Houston we’ve had a problem!

I’ve not been spending time flying for couple of reasons. No time and no money! Every day is worse than the previous one. I think I won’t be flying for a long time now. In the meantime I thought to pen down my thoughts about the current crisis, and why I think this is just the beginning of ‘the end of the world’ we as know it! Or atleast it will be long (years) before things get back to normal.

First the current situation can be decomposed into two factors: economic and financial. What all the central bankers across are doing is to contain the financial crisis by injecting tones of liquidity in markets to thaw the MM / credit freeze. That is sacrificing tomorrow for today. I respect their predicament though. There is apparently nothing else that can be done or atleast done immediately.

After this first wave of mortgage crisis, the next wave will be of ABS (credit cards). With so many people furloughed, things are going to get uglier. This festive season is not going to get the same demand of goods as previous seasons. This will entail cut in production, reduced ancillary demand and more retrenchments (vicious cycle).

This is affecting all the industries across the board:

1) Credit lines are withdrawn. Industries have no cash flow to meet working capital requirements.

2) Low demand for goods due to lack of finance, and rising unemployment

3) Fall in commodity prices (infrastructure, petrochem etc…)

4) Furlough across the board… airlines, construction, financial services, IT & ITES, commodities ventures etc… more job loss than we ever imagined

The economic effect of all this intervention is tremendous. Think for a moment, where is all that money coming from. Initially I was against using peoples’ money to finance / fund all this. However, the scene got so bad that I had to either change my mind or lose my job. Let’s sit back and imagine for a moment that things (financial crisis) start improving. But the already fiscal deficit for countries like US and even India for that matter will be staggeringly high. This is going to be another big problem in itself that will unfold after all the waves from the tsunami are over. This will be the ensuing epidemic that will engulf the economy for much long.

The world that we will see tomorrow will be completely changed for better or worse. There will be lot of political impact too. Imagine, the days of free credit are gone. People will be unable to afford to buy home. The social and economic divide among the rich and poor will widen. There will be more people at the bottom of the pyramid. Lack of finance, insurance, social benefits will be affected. More people on roads than in homes. Get the picture.

Fiscal intervention will needed. But don’t ask how and when. The government will need to do something to reduce unemployment. What we are seeing now is just the tip of the iceberg. Lets hope someone will prevent Titanic II happening.

Flight Level 120 (Part II)

“Positive rate of climb”, “gear up”. The engines love the cold air; it is accelerating very fast through the cool evening. Reduce the thrust to climb. Switch the autopilot to NAV (FMS). The flight director comes up and the FD guides the jet on the assigned course to RENO intersection. The TAS reads 220 kts. Start to reduce the flaps. ATC clears us to climb to FL 120 and contact the center. Since we are VFR, we request ‘flight following’. Once we are FL120, thrust to set to cruise.

We are now ‘feet wet’ over the sea. I keep a check of the flight navigation of the autopilot and the flight plan. We are having a direct tail wind of 20 kts.
Soon we are on TOD (Top of Descent) point (It’s only a short hop). Time to get busy. Things move pretty fast from now on!

I contact the approach at SABA and request a VOR/DME approach to runway 27. They vector us to the approach procedure which requires me to perform 15DME Arc over SABA VOR. The ATIS informs us of a wind shear near the runway and a direct crosswind component of 15 kts. Within the operational flight envelop. It will be fun.

After completing the DME Arc, we are almost lined up with the runway 27 10 miles out. Wind blowing from the left is pushing the fuselage off the runway alignment. I switch the smoke & mirrors off and crab the plane and cross control thereby increasing the stall speed. Nudge a bit on the throttles, roll to the left and a little rudder input to right align with the runway.

5 miles, IAS = 140 kts, flaps = 45, gear = down and locked, spoilers = armed, anti skid = armed. At 1.0 DME and @ decision height. Visually lined up and looking good (PAPI = 2 red & 2 white). Over the threshold 50’… smoothly reduce the throttle to idle… 40’… come out of the crab – null the rudder rate, and gentle left aileron to keep the plane more or less lined up with the runway…30’… 20’… start the flare – nudge on the stick to raise the nose 2-3 degrees… 10’… touchdown…

Spoilers come up… and I pull back on the reversers and smoothly slow down… the runway is long, and the tower has cleared us to use the entire length of it! At 60 kts, throttles at idle and apply breaks to slow down to taxi speed of 15 kts.
The ground instructs to turn left via taxiway delta and proceed to gate 2. As I come to the assigned gate, I apply the brakes and come to halt right on the markers. Cut the engines and pull the parking breaks. The engines spool down, switch off the avionics master switches, batt off display off.

Wonderful feeling to have accomplished another crosswind landing… life on the line continues!

FL120 (Part 1)

Equipment – Bombardier CRJ70

Flight Plan – TNCM (Princes Juliana) – SABA (Juancho Yrausquin), ALT – FL 120, VOR – TNCM (112.10), Distance – 40 Nautical Miles. Clear Skies. Winds 2 Knts at 210


Started the day (err… evening) in a cool warm summer in SXM. Not bad! I filed my flight plan and set out on the ramp to begin my pre flight checks. I did a detailed circuit of the beautiful CRJ and checked for anything out of place. Satisfied, I entered the cockpit, err Flight Deck. Completed pre flight check and pre APU start check-list. Instinctively, my hands went up to the over head panel, armed the batteries and started the APU. All the electronic equipments in the flight deck came to life. Completed the post-APU start check list.


