Capitulation

US markets fell below the 2002 lows today. I don't know whether that is the legendary "capitulation" or not, but I capitulated more or less in my Ameritrade trading account today. I sold most of my remaining stocks and kept just 4 (BRK/B, MVC, CHN, LGDI) and now the margin loan is less than 50% of the value of the stocks. Of course, I should have done this many months ago. But I didn't and there's not much I can say. The most important lesson is not to use margin loans. Some people maybe can use them as a short-term source of funding or be disciplined to use them in extreme moderation. Mainly, I sold because I want to be able to sleep at night. But really there is only a 10th of the peak value of the account left and if the market kept falling I would soon be wiped out entirely. My main concern now is for my Australian margin account. I've continued to make adjustments to keep within the margin "buffer". It's been a slow bleed.

Some people were right about how severe this bear market would be. But many of those were very early in their forecast and others were very extreme in their predictions. The average investor should be diversified across assets and managers and only adjust their weightings moderately in response to economic news. When things finally stabilize, that's where we are going personally with our future savings. Luckily we are still not that old.

The pain in this bear market has had two main dimensions for me. One is realizing that I am not as smart as I thought and the other is losing money I worked to earn and sacrificed to save. It is also painful to lose Snork Maiden's and my Mom's money through my decisions. But there were no margin loans there and unless the economy is shifting to a permanently lower state the money should come back eventually.

Surveying the Wreckage

Our estimated net realised capital loss for the year so far is $A38k ($US24). At least I won't be paying any capital gains taxes for a while. In Australia you can't deduct any of the net loss against other income but you can carry it all forward to future years to offset future capital gains.

On the theme that a demolition prepares the ground to build something new I've completed the first draft of my job application for the local university job. Academic job applications are always long but in Australia all government jobs (and maybe some private sector ones too?) require you to address a list of explicit "selection criteria". So most applications are rather lengthy. Snork Maiden will help me improve this first draft and then I'll try to get some input from another friend before submitting.

Savings

This chart shows in Australian Dollars my/our cumulative saving over the last twelve years. It doesn't include retirement saving and it completely ignores all investment income or losses. So it is purely the accumulated difference between non-investment earnings and spending. Unfortunately we don't currently have all this money as cumulative non-retirement investment earnings are negative. Retirement earnings, however, remain positive.

The big difference between the last bear market and the current one is I was spending far in excess of what I was earning then as well as losing on my investments/trading. This time we are actually saving a little.

The little spike in 2007 is where I added in Snork Maiden's savings and then we spent a lot when we moved to Australia.

Perth

No, I'm not moving to Perth, but my former PhD student was just offered a lectureship job there on the last day of his interview process. This student is from the same city in China as Snork Maiden and has been doing a post-doc in the U.S. Back in 1996 I was offered a job in Australia during my interview here. If they like you here they move, screw the bureaucracy. This is great news. He wants to move to Australia in order to get married to his Australian girlfriend - she'll move from Melbourne to Perth. Co-location was the main reason Snork Maiden and I moved here too.

Of even more interest, is that the guy I set up a meeting with here was looking to try to hire this student of mine too. This might increase my chances of getting hired myself instead.

The huge rebound on Wall Street last night makes me a little less nervous and a little more hopeful of retaining some account value. Otherwise, I'm puzzling out how to set up my website. Not sure if everything is activated yet or not. Sent a message to the helpdesk.

Darkest Before the Dawn?

Today, Paulson said that he's changed his mind and they aren't going to buy up mortgages using the TARP funds. Now the name of the program: "Troubled Assets Relief Program" is a real misnomer, but I guess they are still trying to give relief to institutions with troubled assets. When the TARP was first proposed, many commentators argued that buying stock in the troubled institutions would make more sense due to leverage that banks balance sheets could provide to turn that capital into a much larger amount of new loans. But now that the government has finally decided to mainly do that (of course they have been doing that in practice) the Dow falls another 400 points. I guess investors have no confidence in the government after all these twists and turns.

Of course this fall battered my poor accounts again and I am again in a margin call. There is a chance that another account may soon be totally wiped out unless things turn around fast.

