What’s Next, North or South?

On a day when you hear about the worlds largest bank CITI Group losing $5 Billion and cutting 4,000 jobs world wide, you might expect markets to be down severely. You might also have expected the FTSE to stumble on the news that RBS is preparing a rights issue to shore up its balance sheet. However, apart from some early nervousness on Friday, the UKs benchmark index managed to close the week up 3.2%. The CAC & DAX both managed 4.3%.

The worse is behind us argument continued to gather pace as evidenced by RBS share price actually rising on the day of the rights issue announcement. Investors had been speculating for months that RBS would be taking this step and in some ways the eventual announcement relieved some of the pressure on the UK banking sector. More than anything markets hate indecision and traders seem buoyed by the hope of an eventual end point to the liquidity crisis.

A significant catalyst last week was some positive earnings announcements from some heavy hitting US companies; Intel, Coca Cola, Honeywell, Caterpillar, Google and IBM all surprised to the upside. According to Bloomberg, profits have slumped 26% on average from the companies releasing results so far with the financial sector being the worst hit. However, this was largely expected to be the case, and share prices have adjusted to price in consensus estimates. One important question is whether US companies have truly under promised and over delivered, or if investors are just fearful of missing out on a rally.

On the currency markets, the Pound and Dollar made up lost ground lost after figures showed Eurozone inflation hitting a 16-year high. Chinese CPI was also red hot with staples such as soyabeans and rice continuing to rise. The price of rice has doubled since August 2007 while sugar and wheat have retreated from recent highs. The king of commodities, oil, continues to make record highs and until this market significantly retreats, inflation projections will remain high. This will put further pressure on central banks such as The Bank Of England, which has to balance fighting inflation with easing the liquidity crisis in the credit markets.

Inter bank lending rates have remained stubbornly high since the summer, with the actual cost of lending being a quarter point higher than the official LIBOR rate. The fact that The Bank Of Englands recent loan action was over subscribed by three times the amount tells its own story. With little movement on LIBOR or mortgage fees so far, the next move could put further pressure on the Bank of England to cut rates.

Traders foresees that while the worst may or may not be behind us, what is probable is that it won’t be plain sailing from here in either direction. There may still be some pull backs along the way even if March turns out to be the low point of this credit crunch for the FTSE. A one touch with the trigger set to 5900 could return 50% over the next 17 days.

Financial Markets: 10 Facts The Experts ‘Fail’ To Publicise

1. Financial markets are incredibly complex. They are difficult to interpret and predict. And yet, our understanding of it is grossly over-simplified.

2. Modern day investment theory rests on weak assumptions. According to French mathematician Benoit Mandelbrot, ‘Markets are very, very risky – more risky than the standard theories imagine.’

3. Standard models do not define or measure risk accurately. The need to measure and predict risk has lead to elegant mathematical equations, which in turn have been used to develop fancy economic models.

However, current models take a highly manageable view of financial markets. For example, the theory assumes that price movements from one moment to the next are smooth, when in actual fact price changes in financial markets are erratic. The formula used to measure risk ignore the true state of affairs. As a result, retirement funds are subject to extreme ‘financial turbulence’. This begs the question: has your retirement fund taken a holistic view of the risks inherent in financial markets?

4. Standard theory assumes that markets are rational machines, which are basically ideal markets. It is a world in which buyers balance sellers. The central idea is that financial markets will always generate the ‘right’ prices whenever new information about assets becomes available.

How does this all happen? Well, according to investment theory, people react logically when presented with new information. No emotions attached. This implication is that buyers and sellers are well-reasoned individuals that assimilate all available information to conclude deals at economically ‘correct’ prices. For this to work, it is assumed that people have the same goals and when presented with certain information, they will all make the same decisions. It is also assumed that these decisions are made independently of each other, meaning that prices reflect a market consensus rather than the opinions of a select few.

