Soros has been banging on about his new theory on why markets tend towards bubbles. Well it’s not a new theory as he’s been going on about it for a long time. In fact he’s made plenty of dough out of this approach for many years. But so has Warren Buffett so what’s the difference?

Well his mani point is that markets do not tend towards equilibrium but can be quite extreme in their pricing. I completely agree with this. But do they alwats revert to an equilibrium point? I think so but unfortunately for many it’s like an elastic band. It either rebounds on you causing a sharp pain or actually complete explodes.

This leads us to the greatest maxim of trading and investing: buy low, sell high.

The best traders are those who are completely detached from the instruments they trade. The ego is removed and there is no emotional investment about being right. But markets move on emotion of crowds since that is what the market is. The market can also be seen as a system in which intentionality is the main driver. Yes the fundamentals (price, yield, forecasts) play an important part in determining a basic price but it is the intention of the market, whether to buy or sell, that really drives the price.

So stock markets happily trade a twice their preceived fair value earnings. Currencies happily trade at a huge premium or discount to perceived fair value. Why does this happen? It’s simply the collective outcome of countless intentions.

And many fortunes have been lost betting against the wisdom of the crowd.

Soros suggests regulators have a part to play here in smoothing or preventing bubbles. He says that the control of the money supply itself is not enough but that credit conditions need to be managed. In essence this is the same thing depending on how you view the money supply.

He thinks margin and capital requirements for banks should be used to make credit less or more available.

He’s right to a point. But he missed the real problem which is the creation of the money supply by the banks.

Banks control both the money supply and the supply of credit . How? Well nearly all money is credit.

Now there’s something for Geroge to get his teeth into.

Another high level global conference and another list of innocuous plans and goals.

Fiddling whilst the plant burns seems to be infectious. With the global economy collapsing around their ears policymakers have never had a better opportunity to declare a move to a quota based system of fossil fuel extraction.

With oil prices at 5 year lows, down $115 from the highs earlier in the year, I am sure that producers would be willing to sit down and listen.

Whilst global demand is down there is an opportunity to slow emissions at source by setting a target as per the Sustento Framework and making it stick. All the talk of the last few years has been about increasing demand for fossil fuels and the impossibility of reigning that in.

Well right now any demand would be welcome. There has never been a better time to lay it on the line. It’s time to stop pissing around with talk fests and policies which will never actually reduce emissions in any meaningful way.

Set a target for global annual fossil fuel extraction and then stick to it.

The implosion of the US financial system gets worse by the day. Treasury bills printed negative yields whilst the Fed prints “enter your own number here” dollars. Now comes the largest financial scandal so far (discounting the banks which are a scandal all of their own).

A $50bln ponzi scheme. It’s so daft i can’t bring myself to write about it. As usual others cover this story better than I could. But it seems the US financial markets are receiving the greatest hosing out since Hercules cleaned up the Augean stables. There is no doubt more to come as rogue players just fess up and come clean. This may take some time as the initial reaction is to close ranks and pretend everything is fine.

The unveiling of dubious credit structures over the last 18 months is way overdue and may at least provide an opportunity for another look at how our money system works. Bubbles come and go, part of human nature, but never has a bubble so exposed the inner workings of the banking system.

The giant hubris of “tamed inflation”, “end of history” and “the end of boom and bust” has been exposed for the posturing it always was.

Time for a major serving of humble pie all round. But will those in power get down and start eating it?

Today reminds us to remember those who rot in jails without a fair trial, due process, being tortured, maltreated and malnourished. For what?

Expressing a thought, an opinion, a belief.

How we treat each other is a reflection of the world around us, a manifestation of a sickness that expresses itself in the near constant drama of war and crisis.

That’s why human rights abuses are the thin end of a very big wedge. It’s a good time to read through the UN Declaration and spend a few minutes thinking about what it means to us as individuals.

And then please sign up as a member of Amnesty International wherever you live.

December 10th is the 60th Anniversary of the UN Declaration of Human Rights.

Click on the badge above and see where it takes you.

