Brainteasers You have a gold bar. You can cut the bar twice. You have to give your worker exactly 1/7 of a bar of gold per day. How do you cut the bar.

Brainteasers

• You have a gold bar. You can cut the bar twice. You have to give your worker exactly 1/7 of a bar of gold per day. How do you cut the bar of gold so you can pay him?

Tickle Your Brain

Market Update

• Stock market started a sell-off

• Fed tapering by another $10B /mo (Now at $65B)

• Month of surprising earnings

• Argentina crashed after the peso tanked, leads to EM worries

The last few months

Quantitative Finance SocietyBubbles

What is a Bubble?How not to look at a bubble – Using a price chart

The mechanism of a bubble

• Multiple expansion– People are willing to pay

more per dollar

• Products with higher yield has higher demand in a low yielding market

1 – Multiple Expansion

The mechanism of a bubble

• Cost of capital decreases– Future cash flows are

worth more than they ‘should’ be worth

• Interest rate driven

2 – Discount Contraction

The mechanism of a bubble

• Irrational buying driven by price increases

• Ignoring downside protection / risk

3 – Unsustainable Price Increase

Where do you start?

• Bubbles are– Credit driven– Sentiment driven

• Bubbles are NOT– Fundamental growth

driven– Foreign investment /

export driven

Where most people get it wrong

In plain English please…

• Spotting bubbles are not difficult– Screening for large scale

growth areas– Excluding areas where

growth is driven by fundamental causes

• Spotting a bubble burst however…

The Burst

• Why does a bubble burst?– Credit crunch– People waking up

• When do people wake up?

• Activism at the policy / politics level

• Sometimes, investors can burst a bubble (Soros)

Checklist for a burst

• Bubble was created by easy access to leverage

• People jump onto the growth train

• Newspapers talk extensively about growth

• Credit tightening becomes a reality

• Price does not respond to credit shrinkage

• Demand outstrips supply, massively

History of Bubbles

• Beautiful flowers, high demand– Lull in the 30 years war

• Price rises, people want to buy more

Tulip Mania

History of Bubbles

• Internet starts to catch on in the 1990s. Investors start to get enthusiastic over the “new economy”

• Basic plan was to build market share and then monetize later– Growth over profit

• 1999: 457 IPOs and 117 doubled in price on first day of trading

• 2000: MSFT declared a monopoly• Companies start reporting huge

loses / filing for bankruptcy• 2001: 76 IPOs and none doubled

Dotcom Bubble

Other BubblesLots of these

Let’s Practice

Nov 2013Oct 2011Sep 2009Aug 2007Jul 2005Jun 2003May 2001Apr 1999Mar 1997Feb 1995Jan 19930

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Private Housing Small Private Housing (Less than 100 Sq.M)Large Private Housing (100 Sq.M or above)

Hong Kong | Housing Price Index

Let’s Practice

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Hong Kong | Home Price v. Mortgages

Let’s Practice

Let’s PracticeDifferent types of credit we are all familiar with

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