On a more positive note, I have a meeting set up in about ten days with a guy who maybe can either hire me as a researcher or work with me on developing a proposal that could fund me. On the website, opinions seem pretty divided between .org and .com. I'm leaning to .com following my brother's advice and that maybe in the future I'd offer consulting services via the website.

P.S.

I registered my domain (.com) and applied for webhosting and I'm working on editing my old webpages from my former university site to be ready for my new site. Also I've registered for an open day (2 days actually) in my disciplinary area at the local university. It'll be a chance to meet all the relevant people. I also just contacted a senior professor about some lectureship jobs (assistant professor in American) that are currently being advertised here. I was an external examiner for one of his PhD students. I'm also putting the finishing touches on an academic paper I co-wrote with Snork Maiden.

Professional Website

As part of my new career direction I want to set up a professional website which is not linked to this blog. Snork Maiden found a cheap and easy service for buying a domain name and hosting a website: www.crazydomains.com.au. It is so much cheaper than my ISP's offerings. It sounds great. Only question is what domain name to go for. Here are some options:

www.myname.com

www.myname.net

www.myname.org

All these are available. Let me know what you think. I found that there are restrictions on .au domains. You can't get a .com.au or .net.au without an Australian Business Number. And you really have to be a non-profit organization to get a .org.au domain.

Career Explorations

I'm beginning to make contacts and explore career options. In the short-term I want to stay here in Canberra, which somewhat limits options. But it is a good location for my long-term career goals and there may be also online money-making opportunities in the meantime. One idea I'm exploring is editing academic papers for authors who are not native English speakers. I have plenty of experience with this - I've continued as the associate editor of an academic journal since leaving my former academic position in the U.S. - and would play the role of a subject expert more than a copy-editor. The other track is meeting people in my academic field and discussing the opportunities here to work in research and/or teaching. I should have a better idea of what I might be doing by the end of this month and whether I need to move onto something else, perhaps in the public service.

Zimbabwe Crisis

Good series of photos on the hyperinflation in Zimbabwe. Nothing like photos to illustrate the craziness of hyperinflation. My Dad remembered the hyperinflation in Weimar Germany though he was only seven years old at the time. That was just as crazy. Most hyperinflations haven't gotten that bad. I wrote my undergraduate thesis in economics on Turkish inflation policy. The rate only got a little above 100% per year and I experienced the hyperinflation in Israel directly living through rates of 100-400% per annum. But those were relatively manageable compared to Zimbabwe, Weimar, and other ultrainflations.

Endowment Asset Allocations

Interesting article in Barrons this week on the performance of U.S. college endowments. In recent years endowments have increased exposure to alternative investments in an attempt to emulate the star endowments of Yale and Harvard. Barrons' main argument is that while this strategy looked good up till this year recently alternatives have performed just as badly as traditional assets (stocks and bonds) and that maybe these funds should focus more on traditional assets in future:



(I don't know how they're coming up with a 50% loss in private equity since June 30 - I think this is just a wild guess based on assuming that private equity moves like public equity and as it is levered the losses will be worse. Private equity funds aren't reporting these kind of losses as is discussed in another Barrons' article on Blackstone). In contrast to the article and the headline on the table, the theory of rebalancing would argue for putting more money into the alternatives that have had recent poor performance. What do you think?

Having a lot in alternatives hasn't done Moom and Moominmama much good either. These are our allocations at the end of October:



Compared to the star endowments Moom has heaps of foreign equity (mainly Australian stocks) and low allocations to private equity and real assets. Moominmama has piles of bonds and cash and zero allocation to private equity and a low allocation to real assets. Of course, our low allocation to US stocks is because we are not US based. Moom had a 46% allocation to his domestic equity but Moominmama has a zero allocation to her domestic equity. The average between our two portfolios is not that far from the portfolio of the average educational endowment as estimated by Bloomberg. And despite Barrons' article that might not be a bad benchmark to aim for in the long-term.

P.S.