5. People move financial markets. Think of it this way. Markets incorporate thousands of different needs, ideas, investing strategies, tactics, goals, objectives and emotions. As an individual you have no control over price changes or capital growth.

6. Fundamental and technical analyses use historical data to predict future price movements. The problem: It is impossible to predict what will happen in the future. Moreover, financial markets are inconsistent and most retirement funds are ill-prepared for surprises.

Unless scientists find a way to quantify peoples’ emotions, long term investors will probably have to stick to the one size fits all ‘diversify, invest and hope’ approach.

7. Gloom and doom inspires fear. A friend with a hot tip inspires greed. Following the advice of other people may be harmful to your bottom line. Fundamentally, you need to change the way you invest and conduct business.

8. Market crashes will happen again in future and people will be responsible. When greed gets into the mix, you may have yourself a ticking time bomb. The 2008 sub-prime crisis is testimony to this.

9. The high risk high return strategy needs redefining. It is extremely difficult to predict future returns in financial markets and your expected returns may not materialise. A high risk unknown strategy is more apt.

10. Retirement planning as it is today is an ineffective way of creating wealth. The facts show that only 1% of people will stop working with the same standard of living they had prior to retirement.

Consider the following:

  • Can one really create wealth if you expose your money to a high risk unknown return strategy?
  • Is it a good idea to wait 20 years or more to capitalise on a return that may or may not be there?

Living needs to happen today. This is why a low risk high return strategy is in your best interest.

Occupy Wall Street and Beyond

Occupy Wall Street is a protest movement against inequality, greed, corporate-government nexus and police brutality which broke out on September 17, 2011 in Zuccotti Park of Wall Street in New York. The international protest was named “Occupy Movement” and in other parts of the United States, the movement was called “Occupy Together”. There is no formal, explicitly stated leadership and the protestors are mostly young and unemployed. However, there are moderators, and as it happens in any society, movement or organization, leaders have emerged. The noise, complete lack of civility and violence in the movement has often been pointed out by the critics. Police brutality is rampant and many protestors were arrested.

The eruption of the protests

The protests broke out when Adbusters foundation in Canada urged people to peacefully occupy the Wall Street to protest against the growing disparity of wealth and the government’s rescue package to deal with the failures of the financial crisis through their email list. Slowly, many other groups joined in to organize the movement which was largely inspired by the strategy of the Arab Spring protests. The protests began when thousands of protestors marched through the streets. In a month, the demonstrators were tens of thousands in number and held protests in close to thousand cities across the world. In two months, the movement had spread to 2,609 towns and cities across the world. The protests slowly led to arrests and the police mistreatment of protesting women and journalists were controversial.

Goals of the movement

The stated goal of the movement was protesting the Wall Street for its collusion with the state. The explicit goal clashes with the views of many critics, but there is a clustering of many mutually incompatible political positions among the protestors. Though the leaders of the movement were very much against the media reading too much into their positions other than the protesting Wall Street, the protestors in other towns and cities were free to define their positions. Social and economic justice, better employment opportunities and working conditions, income equality, banking reforms and the elimination of corporate power are the demands which echo the most.

The role of the Wall Street

The protestors tend to believe that the Wall Street and corporate greed are largely responsible for the financial crisis and resulting stagnation. The protestors oppose bailouts, and suggest banking reforms and a better regulatory framework. Many economists argue that the stock market serves a healthy economic purpose, and that the Wall Street couldn’t have brought about the crisis by its own. They argue that the blame should be shared with the Federal Reserve System which issues cheap, artificial credit and distorts the market signals to investors and individual businessmen. The Federal Reserve System has been quite active for long to rescue financial firms which run into trouble, and to compel the taxpayers to bailout these companies.

