Ittihad Weekly Briefing

Belly-dancing in Rome

2008-11-19T13:03:00.001-05:00

Quote of the week:

'Cowardice asks the question: "Is it safe"? Expediency asks the question: "Is it politic"? Vanity asks the question: "Is it popular?" But conscience asks the question:"Is it right?" And there comes a time when one must take a position that is neither safe, nor politic, nor popular but one must take it because one's conscience tells one what is right.' - Martin Luther King Jr. (Hat-tip to Mr. & Mrs. Pappano Hussain)

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.

Commentary of the week:

Belly-dancing while Rome burns:

At times of economic stress, many of the most unusual sources become the best places to find entertainment. For example, when times are good, we become very trusting of people in power and begin to speak of concepts such as Leadership and Experience. We begin to admire expertise in exotic fields of study and begin to perceive of the people in those fields as people that know what they are doing. When times are bad, pronouncements that would usually be seen as prophetic and full of wisdom come to be seen as they really are: comedic guesses in the dark. The economics department at one of the banks comes to mind here, but since we shouldn't get personal (not that the economics department at a bank is very personal), we shall let them escape unnamed. What is more alarming than our minor pop-economists though is that our full slate of 'Global Leadership' is completely and utterly flummoxed and confused at how to deal with this crisis. While Ittihad does not yet have a complete solution to the world's problems because our photocopier is being difficult, we do recognize bad ideas when we see them - and at the moment, all these various 'solutions' that we have come across seem to be terrible ideas.

Idea #1 is a bailout of all, if not most failing businesses, especially if they are in the financial space or in the business of manufacturing bombs or cars that might as well be tanks. Idea #2 is to let people who took on unsustainable debts pay it off over longer terms. Idea #3 is to let the government buy everything. Idea #4 is to not do anything but talk a lot. Idea #5 is for everyone to take up farming. Needless to say, there is a good story we can tell around each idea but it won't save your retirement funds because half of those are toast already and they won't allow your kids to buy the shiny new car they want in their first year of college. So what is a good idea then, you ask? Well, as I said the photocopier is not working so the full plan cannot yet be shared - but once again, each losing investment has its own dynamic so specific advice over the newsletter is difficult. Nevertheless, there are some general timeless principles that we would do well to keep in mind and I will share two of them with you today.

The first thing to do at times like this is to manage cash-flow such that unexpected events have a minimal impact on the family finances. Although I have spoken about the dangers of uncovered debts before, this would be an excellent time to take two pieces of paper and make up two statements. One is a balance sheet of your assets and liabilities to get a handle on what you owe and to whom. The other is a statement of cash flows that shows on a monthly basis how much is coming into the house and how much is being siphoned away by the marketing departments at the companies that keep sending you bills. Once you have an accurate picture of these, look at how you can move your outgoing cash from your discretionary spending and needless bills (you do not need satellite TV for example, or a TV for that matter) to the regular paying down of your liabilities. For most of us, liabilities come in the shape of a gigantic house that is not sealed too well and so gets very hungry for natural gas in the winter, so the sooner we can get it away from the clutches of the friendly neighbourhood banker, the better it is. For others, these come in the shape of cars that protect us from the company of bus-people and bicyclists so the sooner we can actually own the wheels that move us the better it is. The idea here is to weather the coming economic storm in a manner that does not leave you too vulnerable and exposed to happenings outside your control that can still be messed up further by our political and economic leadership.

The second thing is a little less financial and a little more personal. All of us at some point find that we are at some plateau in our careers and that we are neither moving forward at a great speed, nor dropping into the abyss of becoming forgettable. If this is where you are at work, then my friend, this is a dangerous time for you. With the way things are shaping out, the teenage math prodigy who couldn't get a job designing weapons of mass destruction but found one designing debt instruments which are almost as bad has ensured that your company will probably lose customers over the next little while. This means that you have to become indispensable, which may mean that you have to improve your schooling, your areas of expertise, or be willing to do more than what is merely your job in order to ensure that neither you, nor none of your colleagues at work get laid off for 'economic reasons'. Be the person that will make and facilitate the creation of indispensable teams that pull in the same direction and accomplish great things. Be the pleasant antidote to the slow poison that is workplace stress, and then go home and be even better with the family as well. A few years of being excellent at work and considerate at home will get you into the habit of being that way forever and will IA rub off on your kids and significant other as well - finding you some peace at a time where there seems to be only strife.

