aPortfolio Performance : +57.82%

US Dollar Barometer stands at +2

Trade Recommendation : Long USD/JPY

Bottomline : US Dollar is bouncing back strongly, yes this is strange even though we have the bailout package which might cause more burden on the US fiscal system. There is so much fear in the markets now. Face it - the media is blaring all the bad news about the economy, the TV is causing the negativity to seep into our brains, it is some kind of brainwash and all that propaganda. Look here, the equity market is at a bottom - if you want to make money, no one sells at the bottom. I almost cannot believe it when Goldman Sachs placed a sell call on one of the equity counters - Comfort Delgro (I dont own this by the way). I mean the analyst should realise that he is placing a sell call when the equity market is at the bottom. No one places a sell call at the bottom of the market - it is equivalent to placing a buy call at the peak of the market. I had really thought better of the calibre by Goldman's analyst. Anyway, the report by Goldman was just one page long - too superficial and definitely not enough reasonable basis for a recommendation. I think the equity market is at a bottom soon, I feel really sorry for the people who are thinking about selling stocks now. "Don't be so caught up by the fear in the market."

In "Did the Asset Price Bubble Matter for Japanese Banking Crisis in the 1990s?" by Monzur Hossain (2004)

The failure of a large number of Japanese banks during the 1990s following the burst of the asset bubble in the early 1990 synthesizes a vast literature. Two stylized facts have emerged in explaining the crisis - 1. the transition from highly regulated main bank system through slow and undirected financial deregulations caused problems for the banks to adjust with the new environment; and that's why their speculative behavior during the asset price bubble to increase short term profit made them vulnerable after the burst of the bubble. 2. The other focuss on monetary policy. The view holds that in the era of protracted monetary easing during the mid 1980s, banks expanded their business aggressively to the SME market, real estate businesses as they lost their big customers of main bank arrangements, which created the problem of moral hazard and asymmetry of information. Since their loan was secured by collateral assets (land), the continuing plunge of land prices made the loan uncollectible and a huge burden of non-performing loan occured that ultimately contributed to banking failures.

The author argues that beside the two causes for the bubble, he says that declining profitability of the Japanese banks had caused them to resort to such speculative practices. He said that the declining trends in 1970-1980 caused the speculative builtup in the 1980s to cause a burst of a bubble in 1990. The diagram below illustrates


In the post-war banking system, Japanese banks were heavily dependant on BoJ subsidies and borrowings of enterprise groups. The characteristics of Japanese model of financial system during post-war economic growth included high debt/equity ratios, greater reliance on bank loans than securities markets, closer relationship between bank and borrowers, extensive corporate cross-shareholding, greater guidance from the government in credit allocation etc. The system was known as the "main banking system"

The structural changes in the financial system started from the mid 1970s in the form of financial dergulation. The main features of the deregulation were interest rate dergulation, relaxation of regulation to raise funds in the securities and investment market by firms, initiation of freely floating exchange rate and allowing banks and firms to participate in the capital market etc to increase the ability of the Japanese banking system to meet international competition.

Since the failure in 1990s, the number of Japanese bank failures continued to 2003.

The prospect of failure of banks can be expalined by analyzing the 1. asset risk, 2. capital adequacy 3. liquidity 4. management and operating efficiency 5. earnings

Asset quality is important for determining the current and future profitability of the bank; it deteriorates with the significant increase of non-performing loan. On the other hand, capital adequacy can reduce risk of failure and absorb losses. Capital acts as buffer against loan losses, it may prevent the failure whose customers default on their loans. According to Nelson (1977) the probability of failure is a fuction of current level of capital, and the estimated mean and variance of earnings and charge-offs.