The Political Slogan: “We are the 99%”

The protestors held a themed sign which read “We are the 99%”. It was in reference to the growing inequality between the majority of the population in the United States and an elite minority, which according to the protestors, arrogated to themselves, much of the wealth and political clout. The slogan emphasizes the notion that 1% of the population owns a significant part of the wealth in the United States. It is also argued that the income disparity has gone up slightly after the economic recession. Though the concentration of wealth is often overstated, there is much truth in it, and the sentiments echoed by the slogan are not far off the mark. It is true that an elite minority owns a significant part of the wealth in the United States and very few go to the extent of denying this. However, there is much criticism against the proposed solution of redistribution of wealth.

Is inequality growing?

The Gini index (or coefficient), a measure of income inequality tells us that income inequality has been growing dramatically in the recent past. However, other studies of the income distribution in the United States do not support the notion that income inequality has been rising in the present century. The Census Bureau measures suggest that the income inequality had gone up from 1960 till 1990, but have remained roughly constant in the last two decades.

Inequality is much less pronounced when we consider income of households instead of that of individuals. The size of the households has shrunk over time and, the number of households has been growing at a much faster pace than that of the population growth. Income inequality statistics which fails to take this into account can be highly misleading.

According to US Treasury department statistics, between 1975 and 1997 the wealthiest 20% in the United Stated raised their status from receiving 43.2% of the national income to receiving 49.4% of it. The poorest 20%, at the same time from receiving 4.4% went down the rung to receiving 3.6%. But economist Steve Horwitz points out that the people who formed the bottom 20% in 1975 are for the large part different from the ones who formed it in 1997. The poorest had almost always raised their financial status and moved out the bottom quintile in these two decided. Moreover, 4.4% of the total national income in 1975 is a much smaller figure when compared to 3.6% of the total national income in 1997. The absolute position of low income individuals have been consistently improving for long.

Causes of inequality

The poor often remains poor because success in the market is partly luck and often influenced by closeness with the state. However, the consensus in twin adoption studies suggest that intelligence and conscientiousness are the strongest predictors of financial success.

The arguments against egalitarianism

Many economists think that it is the wealth of a small minority which makes the superior living standards of the common man possible. They argue that much of the wealth of the extremely rich is in the form of means of production and not in the form of consumer goods which are available in the market. It is the concentrated wealth which allows big corporations to invest in physical infrastructure. Such huge capital investment results in much higher productivity, higher wages and lower prices which wouldn’t have been possible at all in a society of self-sufficient farms and small traders. The growth of individual fortunes of businessmen pales in comparison to the growth of big business enterprises.

Big business enterprises are almost without exception, corporations, and not owned by a single individual. The big business enterprises would have long lost its status if it hadn’t served the needs of the masses, as they always serve the common man though not always in a manner visible to the untrained mind.

However, these economists readily concede that in the present world, to a large extent, wealth acquired and sustained through special state privileges and by maintaining proximity with the government. The elimination of government privileges, protection and subsidies will make the path of riches open to everyone, and not just to an aristocracy of pull. The regulatory burden and progressive taxation, especially in developing countries like India makes it increasingly difficult for an upstart to accumulate capital and reach the state of big business.

Reaction to the protests

Unlike the reaction to the Tea party movement, the public response to the Occupy Wall Street protests is largely favourable. The response is positive from left-liberal media which claimed that the protests are a left-wing tea party. While unions predominantly agree to the goals of the protests, some disagree with the anarchistic structure of the protests which is strikingly different from the unions which are well organized and authoritarian in structure. Intellectuals and people in the entertainment industry are largely supportive, and some of them make public speeches at the protests. Many leaders of huge corporations think that the protests are much understandable, though they often have disagreements on the nature and goal of protests. Most think that things are not as good as they ought to be and that to say otherwise would be a complete denial of reality.