The one thing that you cannot, under any circumstances, even think of doing, is trusting that what is happening inside the circles of power around the world, particularly the financial world, is somehow guaranteed to provide your family with some benefit. While this may be the friendly cynic in me speaking, I fail to see much inspiring leadership around this economic crisis at this crucial time. Just as the Emperor Nero once played the harp while half of Rome burned down, we seem to have our own makers of useless noise. The difference is that while the sound of the harp is somewhat soothing, our policy-makers seem to be doing little more than belly-dancing of the noisy and tasteless kind. All this managing of the public's emotions and the relentless flip-flopping is making some of us quite dizzy. Perhaps you will protect yourself and turn this noisy dance on the nightly news off for a while. After all, you have a job to do and a family to take care of - what are you doing watching all this economic belly-dancing on TV while the education of your kids is at stake?

Noteworthy News

Finance News:

1. The most indebted town in the USA ... read more here

2. As usual, women have it right when it comes to finance. A survey of what 'Financial Success' means ... read more here

3. Swiss Banking comes to Canada ... and leaves with $5.6B tax-free ... read more here

4. PM calls for global peer review mechanism for the financial sector ... read more here

Economic News:

1. Govts. Get together to redesign the Global Financial System (again) ... read more here

2. Reflating the Chinese Dragon ... read more here

3. Home Re-sales down by 14% ... read more here

Islamic / Middle East / Emerging Markets:

1. China calls for the technology transfer of the 'Green' kind ... read more here

Interesting but not all Finance:

1. Does anyone in Toronto really know what Garbage really is, and how the recycling system works? ... (hat-tip to S Qureshy) ... read more here

2. Saudi Arabia has the oil, but Oman has found the rock that consumes CO2 ... read more here

3. How easy it is to make fake news ... read more here

The Loony Loonie

2008-11-04T09:46:00.001-05:00

Quote of the week:

'I tried to get cash out of the ATM but it said 'Insufficient Cash'. I didn't know if it meant them or me.'- quoted from the Globe and Mail speaking about Banks.

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.

Commentary of the week:

The Loony Loonie:

As you may have noticed if you went over to the US this last week in order to test whether the overzealous border guards are still keeping us safe by checking whether someone is sneaking in cats across the border, the exchange rate between the Loonie and the Greenback seems to be in a bit of flux. Currency traders don't know if the US$ is going up, down, sideways, into hiding or whether refugee status is about to be granted to the Japanese Yen. Sometimes the world's smartest people believe the CDN$ is worth $0.80US, sometimes $1.45 and sometimes it's worth more than what you can find at the dollar store. So what are we as Canadians subject to this kind of fluctuating standard of life supposed to think about this sad and confusing state of affairs?

Sometimes events such as this prove something, but by the grace of God we live in a theory-free environment here at Ittihad, so we know that events of this past week prove nothing - they just point us in many different directions. First, despite our various governments' assurances to the contrary, things are not fine and dandy and our beloved policy-makers have no clue about how to deal with the crisis or where the next blow-up (yes, this is actually a financial term nowadays) will be. Second, what started in the debt markets has spread to the real economy, to the fictional and now to the fantastic. After all, currency markets are fantastic in the sense that they are the most liquid (more money moves through these than anywhere else), most efficient (more or less instantaneous trades), they never close (yes, currency can be traded 24/7/365.25) and above all they generally enjoy the perception of having currencies backed by governments and thus essentially worth something. Third, we discover a link between resources and the CDN dollar, but a confusing absence of a corresponding link between the US$ and resources (this may not be entirely true, but bear with me for a moment). We thus discover that this link is not as solid and obvious in the short run as we would like for us to be happy about living in a sensible world.

In theory, currencies trade against each other based on supply and demand, meaning if someone from Mongolia wants to buy up lots of CDN oil, gas, maple syrup or beaver pelts (fur is wrong btw), they have to buy CDN dollars by exchanging Togrogs for dollars, driving up the price of dollars and driving down the price of Togrogs. Since Canada has lots of agricultural produce, oil, gas, meat and brains to export, people have enough demand for the dollar. When the price of any of these commodities such as oil, wheat, uranium etc. goes up, people from abroad need to buy more CDN loonies in order to buy the commodities they need and this excess demand drives up the value of the CDN loonie as well. Of course, this works the other way around as well. If the price of oil falls, less CDN dollars are needed by foreigners to pay for the oil, so demand for CD loonies falls and the value of the loonie falls as well. This is the theory anyway, and given what has happened to the exchange rate recently, this is the way things have been explained to us. Canada, it is said, is a resource based economy and as the price of Oil goes, so does the price of the Loonie. Sounds simple, doesn't it?

