Lessons from the Asian Financial Crisis, bailouts and capitalism end game.
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The fateful day in 1998 when two very smart intelligent Nobel price winners had concocted an excellent never fail strategy of trading, arbitraging on Asian and Russian debt markets, which went awfully wrong against them, it was a year prior, when another great speculator Victor Neiderhoffer’s* wrong call on the markets caused the collapse of his fund, due to him being short S&P 500 puts, Victor had not only his lost fund, when the brokers squared his positions on margin calls, but also his twenty plus years of great performance of winning in the markets. It was the first large bailout I can recall and the largest I had known in my trading career as a speculator. The Feds bailed out LTCM at a cost of around 3.6 billion dollars, and this seemed a very large number, it had to be done, as the FED said “it had the potential to put the markets in a freefall and to avoid economic calamity, the FEDS saved a company which had made a wrong bet and it was considered “To Big to Fail”.
At the same time, the Asian Financial Crisis was underway and people were losing their jobs all around the region, Indonesia, HK, Malaysia, China, Thailand etc, and factories were closing, due to the sudden collapse of their Asian Currencies and as a double whammy prices of their assets were headed lower at the same time too, it was a precarious situation, similar to the situation in the America’s today.
There was no BAILOUT for these entrepreneurs, factories that produce real goods and employment, in fact the IMF prescribed their doctrine of raising interest rates to stem the fall in the currencies, and asked the countries who took loans, to increase taxes to stem the fiscal deficits and told them to lower tariffs and open their markets to competition, so as to integrate into global markets. It was chaos! And panic!
The IMF was not providing these countries with any help or assistance, in disguise all the steps they asked these economies to undertake were to ensure that they would profit from their timely investment and the countries had the capability to repay the loans taken. In other words to get countries into DEBT and Favor.
One man in Asia stood up and said NO to the IMF, he refused to take any loans from them, refused to buy into their chatter and he saw their end game right through, This Man was DR Mohammed Mahathir, the then prime minister of Malaysia. Mahathir took some very interesting, innovative and bold steps, while the rest, i.e. Philippines, Indonesia, and Thailand agreed to the IMF. Mahathir instead, closed his economy, undid the opening of markets of the last 50yrs and pegged his countries currency; say to the US dollar at RM 3.80.
With the Malaysian economy now shut to the rest of the world, he could simply do his own internal bailouts as Dosmestic problems could be settled domestically, and it had nothing to do with the International community at large. Bravo, a great move by one man, who stood against the crowd, with the support of his fellow men.
These events taught me a couple of things.
1. Never trust the IMF, or any big organization, their own rules do not apply to them.
2. Speculators will eventually go Bankrupt. The smallest swing will be the cause.
3. Capitalism will eventually destroy itself. It’s called Cannibalizing.
* I recalled the Neiderhoffer story well, as I was on the floor in awe of the market collapse. Neiderhoffer is the author of the Book “Education of a Speculator” a very interesting read.
In Malaysia.
While Mahathir was doing the right things, at that time, as a trader, I couldn’t understand any of it, or of the things he was saying, he said the financial markets are useless, they are of no value, they create nothing, and it’s simply a giant casino. Which in some sense is true, as naïve I was then, I saw him simply as a old man who is past his own expiry date.
A lot of his statements ring true to this date and he is a visionary in that sense. The stock market is indeed a giant casino and it’s only those who sell STOCK that make money.
The cycles occurrence are simply there as a mechanism to transfer wealth out of the populace, with occasionally a few genuine winners to spread the message to invest and be rich in the future. Beat Inflation. They say. Mahathir blamed the IMF, United Nations for the plight that fell on Asia at that time and called the IMF and the UN tools of the mighty powerful Elite.