Using the concept of Euclidian distance we can compute the similarities between the portfolios (I dropped Stanford from the sample). Moom is closest to the average endowment with a distance of 38% and furthest from Harvard with a distance of 56%. Moominmama is also closest to the average endowment (30%) and furthest from Princeton (41%). The distance between Moom and Moominmama is 49%.

Position Level Allocation

After all the changes of the last couple of months, I'm posting my position level allocation as at the end of October. This is one the main spreadsheets I maintain to see where I'm at across the whole portfolio. The primary breakdowns are according to currency and investment mode or function. "Passive alpha" are investments that are usually expected to have low correlation with stock or bond markets (including all individual financial sector stocks) while "beta" investments are funds and ETFs which are either index funds or mutual funds that are close to closet indexers. Some of these are sector funds (e.g. XLF, PBW, Global Resources Fund), some country funds (e.g. IFN), some capitalization funds - small and large cap Australian stock funds, and asset class funds (CREF Bond Fund). I break out individual non-financial stocks as "industrial stocks". The point of this post is mainly just to show what I'm currently holding in what proportion.

Positions that have done relatively well have grown into rather large percentages of net worth. In particular, the TIAA Real Estate Fund is now more than 9% of net worth and regarded as a "passive alpha" investment. It provides the bulk of our real estate exposure. It is a "direct property investment" as it is a non-exchange-listed open ended fund that directly invests in property. Direct property investments behave very differently from exchange listed property investments. They have a lower correlation to the stock market. Our only other exposure to direct property is through Snork Maiden's retirement account (PSS(AP)), which currently is still a very small exposure. Our other "real estate investments" are NCT (mortgage REIT), CIF.AX (Infrastructure Fund), BT Property Investments (a REIT mutual fund), and 3% of the CFS Conservative Fund. I'm rather loathe to cut exposure to the TIAA Fund given how well it has performed and our limited other opportunities currently for real estate investment. We could increase the share of Snork Maiden's retirement account in direct property, but the total amount to play with there is still rather small. Our other accounts are rather "liquidity constrained" :) So despite the single fund manager risk, I'm going to keep the current allocation.

Everest Babcock and Brown and Platinum Capital

Received the offer document for Platinum Capital's (PMC.AX) rights issue and Everest Babcock and Brown Investment Trust's (EBI.AX) withdrawal offer. Platinum granted shareholders the right to buy one new share for each share they own at a discounted price (well it was discounted at the time of the offer). I already sold my rights, which are essentially call options, on the stock market. Even if I had the money I wouldn't want to increase my position and currently the market price is equal to the exercise price.

EBI, which is planning to delist from the stock market is offering investors an opportunity to redeem some of their shares prior to delisting at a 7.5% discount to Net Asset Value. In total, up to 10% of all shares can be redeemed so if the offer is oversubscribed requests may be scaled back. I'm planning to redeem 31% of my shares. Despite the discount this price is much better than the current market price and it'll will be a year before another redemption is allowed. Still, I'll probably wait until October's NAV is published mid-month, before sending the form in.

EBI's management company is also in the news today with rumours of a takeover or some other transaction. The stock price of this firm has completely collapsed. It would be strange for the major stockholders to sell out at anywhere near this price - the P/E ratio is 1.6 based on last year's earnings and analyst's forecast a forward P/E of 3.8. But they probably need the money. A big one of course is Babcock and Brown.

I'd be happy with a price of 50 cents a share rather than the current 10 cents (or less). I'm ashamed to say that my net cost/breakeven point is 71 cents a share.

October 2008 Report

In percentage terms October's results are the worst on record but they were heavily influenced by the decline in the Australian Dollar that took place in this period. This has the effect of reducing both our expenses and non-investment income in US Dollar terms and making investment returns in USD terms much worse than in Australian Dollar terms. In Australian Dollar terms the results were bad but no worse than September. Of course, September was horrible.

Income and Expenditure



Expenditure was $3,523 ($A5,340). This was elevated by heavy spending in China on everything from family banquets to hotelrooms. Non-investment income of $7,057 which was increased by a third salary payment this month and by money we received from Snork Maiden's parents. Retirement contributions were $668. Total investment losses were $96,753, which is a record loss. But $37,660 of this was due to the fall in the AUD. In AUD terms we lost $A52,637 - a little less than in September - with a positive $36,866 contributed by the rise in the USD.

