Monday, October 20, 2008

Nowhere to Hide

Quote of the week:

'A half truth, like half a brick, is always more forcible as an argument than a whole one. It carries better.' - Stephen Leacock. After listening to people's solutions for the economy, this is a very fitting quote.

Some previous articles from the IWB have been picked up by the International Business Times. Please click here, drive up traffic and leave some comments. This way, perhaps the usually faulty media coverage of Muslim issues will change for the better.

Commentary of the week:

Nowhere to Hide:

Many of us go through life collecting one bad decision after another, but live reconciled to our choices because we do not have to live with their full consequences. We choose to eat unhealthily, but let our doctor or family worry for us; we choose to stress out about gas prices, but still buy SUV's that compound the problem and we invest somewhat wisely, but borrow irresponsibly. Thus, the contradictions in our lives are endless, but they don't catch up to us because life usually moves too fast for us to take too many moments to reflect; too fast for us to know what we are doing and all too quickly the moments to right the wrongs pass. There are other moments though, when the pace of life slows down as well and our mistakes come back from the mess we call the past to haunt our excruciatingly long present. This is what is happening in the financial markets these days, where every day there is some new low that was quite obvious in hindsight. At moments like these, one is reminded of the ultimate Judgement, when there will be nobody else to blame, and nowhere else to turn. This, in a nutshell then, is where we are. We have messed up as a society and twist and turn as we may now, there is probably no weaselling out of this one. What we call our standard of living is undergoing some destabilization and perhaps even re-standardization. All our financial decisions as a society over the past little while, are now coming back as a spectacular show of fireworks requiring the full blaze of our attention.

So how do we make sense of all this? And what are we to do in such times? Well, other than going back to read 'Dealing with Losses' once again, there is very little to do quickly - best to understand where we are and ONLY then can we make plans never to be here again. Jumping from one asset class to another just because that will be fashionable for the next three hours is like trying to jump from one donkey to another as they ride past one another silently in the night - it can be exciting and the action involved in switching will no doubt be satisfying, but only God knows where the new donkey will end up in the end.

The easiest way to understand this turmoil is to look at the stock market and deconstruct it a bit - and I apologize for being pedantic but I think it best to start at the beginning. The stock market, for those who are unfamiliar with its intricacies, is a place where people come to trade their shares in businesses. Usually, they trade with each other through brokers, without the underlying businesses themselves being involved in the trade. This is how the majority of trading takes place - between people, using third party shares. Now, some traders are bigger than others because instead of trading just their own life-savings, they make decisions for thousands of future pensioners or investors. These are generally called asset managers. More recently though, a new beast has come to play in this market - this is the leveraged trader - the trader who has little money of his own but lots of borrowed funds (usually from banks) to place (read 'invest' and / or 'speculate with') here and there as he sees fit. The latest estimates are such that around 30% of trading in the stock market is undertaken by this last kind of animal.

Now, with the credit crunch in the mortgage sector, many banks are simply unable to decide whether they want to call in all their outstanding loans, or if they want to keep loaning money to people with little cash. As they resolve this in their own sweet time at tax-payer expense, the hedge fund animal realizes that the game may be up soon and starts to sell what he owns in order to have cash handy in case his loans are called in. As 30% of buy orders starts to dry up in the stock exchange, and an extra 30% of sell orders pour in, what you have is yet another lop-sided trend. Just as the extra 30% of cash on the buy side drove the stock market up these past few years, the extra 30% of shares being sold now are causing many others to liquidate their holdings as well. This is the magic of leverage - as our Hedge Fund friends borrow at prime to invest at Prime times Ten, things seem great and their perceived expertise grows along with their portfolio. Suddenly though, out of no fault of their own other than excessive greed on behalf of their investors, if returns are now Prime times Negative Ten - these erstwhile geniuses are wiped out before they can finish the resulting sneeze from the solitary 'caffe latte avec cinnamon' they can afford on their new paycheque.

What is worse is that they now have to suddenly return their leased car and since their bosses are in line at the dealership just ahead of them, now the car business is affected also. Then the tire business is affected because there is no more demand for racing tires to be used in rush hour traffic and then soon the furniture business is toast because Mr. Hedge Fund has to give back the leased couch and use the plywood chair he is building himself because he is no longer employed and has extra time on his hands. Repeat this story a few thousand times because it is not just one part of the financial space that is affected but almost all of them and you have the beginnings of a fundamental restructuring of way business is done in financial circles.

Perhaps, just perhaps, this is one reason why Muslims and many of our other faithful friends believe that God knows Best, and that there are deep reasons in Islam and other faiths to avoid speculation, uncertainty and the Riba-i and usurious forms of debt that are so prevalent in the world of Finance today. Indeed, one could almost say that if done the right way, Islamic Finance has the potential to be medicinal for the world. Sadly, we are nowhere close to this potential and at this point, there is nowhere to hide.

Just the way we feel as if we are being cooked on a hot, humid and sunny day at a beach without any shade; our portfolios and retirement strategies are being cooked by a faulty system that stands outside our control because of our own mistakes. In our next column, perhaps we can discuss some possible strategies to find some shade. In the meantime, I hope you enjoy the tan ...

Noteworthy News

Finance News:

1. 10 things to learn from the credit crisis ... read more here

2. A very good FAQ section on questions such as 'Why countries can't go bankrupt? ... read more here

3. The CDN govt. buys $25B of mortgages using our tax dollars! ... read more here

Economic News:

1. The Economist now predicts a Global Recession. It's a good thing journalists don't have long term memory ... read more here

2. Will the cure for our economic ills be worse than the disease? ... read more here

3. Lots of bankruptcies on the way ... read more here

4. Canadian job growth in trouble ... read more here

Islamic / Middle East / Emerging Markets:

1. Real Estate in Dubai falters ... read more here

Interesting but not all Finance:

1. An interesting, dissenting view on the Chinese Economy ... read more here

2. Trousers in Sudan are 'Disturbing the Peace' ... read more here

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