Perhaps too simple. While it may be true that the correlation between the price of Oil and the CDN Loonie is such that we think they are stalking each other harmoniously, there is something deeper that drives both of them perhaps. Let us use the price of Oil as an example to make this point clearer. Let us say that the world uses X barrels of Oil per day and this demand is somewhat inelastic in the sense that regardless of whether gas is 90 cents or $1.50, driving around Northern Ontario in the fall is still a necessity and un-give-up-able. Let us now ask what the price of oil has been over the last little while given that demand for oil is somewhat constant. Lo and behold, we find that the price of oil has gone from $140 this past summer to around $60 now, but demand has been steady in the sense that there are still as few bicycles on the street as there were over the summer (perhaps even fewer) and we have not discovered any new ocean of Oil under yet another Arab country which has doubled our supply. Why then, according to the theory, is the price of Oil falling?

Well, this is where the theory of course breaks down a bit and all sorts of qualifications have to be added. It seems that it is not just present demand that we have to take into account but the futures markets as well. This means that you and I (actually just you, because my bicycle does not use gas) have been paying for gas at $1.40 for a few months not because there was some present demand, but because there were all sorts of investors who had borrowed money from banks in order to buy futures contracts of oil for speculative purposes. Now that the banks have called back those loans and these investors are realizing once again that prices can move both up and down, this pressure in the oil market is gone and we are seeing Oil drop to $60. It is this cooling of speculative froth that has brought down the price of oil and through its effects on the Loonie, our standards of living as well.

One gets the impression more and more that the stock market is just daily theatre for the masses while the real business of the day gets done in the futures and derivatives markets by people of 'vision'. What is worse is that the ideas being bandied around to solve the issues at hand are being developed by the same visionaries that thought making commodities expensive for the rest of the world in order to make trading profits. Over $700Billion in the US and tens of Billions of CDN tax dollars later, perhaps our short-sightedness in trusting fantastic visions of the future over a little bit of sense now will finally become clearer.

Noteworthy News

Finance News:

1. Wachovia Bank declares a $24B loss for the quarter. This is the bank that financed and has grown along with RJ Reynolds (of Marlboro cigarettes fame) since the 1950's ... read more here

2. 10 Reasons to be Optimistic about the markets ... read more here

3. Some Investment Banking humour ... read more here

4. 5 things to know if you're thinking about Real Estate (not all advice is beyond question of course) ... read more here

5. A good column on Investor Psychology ... read more here

Economic News:

1. The wonders of Globalization. Iceland's financial system is the first to collapse completely, requiring a 'bailout' by the IMF ... read more here

2. Interesting video on the way the Monetary system works (or doesn't really work) ... read more here

3. The best picture to describe the US economy I have seen yet on this page (good article too btw) ... read more here

4. The investment views of one of the finest investors in Canada (who has also lost lots of money) ... read more here

Islamic / Middle East / Emerging Markets:

1. Slowdown in Persian Gulf has grave implications for non-oil exporting Arab countries ... read more here

Interesting but not all Finance:

1. Is sentence length is important if you are running for President in the US? ... read more here

2. Margaret Atwood on the Debt Crisis and how fairness should be the cornerstone of finance. I wonder if someone pointed her to the usury laws of Abrahamic faiths ... read more here

3. Very interesting article on the politics of being Muslim in the US during the election ... read more here

4. Rotterdam gets a Muslim mayor ... read more here

5. Personal stories of some great risks ever taken by people in business for themselves ... read more here

6. A nice story about the biggest mosque in Germany ... read more here

Nowhere to Hide

2008-10-20T15:03:00.000-04:00

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

Pointers for Eid

2008-10-08T10:36:00.000-04:00

Quote of the week:
'Islamic financial institutions, in an attempt to compete in "the conventional, interest-based marketplace," have churned out products that give lip-service to Islam while using "ploys that sound minds reject and bring laughter to enemies.' - Taqi Usmani [quoted on Portfolio.com (big hat-tip to Owais Qureshi)].

Eid Mubarak - All of us at the Ittihad tribe wish that you all have a wonderful Eid with your loved ones, your nearest and dearest and even the people you have to meet on Eid because you just have to.

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:

The Economics of Eid:

The end of Ramadan is just around the corner and it seems that many of us are making plans for finally rewarding ourselves with home-made Halal steak in the afternoon while sipping the lemonade we couldn't even think of during the fast because of its mouth-watering aspects. But before all this hullabaloo about Eid parties carries us away into a festive spirit that drains us of the piety that we built up over the month in a matter of days, perhaps a deep breath and some reflection on what it is that we have done to deserve the kheer (look it up, or better yet, try it) we have been blessed with is warranted. The answer of course, is very little. The kheer, just like Eid, just like your monthly paycheque, just like the cash your uncles and aunts gave you on Eid for no reason other than the fact that you were cute once (but only when you were young), and the love within your family and friends is a blessing and a gift from the Divine. So as you have enjoyed these blessings and continue to enjoy them, the question to ask yourself on Eid is: Are you going to be someone that just enjoys what you have been given from Above, or are you going to be a vehicle through which these blessings pass on to others as well? The reason I bring this up is that Eid is actually a wonderful time to teach responsibility, gratitude and resource-management to the young and the still youngish (unfortunately, it may be too late for the old-ish, who like to believe that they are set in their ways and thus cannot change). These are some things I will be thinking of teaching my brand-spanking new nephew (even though he thinks what I say is gibberish) and perhaps you will find some food-for-thought in them as well. At the very least, you can find some young person who has been brought up the right way, is polite and therefore has to listen to you discuss these theories with him / her so he can get his mind off sports / cell-phone features.

