aoyong's blog

I am a little bit surprised the market did not take his word as a serious warning that China might take a strong stand against the presure from US to force RMB appreciation. It also sounds like a warning to the sounds in US to inflation away the debt and off the crisis. Given he gave these comments in an interview with Financial Times in his European trip, it appears China has try to position itself to play the balance between Europe and US.

I have long been in doubt about the accusation of finanacial engineering for creating the current financial crisis. CDO, CDS and VaR have been in the real world for some years. The concept is not hard to understand and the capability of the thoery for pricing the derivatives and estimate the risk is obvious, if not to the public, should be to the financial industry and regulators.

I have read suggestions like this twice in a row in Financial Times. The idea is for China to use its giant foreign reserve to bail out US financial system. That sounds like a good idea. Actually, if I am running China's treasury, I will for sure have a shopping spree on Wall Street, just like Warren Buffet. However, I am not sure my boss will like that idea, not after I have just burned 3 billion dollars in Blackstone, and almost burned a quarter of the foreign reserve with FannieMay and FreddiMac. To make it worse, US just sold more weapons to Taiwan.

The report was out in Septermber, though the founding of the report still conclude there is no speculation force, there are apparently something going on which the report is calling for additional funding and staff to trying to fix. The report mentioned ...

The swap dealer, which is often affiliated with a bank or other large financial institution, has emerged to serve as a bridge between the OTC swap market and the futures markets. Swap dealers act as swap counterparties both to commercial firms seeking to hedge price risks and to speculators seeking to gain price exposure. In essence, swap dealers function as aggregators or market makers, offering contracts with tailored terms to their clients before utilizing the more standardized futures markets to manage the resulting risk. The bilateral contracts that swap dealers create vary widely - from contracts tailored to customer needs, to relatively standardized contracts (some virtually identical to an exchange-traded futures contract). Because swap agreements can be highly customized and the liquidity for a particular swap contract can be low, swap dealers often rely on a variety of means, including other swaps, physical market positions, and futures contracts to offset the residual market risks in their swap book.

This described what a swap dealer do. Please pay attention to the fact the counterparty of a swap dealer could either be a commercial firm actually doing hedge, or a speculator who is actually trading for profit. Due to the nature of swap, when the swap dealer enters the futures market to hedge it's own risk, the nature of their trade is really depend on its counterparty. If the counterparty is a hedger, then the trade the dealer made on the futures market is function as a hedge. If the counterparty is a speculator, then the trade the dealer made on the futures market is speculation. The dealer simply transfered the trade from its counterparty into the futures market.

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If we count the market as vote of investors, then they certainly voted NO even the bailout bill is expected to pass both senator and congress shortly. Dow is down 2.26% so far. Nikkei 225 down 1.26%, Hang Seng down 4.29%, Strait Times down 2.08%.

With the $700 billion bail out plan in the shape, the financial market might be calm down a little bit in the coming week, but I have been growing nervous with what might happen next.

A letter from Mr John Lepire on Financial Times today compared Bush administration's push of the bail out to the rush to Iraq war. It's funny then tonight the president is on TV and talking about crisis. I do think the federal government should do something, but now I am really alarmed to what this administration is about to do.

"The plan is big enough to solve a serious problem," President Bush said. Yes. It is also big enough, plus the huge debt the nation has already had, to cause a big problem on our currency and might cause high inflations.

The past Sunday is the Chinese Moon Festival, or called Middle Autumn Festival. Happy holiday.

My wife just told me yesterday that, in China, this now became a offical holiday. This morning, I noticed that all the financial market is closed. That is a perfect time to have a day off with the turbulance caused by Lehman Brothers and Merrill Lynch.

There is no way to solve the current problem, actually there is no single current problem to be solved. What we are facing is a very convoluated situation created by years of careless economic policies of US, China and other governments, the irrationality of US consumers and investors, the blind believe of market efficiency.

Wow, what a story and it really touched my nerve.

It is a story about a boy sheperd who had the ability to communicate with things sourrounding him. He met this old king who encouraged him to pursue his personal legend and he did. There are a lot of things worth some deep thoughts in the book. Something I think I will never forget is what the old king said: "... when you want something, all the universe conspires in helping you to achieve it."