Some thoughts before the opening bell

Nobody knows the extent to which the recent stock-markets "correction," which began with the Chinese bourses, was due to anyone from the so many objective factors, such as Chinese overheating, American economical slowdown, or global excess liquidity.

Of significant relevance I find a subjective potential factor and an anecdote. Just before the Chinese sell-off, Greenspan said via satellite link to a business conference in Hong Kong the following: "When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign. For example, in the US, profit margins have begun to stabilize, which is an early sign we are in the later stages of a cycle." The, otherwise widely circulated, anecdote has it that a certain Li Ruichang, a 63-year-old Chinese engineer and speculator, stated the day after the fall of the Chinese bourses that: “Things like that happen. But I’m not worried about a crash. After a five-year-long bear market, the bull market shouldn’t end that fast.” I should add that Mr. Li's statement came a day after the sell-off, as the Asian and European bourses were still falling while some in China regained some of the losses. Before the sell-off, the Chinese major indexes were twice as high as 12 months before. In any case, for some, the strength of the Chinese stock market consists of its number and determination (not to lose) of investors.

As if encouraged by the second day gains in the Chinese and US stock-markets, officials put out several soothing messages. The Chinese regulators gave up on plans to curb speculation and were ready to consider opening their stock markets to foreign investors--it would be interesting to see if foreign speculators get any special treatment. In the US, Ben Bernake, chairman of the Federal Reserve, said that one could reasonably hope for a stronger economy by mid-year IF housing stabilized, and IF manufacturing improved. So far, his twice-conditional message has been taken as support for the rally.

But then again, what's a stock market if not a conspiracy of hopefuls? One would only have to distinguish among the types and motives of hope, and then check for alignment between their own and the economic realities.

On a final note, it's ironic how globalization has been considered to transcend stock-market rules, just as increased productivity driven by technology had been until (twice in) 2000.

Market failure vs. Regulatory failure

The long journey of the New York Stock Exchange (NYSE) from demutualization to a reverse-merger IPO, and on to the merger with Euronext, and to the alliance with Tokyo Stock Exchange (TSE), will make for a fascinating subject of many a business history book. Deutsche Börse and London Stock Exchange (LSE) will make for interesting collateral damage and props, respectively. It should be noted that NYSE has had a regulatory role in addition to its being a market for securities.

Equally interesting is the trajectory of the big i-banks relative to NYSE. Exemplar is Goldman Sachs (GS), which has placed its people and made money on ALL sides of the NYSE-related transactions, ALL the time from demutualization until last Friday when one of its analysts, by downgrading NYSE, sent its stock price (NYX) down. To return to the i-banks, they are forming what seems to be an exchange, separate from NYSE, to make sure they get the best service at the lowest cost. Thus, a question arises: Do we face a failure of the market, or a regulatory one?

Indeed, while the banks had been the NYSE patrons, the Exchange could do no wrong. Then the banks got out of NYSE, making lots of money, so that NYSE could do its job better--faster and cheaper trades. However, since the banks want to set up a separate exchange, inscrutable to you and I, is it that they don't trust either the open markets or the regulation that comes with open markets?

21st Century

Our communication - Wireless
Our dress - Topless
Our telephone - Cordless
Our cooking - Fireless
Our youth - Jobless
Our food - Tasteless
Our labor - Effortless
Our conduct - Worthless
Our relation - Loveless
Our attitude - Careless
Our feelings - Heartless
Our politics - Shameless
Our education - Valueless
Our follies - Countless
Our arguments - Baseless
Our boss - Brainless
Our Job - Thankless
Our Salary - Very less
Our Future - Hopeless!

Have a good day, with LESS problems!

Opportunity Cost of War vs.Military Keynesianism

Click on the image to expand
Source: What $1.2 Trillion Can Buy (NYTimes)

There has come the time for people to ponder war and its opportunity costs. For a comprehensive view on the cost of another war of sorts, check out this title: The Fifty-Year Wound: How America's Cold War Victory Has Shaped Our World

Change of ownership, change of fortunes

Who can tell the extent to which private/hedge funds owe their popularity to Sarbanes-Oaxley? Their coming into being could be attributed to urges similar to those that once made Enron popular, while the success of many may well lie with Sarbanes-Oaxley, the very act meant to prevent another Enron. This is to say that private/hedge funds can do what your regular financial institution could not even dream of after Sarbanes-Oaxley. Indeed, who doesn't know that what is not allowed for some becomes source of profit for others?

Signs of the popularity of the funds abound. For one, it is the sheer size of the funds phenomenon, there are about 9000 of them, with total assets of more than $1.2 trillion. Then there are the seasoned managers and deal makers leaving established businesses and financial organizations to join the funds. The investor public is also an increasing part of this, directly or not, knowingly or not, via either direct investments or the very pension funds they send money to every month, respectively. And, as if to take their popularity to the bank, some funds began offering themselves to the largest investor public there is, the public markets of capital.

