What do a salesman, a prisoner, and an investor have in common?

So a few friends got into a debate over fed's influence on the interest rate - if it should be completely left at the hands of the market, ie, the central banks should not set a target rate and hence influence the market interest rate.

The opposite of my argument is that the market does a better job at setting an interest rate, one that will benefit the economy in the long term.

I thought the idea to not 'manage' the interest rate is a wild one. But it is nevertheless interesting to talk about.

Few of my relatives were visiting Hong Kong from the mainland, and as all HK visitors will do, they went to shop for electronics.

It took them a mere couple of hours to buy a digital camera, one that costed HKD $2300. However, luckily, or unlickly, they soon find out that the same camera was selling for HKD $1900 at another store of the same chain, only had they paid for it with cash. So the salesperson took advantage of them by withholding information of the cash discount.

My relatives were definitely not pleased. Fortunately, they managed to get a full refund, but you can bet they would be extra cautious next time they shop here in HK. On that day, the entire retail industry in HK took a hit at the doing of that greedy salesman, what tried to score higher commision by not disclosing the cash discount offer.

So what does this have to do with a pure market-based interest rate system?

It proves that it just won’t work. It is a classical Prisoner’s Dilemma problem. Each prisoner will confess because he thinks his counterpart will. That is, each individual will only try to maximize his local gain, resulting in a sub-optimal equilibrium of the system. See more on Prisoner's Delemma here - http://en.wikipedia.org/wiki/Prisoner's_dilemma.

As in retailing, every salesman will do what he could to maximize his commission pay, and that is often at the expense of the uninformed customers. But this hurts the industry, because customers will learn to compare prices from one store to another before the purchase (even stores of the same chain), and subsequently bringing down the average price (as the consumers become more informed, the market gets more competitive on pricing), and therefore margins for the industry.

In a pure market-based interest rate system, banks and investors will only look to ride the current market, make as much money as they can and try to get out just before everyone else does. They would argue that it is the other banks who should be more rational and responsible for the economy.

So in an overheated the market, the interest rate will only adjust, just right before a market crash.

ATV - Family style

From SCMP’s City section, December 16, 2008, on ATV’s recent management turmoil, one employee of ATV (亞洲電視) commented:

“[ATV] has no culture, no goals and no communication. Everybody doesn’t know what others are doing but they are all burning money.”

Hm...I am guessing 90% of the family business in Hong Kong is operated as such.

The upside: I think there are tones of value to be unlocked in these companies given the right management, and the trust of the family shareholders in the management. But the question remains if the lot of family shareholders has the patient and will to sit back and watch changes unfold.

What is different this time.

So there has been no short of news on the worsening financial crisis, and where and when it will bottom out. Many looked back as far as the great depression for comparison, and I am freaking out to think of the possibility.

One argument attributes to that the consumer confidents are hurt, so they will stop spending, to a point that will halt the entire economy.

But one thing people don’t seem to understand - the income generating force today is very much different than the ones in the great depression times.

When the great depression hit – around 1930, people were living in between two wars, WW1 ends around 1918 and WW2 starts around 1939. So households have very fresh memories of the difficult war time, and many would “save all” for preparation of another war. The difficulties of living people could endure back then is beyond our thoughts.

The working force is much different today. Most of us in our twenties to fourties have hardly gone through tough times. Especially if one grew up in the west to one of the developed countries. I can easily count a few high school friends who got their first car at age of 18 or earlier, myself included. We are to a bigger extend - spoiled!

Amid the current economy, those running a business will see sales drop; those who work will have a lesser sense of job security. But we will still spend a great level of money to be entertained. The new Keanue Reeves (the day earth stood still) movie might not be very good, but we will go watch it anyways...

There is no debate we are in a very bad crisis, but I think it is no where close to the great depression.

If 24 was real.

WOW, the new 24 (24: Redemption) is really good!

And, the introduction of Madam President Taylor really got me thinking if it wasn't for Obama, we could have our first female president in Hilary Clinton. But at any rate, 24's crew already flashed its crystal ball in predicting a first black president with David Palmer.

So it has got me thinking, maybe the characters in 24 were inspired by real life politians. If so, here are the comparisons:

President Palmer







- David/Clinton wasn't perfect, but he will be loved by most.

President Wayne Palmer







- Wayne/Gore has great passion, but they always have to live in their big brothers' shadow.

Madam President Taylor







- Hey, they even wear the same suit, almost.


President Logan






- If you actually like Logan, you will love Bush.

