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How to eliminate souvereign funds!

May 12, 2008

Analysis of:The invasion of the sovereign-wealth funds: The biggest worry about rich Arab and Asian states buying up Wall Street is the potential backlash. | www.economist.com

1. Souvereign funds based on the undue accumulation of unproductive foreign reserves can only exist in a mercantilist system of fixed or pegged exchange rates. 2. By moving towards a complete floating exchange rate system, foreign reserve accumulations will be driven to zero and, ergo, also the souvereign funds. 3. So, instead of regulating souveraeign funds, create free-working futures markets on the pegged exchange rates in Chicago and London and the "invisible hand" of goods and services arbitrage will force the pegged currencies to become floating and the souvereign funds will disappear like snow before the sun.

Electro-shocking a corpse

May 5, 2008

Analysis of:SEC's Atkins Calls for Fair-Value Guidance | www.cfo.com

1. Something is clearly worth nothing when nobody wants to buy it, e.g., Bear Stearns price went from $58/share to zero. 2. Option pricing theory tells us that the equity in a firm functions as a long-term option. Clearly, Bear Sterns "American-style equity option" was clearly out-of-the-money. 3. However, without Bear Stearns the whole financial system could possibly unravel and the Fed leaned on JP Morgan's surgeons to electro-shock the dead patient into live at $10/share.

Epistemological Risk or Why the SEC Can't Determine What Fair Value Is

April 14, 2008

Analysis of:SEC fails to douse debate over ‘fair value’ | www.ft.com

Investors and traders need "buy," "hold" and "sell: signals based on intrinsic value models, e.g., bond, stock, futures, options, swap, real estate, etc. models, but there is no consensus, even among expert economists, what are "fair" intrinsic value models, although a minority consensus is emerging, based on "risk-neutral pricing" models. But even "risk-neutral pricing" experiences epistemological problems regarding the measurement, modeling and analysis of empirical risk. Some classical economists contend that "the market is always right" and, therefore, that the fair value is what the market determines it to be But this assertion presumes complete and efficiently working markets. When markets are incomplete (e.g. often real estate markets lack buyers or sellers during some periods in time) or when they operate inefficiently (most of them do in some form or another), aka non-neutral persistently, there are opportunities for arbitrage, i.e., trading.

Communist Chinese Mercantilism Whithers in the Face of Pragmatic Financial Capitalism

April 14, 2008

Analysis of:Yuan's Climb Shows Beijing Fears Inflation | online.wsj.com

China is in an important transition from its communist 18th century mercantilistic trade policy, based on fixed exchange rates towards a policy of integration into the world trade system, based on floating exchange rates. This leads to an appreciation of the Asian currencies versus the US dollar. This currency appreciation leads to slowing Asian exports to the USA, slower internal econmomies and a lsowing down of domestic inflationary pressures. In contrast, the relative depreciation of the US dollar stimulates US exports industries towards, in paarticular Europe, offsetting the reduction in domestic US consumer and investment spending caused by the recent credit "crisis" and weakening of the financial sector in the US. Because the essential industrial inputs in Asia, like fuels and raw materials are denominated in US dollars, this will not lead to the loss of millions of Asian jobs, as some expect. There is therfore no reason to expect a second Asian currency crisis.

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