Static Chart – 1yr
The 1998 US Feds bailout of LTCM was considered by many in ASIA as double standards, as it was only a year ago the western definition of Capitalism meant there are winners and losers of economic cycles and the losers will be replaced by another set of new budding entrepreneurs who will find fortune. The IMF was against the idea of bailing out companies in Asia who were hard hit with the economic downturn, while in the US just a year later, they were not only bailing out a hedge fund, but also adding the right fuel to fire, by lowering interest rates, flushing capital into the markets so as the desired bailout affect could be met.
Static Chart – 2yr
How did this bailout result in?, well it created another ripe bubble, as we got into the new millennium, we were greeted with the Dot Com Economy, old rules are out, the new is in, everything out with the old, this time it’s the golden ERA of growth and technology, Its called the NEW NEW THING.
Static Chart – 5yr
Here again the same pattern presents itself, some very smart people including myself, quit the safety of our stable jobs and started out to dig gold on the internet, which was still in its infancy, but all of us went out there anyways; to beat each other with a much dumber idea than the previous to prove that we were indeed smart, how will it work? None of us actually had any idea. Indeed dumb and dumber at work here.
Static Chart – Snapshot
What made us do that, Who told us to do so, we have no idea, but everyone else was doing it, governments wanted technopreneurs, investors greed wanted the next new thing equity, Merchant bankers had the pleasure of selling IPO’s, and we probably wanted to prove out intellect and gain popularity for it. Its estimated the most dumbest ideas of our time had the greatest audience during the dot com era. This same pattern presents itself in all the previous collapses. We shall explore more in detail on patterns of exuberance and stupidity.
Static Chart – Snapshot
By the year 2000, the New New Thing had created another bubble in the Markets, NASDAQ had rallied 500%, and yes that is five hundred percentage points in a year and half time, from the last October 1998 lows of the LTCM collapse. Note, The huge gain of five hundred percent is not that of an individual stock, but the whole market rallied 500% in just over a year and half, sadly that too ended in a bust. And yet again we had a common game being played out each time. It simply wasn’t sustainable, but we did say, “It’s different this time”, sadly it’s never different. It’s the same pattern of Greed.
Static Chart – Snapshot
These events taught me a couple of things.
1. Boom Bust Cycle. Hope, Fear, and Greed.
2. The Bailouts. They were getting bigger and far larger than the previous.
3. The cycles were occurring at much shorter intervals than the previous.
Once I identified all those above. I got very very scared at the tops, cause I foresaw the bust coming and for protection I shorted the markets at the tops and when I saw the fear most, I bought at the lows;
Static Chart – Snapshot – 5yr
My system for knowing tops.
1. The smartest people start to do the dumbest trades.
2. Greed is so prevalent, even a farmer wants to become a banker. And bankers farmers.
3. There is very little time to think, as sales are made on fear of losing out.
My System for knowing bottoms.
1. Value of everything is below the replacement cost and there is much fear of losing.
2. End of the world seems a year or months away.
3. Even a dollar is a very big number. Cash is King.
Static Chart – Snapshot – 2yr
While all my own market timings and trades were alright. And I profited some, but at what cost? I started to question. I knew the END GAME was been played out and eventually Capitalism will cannibalize itself.
Static Chart – Snapshot – 1yr
Then comes along the greatest bailout ever known to Man! 2008, The Mortgage market plays itself out to such, an extend that the buyers and sellers became fools of their own devices. Now this was really very, very funny, here too was a situation of the smartest people doing the dumbest trades. And the FED comes out to bail the banks out and bloats its fiscal deficit to almost two trillion dollars.
Now I wondered how the number had changed from 1998’s three plus billion to two trillion dollars. Amazing don’t you think, now if we went down again in let say in a year or two or whenever, Do we have two trillion dollars multiplied a thousand times. I think they call it a sextillion. I don’t think so and here forth there will be no more bailouts. So what awaits us? Let’s find out!
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I continued to investigate and tried to understand why the cannibalizing was occurring? What exactly the motive was? who was in charge, why were they happening, was it we as humans were becoming much more efficient where the previous edges that once resulted in growth were been made obsolete, that was my technology angle, from a technological perspective.