Net Worth

Net worth fell by $90,408 to $234,430 or in Australian Dollar terms by $A43,074 to $355,305. This chart, in Australian Dollars, does look a bit less scary than the US Dollar chart posted on NetWorthIQ:



Medium term balance is just non-retirement accounts and superannuation is retirement accounts (including US ones as well as Australian ones).

Investment Performance



We are now trailing the MSCI All Country Gross Index across all of these time frames. Returns just fell off a cliff in September and October compared to any previous period:



Whatever way you look at it:



Using my preferred time series method portfolio beta to the MSCI index was 1.27 in October with an annual alpha of 3.1%. This alpha is hugely down on past estimates but still positive.

Asset Allocation

At the end of October the allocation was 52% in "passive alpha", 58% in "beta", 2% was allocated to trading, 6% to industrial stocks, 6% to liquidity, 4% to other assets, and we were borrowing 28%. Due to the use of leveraged funds, our actual exposure to stocks was 105% of net worth, which was down sharply this month due to "forced deleveraging". In September we were borrowing 29 cents for each dollar in equity; we are now borrowing 28 cents. The change is much bigger when we take into borrowing by the leveraged funds we are invested in. In total, borrowing per dollar of equity declined from 82 cents to 67 cents. Looking at asset classes:



Exposure to stocks reduced as they declined in value against other assets or we were forced to sell. At the end of September currency exposures were roughly 51% Australian Dollar, 27% US Dollar, and 21% Other and Global.

Dollar Cost Averaging in Action

Added another $1,000 to Snork Maiden's Colonial First State account. Since the end of September we've added between 29% and 89% units (shares) to each of the seven funds in her account. The differences between the funds is because I'm using the additional contributions to rebalance the account and also because our money is buying far more units in funds whose price fell a lot than it is buying in the better performing funds.

Allco

Allco went into administration i.e. bankruptcy today. Allco Equity Partners announced that they are terminating the management agreement with Allco and will in future themselves employ the Allco managers seconded to the company. A name change is coming up. The upside is that this cuts the links with the embattled Allco Finance Group which I think has contributed to the exceptionally depressed state of AEP's share price. The downside is that the Allco administrators can now sell AFG's shareholding in AEP which could keep the share price depressed in the near term.

September 2008 Report

I'm still waiting for one final piece of data for the October report, so in the meantime here is the much-delayed September report. This report will be pretty short as I'm no longer comparing results against annual goals and there'll be more detail in the October report. Also, these results are so bad I don't really want to analyse them too much!

Both September and October's results are heavily influenced by the decline in the Australian Dollar that took place in this period. This has the effect of reducing both our expenses and non-investment income in US Dollar terms and making investment returns in USD terms much worse than in Australian Dollar terms.

Income and Expenditure



Expenditure was $2,996 ($A3,674). Non-investment income of $3,618 ($A4,436) mainly consisted of Snork Maiden's salary. Retirement contributions were $539. Total investment losses were $71,412, which is a record loss. $11,648 of this was due to the fall in the AUD. In AUD terms we lost $A64,651 with a positive $8,641 contributed by the rise in the USD. The currency neutral loss is worse than the estimate of October's loss.

Investment returns are reported pre-tax. Australian retirement account earnings are taxed at 15% (10% for long-term capital gains). A fall in the value of the account reduces the tax liability and so the actual account value falls by less than our estimated pre-tax investment returns on the account. Reduction in the tax liability on these accounts kicked in $2,756 to the change in net worth.

Net Worth

Net worth fell by $67,496 to $324,821 or in Australian Dollar terms by $A59,849 to $398,358. At month's end retirement accounts stood at $172,541 and non-retirement accounts at $152,280 ($A211,603 and $A186,755).

