The war that never ends

The war between Israel and Palestine is back started this time, by Hamas when it raided civilians on Oct 7th causing more than a thousand deaths. Unfortunately the crisis has only got worse pushing out peace in the region by few more decades. Unlike other conflicts of the world - which I believe are solvable over time - this one unfortunately cannot. Conflicts between India-Pakistan, Russia-Ukraine - they have historical precedence of being together as one nation. Pre-dominantly - it’s a clash between rulers / governments on either side - there is no big people to people conflict. But only in the Israel-Palestine conflict - historically this has been a people to people conflict. This confirms - the problem has no end in sight. The war would end one day - lot of people would be dead on either side - more on the Palestine part - because of their vulnerable status, only to start all over again a different time with a different reason. Subsequent leadership on either side - lacked the will or the desire to resolve the conflict. It has only got bigger and bigger.

We all will live to see a lot more quick wars between them - the hatred has only increased.

Israel is supported by Western countries and is genuinely part of the richer nations club. It has access to weapons, technology-progress and might against a smaller refuge state of Palestine.

Palestine on the other side, is a weak block. Even though they gain sympathy from a majority of the world population (who are aware of the conflict) - Their lack of progress (economic, social & political) can only be attributed to their own people and its past leaders. In my opinion - its applicable to the entire Muslim-dominated middle eastern countries. It can arguably told - The middle east hasn't generated a single political mass leader in years. Because of radical religious thoughts - the country has not been exposed to alternative thinking - and the weakness has only extended over the years. What the middle east really lacks - a unifier like a Gandhi. In my opinion, that person has to be non-religious (leader of all sections), carries the integrity, honest and vision of a future middle east. This part of the world has always missed that. This is probably because the leaders liked power more than the genuine belief to make things better beyond their own interests. I am not saying - what the Muslim world should do - all I'm saying is - they need to operate as a united block under a commanding leadership of someone (home grown) - who has a vision and has the belief of majority of the people in the region. What we often end up - leaders who are token citizens of a country but really whose family resides somewhere in an affluent western country with business interests everywhere around the world except in their own native countries. These so called leaders - exist in plenty on the west of the Indian subcontinent until the Atlantic Ocean. The lack of unity among the middle eastern nations can be attributed to just the lack of this leadership trait - unauthenticity. Because of that - they are corrupt. The leader has to be from within - someone who is born, grows up and lives through the daily routine of most of his people - a really close to the people leader.

India is a diverse land with huge diversity is religion, caste, creed, language - but still she managed to create visionary leaders like Gandhi, Nehru, Indira Gandhi, Abdul Kalam, etc. They represent Indianism in the minds of the Indian people. It is very hard to remember a visionary from say Pakistan - which was part of India for bulk of its existence. That is because the country is based on a religion. Once you go that route - it is very hard to lead otherwise. Religion is good and it controls the chaos - I'm not saying there should not be religions. There can be. It cannot be a way of political life. Because religions has beliefs and not all people in a region conform to the similar beliefs - it fundamentally divides people even though it unites a concentrated section of the people. By definition - if you accept a religion's beliefs, you are against the beliefs of other people - that puts you in conflict right away. So right to practice any religion should be the norm - but it cannot be politically enforced. I'm not advocating for a liberal society. I am just saying - political leaders with the will of the people and with aspirations of the son of the soils without a religious bias can provide better political establishment to a nation.

The history of Israel-Palestine conflict - Every time the Palestinians get killed (most of them Civilians), the Arab world would send signals indicating their support and then it goes nowhere. Israel is too bigger power for the Arab nations and exerts its authority which is natural. Historically - the Arab nations have not even be able to reduce the intensity of the damage caused by Israeli military on the Palestine civilians. It breaks my heart to see those horrible visuals on X. Most of them are not combatants.  

With Elon Musk opening up X- more uncensored information is coming out of the conflict and it has created more awareness on the issue for people around the world. This time - it has increased the sympathy for the Palestinian people and decreased the empathy for the Jewish state.

What should be the resolution for this major conflict that can cause a world war? I do not know. But I do know - the resolution has to be from people who live there on either side. They need to determine how it should be resolved amicably with mutual give and takes. There is no alternative. The UN or other powerful nations - may have opinions on how it can be solved - but are useless. Those planted resolutions don't work. A true resolution should come from within. 

Banks of America (again)

After the 2008 financial crisis I personally got interested in the markets and started seeing them closely. The first thing that caught my huge interest then was the banks i see around me, failing. My first article in this blog was about "Banks of America". We have come a full circle - as the banks of America are failing again now. For anyone who has followed this thing for years closely - its very clear. The problem then and the problem now are exactly the same. It was just a temporary pause for few years. In 2008 the banks had assets that had its value gone down significantly. It was housing bonds then, now its the low-yielding bonds from the ZIRP decade. The problem is pretty much the same.