Jack Bauer






- Maybe if the new 24 was aired earlier, McCain could have had a better chance winning the election.


And last but never the least...Kim Bauer






- Both John and Bauer did so much for them, but they never gave anything back.




Sorry, gotta end one with a Sarah Palin.

U-Bankers

So the Chinese government is revising laws to legalize underground banks. At least, legalize the lending business (foreign exchange is a different story, the government won’t let that one go for the time being). So what is the problem with their existing banking system? What can some of these underground banks do that the big banks can’t?

For one thing, its credit rating is tracking the wrong dude. The current system only tracks credit history of companies. Under this system, any average Joe can work the magic: creat a few companies and shuffle money around them – the goal is to make some of them credit-worthy at the expense of the other ones. Once you have built up a basket of beautiful apples, you have got your loancow (like cashcow of loans), and you may throw out (default) the bad lemons.

But the state banks are not stupid; they know this trick by heart too. Consequently, they don’t lend to your company unless they know you, or they know somebody who knows you. So hence a vague individual credit rating system. However, the network of who-knows-who does not help most of the smaller name, SMEs entrepreneurs, especially in the rural area where developments have lagged behind.

In turn, these SMEs entrepreneurs look to the savior - the informal underground banks (Check Here).

Some of these underground banks are actually more visible than you think. These U-Bankers often know the SMEs entrepreneurs well, both run business in the same industry and they likely have extended loans to the entrepreneurs in one form or another (think of a supplier-and-buyer relationship). Most importantly, U-Bankers have far better information on prospect customer’s ability to make payments.

As a case study, 奧康集團, a shoe maker from Wenzhou has set up a 1.5 billion loan company with state bank’s help and finance - 永嘉瑞豐 - (Check Here), and all of the 1.5 billion loans was ditched out three month after the company was set up.

I do not have a list of 瑞豐‘s customers. But I would bet those who borrowed from the pool of 1.5 billion were the shoe maker’s suppliers, business affiliates and the likes.

What is amazing is that I think a semi loan-bank like 瑞豐 will actually make a formidable profit. It charges a monthly interest rate of 10.2% to 23.1%, this is 122% annually! ((Check Here)) And, this is legal.

But, what if these loans are extremely risky therefore a loan shark-like interest rate is justified.

Sure, that could be the case, and I am no risk management expert. But, if my assumption was true, and that 瑞豐 only makes loans to those who it knows well and has credit information of, then the default risk could be mitigated somewhat. At the end of the day, 瑞豐 is operating with an on-paper yield of 122% and up, so they should have some appetite for risk.

So there you go, who would think some shoe maker out of a rural town in China has suddenly set foot in the high risk, high return venture capital funding business. Thanks to China’s out-dated banking system.

China is more Capital-centric...

So a few beloved friends of mine travelled to Hong Kong, as we met up for drinks, a ‘over-the-beer’ conversation centered on the form of “capitalism”.

One claimed: “On a scale of 1 to 100, China now resembles more capitalism than that of the U.S.”.

And, another friend concurred.

I couldn’t disagree more with what was said! But I didn’t know what arguments I could present to counter the claim. So it prompted me to look up Wikipedia for the definition of “Capitalism”.

“Capitalism is the economic system in which the means of production are controlled by the private sector rather than by government.”

Well, let’s see, on a relative basis, which government (China or U.S.) has more control over its nation’s production (think state-owned banks, oil/coal production companies, telecommunication companies and airline companies, etc.)?

While we have seen real estate development been privatized, which country, today, has more rigid control on its property rights and commodity prices (think no individual can own land in China but lease them, and the property price cooling measures Beijing has administered in the past twelve months)?

While the answer is obvious, I have to appreciate the topic of discussion. With the way China has transformed its centrally planned economy to a mixed one, how soon can we expect China to overtake the U.S. as the biggest economy, and when that happens, would it be as capital-based as the U.S.?

Here comes the Taskforce on economic challenges...

So the Taskforce appointed by Donald Tsang to tackle and advise on economical challenges Hong Kong faces has delivered their 'insight' from their first meeting:

From SCMP, Nov 4th 2008:

"Being a small and open economy, the risk of Hong Kong going into a recession...It is expected that four sectors relating to financial services; trade and logistics; tourism and consumption-related services; and real estate and construction will be hit rather harder in the next year or so."

Yeah, thanks dude, why don't you just said every sector other than the IT industry will struggle? Oh, wait, there is not much IT industry in Hong Kong, so you can just say 'every industry will struggle'.

Thank you, and please send the cheque my way.