Charlie Munger is the vice-chairman of Berkshire Hathaway Corporation and long time partner of Warren Buffett.

Usually, Charlie doesn’t say much in public but there are times he does. A couple of days ago, he wrote a parable about how a nation called Basicland went from riches to ruins. He relates our financial markets as one big casino which attracted highly talented engineers.

Charlie gives a pessimistic view on the future of America’s economy. This view is in contrast to the optimistic view of Warren Buffett.

You can read Charlie’s parable here:

Basically, It’s Over – A parable about how one nation came to financial ruin.

PIIGS – Portugal, Italy, Ireland, Greece and Spain are currently the five weakest of the Eurozone countries.

Their huge deficits has lead the financial markets to increasingly believe in recent days that one of them might default on its sovereign debt.

Their recently downgraded credit ratings not only makes it more expensive for them to borrow money, and also harder to find lenders.

Devaluation of currency is not an option unless they want to consider leaving the Eurozone. To prevent this from happening, some of the stronger countries might have to step in to bail out the weaker ones. This is provided (of course) that the stronger countries are not in trouble themselves.

Ultimately, governments will find that they cannot spend more then they earn forever. The biggest challenge is knowing when a crisis will erupt as such situations can run for longer than expected.

Dubai was quickly written off as a non-event. How will PIIGS play out?

The recent financial crisis follows a period of deregulation of the financial markets in United States. Depending on financial institutions to self-regulate has been shown to be inadequate. Often, excessive risks were taken in a bid to boost the bottom line.

If everyone is employing (high levels of) leverage while you do not, your returns will be dismal compared to the rest. However, doing what everyone else is doing does not in any way makes it correct if it is wrong in the first place.

In Singapore, we are used to being told what to do. If there is no explicit sign that says we can do something, the default assumption is that we can’t do it. For example, other countries use a “No U Turn” sign. Here, we only turn when we see a “U Turn” sign.

A joke has even been made out of it with a “ Flirting Point” set up outside the Singapore Art Museum.

Growing up in such an environment, some people take it for granted that if something is allowed to be sold in Singapore, then it can’t be bad.

This mindset is dangerous because when it comes to personal investing, the concepts of buyer’s beware and caveat emptor come into play. Sadly, some structured notes investors like Minibond or Pinnacle would have found out about this the hard way.

If you invest into regulated financial products, there are rigorous procedures in place whereby you need to sign pages of forms. More often than not, you would have signed a declaration that the adviser or sales person has explained to you what you are investing in.

Now, whether that explanation is correct or not is another matter. The playing field is usually not in favor of the individual as it is likely he will end up having the burden of proving the wrongdoing if things go bad subsequently.

In Parliament yesterday, a question was asked whether (in view of the past year’s global financial crisis) the level of government regulation of our financial market will increase; and whether the Government’s regulatory philosophy of the market has shifted due to the lessons gleaned from the crisis and, if so, (i) how has it shifted and (ii) what have been the lessons gleaned.

The response by Mr Lim Hng Kiang can be found here:

Reply to Regulatory Response to Financial Crisis

I would say that no matter how good the rules and regulation are, the weakness in any system is always in the people. This could occur either in the implementation or enforcement.

In this time and age where information is widely available, it is important that all of us arm ourselves with the correct information to understand what we are getting ourselves. This will help mitigate (to a certain extent) the shortfalls in the system.

Lim Say Boon, chief investment strategist for Standard Chartered Group Wealth Management, explains why 2010 will be a more difficult year for investors than 2009.

However, he ends off the interview by telling investors to remain long in equities.

Watch the video below:

What a difference a year has made.

At the start of 2009, all was dark and gloomy amidst the greatest financial crisis the world has seen.

Now, in 2010, there seemed to be a lot of optimism, at least among the people I spoke to who are starting to invest into stocks again.

Ironically, those who have made the most money would be those who have invested in the depth of the crisis and held on to their holdings.

The stock market is driven largely by sentiment and if sentiments change, the direction of the market can also change.

What are some factors that can threaten to trigger a change in sentiment?

Unwinding of US Dollar Carry Trade

The US dollar, forsaken just a few weeks ago, has staged a remarkable rebound since the starting of December 2009. Nearly everyone was bearish on the USD back then and it has appreciated nearly 5% against both the euro and the Japanese yen.

The appreciating US dollar has raised concerns that it could derail carry trades. In the past year, the cheap USD has been used as a funding source into more risky assets. If the dollar continues to strengthen and some of these carry trades are unwound, it could trigger a fall in riskier assets like stocks, commodities and other currencies.

Contagion Effect from Dubai

The bailout from Adu Dhabi has prevented  a crisis for now. However, this does not guarantee a bailout in the event of a future default. Already, there has been increased concerns over other debt-laded governments like Greece.

Premature Removal of Loose Monetary Policies

Australia had been the first developed country to increase their interest rates. Most of the other governments are threading a thin line between maintaining their current policy or tightening them. The fear is that tightening too early might lead to a adverse effect in the economy again. On the other hand, if monetary policy is kept loose for too long, it will ultimately lead to inflation with risk of asset bubbles forming.

Unresolved Issues in the US Sector

Looking beyond the recovery numbers, you can still see banks failing in the United States practically every week. Bad mortgages are still bad and the question is whether the medicine has been enough or correct. To quote Marc Faber:

If we agree that excessive credit and excessive leverage led to the crisis, then what the Federal Reserve is doing is giving a wrong medicine to the patient –  they are giving the drug addicts more drugs instead of sending them to rehabilitation, which is not good for the economy.

If the medicine is wrong, then problems will resurface, not now – but maybe one or two years down the road.

In hindsight, the past two years had been a great learning curve. Now, I am more convinced than ever that most people are doomed to making losses or dismal returns when they invest. More on that in a future post.