A-template-for-understanding-big-debt-crises读书笔记

债务周期的长期负面影响

  1. 债权人的损失
  2. 债务人的未来收入和支出削减

观测债务周期的关键指标

  1. Debt to Income Ratio
  2. Debt Service Payment to Income Ratio

Credit is "Money"

Most of what people think is money is really credit, and credit does appear out of thin air during good times and then disappear at bad times.

A big part of the deleveraging process is people discovering that much of what they thought of as their wealth was merely people's promises to give them money.

债务危机的根源

举债投资的边际效用减弱,收入增长不及债务成本增长

How to deleverage the Economy

Make income grow faster than debt, lowering the debt-to-income ratio. For the burdens from existing debt not to increase, nominal income growth must be higher than nominal interest rate.

Current U.S. federal Fund Rate:

2.25%
2.2% - 2.5%

The amount of national (gross) income is equal to GDP

The debt burden cannot growth faster than gross income.

The primary beneficiary of QE

  1. Raise the market price for financial assets, generate capital gains for financial asset holders.
    The process of QE creates a positive wealth effect.

The Root Cause of Debt Crsis

The vanish of credit.

Deleveragings Can Occur Without Depression

GDP and Growth In Demand

Growth in demand are commonly accompied by growth in spending. As gdp growth slower than growth in demand, the economy as a whole spend more than production (income). The gdp and spending difference increases the total debt of economy.

Three Forces and Interactions

Productivity growth rate is relatively constant across the 100 years span, economic growth follows the trend in general but variations did occur frequently.

The marjor swings of economic growth are due to expansions and contractions in credit - i.e. , credit cycles/debt cycles, 1) long-term debt cycles and 2) short-term debt cycles

An economy is the sum of the transactions that make it up. A transaction is an exchange of money/credit for goods, services or financial asset. A market consists of all the buyers and sellers involved in the transaction of the same nature.

The average price of any good, service or financial assets in a time span is the total amount of consideration given (money or credit) by the total amount received in this window. The market participators (buyers and sellers) have different motivations.

When buying in credit, the settlement of the transaction is actually delayed until the debt is paid off.

A credit-based transaction, as well as other cash settled transactions, would result in an increase in asset of both the seller and the buyer. The expansion of balance sheet for both the seller and buyer would then allow more credit transactions to occur. The process is self-reinforcing because rising spending generates rising income and rising net worths, which raise borrowers' capacity to borrow.

The economy expansion is highly correlated with the expansion of credit. As increase in demand would result in growth in production and economy, typically financed by credit growth. In a credit-based economy, strong demands equals strong real credit growth. Consequently, recessions and depressions are developed from declines in demand, typiclly due to a fall-off in credit creation. In such an economy, demand is constrained only by the willings of creditors and debtors to extend and receive credit.

The modern practice of supporting economy growth by credit expansion is the root cause of debt cycles.

The constrain of modern credit-based economy is relative size of money (cash) v.s. credit. The total amount of debt in the U.S. is about 16 times the size of money in existence.

Lending naturally creates self-reinforcing upward movements that eventually reverse to create self-reinforcing downward movements that must reverse in turn. Mostly due to the fact that it is increasingly difficult to convert debt into income.

Short-term debt cycle is controlled by central bank's monetary policy to tighten or ease credit.

The long-term debt cycle is determined by the relative speed of debt service payment growth and income growth.

2018年10月随笔

The limitation of Market Valuation

Market valuation by stock price * number of shares is misleading, because not all shares can be sold on the same quoted market price at the same time. Once large volume of dumping emerged, the stock price is definitely going to drop significantly.

An estimation can be made by multiplying market value by a factor, say 0.7.

The Nature of Equity Investment

  1. Source of Income (dividend, earnings)
  2. Marketable Security

The underlying substance of knowledge

  1. Facts
  2. Cause-and-effect relationship among events
  3. Distribution of possible outcomes on certain event

The underlying utility of knowledge

  1. Prediction
  2. Analysis of the past, revealing what happened.

Economic Downturn Periods

  1. Financial Crisis of 2007 - 2008 (2008 Financial Crisis, lead to the Great Recession)

Strong Foreigh Capital Inflow can help keep long-term interest rate low despect the Fed kept raising short-term rate.

The Inherent Inevitability of Crisis

If the danger of crisis was fully recognized by related party, it would never happen. Crisi usually happens when situation looks good, when the potential of crisis was not be foreseen by the authority. Therefore, crisis is very likely to happen even when authority claims everything will be fine (out of true heart or not).

Financial Crisis happens when Big Financial Giant cannot meet obligations (fulfill contracts). To meet these obligations, large amount of financial assets have to be sold, which drives down asset price.

When yield curve flatten, holding short-term assets becomes attractive since their yield increases.

The contagious of 2008 financial crisis

European banks invested in the U.S. subprime mortage market sufferred great losses. The tightening money market in U.S. crippled some European banks who rely on the U.S. financial market to raise short-term fund and maintain liquidity.

Structured Investment Vehicle

Borrowing short-term to invest long-term, by entities established off-shore to avoid regulations

Mezzanine Capital

Any subordinate debt or preferred equity instructment that represents a claim on a company's assets which is senior only to that of the common shares.

The U.S government saved U.S. auto industry by providing loans from government fund

The ultimate Loss

Government assistantace and the act of bail out will ultimately impose the loss on taxpayers, non the less the currency depreciation. Those suffers also includes foreign U.S. currency and bond holers

2009年3月18日,在美国政府宣布将加大量化宽松操作时,金价为何大涨

货币贬值 --> 金价大涨(保值)
预期驱动交易

货币走弱的两个表现

  1. 国内: 通货膨胀
  2. 国外: 大宗商品价格上涨(黄金、石油等),对一揽子货币贬值

做空的风格选择

  1. 短线为主,适合做空的股票往往波动性较大,大幅下跌后经常回撤上涨,短线宜以波动性即得收益为主。预期下跌后平仓等待股票回撤。待有合适回撤后继续做空。波段性操作。

The Underlying Cause of 2008-2011 financial crisis

  1. Tremendous misestimation and Ignorance of the Risk related to mortage related financial assets.
  2. Leveraged Investing

Classic Sign of Buble

New buyers flooded the market, many of them have no prior experience.

The Substance of Financial Crisis

The deveraging process is the process of contracting balance sheet for every participants in the credit market, as large scale credit defaults occuried.

As the overall capital in the economy stay unchanged, the real impack to the market is investor faith and the failure of systematically important institutions.

The collapse of faith is usually followed by a strain of liquidity, which spread the crisis to non-financial sectors.

Recording

It is organization, not medium of storage, that really matters in periodical recording of information.

Bonus Army Conflict

1932年7月28日,美国华盛顿武装驱离抗议人群,出动坦克