Now comes the interesting part. Setting up the comps in for the flight. Setting all the NAV data. Set the altimeter, barometric altitude, heading, Transponder ‘Squawk, set auto-pilot settings for altitude, heading, speed,’ set the ground freq on NAV1 and VOR freq on NAV2. Once completed the entire pre pushback checklist, called the ground for pushback. The ground cleared us for the pushback. After the pushback, I complete the pre-engine checklist. Start the Engine 1 followed by Engine 2. I hear nice rumbled noise of the engines spooling up @ idle thrust. The ground gives us the taxi clearance for RWY 09 (the active runway) thru the taxiway Delta and contact tower on 190.12.


I start the taxi to the runway. Set the tower freq on NAV1, and call the tower to request clearance. Tower instructs to hold short RWY 09. And wait further clearance. I reach the holding point and wait for clearance. The tower finally gives me the clearance to enter the runway and hold. Then finally, “AF 2110, cleared for takeoff runway 09. Climb and maintain 3000 heading 90. Contact departure at 120.31. Have a safe flight.”
Nice. Just as planned. I push the throttles to 40% thrust, after 2-3 seconds, push it to forward stops. The sleek jet starts rolling at an amazing thrust. The automated metallic female voice calls out the speed. 30..80.. 100… V1… Vr.. rotate!!! Pull back gently on the yoke and the nose gear lift off the ground… followed by the main gears 2-3 seconds later. We are airborne!!


Life on the line continues....

life on the line...

Equipments Flown:-

Boeing Family

1) B737 – 300 (thanks to my route from CAL – DIB)

2) B737 – 800 (mostly on MUM – CAL routes)

3) B747 (one one of the older Air India’s)

4) B777 - 300

5) B777 ER (SGX – CAL on SG)

Airbus Family

1) A300 - 200 (mostly TO/FRM Middle East VORs)

2) A300 - 300

3) A319 (mostly TO/FRM Middle East VORs)

4) A320 (Fi-Fi / Sparky!)

5) A330 (mostly TO/FRM Middle East VORs)

6) A340 (mostly TO/FRM Middle East VORs)

ATRs

1) ATR 72 (on one of the pioneers in rupee travel – Deccan)

Equipments dreaming to fly:-

1) A380!

2) B787 Dreamliner

Life on the line continues… and so does the list!!

The Economics

Trader Risk Management Lore: Rules of Thumb

Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.

Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.

Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.

Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.

Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on.

Rule No. 6- Never let a day go by without studying the changes in the prices of all available trading instruments. You will build an instinctive inference that is more powerful than conventional statistics.

Rule No. 7- The greatest inferential mistake: "This event never happens in my market." Most of what never happened before in one market has happened in another. The fact that someone never died before does not make him immortal.

Rule No. 8- Never cross a river because it is on average 4 feet deep.

Rule No. 9- Read every book by traders to study where they lost money. You will learn nothing relevant from their profits (the markets adjust). You will learn from their losses.

Fundamentally Flawed

Déjà vu

Remember the decade of 1990’s in Japan? I am sure any of the less initiated, however, in his right frame of mind would unmistakably remember the 13% deluge of the capital assets from 1990 to 2003. Or say the 15 year flat spot in the US markets from 1960 to 1975.

Cut to the present: Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way. It’s an optimistic era of too much liquidity; too much leverage and too much financial engineering slowly giving way to fundamental reasoning.

Who takes the responsibility?

Who do you think is to be blamed??? Is it

(a) that American slob who took mortgage that he couldn’t afford

(b) the US regulators; or

(c) the I-Banks – who repackage sub primes and transfer credit risk into the hands of unsophisticated funds

Now you can’t blame that poor sod who took that loan from that next door broker who pushed the loan down his throat! The smart quants at bulge bracket I-banks took that loans and built tower of securitized debt with models that are fundamentally flawed while the US regulators were caught sucking their thumbs!

Stripped by Leveraged liquidity!

Say the bank has – $100 and issues loan worth $100. Now it collateralizes (CDO / CMO call it what you may!) the loan and immediately receives say $98 which it loans out to another borrower. This continues and the bank finances itself multiple times using nothing but that initial amount of $100. According to Satyajit Das a dollar of ‘real capital’ supports $20 - $30 worth of loans.

Fundamentally Flawed – painful unwinding!!!

Now when we look at the recent doubling of default rates (in contravention to that predicted by the geniuses at I-Banks) the pass-troughs (MBS etc…) began to collapse. Now valuing these papers would put rocket science to shame. Through last couple of months billions of dollars of these securities have been ‘orphaned’. That is it cant be sold off or used as collaterals (well, apart from the fact that, the day before Fed started accepting ABCP’s as eligible collateral).

This has had a big effect on the big bad world of PE. Yeah! I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works. So the structured finance market is coming undone; not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust.

The current market volatility is much more profound than a simple "correction" in prices. It is a gigantic liquidity bubble unwinding -- a process that can take a long, long time.

While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as it did Wednesday, well at best it may help smoothen the transition!’

Some off the cuff thinking leads to believing that post crises environment will be:

(I) Declining supply of underlying assets (i.e. Mortgages, Loans etc…)

(II) Move from structured to more plain vanilla products

(III) Less leverage more desirable

(IV) Lower returns on credit structured products due to lower demand

(V) Regulatory overhaul

(VI) Well… and… hmmm… some other new crises… !!!!