Investment Performance



Investment return in US Dollars was -18.2% vs. a 7.59% loss in the MSCI (Gross) All Country World Index, which I use as my overall benchmark and a 8.91% loss in the S&P 500 total return index. Returns in Australian Dollars and currency neutral terms were -14.11% and -15.23% respectively. My previous worst return was in September 2002 when the loss was 17.96% (17.13% in AUD terms).

So far this year we have lost 29.47%, while the MSCI has lost 21.04%. We are still beating the market over 5 years and 10 years in USD terms but trailing in all the more recent timeframes.

Asset Allocation

Allocation was 49% in "passive alpha", 63% in "beta", 1% was allocated to trading, 8% to industrial stocks, 4% to liquidity, 4% to other assets and we were borrowing 29%. Due to the use of leveraged funds, our actual exposure to stocks was 128% of net worth. Leverage declined due to the restructuring following the margin call from CommSec. In August we were borrowing 36 cents for each dollar in equity; we are now borrowing 29 cents. Taking into account leveraged funds borrowing declined from 89 cents to 82 cents per dollar of equity. Looking at asset classes:



We halved exposure to bonds but kept stock exposure as a fraction of gross assets constant. I've also included a tentative long-term allocation for the first time. We're not going to move our allocation towards these targets in the short-term, but they indicate where we'd like to be a few years from now. I've allocated 10% to each of bonds, hedge funds, private equity, commodities, and real estate, which is totally arbitary. We would like to have about half of total assets in these categories as against about 30% now. But I really don't know if 5% or 10% is say the appropriate allocation to private equity given the limited options available to retail investors. I am pretty sure though that more real estate and managed futures would be good.

There is a bit more science behind the equity allocations. The Australian equity exposure is double the foreign exposure. The allocation to large cap vs. small cap reflects the 78% of Australian market capitalization in the ASX 200 stocks. The breakdown between US and rest of the world stocks reflects that 50% of world market capitalization is in the US.

Anyway, in the next few years I plan to scale back exposure to large cap Australian stocks and increase exposure to real estate, bonds, and commodities if and when global stock markets recover. I'd also like to get overall leverage down to about 30% or so.

At the end of September currency exposures were roughly 54% Australian Dollar, 24% US Dollar, and 22% Other and Global.

Reinvesting Distributions

A couple of years ago, I stopped automatically reinvesting the distributions from my Colonial First State Managed Funds. It turns out it was a good idea not to reinvest the distributions when the stock market was near its highs. Unfortunately I didn't always just pay down debt with the money... Anyway, times have changed and I am now switching back to the automatic reinvestment option. I doubt these funds will have much in the way of distributions in the near future anyway, but whatever it is it'll get reinvested at what are relatively low prices. I'm not switching the distribution payout method on Snork Maiden's account as it is very straightforward to make the reinvestment online ourselves and when we do we can rebalance the account. Reinvesting in the funds in my margin account though requires faxing or mailing in a form to CommSec, which is a hassle.

Berkshire Hathaway

After yesterday's massive rally boosted the value of my account, today I had the buying power to buy back Berkshire Hathaway at a cheaper price. So not everything is bad. And the stock has even gone up since I bought at the beginning of the session. I also added $A1,000 to Snork Maiden's Colonial First State account allocating more to funds that have declined so as to rebalance the account.

Performance of Commodity Trading Advisors

An interesting paper on managed futures funds, otherwise known as "Commodity Trading Advisors":

"Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors"

They argue that the after-fees performance of the average fund is hardly higher than U.S. government bond returns and that no skill is shown on average by CTAs. The latter isn't a surprising result, the former may be a bit surprising. But maybe not when you find that annual fees averaged 4 1/2 percent!

On the other hand some managed futures funds have very good track records and can provide diversification benefits. The question is will their outperformance persist? If it does then it will have been worthwhile to research the better funds to invest in.

Warning Signs

They really like warning signs in Hong Kong. This one seemed kind of apt:



They especially like warning signs inside taxis:



We counted around 22 stickers inside each back door.

Pictures of Food in China

Revanche asked for some food pictures from our trip to China, so here are some pictures of food and related things. These are freshwater crabs, which are popular in Tianjin:



Their claws are furry even after being cooked. There are huge barrels of live ones scampering around in supermarkets.

