Tuesday, May 6, 2008

Economics of Stealing Cutlery

Quotes of the week:

"To some degree it's a very gigantic version of Las Vegas" - Gary Burtless, an economist at the Brookings Institution, speaking about either Wall Street or Hedge Funds (Is there much difference these days?).

Commentary for the Week:
The Economics of Stealing Cutlery

Recently I attended yet another seminar on yet another obscure topic in Finance. True to form, it confirmed my worst suspicions and most uncharitable of analyses about the field. The food though, was excellent and I consoled myself with a healthy helping of Zaafrani Rice topped with some exquisite chicken. Once I had had more than my fair fill, I looked up to see fellow geniuses in the audience also using the same strategy to tune out the proceedings.
As the lectures droned on however, and I began to fear becoming even more corrupted by listening to speeches about zero-coupon bonds and 16% interest, I began to focus on the more mundane aspects of my surroundings. In order to shut my not-so-pious ears, I began to fidget (as curious people often do) with the cutlery on my table, becoming lost in the intricate patterns and designs on my fork. Noticing this fascination, the distinguished gentleman sitting beside me leaned over indulgently and conspiratorially observed: 'Relax, it's stainless steel. I checked already ...'.
Initially, I was shocked at being mistaken for a cutlery pilferer masquerading as a finance genius and began to think of stabbing the chicken on the man's plate using the fork in question with such force as to send a timeless message about the limits of my tolerance for inconvenient questions about my character. As I weighed the impact of such an action on my only $1000/suit however, my calmer self prevailed and I realized the humour and novelty present in the situation, letting the unfounded comment pass with a haughty smile. I also realized that the man was flat wrong about the value of the cutlery.
While it is true that silver is more expensive than steel to buy, steel is a more valuable or sought after commodity at the moment; and as you and I are arguing about knives and forks, there is a $150 Billion buyout offer from BHP Billiton on the table for Rio Tinto. The No. 2 company for iron ore production (an input for steel) is proposing to buy No. 3. for $150Billion. This is of interest to us for three reasons. First, we have to bury the news about how I was almost caught stealing a fork in more meaningful commentary. Second, cheap steel is an essential input for a growing consumer and industrial economy such as China, which is doing everything possible to guarantee predictable supplies. Third, and this the key for me, is that this buyout may be a signal for the turning of the tide as far as the boundaries between the financial economy and real economy are concerned. The first two are beyond our scope for today, but let me explain the last one a bit more.
For at least a couple of decades now, the real economy has been overshadowed by the financial sector. It has been 'cooler' to speak about stocks, bonds, derivatives (although very few speak on this one without looking foolish) and interest rates than it has been to speak about grains, gold, rice and other real commodities. This has been a departure from most of human history, where it has not been the price of IBM stock that has been a topic of discussion at the dinner table, but the price of food. In essence, the financial superstructure that we have built over and above that of the real economy of trading in goods has skewed our attentions, priorities and expertise. As a sector, finance sits in an octopus-like repose atop the real, with its tentacles at each node of the economy, always present and always growing. It used to be that the role of finance was to intermediate capital between real sectors. More recently, it has become an economy in and of itself, with little or no connection to reality. What is worse is that people had begun to believe the hype and feel that way as well.
In my opinion, this is changing now in spectacular fashion. Governments, corporations and financial types are realizing something they should have known all along - that reality takes no prisoners and however much you believe that paper (cash / stocks / bonds) is worth something, it is actually the something in question that is worth more than paper. In the case that we are discussing here, Rio Tinto shareholders have flatly refused to accept $150Billion in cash and stock, for a company that hammers and processes rocks for a living. Around this transaction, governments and sovereign wealth funds are circling with untold amount of funds to support one side over the other. Gone are platitudes about the 'free-market' and the open economy. It is now about ensuring ownership of iron ore supplies; cordial relations and corporate commercial law be damned.
Even though one case does not a trend make, I encourage you to think of things using this framework of the real vs. the mere financial for a few months. I think that you will notice that human concerns such as food, gas, heating, cooling and even cutlery will be on people's minds a bit more. You will also notice that while powers-that-be are going to be speaking much about how they are bringing stability back into the financial system, you will notice that we are actually in the hunt to carve up the real world and it's treasures in obvious manner once again.
Once the pretence and confusion over what is truly at stake is gone, all sorts of magical things can happen. To make sense of these, you will have to keep an open mind and reinvigorate your curiosity. Most important of all, the next time you see cutlery, ask yourself whether you knew that hammering away at a steely rock could lead to so much fun.

MAP Canada is hosting an event for young businesses and people looking to take their businesses to next level on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that most of you will attend, I promise you both insight and even a few fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served, sans any silver forks. Please Register Here

Finance News:

1. This story is too good (and quintessentially Canadian). Around 300 grannies are forcing the bankers / brokers / lawyers involved in the credit crunch 'fix-up' to be more responsive to small investor needs ... read more here

2. Some things to consider if you are thinking of moving to a fee-based personal financial advisory model ... (this is not a condemnation, it is something to know) ... read more here

3. Even more high payouts for hedge fund managers ... Such are the wonders of leverage, it can make geniuses out of normal people that bet the 'right' way ... read more here

4. Where most global banking decisions are made ... read more here

Economic News:

1. Our old friend, Chief Economist at the CIBC, comes up with another 'analysis' on the strength of the Canadian Economy. It is not so much that his conclusion is wrong, but the sheer chutzpah of consistently shoddy reasoning is very endearing. Keep up the ... ummm ... the work! ... read more here

2. At the end of the day, all talk, economics and politics is about gas ... (and not the Pepto-Bismol kind) ... read more here

3. A dissenting view on the US$ ... Is this denial or the turning of the tide? ... read more here

4. The Economist (which strangely remains my favourite source of news) discovers that there is a food allocation problem in the world ... read more here

Islamic / Middle East / Emerging Markets:

1. Asian Policy-makers having a tough time with inflation. What's funny is that this time, they are importing inflation in the form of US$'s that simply don't buy what they used to anymore ... read more here

2. Recasting futures and commodity trading role as a price-signalling mechanism ... problem is that this trading also in fact interferes with the price. It is not just a signal ... read more here

3. Is there a role for gender in finance? A normative question and a descriptive (yet quite probing) article ... read more here

4. Middle-East money moving to Asia instead of the West ... read more here


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