Years of Poems and Spirits

Continuing from yesterday long blog. Bill added the comment that “Stock market is far from being rational”. I can see where he comes from, but I don’t think we can dismiss the entire “efficient market hypothesis” (EMH) because of this crisis. After all, there is solid theoretical and empirical foundation underlying EMH, e.g. the decision market experiment and the asymmetric information theory, etc.

Instead, I’d posit that it is reasonable to compliment EMH with Soros’ Reflexivity: in normal times when there are competing sources of information that result in widely distributed asymmetric knowledge islands and none is dominantly more significant than any other, EMH holds. However, under the right condition, the market could become suddenly and increasingly self-destructive. In plain English, it is a time when self-fulfilling prophecy run amok.

In other words, if we call the EMH state a “rational state”, the “Reflexivity” state an “irrational state”, what intrigues me is under what condition would the rational moving irreversibly toward the irrational? It is not quite the same as the “tipping point” where a stable state/system changes into another stable state/system. In this case, it is a point where a stable system suddenly and irreversibly change into a self-destructive system. Or, more to the point here, a rational state into a irrational state.

I may be stretching here, but is it fair to say that American public opinion (or call it collective cognition) experienced a similar transition after 9.11? A shock happened, then a relatively mild stable and rational public suddenly degenerated into irrational fear, which  drained the vitality (spiritual and materially) out of an otherwise healthy society?

Even if we don’t get distracted by politics, I still think the question I asked earlier is a significant one.  However, I am not sure whether this phenomenon is related to human behavior only or it exists in any system? For example, can we apply this pattern to explain why some species survived evolution but some extincted? Hmm … do we want our financial system to be like cockroaches or dinosaurs?

Another good evening in my life  is thus totally ruined.

Too tired to do any work tonight. Not sure what I am working for or why I am working so hard for it (the word is that we may run out of money next month). But I am too tired to even contemplate that. Maybe this is a good excuse to catch up the long list of reading that I thought worth writing something about.

Xin Jiang Riot

NYT article about the first riot, in Guangdong, that preceded the June riot in Urumqi. I always wondered why, given rich labor pools all around it, bosses in Guangdong needed laborer from Xin Jiang? As I told anyone who’d listen, I strongly suspect that the motive was another sinister/disastrous result from the constant pressure of “low price” (aka The Smiley of Wal-Mart). As the economy tanked, the competition intensified and the installation of the new Labor Law, the bosses are looking for even cheaper labor that can be effectively managed. The non-Chinese speaking citizens from Xin Jiang fit this profile perfectly. After all, they are like virtual prisoners outside of Xin Jiang.  Another thing in the article that drew my attention is that the local government in Xin Jiang organized labor migration to “combat high unemployment”. However, Xin Jiang is booming. If the jobs were distributed fairly, what high unemployment is there to talk about? As a Uighur intellectual points out, when Chinese work with foreigners, the arrangement is that the foreigners take management jobs but leave the Chinese to fill in the rank-and-file. But when (Han) Chinese come to Xin Jiang, they not only take the management positions but every other job too. He says Uighur youth can’t even find hard labor job to make a living. Some one answered saying that many poor Hans are not better of than Uighur. It is a sad world. But I have little doubt that the minority policy lacks transparency and Uighur participation.

The Financial Crisis

I used to enjoy making comments about macro-economy until the financial crisis scared me crap-less. I believe my last rant was a Dec. 2007 posting when someone in the MBA program forwarded an article critical of Greenspan. Then the summer came, a series of events came so close to each other that I didn’t know what was going on. It was like a football player, when reacting to an interception, was blindsided by an opponent.

A year has passed.  I finally feel like maybe I can say something again. Recently, read David Wessel’s “In Fed We Trust” and a detailed account on NYKr. Both are written by highly competent journalists and are wonderful reads. For example, James Stewart told of a story that “a financial titan” called Geithner in the middle of the crisis. He was so shaken by the series of events that his voice quivered. After they hung up, Geithner thought about something, called the guy back right away and told him, “Please don’t call anyone else. If others heard your voice, they’d be scared shitless”.

And reading those accounts, I don’t doubt the truth of the story at all. It was total chaos. There was so many crisis-triggered meetings, the word “meeting” was all over the pages. When the story said one of the main character did anything else, like when Paulson calling his counterpart in the U.K., for a moment, I wondered where he found the time to do so. When Lehman was going down, the Fed was having a board meeting. Bernanke was about to brief and consult his fellow region presidents when he was pulled into the next room to join an emergency conference call with Geithner and Paulson. He never came out. His fellow central bankers sat there waited, until some of them had to leave to catch flights.

And the Wall Street bankers were even less fortunate. They wished they could be as busy as the central bankers but they weren’t. Since the situation was so chaotic, even those CEOs were left in the dark. John Thain, the Merrill Lynch CEO, was urged to seek help from BoA’s Ken Lewis. He went in with a proposal selling a 9.9%  stake and came out (in less than 24 hours) sold the entire company and felt gleeful. Similarly, when Goldman’s Blankfein was sent to see Citi’s Pandit, each thought the other was on sale (neither uttered the famous word “Nuts” though). AIG’s CEO was given a contract to sign (he wasn’t allowed to negotiate the terms) which stated that the government would own 80% of the company. As his lawyer read the contract, he joked, “You are going to be a federal employee tomorrow.” Then Geithner and Paulson called. After taking the call, the CEO came out and told his lawyer, “You are wrong. I won’t be a federal employee. I was just fired.”

