Financial Astrology

A decade of one crisis succeeding another, have clearly demonstrated that at time of turmoil the market is a lagging indicator for the economy, and not as postulated by financial theory.

In science when an underlying assumption is negated, a theory has to be recreated. Therefore, if we claim that finance and economics are scientific then it's time to toss away the books and go back to the drawing board. Alternatively, we can simply admit that astrology is as predictive as economics, and we should all go outdoors to watch the stars. At least with astronomy, we have no illusion that we are in control.

Do we get our priorities right?

A friend has just bought, for over $500, the latest, most advanced, can do all vacuum-cleaner, which should make housework an effortless exercise. She uses the time and energy she now has to go to the gym and get fit.

I don’t get it at all. Doesn’t it make more sense to get the hardest to use machine for about £50. This would give her all the exercise she needs at home, while saving her the time and money she spends in the gym?

Credit Crisis Rescue Package: if you still don't understand what they are talking about in the news

 

You have two cows, and you write down on a piece of paper that the cows are worth $100 each.

You notice the cows are on fire. Your paper still says $100.
Fortunately, mark to market has been suspended so you don't have to pay attention to the fire.

Your cows are dead from fire. Your paper still says $100.
Fortunately, mark to market has been suspended so you don't have to pay attention to the dead cows.

You notice that you aren't getting as much milk as expected, so you adjust the model and mark the cows down to $98. You are confident, however, that the dislocated stream of milk revenue will quickly revert to expectations.

You need to borrow some money so you ask investors for a loan against the cows. The investors tell you the cows are dead, and you already owe them $200 dollars you borrowed to buy them in the first place. You show them the paper that says the cows are worth $98 each.

They light your paper on fire. You ask the government to buy the dead cows at $98 each.

The government holds meetings all weekend and finally comes up with a plan to inject $45 dollars into your cattle ranch. In exchange, the government gets a right to milk generated from the cows at some point in the future. It expects you'll buy a new cow with the $45.

You have two dead cows, $45 and $200 in debt to your investors. You have no plans to buy new cows, so you take the $45 as a bonus.

Lesson In Banking 101

This article was first published in the British humour magazine "Punch Magazine" on April 3, 1957: But still VERY pertinent to Banking practices today. It a clear demonstration that in 50 years, we have neither improved not got any smarter.

Q: What are banks for?
A: To make money.

Q: For the customers?
A: For the banks.

Q: Why doesn't bank advertising mention this?
A: It would not be in good taste. But it is mentioned by implication in references to reserves of
$249,000,000,000 or thereabouts. That is the money they have made.

Q: Out of the customers?
A: I suppose so.

Q: They also mention Assets of $500,000,000,000 or thereabouts. Have they made that too?
A: Not exactly. That is the money they use to make money.

Q: I see. And they keep it in a safe somewhere?
A: Not at all. They lend it to customers.

Q: Then they haven't got it?
A: No.

Q: Then how is it Assets?
A: They maintain that it would be if they got it back.

Q: But they must have some money in a safe somewhere?
A: Yes, usually $500,000,000,000 or thereabouts. This is called Liabilities.

Q: But if they've got it, how can they be liable for it?
A: Because it isn't theirs.

Q: Then why do they have it?
A: It has been lent to them by customers.

Q: You mean customers lend banks money?
A: In effect. They put money into their accounts, so it is really lent to the banks.

Q: And what do the banks do with it?
A: Lend it to other customers.

Q: But you said that money they lent to other people was Assets?
A: Yes.

Q: Then Assets and Liabilities must be the same thing?
A: You can't really say that.

Q: But you've just said it! If I put $100 into my account the bank is liable to have to pay it back,
so it's Liabilities. But they go and lend it to someone else and he is liable to have to pay it back,
so it's Assets. It's the same $100 isn't it?
A: Yes, but....

Q: Then it cancels out. It means, doesn't it, that banks haven't really any money at all?
A: Theoretically......