Here is the table at Snork Maiden's parent's at lunch on the day we left for Beijing:



Note both cold and warm dishes. Bread on the lower right. In this part of China people eat at least as much bread as noodles and rice (and sweet potatoes and corncobs are also popular). I can't remember what the top right dish is. The middle top dishes are some kind of vegetable with tofu and some extremely cooked very crispy fish. Generally, Chinese cook fish too much for my taste. Top left is a piece of very tasty green radish. Bottom middle includes some white bambooy stuff, some dark fungus and some green vegetable. All cold.

This is a dish at a small local Sichuan restaurant in Beijing a block from our hotel:



The red things are peppers the brown chicken. You don't eat the peppers luckily, just pick the chicken out :) Lunch came to RMB45 for the two of us with about three dishes and probably a beer or tea.

This is a very large more expensive restaurant a few kilometres from our hotel on the same street:



In this kind of place the menu is likely to feature pictures and English in addition to of course Chinese. So you can order stuff by pointing if you don't speak Chinese. Luckily I had a Chinese speaker with me :) Yeah it's called "Golden Tripod Attic". A chain apparently as there is another one between the Yonghegong Temple and Ditan Park.

This guy was a decoration in a Yunnan restaurant near Houhai in Beijing:



The menu features some interesting fungus recipes and stuff cooked in banana leaves.

Some kind of noodle soup in a cheap noodle place in Hong Kong:



Prices in cheaper places in Hong Kong match mid-level prices in Bejing and are still half the price of restaurant prices in Australia.

This isn't very clear but it's supposed to be a dessert made of soy milk, rice, and gingko fruit:



It cost about HKD 15 in a small dessert only restaurant. Cheaper places in HK have no English on their menus just like in Beijing. The only English the first taxi driver we encountered in Hong Kong seemed to know was "safety belt". He only understood our address when we showed it to him written down. The level of English knowledge is a bit higher than in Beijing but far far below Singapore. Snork Maiden fluctuated between trying to talk to people in Mandarin and in English (They speak Cantonese in Hong Kong with Mandarin as first foreign language and English as second foreign language in the public schools). At this restaurant in Kowloon:



I said to her: "Now imagine you were in Thailand and trying to get your food :)" At least she could read the menu and there were some pictures on the menuboard you can see in the background. But we were served one wrong dish and our rice didn't show up and we weren't sure it was coming. Of course, it is usual to eat rice late in the meal so maybe that's what they were thinking. Between Mandarin and Cantonese we weren't sure what was going on. You can also see the woman in pink in the background cooking at the store entrance. Umm here's a pile of some kind of clams or something:



Round the corner from that place was a dessert restaurant where moom tried this:



The black on the bottom is glutinous rice, the white, coconut milk based stuff, and the yellow mango. The menu had English and pictures (a chain). One dessert had "mango in mango juice with extra mango"! There were also some very odd things including desserts with "harsmar".

These are live crabs for sale in Hong Kong:



It looks very cruel to me.

Snork Maiden was very happy to learn that there is Ben and Jerry's ice cream in Hong Kong:



We don't have any in Australia unfortunately. On a finance note, that banknote was issued by HSBC, not the monetary authority. We also saw Standard Chartered and Bank of China notes. Only HKD 10 notes seemed to be government issued. The only other place I've actually seen that is Scotland.

We spent most of our second full day in Hong Kong on a trip to Lamma Island. These are fishfarms in the harbor at Sok Kwu Wan:



And here are the restaurants lining the main street:



Fish hanging up to dry maybe?



And here is a fish not totally destroyed by Chinese cooking methods :P



This is what we ate - they often post lists like this on the table and the waiter ticks things off as they are delivered:



All I can read of that is "beautiful", "sky", "water", and "cow". Now that's puzzling :P Here you can see the fishtanks in the restaurant:



Some contain quite peculiar creatures like mantis shrimps:



And to finish off the meal here is a fingerbowl:



I don't know why the water is colored. It looks like Russian tea.

