The Anomaly of US Credit Rating Downgrade!

The credit rating downgrade of US Govt. seemed like an exercise in signalling alone. In fact funnily enough the flight of safety that will ensue thus will push up the prices of US treasuries thus reducing the yields on them. Hence the US treasuries would probably become the first security ever to increase in value after a credit rating downgrade!!

That of course is only half the story. The price of a security is mostly about its economic value. However, there are some overlays such as liquidity, special currency status and home country bias that may produce a fundamentally opposite outcome to that on account of inherent economic value alone. This is indeed the case with US Govt debt. Owing to the special status of dollar as the global currency, the unmatched depth and liquidity of the US Treasury bond market and the fact that US in indeed the home to a large proportion of global investors, the treasuries can indeed rally despite (and in fact because of) the credit rating downgrade!

Where do we go from here? Will the US go into long-lasting recession (or even depression)? Will the Euro survive? Will China slow down? Will India slow down? Will global inflation lead to continued tight money policy in emerging economies thus leading to a period of anaemic growth even amongst the BRIICS?

Whatever be the ultimate diagnosis and the result thereof, I often think that the worries as well as enthusiasm get played up significantly in our times - thanks largely to media, social networking and the presence of highly liquid markets for assets. While that may sound like a nuisance to some, it also smells like an opportunity - if only one can keep one's head when everyone around is losing theirs!

The Problem of Induction

I have been reading Fooled by Randomness lately. What got me interested was of course the fact that my newest career choice requires me to pay a lot of attention to the risk of rare events and the fact that much of the book is drawn upon the author's experience as a trader - a valuable guide for my new line of work.

Currently i am reading the section on the problem of induction. In IITB during the course on introduction to philosophy, we were introduced to the Karl Popperian philosophy of falsification and how no theory is true. We used to have a lot of long discussions on this problem in our hostel rooms then (curiously on only thursday nights!) While the business of finishing an MBA (or PGDM as they call it) subsequently and earning livelihood post that put the whole topic of epistemology far at the back in my mind, this book brought it all back with a bang!

If you observe two events occuring back to back several times, can you make a statement of the type
1. This thing Y always happens after that thing X
Even more strongly, can you ever make a statement
2. This thing Y is caused by that thing X
The problem of induction is that we can say neither 1 nor 2. Science is carried out with better and better approximation to the reality "out there" in nature while never claiming either 1 or 2. It does provide us with technology which does help in making our lives more comfortable and less painful. However heart of heart, every scientist knows that s/he will never find THE truth. Every theory is an approximation - an elegant one, a massively accurate one (to the nth decimal) - but is precisely that, an approximation.

As Taleb observes, the practitioners in humanities as well as trading floors do not seem to share that humbleness. Most people in these fields make ludicrous claims of x following y ALWAYS and worse still X CAUSING Y. Curiously, mathematics seems to have made matters a bit worse! Elegant modelling often creates a sense of comfort amongst its creators as well as audience - which is akin to believing that a fortress is safe because its small clay model is butressed with concrete!
Unlike Science the problem with humanities and by extension most of our day to day lives is that of lack of repeatability. We can never really test a hypothesis, we can never rerun an event and no two situations are alike. Hence we are forever doomed to be fooled by randomness. As the victors write history, the lucky few businessmen that survive will have vision pasted onto them post facto and the lucky individuals will talk of their grit, perseverance and fortitude!

I dont know if there is a reliable sum over histories approach possible in the humanities, day to day life, running of businesses and countries. Maybe some of the intellectual energies of our generation need to be redirected towards that rather elusive but potentially paradigm shifting goal!

Turkiye!!!

No country has the confluence of cultures and religions like Turkey does. Its a country at peace with its own religion but also its place in the world. It is fond of its culture. But it is very forward looking. It is secular but proud to be Muslim. It has wide roads and disciplied traffic but its cities have a lot of life!

I believe that geography defines history in the long term. Nowhere is it as visible as it is in Turkey. The strategies location it had in the ancient as well as medieval times kept it at the global centrestage - initially as the eastern roman empire (Byzantines in Constantinople) and later as Ottoman Empire (Turks with their capital in Istambul - new name for Constantinople). Over time as the centre of action shifted to Western Europe, Turkey became a backwater of sorts econo-politically speaking. However, post World War 1 and its battle for independence from Greeks (after a brief 3-4 year period of occupation) the country broke away from its Arab peers in its orientation. Under the visionary leadership of Mustafa Kemal Ataturk, Turkey embarked on a path of modernization. Like the proverbial two paths of Robert Frost, Turkey could have gone the way of the European countries or the Arab countries. After all, it is slotted right between the balkans and Greece on one side and Syria and Iran-Iraq on the other!!

As Ataturk thought fit, Turkey chose the path of secular growth. Its choice is most obviously visible in the way it chose to shun the Arabic script for Turkish launguage and instead went for the standard Eurpoean letters. In a similar vein, in other walks of life as well, Turkey chose to follow a primarily western model of growth and governance. The rest is History! Today Turkey is attempting to enter EU - however on its own terms.

The country is a great place to visit for its history as well as the beauty of its sites. Istambul, Konya, Ephesus, Troy all have their own character. Istambul is one fifth of Turkey in terms of population - and I guess it might be larger in terms of share of the economy. It was in its heydays the equivalent of today's New York in terms of its relevance to the world. While far lesser today in terms of significance the city does not strike as a yestercentury's city at all. It owns its culture with a lot of pride but has moved on to a modern existance in general. Hence for most parts the city is a nice friendly place to move about in once you are done with the historically significant tourist attractions.

The war memorial at Ankara is quite a magnificent piece of architecture as also representation of history. While it is relatively more recent, the respect it signifies for the heroes of the country makes one thoughtful. Capadokya is a world in itself. A very queer place in terms of its geography, it is beautiful as it is distintive. The cotton terraces at Pamukkale are a case in point! Come Ephesus and one starts to realize the melting pot nature of Turkey as a country. This western side of the country has deep Greek and Roman influence in its architecture and perceptibly in its day to day life today as well. Much of Troy is destroyed. However, as our tour guide told us, if one has good imagination a lot can be experienced in Troy as well. Especially the story of Trojan war!

All in all, 21st Century Turkey is a place which in a way stands testimony to the power of positive governance just as its previous century Avatars stood for the importance of Geography in History!

(I have not written much on the site seeing etc since the purpose of this piece was to summarize my thoughts about Turkey as a country as against Turkey as a vacation destination.)