Q: Never mind theoretically! And if they haven't any money, where do they get their Reserves of
$249,000,000,000 or thereabouts??
A: I told you. That is the money they have made.

Q: How?
A: Well, when they lend your $100 to someone they charge him interest.

Q: How much?
A: It depends on the Bank Rate. Say five and a-half percent. That's their profit.

Q: Why isn't it my profit? Isn't it my money?
A: It's the theory of banking practice that.........

Q: When I lend them my $100 why don't I charge them interest?
A: You do.

Q: You don't say. How much?
A: It depends on the Bank Rate. Say a half percent.

Q: Grasping of me, rather?
A: But that's only if you're not going to draw the money out again.

Q: But of course I'm going to draw the money out again! If I hadn't wanted to draw it out again I
could have buried it in the garden!
A: They wouldn't like you to draw it out again.

Q: Why not? If I keep it there you say it's a Liability. Wouldn't they be glad if I reduced their
Liabilities by removing it?
A: No. Because if you remove it they can't lend it to anyone else.

Q: But if I wanted to remove it they'd have to let me?
A: Certainly.

Q: But suppose they've already lent it to another customer?
A: Then they'll let you have some other customers money.

Q: But suppose he wants his too....and they've already let me have it?
A: You're being purposely obtuse.

Q: I think I'm being acute. What if everyone wanted their money all at once?
A: It's the theory of banking practice that they never would.

Q: So what banks bank on, is not having to meet their commitments?
A: YOU GOT IT!

British Rail and Economic Rationalism

It has taken some time, but at last, our train masters have conceived an ingenious way to cut cost, while simultaneously improve their performance statistics and make commuter’s trip even more miserable. Three trains with one stone. Not too bad for people who get huge bonuses for failing at their job.

How do they do it?

The Bedford to Moorgate trains, a morning service only, take commuters from Bedford, Luton, Harpenden and St Albans to the City. However, as a ticket to Moorgate costs as much as a ticket to Farringdon, the masters have decided to stop the Moorgate service altogether, and let everyone used the London Bridge train instead, changing at Farringdon to the underground.

This will force commuters to the City to experience the joys of the London underground. In addition, paying the additional underground fare, will add to consumer spending, increase our GDP, and help the economy at times of hardship.

Moreover, while not operating this service, the train company will still get the same number of commuters paying the same amount of money. Genius isn’t it?

Anyway, these days, nobody likes the City bunch. Let them all suffer. Why not?

RBS reveals biggest loss in UK history

Following the loss, RBS management has agreed to reduce (not eliminate, God forbids) their performance bonuses, and instead increase their base salary, claiming they will not be able to attract talent otherwise.

Indeed, if it’s talent that was needed to lose such sums, wouldn’t it be a prudent business decision to attract the less talented?

And let’s get serious. Bankers are not as hot as they once were. Do we really feel that if we didn’t increase their salaries they will resign, and take, for instance, teaching jobs instead? If banks don’t understand the current economic reality of supply and demand they are in the wrong job, and we’d better get rid of them altogether.

On the other hand, if we give them, why shouldn’t they take? After all, this is one of the only things they do understand.

Post-Capitalism is ...

A system in which reward is not shared by the risk takers, and where the biggest players demand to be rewarded for making products that no one needs or wants to buy.

Brown vs. Titian by ranfuchs @ 21/02/2010 – 15:17:54

Brown: "'Titian reached the age of 90, finished the last of his 100 great paintings, and said: ‘I’m finally learning how to paint.’ That is where we are’"

And to this all I can say is that I have not yet seen Mr. Brown's 99 masterpieces. So why doesn’t he go home and leave us alone until he's 90?

About brothels, banks and governments

The Mustang Ranch brothel, also known as the Mustang Bridge Ranch or Valley of the Dolls, was Nevada's first licensed brothel. In 1990 the U.S Federal Government seized it for tax evasion and, as required by law, tried to run it. They failed and it closed.

I only hope governments are doing a better job at running the banks they own than at running brothels.

