Risk Latte - The Inflexion Point in the Markets and Beyond

The Inflexion Point in the Markets and Beyond

Rahul Bhattacharya
Jan 21, 2008

"This is the inflexion point, mate. You are witnessing history!"

Eddie Masamura, the one time options trader in the City and the present owner of a swanky sushi bar in Roppongi, bellowed over the phone the other night when I called him long distance. Eddie, Japanese by birth, English by upbringing and persona non-grata on any soil on this planet, was once a brilliant options trader who believed that the beauty and wrath of nature both lay in the skew of things which is not visible to the naked eye. To him the third moment was everything

"Eddie, I'm calling to enquire about some reverse knock out puts on Nikkei which a client of ours wants..." I could hardly finish that statement when he howled again, an agonizing howl of a man who was neither drunk nor sober: "Cut the crap, will you. Hey bugger off. Reverse knock outs mean jack shit to me, and Nikkei is my cousin in the States....its party time, mate. We're all going to die tonight."

Ok, it was past midnight on a freezing Friday night in Tokyo where the markets had just crashed and two of Eddies best buddies had lost their jobs and everybody was piss drunk, so I gave up. The following afternoon Eddie called me up to say that I should think of starting a sushi bar in Mumbai. That way, I would be able to redeem myself. "Hey, why do you pretend that you love all this..reverse knock outs, Monte Carlo, doing training for the bankers, Ito's crap?" I had no answer to that. And he went on.

You're asking something about the Nikkei last night, right, mate? Don't bother with puts on the Nikkei; don't bother with the Nikkei at all. Look at it. It peaked in 1989 when it touched 39,000 plus and ever since then it has been going downhill. For twenty years it has been falling, going south. Twenty years! That's a hell of a long time for the stock market to secularly go down. Anyone invested in the Japanese stock market for the last twenty years has been losing money. Where is the truth in the saying that in the long run stocks always make money and outperform other assets? I mean you wrote that bullshit on your website, right? Twenty years is more than long run. I got born twice in that period.

Maybe, just maybe, that it will be another twenty years before the Nikkei comes back to where it was back then, in 1989. Forty years to go nowhere. What a great destruction of wealth! What a great tragedy for a nation that built it self up from scratch to become an economic superpower. All that gone! Poof! And what if this - the stuff that was happening today - was the turning point for global equities as well. The Dow Jones, the S&P500, the FTSE, the Hang Seng, all peaking out and then going nowhere for the next twenty years? What if this was the inflexion point for the major economies? What if this was the start of the gigantic destruction of the vast pool of paper wealth accumulated over the last three decades?

To Eddie, all that is unfolding around us is not about Nikkei, the stock markets, Dollar-Yen or sub-prime loans. It is also not about a couple greedy and stupid bankers going broke. It is about a greater malaise, an offshoot of something like cancer that has long infected the entire financial system, the economy, the society and our civilization.

Civilizations have inflexion points too. It is a time in the history of a nation or a society when all advancement in science, arts, literature peaks and political pride and glory takes a beating and everything goes on a downhill ride. But the funny part is that it is only the historians, writing about it decades or even centuries later that can identify these inflexion points. Men and women of substance in their own lifetimes can rarely detect the undercurrents of history which finally determines the fate of civilizations. They go about defending their turf, justifying their actions and agenda, completely oblivious to the fact that they are helping to destroy the equilibrium which is crucial for their survival and the survival of the institutions that they have so assiduously built.

This was the big picture, the really big picture for which I had neither the eye nor the canvas to capture it. I was also not interested. After all, who cares about the big picture? It is the tomorrow of our lives that matter. And to me, it is all about reverse knock out puts on Nikkei. But he was an old friend, so I kept on listening to him. After all, he was calling long distance. And Eddie can really lend grandeur to trivia. He was the master of taking trivial facts of life and extracting greater truths out of it.

He thought that the invasion of Iraq by the American troops was a turning point in the history of American civilization. He also opined that the current sub-prime and credit crisis and the imminent break up of the banking model - oh yes, he thinks the banks are simply going to break apart - on Wall Street and around the globe would signal the end of the great cycle of prosperity and wealth creation that started with the advent of the Regan Administration in the early nineteen eighties. Huge undercurrents of change, that lay hidden for so long are c?ming to the surface that will permanently alter the corporate, social, political and economic landscape of America and the rest of the developed world. Hey, when did you last hear of teens and students actively participating in the US Presidential elections? The sixties right?...and the same is happening now, once again.

I was in diapers in the sixties, Eddie. To which his refrain was "Oh trust me, you're still in your diapers, mate. We all are."

Perhaps, America is doomed to live in the shadows of its own deeds, political and economic, and perhaps it may be another half a century before another John F Kennedy comes along to restore the pride of the Americans in them. Or another group of silicon entrepreneurs and Wall Street pirates come to the salvage and resuscitate the great American dream. Perhaps. I don't know and I don't care. All that stuff is for the historians and text books and the political commentators who would write this stuff for their next Pulitzer essay.

I am just a spreadsheet guy. I do Monte Carlo simulation on spreadsheets to make a living. I talk to gods and demi-gods of investment banking and tell them that rolling a dice is better than anything else, for even though God himself doesn't play dice, he amuses himself by watching men play it. As for inflexion points, it's all random, it's all Monte Carlo. But I didn't have the stomach to tell that to Eddie.

Note: This is not a research or analyst report. This is personal blog. Risk Latte Company and/or any of its members, including the author of this blog, is not a registered investment advisor. We do not advise anyone to buy, sell or invest in gold unless he or she has taken advice from a registered investment advisor or bank.

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