Saturday, September 26, 2009

It is not all relative. It is all relatives.

Did you realise that the UN Declaration of Human rights, includes the following: "The family is the natural and fundamental group unit of society and
is entitled to protection by society and the State"?

However, in the decades since that declaration was signed by every civilised country, those very countries have turned around and, so far from protecting the family, actually undermined the family by means of taxation, welfare, changes in the financial and debt systems, housing and land issues, employment and work (usually under the guise of "equal opportunities"), education (which means maass brainwashing in many things), and of course the criminal justice system.

You may not believe me in all the details of the above statement. But you only have to look around you, or look at the statistics in almost any country, to realise that, whatever the causes, the result is a decline in the occurence of the family, and the richness of family life.

You may not like my views, you may still be open to a sober analysis of the situation, such as you find in "The Penumbra Effect: Family-centred Public policy", which has just been published by The Relationships Foundation, based in Cambridge, UK (

That publication includes the following passage, which I thought might interest you too:
"The family has been, is, and will continue to be the most important single source of wellbeing for the majority of people. ‘It’s all relative’ has been a central tenet of post modernity – in a world without absolutes, everything is relative. This report seeks to subvert that basic proposition. In a world of change, family remains. In times of transition, we turn to our extended families and relatives. Relative means dependent on or interconnected with something else. It also refers to a person connected with another by blood or affinity. The extended family brings these meanings together to conclude this report. The centrality of family to all aspects of society enables us to proclaim, ‘It’s all relatives’." Sphere: Related Content

Tuesday, September 22, 2009

A Tepid Compromise: The EU proposed three bodies to regulate and supervise finance

According to the latest proposals from the EU, three new pan-European supervisory agencies (one each for banks, insurers and securities markets) are to be created for the purpose for drawing up and helping enforce a common rulebook for each activity throughout the EU.

The bodies will have more powers and resources than the three existing EU committees, which play only a co-ordinating role.

What will weaken the ability of the proposed three bodies will be recognition of the principle of “fiscal responsibility”, meaning that the new supervisory structure must not intrude on states’ finances.

Why will it weaken these bodies? Because fiscal IRresponsibility by states is one key reason for irresponsibilty by individual companies as well as by the system as a whole.

In the event of a dispute with or between member states, there an appeal would be possible, ultimately to the European Council, where the final decision would be by qualified majority voting. This makes the whole elaborate creation of these bodies subject to political rather than rational criteria.

Possibly, these proposals from the European Commission may be the best that can be managed at present, but it falls far short of what is needed.

What is needed? Two things: a single regulator and a (separate) single supervisor for the EU.

Why a single regulator for 3 different kinds of activities (banking, insurance and securities markets)? Because these three are converging - or one should say have increasingly converged, and will continue converging ever more, into a single seamless set of financial transactions. This is already largely the case, with the three activities being kept artificially separate for regulatory purposes in areas where these are kept separate (the UK and Switzerland, for example, already have one regulator supervising all three activities).

So why two separate bodies (one for rule-setting and one for rule-enforcement)?

Because rule-setting is and should be a different activity from rule-enforcement.

Naturally, learning from rule-enforcement should feed into the rule-setting process.

But that is better and more transparently done by two separate bodies than by a single one.

So much for the matter of the three bodies that are proposed.

Separtely, there is a proposal for a new “European Systemic Risk Board”, made up of representatives of central banks and financial supervisory groups from the 27 countries which constitute the EU.

I am glad that such a Risk Board is proposed. However, having the same people in the Risk Board as ultimately control the 3 bodies will do nothing to provide confidence in the risk assessments of the Board.

Morevoer, systemic risk in Europe cannot be separated from systemic risk in the USA or in Asia - the current challenges arise from systemic problems in the USA, and the next crisis will arise from challenges in Asia.

While a European Systemic Risk Board is better than no Board at all globally, it would be better for there to be a global board - and one along the lines that I proposed in my article in the New York Times Online ("DayBook" section) at the end of June this year. Sphere: Related Content

Monday, September 21, 2009

When does non-discrimination against a minority go so far as to become discrimination against the majority?