Damage Control

That's all that is on my financial agenda at the moment. I just sold four stocks to meet another margin call. A couple at minor losses and two at big losses. Three were "industrial stocks" and I'm planning to have none of those in the long-run. And the other was my remaining share of Berkshire Hathaway B. This way at least I get to pick what to sell rather than have the broker pick.

China

We got back from China this morning. We left Australia on 1st October. Seems like much longer. We were in Tianjin, Beijing, and Hong Kong as well as the special development zone north of Tanggu on the coast east of Tianjin and the Great Wall at Badaling as well as a reforestation/carbon sequestration project in that area. Also had a glimpse of the rural areas between Beijing and Tianjin. In Hong Kong we stayed on Hong Kong Island and also visited Lamma Island and Kowloon. We had a mix of experiences in each city from the very touristy to the very untouristy - visiting homes in each city, shopping, travelling on public transport as well as taxis etc., meeting friends, relatives (in Tianjin and Beijing), colleagues (Beijing) and other local development/environment professionals (Tanggu, Badaling). Sightseeing in each location - foreign tourists are usually outnumbered by 100 to 1 roughly by Chinese tourists from all over the country in the PRC - observing the domestic tourists (and pilgrims at temples) can be as interesting as looking at the site in question. Yeah, and there was a lot of eating including home cooking in Tianjin, various banquets (in Tianjin and kind of in Tanggu), small local eating places, grocery shopping in smaller and larger stores and street markets, and western and Chinese fast food outlets. Moom was working on his Chinese. Snork Maiden attended a conference in Beijing she helped arrange. There was also a lot of shopping for clothes, tea, gifts, and even a pair of glasses - you don't need to be able to read either Latin or Chinese characters to do an eye test in China. Maybe I'll put up some pictures when we have them sorted out. Let me know what you'd like to see.

Update

As you can see, I removed all the goals from the sidebar. We are so far from them there is little point in tracking them. When I went into the market earlier in the year when it was down 20% in the US and 25% in Australia, I figured there might be 10% downside from there and I was prepared to handle it. Now the market is down 40% from the peak, so I miscalculated. At this point we are very battered by the market but can still survive. I'll report on September together with October. It's going to be interesting after the second severe bear market in a decade whether a lot of the proponents of indexing into stocks, and mostly US stocks change their tune. I know that I will be a lot more cautious in investing in the future after being mauled twice by bear markets. I'm not going to go to the opposite extreme of what I've been doing though, rather making sure I am diversified and not using much leverage.

I also removed the word "trader" from my profile. It's time to get back to my previous career and investing patiently for the long-term. Some people can be highly successful traders. I'm not one of them.

Hold to Maturity Value

During the U.S. Bailout debate Bernanke introduced the buzzphrase "hold to maturity value". The argument is that mortgage backed securities currently trade for irrationally low prices in the markets given the likely cash received if the security was held to maturity. In other words, some loans will default but not as many as implied by current prices. One of the purposes of the "bailout" is to push up the prices of these securities closer to their intrinsic values in order to help keep financial institutions from becoming insolvent.

Many of the closed end funds I own trade at similarly irrationally low prices in the markets:



As you can see, some of the discounts to net asset value are more than 50%. I wondered what effect accounting for all these closed end funds would have on my net worth. As the table shows, using NAVs instead of current share prices would value these funds at $A147,000 instead of $A102,000 adding $A45,000 or about 10% to net worth.

I expect that eventually when the financial crisis diminishes these funds will trade nearer to their NAVs as they have in the past. In most cases I expect NAV to also rise though in the case of NCT it will probably fall. Its NAV is given by valuing both its assets and liabilities at current market prices for mortgage related securities and its liabilities are poorer quality than its assets.

Asian and U.S. Financial Crises

As the U.S. seems to be reaching consensus on the next stage in addressing its financial crisis I thought about another financial crisis ten to eleven years ago. The Asian financial crisis of 1997-1998 had somewhat similar causes and symptoms as the current American crisis. The main difference was the role of dollar denominated foreign loans which suddenly became much harder to repay after currencies such as the Thai Baht were devalued. The IMF response, which was much criticized at the time, was diametrically opposed to the U.S. response to its own crisis that we are seeing develop now. The IMF urged governments to cut budgets, raise interest rates, let banks fail, privatize state companies and to introduce a host of other structural reform and austerity measures that at best were irrelevant and at worst exacerbated the crisis. As a result Indonesia's GDP fell 13.5% in 1998 and deep recessions occurred in all the most affected countries.