I was talking to someone who owns a home in California few months back. I asked him what is the interest he pays on his home. Every one refinanced at a lower rate, and he did too. He told me, he was able to refinance his old mortgage for 3.05% and was very upset, he couldn't utilize the still lower rate it got to at 2.75%. It immediately occurred to me, if there is a transaction that benefited one side a lot, there must be the other end that heavily lost. That exactly what happened. The person on the other side were the banks. The mortgage  was probably 30-years maturity paper and the bank is stuck with it.

The duration risk on the bonds are cited as the main reason for Silicon Valley Bank to fail. When interest rate rises, the low-yielding bonds will lose value. This caused a huge hole in the bank's balance sheet. I believe, even though it could be one reason, there is something more to it. Regional banks are heavily exposed to the commercial real estate market, which we know is not doing well, because employees are not coming back to the office. Also it is not a surprise that the over leveraged technology companies - that ran only because of cheap money had a big role to play. It's not a coincidence that most of the failed banks are from the state of California. I work in technology and i see first hand, how leveraged the industry operates in. Most of the time, almost in all IT companies - work happens not to make the customer happy but instead to get a new investor. Significant time is spent on, doing prototypes, demos to attract new money as investment. This used to be very common in research institutions. Most of the time of research graduates, are spent on applying for grants than on doing actual research. With the Fed hiking rates up to 5% now - all the cheap money is gone. What is left is the mal-investment and accumulated debt from the boom days.

Initially when the 2008 housing crisis started., we were told the issue was isolated to subprime. Eventually, we would find out - it was not subprime but the entire mortgage market. The falling assets problem is same now - Not only the banks have the problem, all insurance companies, pension funds, hedge funds, other financial institutions would have the same problem. If banks are losing asset value because of holding low-yielding long term paper - lot of people hold them. Opening a Fed window for the smaller banks alone to exchange their worth-less bond and getting the full dollar - is a moral hazard. The problem is just showing up in the weaker sections of the economy now. History suggests - there is a contagion effect to it. We will soon find the same problem repeating in other forms at different places. 

Fed raising rates, exposed the underlying problem. There is a bank run on the regional banks. People use their mobile phones and transferring money out for 2 reasons. They are afraid they will lose their deposits and more importantly want to move to other money market funds that may yield 5%. The Bank wasn't paying much interest anyways. With fractional reserve banking - No bank can survive this outflow, as we know it. 

Opening a window at the fed to accept the depreciated asset and giving them on-par price - is a fraud. More over the bad assets are being dumped at the fed, because no one would buy it. Exactly the same thing that happened in the 2008 housing crisis. The mortgage backed securities were dumped at the fed and they remain in the Fed's balance sheet even now. The Bernanke promise of selling them back to the market when things improve never happened. It was a lie. These low-yield assets that are being dumped at the Fed by these failing regional banks - will also stay on the Fed's balance sheet until their maturity. The money the fed pays for it, would reach the economy making the inflation problem far worse.

This can be solved only by the US government (with the Fed) guaranteeing 100% of the bank deposits. Or else the Fed has to lower the interest rates drastically - to add value to the low-yield paper from the last decade. The Fed cannot do the later with CPI hovering around 6%. We will find out in the next couple of weeks on how this unfolds. If they do any one of the above - it would be admission of a financial crisis in-action. Symptoms would be suppressed for a while - but it will show up in a different form say double-digit hyper inflation soon. 

The Fed's balance sheet is already expanding. They were doing a $85 billion in QT every month. They just added $95 billion this week and $400 billion in the last month (the returns from the special window for the smaller & regional banks). So the pivot the market was looking for - has already happened from QT to QE.Jay Powell saying that - its not a QE program because he is not controlling long term yields is a loser's argument. Yesterday in the post-FOMC press conference, he said what happened in SVB and Signature banks were "outliers" and doesn't affect the broad banking sector. After famously using the terms auto-pilot, transitory - outlier might be the next one in that list.

Europe would have the exact same problem. They had negative interest rates for a long time in the last decade. With multiple countries in the Eurozone with different cultures and countries - it is going to be really hard for the ECB to maintain decorum. We already have seen Credit Suisse fail., and there are reports late this week on Deutsche bank having  their credit default swaps prices rising abnormally. 

The Central banks are coming to the rescue again. In fact they have too. After all - they are the ones who kept the interest rate too low for too long. They want to pretend the Central banks are the lender of last resort. Actually they are the lender of only resort. There cannot be a financial system, where no one loses.