Change

It is disappointing that Obama, whose election motto was CHANGE, is taking economic advice from the very same economists whose policies led us here.

CHANGE Mr. Obama, starts with getting rid of that which has been proven not to work. So why don’t you get rid of those who until less than six month ago refused to see where their policies were leading, and employ those few and far between who understood. As for the rest of the economist, let them join the ever growing unemployment cycle. They may learn something.

Brown vs. Einstein

Gordon Brown said, in a meeting of self-proclaimed world leaders, that unless the trend was reversed there was a risk that it would imperil the process of globalisation, damaging prosperity around the world for years to come.

Einstein said that we can't solve problems by using the same kind of thinking we used when we created them.

Is it just possible that globalisation is the problem?

Pittance

RBS, rescued with £20 billion of UK tax payer’s money, throws £1 million Christmas party – a modest amount according to his CEO Stephen Hester.

I am glad that for Mr. Hester £1 million is pittance. However, this is enough to feed 3,000 African children for one year, provide half a million vaccination for malaria – the greatest killer of all diseases, or build schools in 50 villages.

But why go far? Many of ours schools here would be delighted to get only a few thousands dollars each to help with maintenance and acquire basic equipment so desperately needed.

So Mr Hester, as small as £1m might seem to you, it’s not your money that you’re spending this time. It is my money. And it’s me and a few thousands of my neighbours that pay your £1.2m a year salary (before bonuses).

If it were up to me, I would have saved few thousand children and not the bank. It wasn’t my choice. The money was taken from me by the sword of the taxman. So don’t tell me it’s a small amount. If it is, I want it back.

The Island of boom and bust by ranfuchs @ 14/02/2010 – 12:41:06

This is a short (and hopefully simple) illustration of what's happening in our economy. In case you are curious. It was the type of game we used to play, when I was first introduced to the concept of money and international trade.

Once there was a little island, it had a piece of land, and two pieces of 1 dollar coins.

Three people were living on the island. A was the land owner, while B and C had 1 dollar each. One day B decided to purchase the land from A for his 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar. The net asset of the country now is 3 dollars.

Now C thought that since there is only one piece of land for three people, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the and from B for 2 dollars. Now A has a loan to C of 1 dollar, so his net asset is 1 dollar. B sold his land and got 2 dollars, so his net asset is 2 dollars. C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net value is 1 dollar. Thus, the net asset of the Island is 4 dollars.

A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar. B loaned 2 dollars to A. So his net asset is 2 dollars. C now has the 2 coins. His net asset is also 2 dollars. Therefore the net asset of the Island is 5 dollars.

A bubble is building up.

B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A. As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars. B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars. C loaned 2 dollars to B, so his net asset is 2 dollars.

Now the net asset of the Island is 6 dollars, even though the Island still has only one piece of land and 2 1 dollar coins. Yet, everybody had made money and everybody felt happy and prosperous.

One day an evil thought came to C's mind. 'Hey, what if the land price stop going up, how could B repay my loan? There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more.' Coincidently, the same thought crossed A's mind, so nobody wanted to buy land anymore.

So now A owns the 2 dollar coins, his net asset is 2 dollars. B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar. C has a loan of 2 dollars to B. But it is a bad debt, although his net asset is still 2 dollars.

The net asset of the country is 3 dollars again.

So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B's land was worth 4 dollars, and the net asset of the country was 6 dollars.

B's net asset is still 2 dollars, and he has no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.

A owns the 2 coins; his net asset is 2 dollars. B is bankrupt; he lost everything and his net asset is 0 dollar. C got no choice but end up with a land worth only 1 dollar. The net asset of the country = 3 dollars.

So we are back to where we started with redistribution of wealth. A is the winner, B is the loser, C has now the land but now money.

This Island is closed economy whereby there was no other country and hence no foreign debt. If foreign debt was involved, everyone could have ended up a loser.

Profiteering

“Shame of the Banks that are profiteering from the rate cut by axing their best deals.” said a newspaper headline.