At the time I really couldn't understand the IMF's response. It seemed that they were simply applying the same policies that they had applied, to hyperinflation in Latin America to a totally different situation. It seemed to me they only had one set of tricks they knew.

Looking at the U.S. (appropriately) doing the exact opposite of what the IMF prescribed in the Asian crisis, I don't know if we should be more angry or amused.

Failure to Communicate

March of the Unemployed in Perth, Western Australia in 1931

The financial crisis and its possible solution have been very poorly explained to the American people. As a result, people think that the proposed solution is about saving financial services firms in order to prop up the stock market. When the issue is actually about arresting the spiral down into a Depression due to collapsing credit and money markets. And those of us in the rest of the world would also suffer the impact due to the interconnectedness of financial markets. For example, Australian banks get a large percentage of their financing for loans in Australia from foreign investors. Less than half comes from Australian depositors.

I'm not criticizing Boston Gal, it's just that she states the common perception very clearly, whereas most Americans just seem to be angry. I think the contribution of the Democrats in Congress will result in a much improved program, though noone really knows if it will work all the same. Other countries such as Sweden and Israel have effectively nationalized their banking systems after such crises before eventually reprivatizing them. The details of each case were different though. I think a combination of what is currently planned combined with a Swedish type program would be the most efficient use of public money based on what I understand.

More Bailout News

While no-one was paying attention the US Congress agreed to lend $25 billion to the three big US car manufacturers at 4% interest to help them develop fuel efficient and alternative energy vehicles. The US Treasury has added about $450 billion to the national debt since June already apparently (can't find the link for this now).

In the meantime, the FDIC seized Washington Mutual and sold the good assets to J.P. Morgan already. This deal means no loss to depositors and the shareholders wiped out. Not clear what happens to preferred stock etc. yet.

The Republican Plan that has derailed the financial bailout talks makes no sense at all. It calls for the Treasury to charge insurance premia to insure mortgage back securities a la FDIC. Yeah, let's take more money out of the banks, rather than vice versa. There is increasing talk of a emergency Fed rate cut in the next few days.

The proposed bailout plan might not be the best and it has been explained very poorly if at all to the public. But it seems that something needs to be done to stop the banking system in the US completely collapsing. Most people have no idea why the Great Depression happened. Primarily, it was due to bad policy allowing 1/3 of US banks to collapse. The economy still had the same real assets in terms of factories, land, machines, workers, and ideas, but they couldn't be put to work without the ability to borrow money. And that is what is in danger of happening again.

Up till now the Federal Reserve and the Treasury have been battling a potential collapse. They've made a lot of mistakes and now they're running out of firepower or realize they need bigger guns. The Democrat suggestion to reduce the package size while leaving the door open to granting more spending ability might be a good move as is adding oversight for sure. The other $350 billion might be needed for buying stakes in banks to recapitalize them. If the goal is to increase bank's net worth it is far more efficient for the government to buy new shares from them where each dollar goes 100% into recapitalization than to buy assets from them at a small premium where only the premium goes towards increasing net worth. But the Paulson plan is primarily for the government to act as market maker and it seems to jack up the value of mortgage related assets on the balance sheets of banks that don't actually participate in the scheme, which is a good thing.

BTW, the U.S. Government made money on the post 9/11 bailout of U.S. airlines. So it is possible and it's definitely a misinterpretation to think that the whole $700 billion represents government spending.

Soros and Kaletsky on the Crisis

Soros weighs in as does Kaletsky. Not surprisingly they have similar views. Kaletsky has very good contact with Soros. Letting Lehman collapse was not a good idea, despite all the bloggers and pundits who'd like to see all these banks go bankrupt. That would lead to at best a Japan style stagnation and at worst another Great Depression.