When there is a concerted effot to enshrine it in provisions such as are foreseen in the USA's Employment Non-Discrimination Act (ENDA) which is apparently set to be debated on September 23.

As far as I can see:
if passed, ENDA will make it difficult for sports organisations to decline applications for employment from those who believe (like myself) that sports are bad for health.

ENDA will make it difficult for anti-nuclear (peace) organisations to keep out those who are committed to encouraging nuclear weapons.

We can expect to see the depressingly entertaining spectacle of environmentalist organisations being infiltrated by a dedicated minority of anti-environmental activists with the sole purpose of closing down the enviromentalist organisations.

And ENDA will make it impossible to prevent card-carrying members of the Communist Party from being recruited for the managerial cadre of US Government Agencies including the Defense Forces!

Welcome to the new and fascinating world of the United States of Lunatica. Sphere: Related Content

Wednesday, September 09, 2009

What causes share prices to move?

If you want a nice academic discussion about the two principal views regarding why share prices fluctuate, go to:

One view is the "rational expectations" one, which opines that the market rationally analyses all news in relation to a company, and decides....

The other is the "differences of opinion" model, which believes that different market players come to different conclusions about a company and that it is the "clash of views" which eventually results in a particular level of demand for a company's shares (thus determining the price of the shares).

Unfortunately those models won't give you much real insight into the question of what causes fluctuations in share prices, because academic researchers usually take a fragmented and atomised view, divorced from real life.

In real life, the share price of a particular company shifts mainly because of reasons that are never discussed in the literature.

It is elementary economics that price is a function of demand versus supply. Naturally, if the number of shares of a company increases for any reason that could affect the share price too, but the share price usually moves because of fluctuations in demand - or, to be more precise, because of fluctuations in the numbers of people wanting to sell those shares versus the numbers of people wanting to buy those shares. Naturally, price plays a role here too, so the picture is a little complicated. But let's simplify it by saying that when an individual or mass of people with a large amount of money wants to buy shares in a particular company, the price of that company's shares is going to rise. Contrariwise, when a large number of people who hold a company's shares want to sell, the price is going to drop.

So what determines whether a lot of money chases or wants to exit a particular stock? Regretfully for our academicians above, both "rational expectations" and "differences of opinion" are second-order drivers of behaviour.

What are the first-order drivers of behaviour? This becomes easier to see if you look at it not from the point of view of the company in question but from the viewpoint of investors.

OK, so what drives investor strategy? It is essentially portfolio theory. As anyone who has ever professionally managed a portfolio will tell you, portfolio managers are seeking to balance two things: making as much money as possible on the one hand and, on the other hand, seeking to reduce risks - because investing in shares can produce profits, but you can also lose some or all your money if you have to sell at a lower price than you bought or if "your" company becomes bankrupt.

How does looking at a portfolio of investments enable one to achieve a balance between risk and profit? By deciding, in view of one's life circumstances and personal risk-appetite, what proportion of the portfolio should be put in relatively safe assets (let us say US Treasury Bonds) and what proportion should be put in riskier assets. Naturally, there is a gradation here, and some bonds are riskier than others (with junk bonds being among the riskiest) - on the other hand, some companies may be relatively stable while others are of course relatively volatile.

The rule of thumb is "no gain without pain" or "no risk, no fun". In other words, the safer options produce fewer returns on investment but you are less likely to lose your money - while the riskiest investments may produce the largest returns.

Having established the rough proportions to be allocated to safe versus exciting possibilities, how does a portfolio manager go about deciding where to invest the money that has been allocated to the exciting possibilities? The first thing that is looked at is country risk. So if China is viewed favourably (as it is at present, totally irrationally), then the portfolio manager is likely to want to put a relatiely large proportion of the money, with which s/he wants to play, in that country. On the other hand, if a particular country is looked at unfavourably, for example Zimbabwe(for rational or irrational reasons), then the portfolio manager is likely to want to exit that country (if indeed s/he has investments in that country to start with). The second thing at which any portfolio manager looks is the relative profitability of the different "sectors" in which investments can be made. Everyone knows that in boom times some industries flourish whereas those industries may do badly in times of recession - and that the case for other industries is vice versa.