Thanks to Jim for this post (his post in bold)

The BBC has provided a platform for Sir Evelyn de Rothschild, one of Britain’s most noted financiers, to express his views on the global financial situation:

All of us - countries, corporations and consumers - have neglected basic principles.

Ethics - we have lost sight of an honest day’s work for an honest day’s pay.

Careful management - we have indulged our wants without the taxes or the prices or the cash to pay for them.

Oversight - public relations and spin have replaced disclosure and transparency; casual yet complex accounting and accommodating rating agencies left us blissfully unaware of the problems, and we revelled in our ignorance.

Hubris has replaced community responsibility as a requirement for executive positions.

American automobile executives and British bankers have been unable to form their lips into an apology.

Yet their institutions lie in ruins and the rest of us are left feeling embarrassed for them.

Their customers worry that their savings or their working capital will just vanish, their mortgage will be transferred to a new institution they have never heard of.

Their employees wonder which of their colleagues - or they themselves - will be unemployed in the coming week, with bleak prospects for working again anytime soon.

Where is the shame of those who only months earlier boasted of ever increasing profits, of ever more clever products, of ever easier loans?

Remaining credit

The US automakers may be the worst of the lot, so far.

Years of incompetence and now manoeuvring in the halls of Congress for a massive bailout.

Management prefers to hold onto private corporate jets rather than push for fuel efficiency standards to make their products more competitive.

Union members would rather hold onto their gold-plated pensions for life than to save their companies.

Why should taxpayers help those who have so frequently refused to accept responsibility themselves?

If the US government uses up its remaining credit to help the auto industry carry on as usual, who will lend the country the money to repair its bridges, build its power stations, clean its water, fuel its navy?

Slow revival

Thirty years ago, New York City found itself in a position similar to GM, Ford and Chrysler today.

They asked Washington for help. The government refused.

The Daily News summed it up in its front page headline - Ford to City: Drop Dead [ed. the president]

Instead New York balanced its budget, taxed itself, reduced hiring, negotiated better labour contracts and gradually worked itself back to fiscal health.

It took more than 10 years.

Take responsibility

This era of struggle may last as long.

Until we can be generous in accepting fault for our predicament, we will have difficulty dropping our suspicions about others so that we can get on with repairing the damage.

Unless action is taken soon, we can only see a long time of difficult and very onerous problems continuing.

Could be one or two years.

It is therefore essential that management must take a firm look at its problems and accept its faults and redeem them.

A lot of talk and a lot of words have been written.

But in the end action has to be taken and action must be taken very soon if we are not going to see this stretched out over many years.

What we have to remember is that the crisis we are in the midst of is a financial one. A crisis of the syntheticism of money.

Like a cancer this is slowly being removed from the system. What is left of the corpse remains to be seen. But the end of the derivatives trade, especially the highly structured piece, cannot come too soon.

The role of interest (unearned income) in our economy needs to be reviewed. We need to refocus on the productive economy and the ability to invest in it i.e. by purchasing shares in companies are receiving dividends or, in the case of new innovative companies, an opportunity for capital gain commensurate with risk.

My own investment philosophy is simple. Buy low and sell high.

When interest rates (here in NZ) were low in 2003 i bought commercial property which was then yielding 9% (against an interest rate of 6.5%). In 2007 when interest looked like they were going higher (over 9%) I sold the properties which were then yielding 7.25-7.5%).

The market kept going for another 9 -12 months and has now fallen heavily.

I didn’t buy shares as dividend yields were lower than interest rates and p/e ratios were too high.

I put the cash in the bank.

Now I have started buying shares. Why? Because dividend yields are sky high (although earnings will continue to fall), p/e ratios are in single digits and interest rates are falling. Shares could keep falling for sure.

But the point I’m making is investment is pretty simple. Ignore the hype and focus on the numbers.

The hardest skill to learn as an investor (and we are all investors to some extent) is knowing when to sell. When the market is flying high its so hard to sell because you worry you’ll miss out on more. When its falling you secretly hope it will somehow bounce back.

As Evelyn reinforces, its all about basics whether values, ethics or simple strategy.

We’ve been living in a fool’s paradise for a while now and its time to get back to reality.