomalies" could simply be a function of blind chance. The only way you can use an anomaly to disprove the EMH would be to find a strategy which worked for all assets all of time and which everyone was aware of it. To my knowledge, such an anomaly does not exist.

You know as well as I do that the EMH is an incomplete hypothesis and can't be disproved ie. the joint hypothesis problem
That's why financial types (like me) talk about the EMH is being useful or not useful
The existence of Momentum Strategies that yield only specific but still persistent excess returns, over multiple markets, doesn't lend much support to the usefulness of the EMH. Surprisingly, even academic economists (even at Chicago) agree with me that this is a problem for the EMH, Joint Hypothesis Problem not forgotten.

Closer to home, the colorful characters who pass off as experts on CNA have come up with their own local anomalies. For example, "the Chinese New Year effect" and "the Christmas effect". People can be so gullible.

Just a copy of the fabled Jan Effect.
Which has several possible & rational explanations

 

[londontrader]

It is a memory-less system. If you have been lucky 10x before, the probability you will lucky on the 11th time is the same. Simple coin tossing experiment to illustrate. Suppose you have a thousand coins. You toss each coin 100 times. In the process you find 1 coin which is unusually "lucky" because it came up heads 90x out of 100. Have you found an anomaly or was it just luck? The memory less property of games have been fooling gamblers for years. If you go to the casinos, you will see lots of people at the baccarat tables chasing banker "dragons" or player "dragons".

That's why statistics can always refute any claims made by gamblers at casino tables.
You can actually run the simulations
The problem with financial markets is that the true distributions are unknown (and possibly unknowable)
Markets are endogenous remember?
That's why risk mgt in financial markets fails spectacularly once in while. Because it is largely based on statistical theory!
That's why statisticians and the EMH defenders haven't been able to use your argument to convincing kill the anti-EMH clan
BTW, I am not necessarily anti-EMH (that's why I like Granger & Timmermann)

I have a soft spot for Monaco

I particularly like the TAX HAVEN aspect, with UK taxes the way they are!

Haven't heard that name in a long time. Remember locals and how front running with your kakis order filling for the institutions was the easiest and surest way to make money. If you were a quant back then, you didn't have to bother with models to make money. All you had to do was do some "magic" with that primitive clearing system on the floor and download everyone's trades.

Richard Loke was fun to be with and always the dandy at the SIMEX Annual Dinners. In those days, you could claim to be a quant just by having enough skill to run Black Scholes on Excel. I know because I did that!

 

[londontrader]

America has always seen europe as a buttress for NATO, which it controls. A collapse would not be in America's interest, and you're probably quite right in suggesting that america would save europe first before the IMF.

Yeah! And the Germans are counting on it.
Problem is that pesky thing called the US Congress and the need for a President to actually be subject to an election.
That's why sometimes, democracy has a crazy way dealing with urgent problems
But the alternative is unthinkable

 

[steffychun]

397 over posts and all who dont want to provide global stability. Why aren't you all protesting outside the Istana or IMF then?

 

[aurvandil]

Any proper academic economist will not disagree with this statement, whether he believes in EMH or not.

BTW, the usual approach taken by staunch defenders of EMH, is to simply IGNORE momentum in their discourse with like-minded colleagues. Pretty much like how the PAP IGNORES arguments (it can't yet win) against it's policies.

I kind of knew you would raise this which is why I started the para with the carefully chosen words "classic rejoinder". The "puzzles" and "anomolies" are indeed a problem. However as I mentioned in the post, the anti-EMH clan haven't been able to use it to kill the EMH because the fabled universal anomaly does not exisit.

My own thoughts on the matter are as follows, If you follow the latest information paradigm for the EMH, it works fine if the empirical evidence emerging is conclusive and the market comes round to understanding and accepting the inefficency. When that happens, we then have a violent market correction. The paradigm is silent on what will happen if the empirical evidence emerging is inconclusive. It covinces some people but fails to convince others. This would apply to your case of the momentum strategies which only work some of the time. Those who believe in it (like yourself) point to the times when it has generated super normal profit. Those who do not believe (statisticians) point to the times when it failed. To those who believe, they are exploiting an anomoly. To those that don't, it is dumb luck. I believe that some day, one of those young smart economists you talk about is going to do something concrete along these lines and come up with a stunning paper which addresses the "puzzles" and "anomalies".

You know as well as I do that the EMH is an incomplete hypothesis and can't be disproved ie. the joint hypothesis problem

Guilty as charged.

That's why financial types (like me) talk about the EMH is being useful or not useful

You mentioned before that the greatest thing which ends careers in the market is hubris. The EMH is useful because it keeps us humble. It tells us not to think too much of ourselves because whatever we can dream up, our peers can look at us and dream it up too. If we find what appears to be an anomaly, think about it very carefully before jumping in as it could be spurious. And if you make spectacular dollar profits, don't get cocky as it could be just blind luck.