It is only after the country and sector allocation has been decided that a professional manager decides which companies to look at within that sector and country.

In other words, the largest movements of capital take place primarily because of country and sector reasons, and only very secondarily because of reasons to do with particular companies.

Let us take an example. My son is the CEO of an Indian food company in Switzerland. His company is NOT publicly traded, so nothing will be gained or lost by using that as an example.

If I as a portfolio manager, had let us say 1 billion British pounds to put into exciting investments, the first question I would decide would be: in which countries to put how much money. This would be influenced, among other factors, by perceptions of political risk as well as currency risk. So let us say in current circumstances, that I decide to invest 25% in the USA, 25% in the EU, 10% in Switzerland, 10% in Japan, 10% in China, 10% in India and 10% in the Middle East.

Of my one billion, I now have only 100 million to invest in Switzerland.

Now, to what sectors am I going to allocate these 100 million? Let us imagine it is 40% to green industries, 10% to the manufacturing and machine tools sector, 10% to the financial services industries, 10% pharma, 10% to "fast moving consumer goods", 10% to tourism and 10% to "other" companies.

Now, of my 100 million, you can see that there is only 10 million that is available for all the "other companies"! Let us say that, for some reason, the portfolio manager decides to put 1 million into the leisure and entertainment sector, and for some reason decides to put 100,000 francs into my son's company.

Now let us see what happens if there are rumours of a political crisis or a natural disaster or some financial scandal with wide implications in China. Clearly the portfolio manager will decide to eliminate or reduce her/his China investments. Let us say s/he decides to reduce the China investments by 50%. Now s/he suddenly has 50 million to put somewhere else. Clearly, this money could be re-allocated according to the rest of the existing proportions between the areas concerned, or it could be disproportionately distributed. Naturally, as the world is so interlinked, the portfolio manager is going to think about which companies are going to be hit by the problems in China. S/he might conclude that most US companies are going to be hit as China is going to be forced to disinvest from the US - with a resulting hit to the US dollar. In addition, s/he might conclude that the EU is going to be hit because the European economy being highly manufacturing based and export-oriented, is so exposed to the Chinese market. So that leaves Switzerland, Japan, India and the Middle East. Let's say the portfolio manager decides to put 10 million each into the others, but 20 million into Switzerland (as it is considered a safe haven). You can see that even if this money was allocated in the exact proportions that the earlier money was put into Switzerland, suddenly 200,000 become available to be invested in my son's company - which should lead to an immediate rise in the price of his shares, even if nothing material has changed in his company.

That, in rather simplified terms, is the entire magic of the movement of the price of shares. "Rational expectations" affect the choice of a company within a sector. "Differences of opinion" do affect this to a certain extent but have a much larger impact on country allocation.

However, the above explanation depends on the traditional view of the world which has come into question in the last 20 odd years - and with the crisis, everything is up for grabs. With too much money being printed, country-performance was converging in an overall global bubble as was sector-performance over the 20 years preceding the crisis.

Now no one knows anything about how sectors will perform, let alone countries. The "best-peforming countries" (e.g. China) are notoriously opaque.

That is why everyone rushes around like sheep or like lemmings trying to follow where the share price appears to be moving, one finger in the air, the other hand's fingernails being bitten to the quick trying to get into markets which appear to be rising to get out of markets before they deflate.

It is not so much "difference of opinion" as "non-existence of opinion" (because no one understands what is happening). And it is certainly not "rational expectations".

If only all this had no effect on your life's savings, investing might be quite fun right now. Sphere: Related Content

What has driven gold to over $1000?

Clearly, enough of the big boys do not believe that the economy is improving, or they would not be putting their money into gold.

An alternative explanation is that momentum trading has gone mad once again, expanding further the bubble in the gold price.

A third explanation is that investors are becoming aware of the constraints on growth (and therefore returns), and are therefore searching for more reliable returns - or at least security.