Those stories certainly lightened the mood while reading. But the subject is, for the most time, a very heavy one. I am interested in the financial market because I believe it is the ultimate playground for Economic Man and, ultimately, for Reason. When a priest chooses a fund for his 401K, even he has to learn to trust PE and forget about God for a second.

Although I have been kayaking for years but never dared to venture too far into open ocean.  There are many reasons, all of which lead to timidity–don’t have the right gears (a dry suit is said to be a must-have), don’t know how to read currents, don’t want to do it solo, etc.

But having a boat of my own suddenly changes all that. When Jeff heard that I haven’t paddled Othello since I acquired it in July (which was largely engineered by him anyway), he let out a cry that I could overhear through ZR’s cell phone–on the other side of her head, no less, “What a shame!”

Yet it seemed that the shame felt more on him than me, after all. Mid last week, Jeff told me of a pending trip to the San Juans with his b-i-l Scott, and “you are welcome to join us”. Still a little apprehensive, I decided to stick my neck out for this one. The night before, SX mentioned that I was going on an “adventure”, I thought it was a little over-played: how adventurous could it be?

The trip actually started the night before when I scrambled all over the house to find the scattered gears. Suddenly, the living area smelled like neoprene. And loading the boat turned out to be the most straightforward task. For the first time in years, I felt the urgent need to compile a checklist -

Boat, paddles x 2, boots, socks, gloves, float, pump, spray jacket, spray skirt, wet suite, PFD, sun glasses, hat, sun screen, whistle, toilet paper, lunch, water, snacks/trail mix/power bar, dry cloth, towel, sandal, wrist watch+compass, iPod+earphone, dry bags x 2, car rack, boat strap, cell phone, ID

Counting on Jeff to have – map, tidal table

I had some work to finish so had just four hours of sleep. Then left early the next morning with a light breakfast. ZR did most of the driving for she was to bike around Lopez by herself on that day. When I woke up from a deep nap, raised myself from a laid down passenger seat to look out the window, we were already at the Washington Park in Anacortes.

It was a beautiful day. The blue ocean was calm and flat, only the strong smell of sea reminded me of the kind of water we were about to get into. And the initial sailing was no different as on lake. In fact, I never saw ocean being so quiet. The lack of waves made the continuous water surface a vast span of silky blue.  When my orange-colored paddle slid below the surface, it was as if a knife cutting through.

We were a bit late to catch the current sweeping north. Still, we had little trouble cross the busy shipping channel and hit our first stop–Strawberry Island to the west of Cyprus Island. Strawberry was Jeff’s favorite, for good reasons.  Once part of the Cascadia Marine Trail, it is now a deserted island outside of Park Service’s purview due to budget cuts. Jeff’s beloved outhouse (ever time he mentioned Strawberry, he marveled at the size and cleanness of that outhouse) is now gone, lifted out by a helicopter last year. A sign now says “no camping”.

But as if some woman are born to be trophy wives, Strawberry is there to be camped, in my opinion. It is tiny, quiet, fully forested, with an open view to the west. We took  a walk through the forest among madrona trees. Many of them are shaped by the winter storms–barks peeled up and branches leaning inland. Its south end sticks out like a mini-peninsular, with huge boulders bulging up and out, over looking a loud and choppy sea stirred up by strong currents over what must be a rocky bottom. When we paddled our boats away, we passed hundreds of sea birds crowded on the rock like statues, feathers dancing wildly in the wind. Reminded me of the Bedouin women ululating T.E. Lawrence leading their men to battle the Turks.

What came next was perhaps the hardest part of the trip. Suddenly, everything seemed wrong: my back started to hurt, the wetsuit was too tight, I started to bunk, my groin felt sour after sitting in that position for so long and having to transfer every stroke to the foot pedals.  Suddenly, a sense of panic kicked in, for no other reason than feeling exposed and being surrounded by the elements. At the same time, my legs were enclosed in a tight hull and I had only a tired upper body to propel myself forward. The distance seemed grew by the second and a second seemed to become a minute.

The sense of dread took away any fun on that part of the trip. I don’t remember much at all other than the hope to find an excuse to stop, to get on shore, to tear down the straitjacket wetsuit. But I also know that we have to circle around the Cyprus Island by 2pm or we may well lose a favorable current heading back.

The salvation came in the form of lunch. We did stop at a small cove on the east side of Cyprus right around its northern tip.  I could hardly get of the boat as my legs were half dead.  With an urge like a guy just out of a desert finally reached a well, the first thing I did was tearing down the wetsuit.  Steam came out of my body as if being steam-ironed all over.

After devouring a prosciutto sandwich (the best ZR ever made), I laid back on a rock under the sun. Gradually, I felt everything would be OK after all.

The return trip was much more fun. Since we were on the east side, the afternoon sun hung behind the ridge on the island. Lights filtered through a dense forest, shining into emerald-colored water. When Jeff and Scott came out of the shadow of hill and glide through the sunlight, their silhouettes wore a blinding edge of light from the reflections.

The last challenge was to cross the shipping channel again. It was about 4pm, and a steady wind whipped up a choppy sea. There were white caps all around me. I grow a little nervous and asked Jeff whether this was normal. He smiled and said, “while, this is the ever predictable Northwest afternoon wind”. He was right. There was really nothing to it. We crossed the water, dodged a monster looking ferry and peddled into a setting sun.