And I say, shame on those who while using our money to bail banks out, did not take the opportunity to force banks to become socially responsible organisations.

Because, until someone changes the rules of the game, banks will play the only game they know --  profiteering is the name of their game.

Don't Pay Then!

 

In the last year, Britain’s top ten best-paid chairmen have led their companies to an average loss of 36%. In contrast, the companies of the 10 lowest-paid chairmen in the FTSE 100 have gained 1% in average.

We should then expect that companies with unpaid chairmen, or no chairmen at all should perform the best.

Bribes

Rail chiefs are in line for £600,000 bonuses, despite the continuously deteriorating service. I am glad to see that the reward for failure tradition continues. I also applaud the sensitivity of our leaders to the current market condition. After all, merely a year ago bonuses for failure were much higher.

Gallant Brown saves the day (and lives happily ever after)

Mr. Brown came with a rescue plan – good; because he did not have a choice.

Mr. Brown executed the first step of his plan – good; because this the first time I see Mr. Brown doing anything difficult.

Mr. Brown, arrogantly, told the world that he saved the world’s economy, and that the rest of the world should follow his example – can’t get much worse.

Mr. Brown, you, who helped put us in this mess in the first place, probably did the only things that may give us a chance to escape a total disaster. That what you did, gave us a chance. Your action, although necessary, is dangerous, and can backfire badly. No one knows how it will turn up.

To use an analogy Mr. Brown, when you are forced into a war, you stay humble. You should have learnt it from your mate Mr. Bush, who not only helped you put us where we are today, but also won the Iraqi war long ago – just before it turned messy. If you have not read history, just remember that Nixon won the Vietnam War, Bush won the Iraq war, that is, before they lost them.

So please, Mr. Brown do what you can to and get us out of the mess you put us in, but keep your arrogance aside, to after you have won this war. That is, when the troops come safely home. Because when you send troops out, you never know how nasty things can get.

Mr. Brown, I never really liked you as a prime minister, but I like you as a person less and less. BTW, kissing your wife on the stage to improve your public image is a cheap stunt. Few are blind enough not to think otherwise.

Iceland, terrorism and the emergence of racism

I got responses to my previous posting, blaming the Icelandic people for the current crisis. As it seems to be common theme, I feel that it warrants a new post.

I agree that it's only natural that you should feel frustrated when someone who owes you money does not give it back. But these ‘Icelandic pirates’, as some call them, did nothing that our own banks, and most other banks around the world did not do.

The Icelandic banks have never pretended to be safer than they really were. It’s not the role of the bank to tell us how safe it is. Banks are regulated by international standards, audited by international auditors, and rated by external rating agencies. All the above practices should be questioned. But as for the Icelandic banks, they followed these practices just like HBOS, Northern Rock or RBS; otherwise they would not have been allowed to operate in the UK.

This is commercial reality; when you lend money, there is always a chance that you will not get it back. The higher the risk, the higher the return, and if you want risk free investment, you get a low risk free rate.

Why do you think the Icelandic banks were so attractive? Because they offered higher rate. Why did they offer higher rate? Because, at the time, they were considered more risky than our own banks. They did not lie; they worked within the international and UK laws imposed on them. They did not even run into bigger troubles than our own banks; only that their government does not have the size of population it can tax to bail them out.

If it’s done illegally, there should be a court case and some may go to jail. If, on the other hand, it is done by the accepted commercial standards (as this is most likely the case now), then you become a creditor and stand in the queue together with all other creditors.

This, of course, is different when money is given by shark loans. Then if you can’t pay back you should expect to end with broken knees and new holes in your body. But is this the reason we created anti-terror laws, so that we can do whatever we want with anyone we do not like or have a dispute with? I surely hope not. I would not like to live in such a country. I don’t think most of us would.

As for the Icelandic people, the situation is devastating to them as much as the financial failure is devastating to the average person here. The crisis was caused by all of us, the governments and institutions of the developed world. The crisis will be felt by all of us, the tax payers of all these countries.

