Posts Tagged ‘money’

January 3rd, 2009

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Soros: The Reflexive Market

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.

December 13th, 2008

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Cleaning out the stables

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?

December 6th, 2008

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Getting back to basics

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.

December 2nd, 2008

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In the end it’s all about maths

Buying a house used to be so simple. 2-3 times your income or 3-4 if you had joint ones. This was before the days of the grand pyramid scheme known as financial deregulation. The formula was fixed at a level that had been shown to be affordable.

So what happened to the simple model?

This quote may explain it.

It’s from a piece on the sub-prime web by Michael Lewis of Liars Poker fame,

He called Standard & Poors and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. They were just assuming home prices would keep going up“, Eisman says

Nice one. This idea, that things keep going up, seems to have become instilled into our eco-social fabric. Buy houses, buy stocks….they always go up…..well at least in the long run.

The dreaded long run that usually ends in death, mercifully for some.

With a belief system like that it’s no wonder that the recent crash will go down in the annals of history alongside the South Sea bubble, Tulip Mania and the Great Depression.

But really it’s quite simple: learn to trust numbers. They never lie.

November 9th, 2008

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Pump up the Volume: China Stimulates

Not wanting to bve left out of the party, China announced a huge stimulus package over the weekend. $600bln or thereabouts is not be to sneezed at. The Chinese are taking no chances with collapsing global trade and economic activity. They have an large domestic economy and plenty of headroom to generate homegrown action.

They also have the money to do it.

As Yves notes the sums involved are getting to the point where a trillion doesn’t raise eyebrows. The Fed’s balance sheet is expanding quicker than a fast food muncher’s waistline. $2trln or will it be 3? Who knows? Who cares anymore? It’s like the end of a Monopoly game where the deals come thick and fast and the rent for landing on Mayfair (or Park Avenue) breaks your bank.

At the same time one continues to hear, in the background, that ecosystem stress is alive and well. As I noted last week there are some major concerns about the level of ecological debt. In a report by the WWF, called The Living Planet, they estimate some $4-5trln worth of ecological damage is occuring on an annual basis.

Deflation, stagflation, hyperinflation, ecological breakdown and over population.

Your cash losing its value every day as the printing presses run wild.

Time for a pause and a lie down.

November 7th, 2008

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Wokai: Start it Up

I mentioned Wokai briefly in the previous post but after closer examination they deserve the full monty. Developed by 2 smart ladies (Courtney McColgan and Casey Wilson) from the US who met studying advanced Chinese at Tsinghua University.

Wokai means “I start” in Chinese and represents the entreprenuerial spirit of microfinance. It looks an amazing undertaking. With over a sixth of the world’s population the potential for domestic economic activity is enormous.

With 300,000,000 living below the poverty line and the Rural Credit Bank only servicing 25% of demand, there is clearly a large market here for small, flexible lending which is the hallmark of microfinance.

It’s another exciting addition to the microfinance and P2P stable of companies. As long term readers will know I believe strongly that P2P financing will replace traditonal banking systems within 20 years.

Who knows it may be sooner with organisations like Wokai springing forth.

About

I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. I write about the intersection of economic, social and environmental issues . My prime interest is in designing better systems to create a better world. I welcome comments and input.

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