Cloud Redux

Just in case you missed my earlier post about cloud fragility, we have this from the New York Times on October 22, 2012:...read more

Subjective, Risk Is

I asked a Nuclear Engineering Professor friend of mine, after the Fukushima power plant disaster of March 2011, whether that incident would have a positive or a negative impact on his industry. His response was that it would have a short-term positive impact as a result of publicity generating a flurry of requests for inspections and re-evaluations of existing establishments. The long-term effect, he related, could be a public who is less receptive to the concept of nuclear power generation. This did not surprise me, given how Germany decided,...read more

Do you know where your bytes are tonight?

Goha, an Egyptian male folk character, has been often used to convey wise nuggets in the fashion of Aesop's Fables, with a satirical twist. So Goha was once found, at his wits end, looking for his donkey. A passer-by notices his befuddlement and the following dialogue ensues.

    - "Goha, what's the trouble?"
    - "I lost my donkey!"
    - "Where was it?"
    - "Tied to a tree."
    - "Which tree?"
    - "The one with the cloud above it"
    - "Did some one steal it?"
    - "I don't know. I can't find the cloud."

I have seen a lot of IT folk do worse. I saw them...read more

What's in your wallet?

Money. The enabler of all economic activity. The root of all evil. Whatever soubriquet you attribute to it, its nature and substance are becoming the topic of a vigorous debate as of late. A topic that was thought to have been fully settled over half a century ago and relegated to the thought experiments of historians and academics has been gaining renewed interest. ...read more

Airport Nude Scanners

The current lively debate about the health risks of the back scatter X-Ray airport scanners, misses a very important point. These machines are first and foremost X-Ray machines. The fact that the government is currently using them in a low power mode, to capture the low radiation back-scatter images, does not mean the machines are not capable of a high radiation dose. Whether due to malfunction, operator error or a software glitch, the radiation dosage has the potential to exceed advertised levels. For frequent fliers cancer risk is a serious concern.

Given the rising concern that determined prospective terrorists are likely to use body cavities for hiding contraband, will the government resist the temptation of raising the power level a tad to examine the inside of our bodies? Given that government officials are exempt from the process, would they care if the cancer risk for the rest of us is increasing? Given the potential to make billions more, will the equipment manufacturers hesitate in refitting the machines with a software update that has an image-depth control feature? Do you trust that the government will tell you when it decides to see inside of you?

I have no idea where we are headed, but it doesn't smell right.

AIG's Bottomless Pit

Since the majority of the general public, and all of the Financial Media, seem to be constantly asking in bewilderment as to reason AIG keeps requiring additional bail-outs, I decided to try my hands at a simple answer. AIG has exposure to the highest tranches of credit risk. In other words, AIG has insured the highest quality credit in the world. But it did that with gusto. I reckon AIG has risk exposure roughly equal to $1 billion/basis point of investment grade risk^*. In other words, every time investment grade credit risk rises by 0.01% AIG books a mark-to-market loss of $1 billion. Why mark-to-market then? The mark-to-market is required by AIG's counterparties and the rating agencies to properly protect against an AIG default. When an adverse mark-to-market takes place, one has to post additional collateral with counterparties or convince rating agencies of reserve adequacy. The inability to do so, causes a total collapse in credit quality and ultimately insolvency. That is why the bail-outs keep coming.

Two years ago investment grade credit spreads where around 30bps. Today they are over 200bps^*. This blow-up in credit spreads has happened without any considerable defaults in the investment grade world. What would happen when default start taking place. How much of a bail-out would AIG then need. Go figure!

---

* A March 3, 2009 article at CNNMoney.com states that the total AIG bailout so far stands at $163 billion. This almost exactly confirms the analysis presented above.

Filling the Crater

As Washington tries to navigate its way through the current economic morass, the general public is repeatedly stunned by the enormity of the figures. The number trillion (one followed by 12 zeros) was thought by many to be an imaginary number, merely a couple of years ago. Nowadays, it seems that every government official will be in charge of dispensing a trillion or two.

What happened? And is inflation upon us?

The big-bang noise you just heard was the sound of the credit bubble blowing up. The federal reserve system of America, and its sisters around the globe, have been creating capital out of thin air for over 25 years. Through the less than sober expansion of credit, the global economy looked exceptionally healthy for the most part of a quarter of a century. A mini 'real estate'/'savings & loans' bubble, followed by a massive 'technology company'/'stock market' bubble, followed by a giant credit/'hedge fund'/'real estate' bubble, followed by a commodities bubble gave us the pleasurable externalities of a wildly vibrant economy.

The bubble popped! It was tens of trillions of dollars big. Now we are left with a crater. The governments of the world are trying to shovel as much cash as possible into the crater.

In all likelihood, they won't be able to fill the whole crater. That means that no matter how much money they print, it is just a partial rationing of the credit they have already issued. As a result it has no inflationary impact. All prices should fall, albeit not at the same rate. For instance, gold may fall less than Florida real estate. To support asset prices, the government will have to inject so much cash that bubbles will pop up in some unexpected places.

Whether this effort will succeed or not is uncertain. One thing is certain, however, a bubble in government has already begun!