The libertarian ambivalence

Some libertarians and political commentators who are well to the right on the political spectrum looked down upon the protests as a pincer movement, a diabolical plot of the left to overthrow the very foundations of a capitalistic society. However, some of them believe that the protests are well justified, and that it is high time that crony capitalists are stripped of their special privileges and positions. Their disagreement is not so much on the stated goal as it is on the nature of the protests and proposed solutions. Many of them think that the protests should be peaceful, and should make a coherent and well thought out case against central banking in particular and government power in general. Ben Bernanke, the chairman of the Federal Reserve and Ron Paul, the most libertarian politician from both the houses sympathized with the protests on some important levels, though for different reasons. While Ron Paul thought that the Federal Reserve (Fed) should be held up for criticism, Ben Bernanke dismissed the public outrage against the Fed as a misconception. However, both agreed that the economic situation of the country is dismal and people have reasons to find the policy response to it unsatisfactory.

The reaction of political leaders

Many political leaders across the world have expressed solidarity with the movement while some others have disagreed or have had mixed feelings about the same. The American President Barack Obama said that the protests express the deep frustrations of the American public with the aftermath of the financial crisis and the tendency of the powers-that-be to freeze the status quo. The Indian Prime minister Manmohan Singh said that there are reasons why people are protesting and that the system should be willing to honestly address these problems. The Former United Kingdom Prime Minister Tony Blair was among the few who strongly disagreed with the protests.


The performance of the world economies would have been better if it hadn’t been for panics and recessions which occasionally strike them. The public outrage against corporatism, inequality and the failures of central bank monetary management is understandable, but should be directed towards the real culprits.

Five Scenarios Depicting Government Policies As a Two-Edged Sword! (Part 1)

In these times of economic uncertainty, governments under a cowering atmosphere may develop the phobia of actuating policies and regulations in a desperate attempt to contain the situation. From a global perspective, the use of policies in the form of regulations and tax breaks to influence a country’s economic position has been rave about by some transformational leaders as a form of insurance for their economies even though in some cases it transcends the rules of the international trade game or globalization in the bigger context. Whichever policies are made in country, the fact remains that government policy in terms of reality is always a two-edged sword. Unfortunately, most in the world especially the capitalist countries are resentful of government regulations and policies. They see these policies as a threat to the progress of capitalism and also to their freedom. However, much as it appears to be a threat in some aspect, there are beneficiation dimensions when its economics of social cost and social benefits are evaluated. It is in the light of these fundamental truths that this article seeks to discuss the convolution surrounding the two-edged nature from the following scenarios and perspectives: national security versus international trade, nationalization versus de-nationalization, investors and consumer protection versus Innovation, monetary and fiscal policies versus Politics and finally environmental protection commitment versus Nash equilibrium.

