The First Time ...

I am going away for a short trip and just left my dog with a reputable (high cost) pet hotel. It comes with different sized rooms, some with fans, some with aircon .... so I got the best they had at RM125 per night. Seems like more expensive than Tune hotels but they wouldn't take my dog I think. It seems expensive but its guilt-fees I think. 

Though I have traveled before and left my dog behind before, ... before it was always with my mum back in Ipoh or the numerous times when I had a maid in the house (who loved Dali anyway). Now my maid has ran away a few months back and mum is tagging along in the trip ... no choice. First time at a pet hotel.

I guess its the same kind of feelings when you leave your kids at kindergarten for the first time ... or even leaving your kids for the first time to travel. No matter how well you plan it, the guilt is enormous.

I can still see it in her eyes when I ushered her into the 'new room' ... its the "don't leave me here look", "are you leaving me for good look" ... I had to rush out of the place. She doesn't know its temporary, she doesn't even know that there will be walks with other dogs and play time with them as well.

You question what kind of "parent" you are. You also know deep down its the fair thing to do, your life cannot be 24-7 always with the dog, even though she is a member of your family. You think of the numerous "vicious sad thoughts" that she may be thinking of her friend. Sigh...

The Effects of the Strong Dollar

Will the Fed raise interest rates in the face of a strong dollar? What is the effect of the strong dollar on the rest of the world? John Auther tackles these questions in the video below.

Why S&P500 Keeps Rising

by Charles Hugh Smith

As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher.

The unmanipulated sector rose a bit, while the stock buyback crowd soared:Why is the S&P 500 rising, even as valuations are getting stretched, profit growth is declining and sales are stagnant? Two charts explain it all. Here is a chart showing the S&P 500 companies that have been buying back their own stocks (often by borrowing cheap money to do so) and companies that haven't bought back hundreds of billions of dollars in their own stock.

Source: Business Insider

Here is the S&P 500, with red lines marking its recent lows:

Here is the Japanese yen ETF (NYSEARCA:FXY), with red lines marking its recent highs. The correlation is near-perfect: when the yen drops, the SPX rises.

This is a function of the carry trade, in which speculators borrow money in near-zero interest-rate yen and buy U.S. stocks with the cash. The financiers make money in two ways: the buying pushes the U.S. stocks up and the decline of the yen means they can pay back their loan in cheaper yen.

But the correlation isn't caused by just the carry trade: it's also a function of trading computers keying on the carry trade for momentum and direction.

The correlation is also visible in two ratio charts: SPX-FXY, and FXY-SPX:

As long as corporations continue borrowing money to buy back their own stocks and the yen keeps dropping, the SPX will continue lofting higher. If either of these drivers fades or reverses, the rally in SPX will reverse, too.

Bubbles and Central Banks

Marcus Brunnermeier and Isabel Schnabel have a new working paper entitled Bubbles and Central Banks: Historical Perspectives. In their paper, they look at the most prominent asset price bubbles from the past 400 years and how central banks (or their precursors) reacted to those bubbles during their formation and bursting. They suggest that a passive stance of merely cleaning up after the bubble is costly. However, although interest-rate leaning policies and macroprudential tools have helped to deflate bubbles, the implementation of these proactive polices is fraught with danger. What then are central banks to do?

What Brunnermeier and Schnabel ignore is the institutional or regulatory environment which commercial banks operate in during bubbles. As I show in my book Banking in Crisis, asset price bubbles in the UK did not always result in banking crises or economic disaster. The reason for this was that bankers were incentivised to not take excessive risk during the boom by having skin in the game or by stringent asset regulations imposed by the Bank of England. The recent housing boom resulted in the 2008 crisis because of the absence of these two features - bankers had no skin in the game and were not constrained by regulation. This both increased the size of the bubble and made its bursting extremely troublesome for the real economy.    

Central Bank Psychology

Andy Haldane, the Bank of England's Chief Economist, gave a really thoughtful speech a few days ago on central bank psychology. He highlighted four "cognitive ticks" that affect human decision making and public policy making - preference biases, myopia biases, hubris biases and group-think biases. In his speech, he outlined ways in which the Bank has been organised to take account of these cognitive ticks. His speech is well worth reading.

Will We Have A CNY Rally (Gulp)

What an untimely... or timely seminar on the local bourse!!! Please note that the seminar will be largely in Mandarin and Cantonese.

The Biology of Financial Bubbles