Tuesday, April 15, 2008 1 comments ++[ CLICK TO COMMENT ]++

Random Articles For The Week; Plus My Thought on Outer Space

Here are some articles I ran across that you may find interesting... one on how misleading CDS impacting the underlying bonds... a reference to an article about the best hedge-fund manager of all time... The Economist's round-up of IMF GDP projections... and a rambling post about my views on space exploration...

Frankenstein's Monster: The Impact of CDS on Bonds

I hate to beat a dead horse to death but I won't give up until everyone understands how misleading some of the CDS (credit default swaps) and their indexes are. Here is a snippent from an article from Bloomberg summing up the situation:

Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ``Frankenstein's monster'' because they now often drive prices in the so-called cash bond market, rather than the other way around. Fearing a repeat of losses, banks are refusing to support new indexes that would allow investors to wager on everything from auto loans to European mortgages, reining in a market that's about doubled in size every year for the past decade.

``The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that's ceased to exist,'' Jacques Aigrain, chief executive officer of Zurich-based Swiss Reinsurance Co., said...
(source: Swaps Tied to Losses Became `Frankenstein's Monster', By Neil Unmack and Sarah Mulholland, April 15 2008. Bloomberg)

Best Hedge Fund Investor Of All Time?

Best hedge fund? Recently I visited the home of the world's best-ever hedge fund manager and I often re-read his writing on investment topics. On my way to his house I saw some black swans on a lake which seemed appropriate and later ate at a restaurant that had run out of rice which appeared even more significant. It is sometimes the minor data points that lead to major opportunities...

Translated adages from his main book:
"Market action is more important than news."
"Prices do not reflect actual value."
"Buys and sells are decided on emotion not logic."

Not quite up to Warren Buffett standards but an interesting article written by Veryan Allen. I highly recommend everyone read the article when they have some time. I don't necessarily agree with everything in the article (and it's not really tailored towards contrarian investing.) Nevertheless, it's insightful and interesting.

The Economist GDP Outlook

In its recent semi-annual World Economic Outlook, the International Monetary Fund sees few silver linings in the storm clouds gathering over the world's richest economies. The world economy as a whole is expected to grow by 3.7% this year, well down on the fund's last estimate in January of 4.2%. America is expected to enter a mild recession this year—its growth forecast has been cut from 1.5% to just 0.5%. The prospects for Spain, Canada and Italy are also gloomy. But the forecast is sunnier for the developing world, whose economies are predicted to grow by 6.7% in 2008, led by China and India.
(source: A Mixed Outlook, Apr 14 2008. The Economist)

These are IMF numbers and, like most economic forecasts, may or may not turn out to be right. Usually the aggregate numbers (i.e. world GDP) is close but the individual numbers (i.e. GDP for a particular country) is off. Also note that (i) developing countries tend to have higher growth, and (ii) the market may be pricing in all the profit potential from expected high growth. Just to give you an idea of why high growth in developing countries don't mean much, believe it or not, the IMF considers a growth rate below 3% to be a recession. Such a number would be near max potential for developed countries. Part of the reason for the need for a higher growth rate in developing countries is because their population growth is higher. Unemployment will rise and people will be suffering if growth rate in some developing countries were 3%.

Fun Stuff: Space Competitiveness

This probably belongs on my general blog but thought I would stick it here since it has way more readers :) and is somewhat economic. I see that I'm not the only idiot thinking way too far ahead and dreaming of space (instead of worrying about my present life and fixing it ;) ). Here is a chart from The Economist dealing with space competitiveness, courtesy of Futron:

(source: Stars in their eyes, Apr 7 2008. The Economist)

Not surprisingly, the only country to have landed on the moon is way ahead of the competition (for those of you waking up from deep sleep, that would be USA :) ). For America, even though government and public funding of space is tapering off, commercial spending is increasing. The X Prize, along with the present attempt to send commercial flights to space should help USA in the long run.

The surprising thing to me throughout the years is why Japan was always weak. They would have been the prototypical country to rapidly advance towards space flight but they never did. Japan has historically been more tech-savvy (even now, their consumer products are way ahead of the rest and some don't even make it to the rest of the world); they were good at industrial robotics; and they had top-notch scientists, although not many in physics, astronomy, or astrophysics (as far as I can tell). My guess is that their avoidance of nuclear technology (some of it due to international regulations and US control) may have played a role. Although you don't need nuclear technology to pursue space, a lot of the theory and research is intertwined with nuclear physics.

The developing countries have made a big push of late on this chart. Most of it is likely based on economic growth more so than any big advances in space-related technology or commerical endeavours. It's hard to say if countries like Brazil, China, and India can keep their economic growth going, in order to pursue advanced science.

Assuming China doesn't fall apart (like Japan or countless others who had a bright future), China will likely make the most advances in space-related science & technology in my life (not counting USA). A lot of people think China just copies others' stuff but forget that the Chinese were very inventive a thousand years ago. Most people forget that the rocket was invented in ancient China (actually there is debate over the original rocket but anything resembling the modern day rocket with a propellent (gunpowder back then) comes from China). Going back to space would be, in a crude sense, a continuation of the past. China plans to do a human landing on the moon within a decade and that will be their first big test. I hope they make it into a scientific mission rather than the US-style propaganda mission (i.e. let's land; let's plant a flag; let's go home and call it quits :( ). USA really should have put a huma outpost on the moon (yes it would have been expensive but it would have benefitted USA in the long run in my opinion).

Countries like India, which is poorer than many African countries, probably won't make much headway into space. Apart from the smaller and less efficient economy, there will be very little enthusiasm from the public for supporting space programs when most of the citizens are poor and suffering. I'm not an expert but India also doesn't have the technology and engineering skills to do much for the time being. As far as I could tell, India hasn't had much success with space (either now or a few thousand years ago). However, there are some important Indian scientists who are American, British, etc who have played big roles in astrophysics and astronomy. Perhaps the most significant in my eyes is Subrahmanyan Chandrasekhar, an American (born in India), who developed the so-called Chandrasekhar limit (the Chandrasekhar limit determines whether a star that runs out of energy late in life collapses into a black hole, neutron star, or becomes a white dwarf. Anyone who reads about black holes will run into this concept). India doesn't have much going for it but it is planning to launch some unmanned probe to the moon or other planets (not sure if this mission will ever get off the ground.) I'm actually in favour of developing robotics for space rather than using humans. Humans are too expensive and inefficient in space (no offense to humans :) ). Unmanned missions provide the best bang for the buck and might also result in robotics technology that can be used on earth in other applications.

Countries like Brazil and Russia may also do something on the space front but their economy is too small for the time being. Russia might join the EU at some point...

I really hope space development doesn't devolve into a weapons race. If someone develops planetary weapons, it's going to turn into a disaster for all. Unlike Hiroshima and nuclear bombs, space weapons likely won't be localized and may mess up the whole planet (eg. if you release radioactive elements or biological agents into the atmosphere (as speculated in sci-fi novels/movies/etc), it can easily spread across the whole earth). Since space technology is highly advanced, any big advance will likely have massive weapons potential. Unfortunately, I'm quite skeptical that development of military weapons can be avoided for the time being. I'm hopeful that it won't happen in the distant future--if it does happen, humans will die for sure because it will just take one "mistake" (as always, it wouldn't seem like a mistake while the weapon is being unleashed).

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