Despite their popularity, when the amount of assets of the funds is considered in conjunction with leverage, or the absence of oversight, one can only rely on metaphors to describe their risk for anybody ranging from the individual investor to the whole economy. For a very interesting and multi-faceted conversation about funds, have a look at the comments following Hedge Funds Go Public, Culturally and Literally , in the DealBook section of NYTimes.

Market Realist goes as far as drawing an analogy between the conditions surrounding today's hedge funds and those that generated the 1929 crash, chief amongst being leverage. The second comment down, G. Gekko's, is a sensible and insightful analysis, followed by your own' s truly. My point is that by their going public, some of the best performing funds may signal the end of the party.

One can only hope we won't (be in a position to) know the risks associated with hedge funds before some form of oversight becomes the norm.

Due Credit

Much of the credit for winning the Cold War has gone to the late U.S. president Ronald Reagan. And deservedly so. Too little consideration and credit are accorded anymore to the last Soviet president, Mikhail Gorbachev. Had the world, and Mr. Reagan for that matter, had the misfortune of a leader like Brezhnev at Kremlin, we would have lived in a much less desirable world since 1985 onward. Indeed, our chance was that Mr. Gorbachev was both visionary and skilled politician. Visionary in the sense that he aimed for a better world, and skilled for his maneuvering change at so many levels in USSR, despite having so few allies and many adversaries.

Visionariness and skillfulness are not the notions usually associated with Gorbachev. Instead, most point to his quixotically trying to reform the CPSU from inside the party or to the apparent failure to hold the Soviet Union together. While I don't think he could have survived his adversaries, until august 1991 that is, from outside the CPSU, the dissolution of the USSR was the best outcome for all in final analysis.

Before we can learn more from the historians, it's worth having a look at a recent article from Der Spiegel based on Politburo minutes taken by a Gorbachev aide. The Politburo minutes are revelatory for Gorbachev the visionary and the skilled.

To each according to their dream?

Upon learning about the French students' violent reactions to the proposed labor reform--whereby employers would have had to option to lay-off the newly hired any time during the first two years of employment--I thought to myself:

How can it be that smart and educated people, who take the brunt of high unemployment, are so reactionary to a proposal addressing their problem and supported by most evidence?

Then I started pondering: How similar are the French youth and their American counterparts? The former appear to embrace the statist model, despite data pointing to its lack of sustainability. In turn, the latter appear to dismiss the inequality-attribute with which the US is associated, and are firm believers in the American Dream, despite indications that fewer and fewer have been achieving it. To return to the question, an answer could be deduced from the success ratios with which the French and American youth fulfill their aspirations. Alas, such answer would say little about the costs of failure or the attributes of those aspirations--e.g. how great or noble they are.

On the one hand, making it in today's France consists of: an undistinguished job for life, with lengthy vacations and no overtime, and mostly undifferentiated access to good education, healthcare and pension. On the other, failing the American Dream will not only make one's net worth so much less than Bill Gates' or a regular partner's in your typical i-bank, but most likely affect one's education, healthcare and pension. Thus one may conclude, once again, that the French are risk-adverse while the Americans are gain-seekers.

Knowing how human loss-aversion is, not only can one see how different the Americans are, but also why the French youth feel entitled to the French Dream; In both instances, at least for as long as the laws of economics permit.

He's got people pondering... again

Incomplete word has come out about the latest Warren Buffett financial maneuver:

A $14 billion bet on the global stock market. Berkshire sold a form of insurance to buyers who wanted protection from a drop in "four major equity indexes" over the next 15 to 20 years. Instead of buying the individual shares, Buffett is wagering the indexes, three of which are outside the United States, will not fall and force Berkshire to pay a claim. The stock-index contracts - derivatives that function like put options - increase Berkshire's risks from market losses. A 30 percent decline in each of the indexes last year would have led to a $900 million pretax loss for the company, according to the March 7 SEC filing. Berkshire's "maximum exposure" was about $14 billion at the end of last year,
the filing said. (Source: IHT)

I picked up from a NYTimes blog the following two comments:

What can a lowly non-investor (and non-economist) add to the cogent commentary on this ground-breaking event. As one of the planet's wealthiest is embarking on a yet another exotic plan to add zeros to his bottom line, the usual sycophants (the true economic zeroes) are predictably lining up to butter his fanny. The oh-so-small-and-meaningless amongst us seem to feel that by debating the continuing efforts of a classic robber-baron that they are somehow involved in the process. Much as cows feeling empowered by the economic vagaries of the meat-packing adistributionion industry. In a time of incredible usurpation of human rights and the uttdiminutionion of learning, intellectual pursuit and the arts, maybe it is time for the expression of righteous disgust at not just the robber-barons but the worshippers of the golden idols.
Comment by big gee

[...] big gee, while I can't speak for anyone else, there are 2 reasons beyond syncophancy to follow Mr. Buffet: one, he is remarkably prescient and two, he is the Michael Jordan of money. Watching him play the game just leaves us normal people awestruck.
Not that I would want to be him, or that I admire him personally, necessarily. After 120 years, he too will learn the Wisdom of Koheles.
Comment by Steve

Without necessarily aiming at being Solomonic, aren't they both right?