Scenario 1 – National Security Vs International Trade: Interestingly, the trade-off between economic gains, national security and sovereignty presents a very dicey situation especially in this era of terrorism rise and threats of rising military prowess of certain countries. Thus, governments in some instances are eclipsed between national security defense and their policies governing international trade. A paradigm of the case is when a country incapacitated by financial crisis or debt is torn between fulfilling budget constraints and national security. Take the case of United States or United Kingdom. In this epoch of mounting budget deficit when United States or United Kingdom has to choose between buying warplanes or national defense equipments from a low-cost country such as China or Brazil as against securing such gadgets from manufacturers in the United States or the EU at a higher price. Obviously, these countries will pay the higher price of increased budget deficits if they decide to buy the planes from manufacturers on its own soil. Nevertheless, they gain because national security and sovereignty is protected. On the other hand, if these countries should buy the defense items from manufacturers in China or Brazil, there is reduced budget deficit but national security is threatened. Subsequently, the decision on the path to take will depend on the contribution margin of the cost to be incurred with respect to the budget deficit versus the highly valued national security. Strangely, the scenario of national security and trade is absurd when social cost and social benefit are assessed from the perspective of international trade in Arms. International trade in Arms which used to be antipathized is fast becoming an acceptable norm in globalization. The driving force being threat of invasion and some countries desire for military prowess. Over the years the world has witnessed Arms being sold openly by some developed and developing nations to other nations as part of international trade. Information also has it that technology is being sold secretly to nations to augment their military capability. The curiosity surrounding such esoteric trade in Arms becomes more stronger when the investors from one country choose to export technology to another country as part of selling services to the country or customers or partners in that country. Regrettably, trading in Arms and secret technology puts the national security of the seller country and recipient country all at risk. On one hand, the technological secrets of seller country may be exposed to the recipient (buyer) country. On the other hand and in the long term, the seller country may become a threat to the recipient country because of an inherent access to its security intelligence. Undoubtedly, the security of the world is being marred by sale in Arms and secret technology both of which implicitly associates with the much dreaded activity “terrorism”. In fact, the world cannot be a safe place until the esoteric sale in Arms and secret technology is constrained and strongly repudiated by United Nations prompting every nation to come clean on any nefarious trade in Arms and nuclear technology. People are of the view that such an agenda is too ambitious and inconceivable judging from the fact that some nations have resisted similar attempts by the UN in the past. Nations cryptically trading in nuclear technology tend to be the most perpetrators of this kind of trade. I am an advocate of nuclear technology application in nuclear reactors for production of energy for social beneficiation purposes and will always identify with governments policies that promote that. However, any policy that circumvents energy production for beneficiation but promotes usage for antagonistic purposes is absolutely unacceptable and deleterious. Enriching Uranium by centrifuging for production of nuclear bombs is detestable and the world must boldly speak against it. United States is doing well by speaking against it but it needs the massive support of the whole world to deal with this growing menace. It is possible those countries that fall into the domain of nuclear technology abusers may feel isolated because of UN sanctions against them. They will try to placate their anger by pursuing policies that might enrage the world. But the world should not be perturbed by such tendencies and must still maintain the sanctions. Some contend that sanctions are not working but I am of the view that sanctions backed by constructive criticism and dialogue will immobilize these autocratic regimes and bring their unpopular pursuits to an end. I also believe the spread of democracy will definitely catch up on the whole world and help eradicate the bad “nuts” in the system. Only time will prove this assertion right. We are the world and we must not let a few dictate our future and freedom. Freedom is a gift from God and we must enjoy it.

Generally, sale in Arms and technological secrets has made the world unsafe and implicitly exacerbated terrorism in the world. Additionally, international trade restrictions have broken down because of some nation’s policies of self-centeredness and indifference to safety and freedom of the world. Sadly, some nations policies of neo-colonialism or economic imperialism for solidification of their national security pose a threat not only to international trade but also to the spread of democracy in the world.