It’s only natural that in times of hardship racism and separatism raise their heads. I surely hope that this time will be different. Sadly, it does not seem so.

A Letter to Mr Brown

Dear Mr. Brown,

For a man who started his PM role as a self-proclaimed financial prodigy, you seem to have little understanding of financial matters. And by this I am not referring to the financial turmoil itself. It was not your fault.

But in the same way, it was neither the fault of those you blame: the greedy bankers, the immoral short-sellers and the Icelandic government. It’s the blaming and threatening like a simple bully that makes me doubt your financial credentials. Prove me wrong!

Let me tell you why those you blame are not at fault. For decades now, governments all over the world encouraged greed. They loved quick earnings and the spiralling property value. It gave them the spending power they wanted.

In our culture, quick money has become the measure of success; insurance has become a way to make money rather than a way to protect those who suffered damages; fines have been used as a source of income for governments and councils rather than a way to deter crime and anti-social behaviours. So how can you blame us for greed? This is the way the government, you, and most of us, wanted it, choosing to ignore a basic universal principle – things do change.

Some call it Yin and Yang, and you don’t have to be religious to appreciate the wisdom behind the biblical story of Joseph who become second to king Pharaoh because he’d realised that bad years come after good ones, and that they needed to save resources during the good years to be used when things turned bad. In financial terms it’s called reduction of volatility. It’s also called the economic cycle. But if we kept increasing our debt – private and national – during the best of times, what did we think would happen when things turned bad? Did we really think it would never happen? My grandmother knew better, you should have learnt from her, and she wasn’t a financial genius.

You see Mr. Brown, there is no one to blame. You, together with us, preferred to ride the wave of mediocrity and the path of least resistance. Now we are reaping what we sowed.

One more question if you don’t mind Mr. PM; how did you reach the £500 billion bailout figure in only a couple of days? It can only be a very rough estimated, and if it is, I have some suggestions for you:

First, why don’t you use only £460B for the bailout, and keep the extra 40 to fix the education, and legal systems. After all, it was only money that stopped you from doing that earlier, and now you seem to have resolved the problem of raising money.

Second, can you please stop blaming the poor Icelandic government? Professionals at the government and councils put the money there because they got better rates. As professionals they must have known that higher rates meant higher risk. Did you really believe that a 300,000 fishermen country could guarantee UK savings? And besides, if you already raise £500B, why don’t you simply raise 501B and leave the poor Icelandic people alone. Neither you nor anyone else would even notice the difference. On the other hand, if you abuse terror laws, we will all notice.

And one last suggestion Mr. Brown, we all know that now, when we have less money, you are going to increase the taxes to pay for the bailout. I well understand that you have no other viable choice. But why don’t you start immediately by raising the tax on alcohol and tobacco instead of blaming supermarkets for selling it so cheap, and hence encouraging anti-social behaviour. Price of alcohol is not their moral responsibility, it’s yours, and you are given the opportunity to kill two pigs in one bullet.

Remember, it’s just too easy to find scapegoats. But they may only work in the short term. In the long term you reap what you have sown. The challenges you are facing are greater than any post-war prime minister had to face. So please stop finding blame, stop making empty phrases and gestures, and stop being hypocrite. Show us what a prodigy can do. This is your chance. There is nothing more anyone can ask of you.

Our beloved chancellor

In reference to the American multi-Billion dollar bank bailout, Mr. Darling reassured us that we will learn from the American mistakes as: “Nothing is worse than coming forward with a plan that isn’t sufficiently developed.” Words of wisdom Mr. Chancellor, but can you please explain why only last week, you had begged the Americans to pass this bailout?

He continued and said that “when WE take action, we take it quickly. Then it works.” I don't follow. Are you saying that the American action was not quick enough? Or else, how are you going to develop a plan sufficiently if you were to do it quickly. Or do you mean that if and when you decide to take an action, you will take as much time as you want and then do it quickly?

BTW, just in case you have not been following the markets; a day after this statement, the UK came up with a nearly identical bailout plan. So far, it has had the same degree of success – none at all.