Was it caused due to huge economic imbalances? Where the boom and bust cycles were necessary to throw out the excess and start anew again, so as to play the part of distribution. If so, it was hard to hold water in this cup, as the cycles were getting shorter and shorter and we would need longer periods of down turns for the excesses to get soaked up.
For example, China has been creating five to ten new factories every month for the last ten plus years. These were in areas of Steel, Cement, consumer goods etc. Making China the eighty percent plus supplier to the world. So if the excesses had to be soaked up, China would have to close five to ten factories every month for at least the next five years. And you can surely imagine the cost towards loss of employment, the destructive wealth dissipating effect.
I, questioned the objective of the cycles, was it created, manipulated by someone, somebody or government so as to extract wealth out of the system, into their own pockets, was this the trend which provided them to emerge even stronger than the previous past. With this, I delved into various theories, including conspiracy theories, the stories of the Illuminati, and the free masons presented themselves and they started to make some sense. The New World Order, one government taking charge and everyone is simply a digit.
I was looking for repeated patterns, trends and objectives of those trends, something that I was familiar with as trader in the financial markets for the last two decades, it was the same zero sum game, every buyer has a seller and profit is at the cost of the loss of another. As far as I was concerned, I knew that it shouldn’t be that way, profits do not have to be due to the loss of another, or else the cannibalizing effect will eventually destroy even the only winner, as well.
As a trader and a student of Technical Analysis, where charts are observed and past data is used to predict future developments and patterns, it became increasingly clear that everything that is happening today and that will happen tomorrow into the future is from a page taken from the past. We have seen bailouts before, we have seen collapses before, and we have seen chaos, hope, fear and greed playing out before, they were simply called differently in different times. Somehow people have very short memories or had no interest in History. Or they simply were not around long enough to recall what happened in the past.
Delving into Historical records provided further evidence of the current scenarios but there were also some omissions in historical records that were purposely omitted by someone. I wanted to know who that someone is and why?
I became convinced that with the durations of the boom bust cycles getting shorter and shorter, a total destructive collapse was not far away, I took action in my own life, I stopped contributing to society in any form that contributed to that collapse that I had seen coming, becoming a rebel, I though if I wanted to avoid this from happening, writing a book, would be a good thing, it would be my form of research at the same time, provide some important feedback from others, possibly making me wrong on my assumptions.
The economic collapses of 1998 and before were simply “Warning Signs”, and as they had contributed to the future collapses that presented themselves thereafter, they were all connected, like ripples in the ocean that turn into a larger tides, and various tides to create a gigantic wave. These smaller ripples contributing to larges waves, started to increasingly look like a reasoning to the greater collapse that I had seen forthcoming, and every message that came along, I took them as part of the greater warning sign system to which heed should be paid too.
Just like a disease, a person doesn’t get a disease or becomes sick in one day, its various actions over the past many years, maybe decades that contribute to ill health and emotional well being of an individual, if an individual eats plenty, without consideration over the many decades, he will became obese, his bodily functions will sooner or later start to give in, as it can’t support so much of additional weight, but if he exercises then he is able to grow more muscle, strength and stamina, and can carry that excess weight if he wants too. Increasingly, the world economic cycles were also suffering from a similar disease. GREED!
Religions sell HOPE and we institutionalise people who are fearful, calling them MAD. GREED on the other hand is a disease but one that is encouraged in Society, as our barometer of success is often the one who is the most greedy. Greed is such a disease that it will do anything to win its purpose, yet its purpose is infinite, it doesnt have a limit or the word enough, and canibalizing is the last resort.
Reminds me of the Monopoly game, if ten players came together and played the game, in the end there is only one winner, with the whole board to himself, not realising that once left alone on the table, the game is actually over and the chips and properties of the game are of no value.
Debt had began the new defination of wealth, We often associated the ones with the most debt as the most powerful, the most wealthy, logically it just doesnt add up.
Economic Imbalances.