Probably all three factors have contributed to the rise in the gold-bubble.

Will be interesting to watch how big the bubble grows and who gets hurt when it collapses. Sphere: Related Content

Tuesday, September 08, 2009

two steps forward (and, so far, no steps backward)

Regulators have now agreed at least a few rules that will help prevent another bubble similar to the one whose burst-effects we all suffer at present

Last weekend the G20 agreed on proposals that have now been given shape by regulators at Basel. The new rules will force banks to improve the quality and extent of the capital buffers they hold to absorb shocks such as the ones that led to the bursting of the bubble.

Moreover there are now going to be limits on how much banks can borrow. Wheter these are adequate remains a moot point: the ceiling on borrowings is likely to be 25 times assets.

In my view, this is too huge a multiple. The parallel would be if a company with assets of 1 billion, could borrow 25 billion. Or if you as a private individual with assets (perhaps a house) worth 1 million could borrow 25 million. If such a proportion is preposterous for individuals and for companies, it is equally preposterous for banks.

However, it is certainly better than the previous situation where banks could borrow an unlimited amount, at least in theory. And 25x may be the most that regulators can achieve at present without upsetting the global economy too much.

In any case, the unfortunate result is going to be even less lending by banks! At least for the time being. And therefore an even longer recession.

But that relatively short-term cost is worth paying: if the soundness of banks improves, they will run into trouble less often and will therefore need to be rescued by taxpayers less often - and the fortunes of the global economy will be smoother as a result.

One other piece of progress is that bank supervisors can now limit, in good times, how much banks pay out to shareholders. That will enable and indeed force banks to build “counter-cyclical” buffers for bad times.

Isn't it a sign of our degenerate age that such commonsensical activity as saving for a rainy day (which every individual surely should try to practice without being forced to do so!) needs legislation?

Naturally, these (and other rules which will come into play soon) will make banks less attractive to investors interested in quick and high returns.

Equally, however, this will make banks MORE attractive as more reliable and secure long-term investments.

The precise rules are still being formulated and the Basel committee is expected to publicise concrete proposals by the end of the year and adjust them by the end of 2010 after carrying out an impact assessment. Expect people who have their eye fixed on short-term profits (whatever the cost to the rest of the world) to lobby fiercely against the letter as well as the spirit of such rules. Sphere: Related Content

Friday, September 04, 2009

A Question for Transparency International: Is Finland really one of the least corrupt countries in the world?

For evidence that Finland is more corrupt than commonly realised, perhaps even inside that country, see Jacob Matthan's forthcoming book, INHERITANCE NIGHTMARE.

Summary, chapter of contents and ordering information are all at: Sphere: Related Content

Wednesday, September 02, 2009

Are the financial structures beginning to change? Yes...

Before the crisis, I was one, of only a handful of people that I knew about, who focused on the role of speculation in driving up commodity prices.

While that is still unconventional, I am pleased to see this morning that one major global financial institution, Deutsche Bank, stopped issuing "oil notes", which let speculators bet on oil prices. This is the first product in exchange-traded commodities to be abolished in anticipation of the regulatory crackdown on energy speculation

This could be seen as only a tiny step in the reform of the financial system - and, in a sense, it is. But it is a giant step for Deutsche Bank, and I salute it this morning for having eventually done the right thing.

Many more financial institutions need to follow. And regulation does indeed need to kick in to eliminate other still-legal but unhelpful practices.

I should say that I am not a great believer in regulation, except in sofar as it creates a level and reliable field for playing the right sorts of financial games.

What are the right sorts of financial games? Those that help create genuine human welfare - and therefore genuine wealth. Sphere: Related Content

Tuesday, September 01, 2009

Reginald Massey's book ‘INDIA: Definitions and Clarifications’

Reginald Massey's book ‘INDIA: Definitions and Clarifications’, published in the UK and reviewed earlier on my Blog, finally has an Indian publisher.

Abhinav Publications is bringing out an updated edition under the title: ‘SOUTH ASIA: Definitions and Clarifications’. Sphere: Related Content