Brainteasers You have a gold bar. You can cut the bar twice. You have to give your worker exactly...
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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
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Transcript of Brainteasers You have a gold bar. You can cut the bar twice. You have to give your worker exactly...
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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• Bit.ly/quantfsnyu• bubblepop