I tried to make sense of the huge economic imbalances, why on one side we had 800 million people in India living on a two dollars a day, and on the other hand some were spending as much as eighty thousand dollars over a single meal, why many people in some of the most sought after cities were on live support with less than six months of personal cash flow, with almost no savings, these individuals could hardly survive for a period of six months without pay, and had to revert to governement run welfare programs. Its estimated that in cities like new york, rentals and utilities takes a bite of upto 40% or more out of ones combined income, and if you added up, groceries and some personal entertainment, restuarants, clubs, movies and the likes, individuals were left with very little balance and possibly have to depend on credit cards for personal cash flow purposes. Soceity had associated debt as the new found wealth.
Similarly, those who didnt participate in this debt game, had actually found themselves to become poorer, as inflation over the years made debt look small in propotion as asset prices increased, so those who never prescribed to the debt doctrine, and didnt leverage up to the tilt as in a game of poker, going all in, actually found themselves to become less wealthier than the others over the last 3-4 decades or so.
I questioned the reasoning behind the increase of asset inflation and also studied the efficient technological advances made over this period of time, if indeed demand was so great, then why electronics, commodities and other commodities were priced lower than their 1970’s highs, even after four decades of inflationary boom, why were commodities priced lower. The argument that we found out better efficient technological ways to access more of the same commodities at a lower cost, made the commodities priced right, didnt make sense, cause if true, then isn’t it with lower prices of commodities, individuals should have less to spend, and more to save, and with more savings, then live would be relatively easier and affordable and financial indepdence within reach.
I continued to investigate and question, Why four decades ago, a 35yr old unemployed youth could play soccer or cricket on the streets, and it was considered normal, if you did that today, you would be considered a noob and a bumber, while the younger generation today, started to work at much earlier ages than before, all in the pursuit of more money, sacrificing their youthful years when there are many other activities, and they did so, not for their family responsibilities or commitments of their family, but its for their own self pursuits, where as they should be enjoying their youthfulness, when they could, as there are only certain sports, games, activities that are best suited for those ages.
Looking at the current generation of today and how families are these days, if we have indeed progressed, then why in one family, both spouses have to work and the cost of kids going to a nanny, seemed relatively proper, when our own forefathers could have more children, less relatively income and one working indiviual was able to support the whole clan. Whose debt had made them to do that, they had no debt from their parents, all of it was their own accumulation.
i looked at my own personal story, i started to work at the age of 16, while at the same time educating myself, so as to provide for my mother, so she could stop working as she aged and i could take upon myself the responsibility of life. I wanted to know if the current generation were up to it, i found out that relationship of responsibility, only occurs in those who had special situations and it wasn’t the norm, so what drives the youth of today, whose parents are much better off than their parents before them, what was their pursuit?
If indeed both partners are working, then savings rates should be higher, as output equals into input, but that too didnt take place, instead everyone was already a slave of debt.
LINKS
Disclaimer. http://ul3.com/L30qH
Back to the Beginning. http://ul3.com/aeVUG
BTAMSC – http://ul3.com/vAqdH
The Greed: http://ul3.com/pUDgd
The Ignorant, Zombies: http://ul3.com/PP8Ez
History: http://ul3.com/1rCFA
Chart Patterns: http://ul3.com/54VLV
Introduction to Technical Analysis. http://ul3.com/kcYCE
Writings.
INTRODUCTION TO FINANCIAL MARKETS & TRADING OPPORTUNITIES IN COMMODITY, CURRENCY, & FINANCIAL FUTURES. http://ul3.com/dAFWj
Revolutionary Transformation Ongoing. http://ul3.com/kcYCE
– Global Economic Collapse January 18, 2016
And Why;
Technopreneurship Development – Daniel Mankani. http://ul3.com/kcYCE
– Published Sep 2003. Pearson Education Asia
{ Thoughts from 2010. To be compiled into new updated version of Technopreneurship - The Successful Entrepreneur in the New Economy.
Aptly named, Knowledge Based Economy }
All rights, © reserved, Daniel Mankani