Scenario 2 – Nationalization Vs De-nationalization: Presently, there is the conglomerate effort by governments of some major economies to propagate global regulations for the financial markets and banks so as to prevent a repetition of the global financial meltdown. To some analyst this is called nationalization and an infringement on the current supposed de-nationalization existing in the capitalist economies. Again, on the pessimistic side of this issue are the analysts who see the predisposition by the leaders as protectionism and an inordinate desire to influence the economy to the detriment of market efficiency. They also see such tendencies as generally not resonating with stakeholders’ interest especially when the country concerned is of capitalistic proclivity. Howbeit, government regulations whether in financial, educational, health and industrial sectors suggest a form of influence of globalization and have several connotations associated with it. Unfortunately, in a period of economic uncertainty, governments may assume a desultory characteristic which makes them more susceptible to enforcement of regulations in educational, health, financial and even the industrial sectors. For example, the current administration of the United States governments and certain western countries are compelled to press for policies and regulations to control some salient sectors of the economy including financial and health center because of the current global economic uncertainty which has incapacitated a lot of families and made them liabilities on the government. It is true that times are hard and government will want to empathize with the masses by pressing for regulations. However, skeptics are worried about how far the regulations can go and its projected negative impacts on the market and most importantly factors of production. Again, such pursuits are seen as an inclination towards nationalization as against de-nationalization of the market economy. In America some economists have described the handling of the GM financial crisis issue as a proclivity towards nationalization. Recall when GM filed for bankruptcy, the government provided more than $50 billion (tax payers money) for its redemption besides taking a stake of 60% ownership of the company and the replacement of its CEO with a government approved one. Coincidentally, further down the road pockets of nationalization has taken place in the country. For example the interstate rail service takeover to form Amtrak and also Airport Security management take over by the federal government after September 11. All these are forms of nationalization that has beneficiation. For example, the recent changes in airport security with regards to whole body scanning of travelers infringe on our privacy and freedom yet it can be effectual in preventing terrorist from getting into flights to cause harm. Should we blame the government for nationalizing the airport security? No. Must we applaud the government for instituting the measure of effective scanning? Yes. What would have happened if the government had not taken over the management of airport security after the September 11, 2001 disaster? In fact, it is quite impossible for a country to exist without any pockets nationalization. In this period of financial failures and global uncertainty, at least some pockets of nationalization even in free-capitalist countries is inevitable. A little nationalization will not kill even though extreme nationalization like what is happening in Venezuela and certain parts of Africa is unacceptable and vicious. Currently, the question that is being debated is whether the domain of nationalization includes turning a private sector indirectly into a public good. For example the allegation currently by some that the health sector is being made a public good with the presumption of the act being synonymous with nationalization. Others believe that government intervention in the health sector may not correct the failing health system. I am of the view that the health sector will only become a public good if only all in America including illegals benefit from it and there is no way to prevent anyone unqualified from benefiting from it. Also there is immense additional cost to be incurred here if checks and balances are not in place. Unfortunately, after much publicized and heated debate in congress, a consensus has still not been reached on the reform proposals. There is an argument of an increased role by government in the sector affecting efficiency in the sector. Another contention is that employers will be burdened with huge healthcare costs. Whatever the healthcare reforms package will entail, it must be judged based on the economic principle of social cost and social benefit and not on the economics of externalities.

Globally, the predilection by some countries for international regulations for banks has been fueled by the recent developments of bad debts at Dubai Bank and also the huge national debts or financial crisis of some European countries with Iceland and Greece at the front. Though, the debt belongs to the individual countries yet it is turning to be a pervasive problem with consequences likely to affect Europe and the rest of the world. The coming of the EU to the aid of Greece will go a long way to reveal the strength of the relationship between the EU countries and the authenticity of the cordiality governing them. Meanwhile, Greece in order to win the approbation of the EU and satisfy the European Stability Pact that enjoins all members to maintain a debt level of 3% of GDP has decided to take some austerity measures including but not limited to VAT increases, freeze on pension funds and working rights limitations, reduction in healthcare benefits. Though this is going to create hardships for the people of Greece with upsurge in social unrest in the coming days, authorities emphasized the measures as being the heady way for the country to deal with its mounting debt and refinance its 17 billion debt bond. In addition to the Stability Pact, the EU may argue that there is too huge a price to pay to remedy Greece from its predicaments. Perhaps, the EU has decided to follow the footsteps of the United States where generally the rescue of states in financial crisis by the federal government is not popular because the tax payer prefers not to bear the cost of a state’s mismanagement. On few occasions the federal government may come to the aid of a state only if there is a justification for that. Sorry to say, EU is not considering the effect their inaction will have on the confidence of the member countries. But the facts are clear. There are a number of EU countries hanging in an imbalance with regards to debts and economic problems. So if the EU cannot extend some minimal level of credit to Greece to help ease the country’s debt burden then it presupposes in future any EU country that finds itself in a similar situation will be allowed to go bankrupt and collapse. In fact, some level of credit should have been extended by the EU to Greece to show to the world the strength of the Union and the care for its members. Indeed, this is a testing time for the EU and the Union’s ability to deal with such problems will go a long way to substantiate the competency of their unity and to brighten the way forward. Perchance any EU intervention to remedy the Greece situation is being categorized as nationalization by the Union.

Finally, it is feared globally that more of such bad debts and financial failures will occur in the near future with repercussions of consumer and investor confidence reduction if nothing is done. Watch out for part 2 of this article which discusses this phobia.