Responsibility:
While Eid is a time of celebration in the sense that there are things to celebrate if we actually met our Ramadan goals, it is still not really a time to forget that we are still responsible for our long term future. So while we celebrate our private victory over hunger, we have not yet even made a dent on the abject levels of global or if one were to visit a homeless shelter or some Native reserves, even local poverty. So while during Ramadan we fasted so we would know in some shallow way what poverty of nourishment felt like, imagine the level of responsibility we should perhaps feel when we have been made familiar with that which was unfamiliar to our bourgeois lives, but is a constant reality for many below us on the totem pole of socio-economic status. Let us also celebrate the realization that this Ramadan, we disciplined ourselves to come close to a certain kind of poverty for a month. As we celebrate its end, let us also resolve to help others lift the burden of theirs.

Gratitude:
As I am one of the most popular people in Toronto and have therefore received a grand total of 1 invitation for an Eid Dinner (no, it is not from myself), there is nevertheless much to be thankful for. We must thank the divine for allowing us another opportunity to humble our various appetites, and be thankful to the people around us for being understanding of our temper tantrums, confusions, deliriums, chronic laziness and faulty decision-making that lack of nourishment forces upon our weak and impressionable minds. We must also thank the Divine for lining up all these uncles and aunts who want to give us cash, and for all the nephews and nieces that will be lining up to take their cut as well. I hope that we will remember that our wealth is entrusted to us from Above and the opportunity to make young people smile with the thoughts of spending money is innocent enough when they are young. Slowly but surely, they will grow old and realize that money is not their friend, but that you will always be family. Do not let the opportunity for this insight pass them by.

Resource - Management:
As we discussed at the start of the Ramadan series, this season is the time to be out and about in the beautiful places near us. As you have probably noticed if you are not above the tree line, the leaves have started to change colour and are lighting up the trails, streets, rivers and lakes with their blazingly bright show of seasonal goodbyes. There is a beautiful parallel here for us in this show of brilliance, which is that even the trees in this part of the world go through a fallow season, where they prepare to be poor in nourishment by shedding even their lungs. The autumn is their Ramadan - they die a small seasonal death while generously providing us the opportunity to look at the changes taking place within them with wonder. To make the point and my reasons for speaking about trees a bit clearer - as a wise man once said, 'the tree does not ask about those to whom its fruits go, it does what was intended of it, and lets God do the rest'.

So this Eid and this Fall, let us be less like busy people and more like trees. Be like a tree that was planted as a kindness to those around you and let this Eid be like your spring - blossom into the considerate, kind, loving, patient, ego-free and vivacious person that you asked God to make you the during your prayers in Ramadan. Now that would be worth a real celebration.

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Upcoming Events:
Yet another conference on Islamic Finance has found its way to New York. The topics will include heavy doses of truly innovative thinking such as 'Making Distressed Debt Halal' and 'Making Hell Freeze Over'. The Ittihad contingent will be there to ruffle some feathers and no doubt be told by other members of the industry that we are crazy. Our CEO and VP (of dreamy voice fame) will be there as speakers so if you are in the area feel free to drop by and give them a hand in dragging IF back outside the fold of conventional finance. As I have once again been grounded by the powers-that-be, I will not be going and therefore will be unable to report my findings to you later.

Muslim Friend of William Osler's Health Center will be hosting an annual charity Golf Tournament at 8:00 am on Saturday, Oct 4th. As it starts at the ungodly hour of 8 on Saturday morning and involves the painfully slow tapping of a small ball into an even smaller hole, no doubt this will be an unqualified hit with the Muslim masses. This is your chance to see me swing the new graphite driver I pilfered from our VP and wipe the field with my solid 7-iron play. We will give a fee discount to any corporate team that beats the Ittihad team for our investment banking services so if you have ever played ice hockey, ball hockey, field hockey or walked around with a cane in your life, you have a chance at rare glory. Be there ... email here for registration

Ittihad will be sponsoring the Eid festivities at the Rogers Centre downtown, so if you would like to see the unfortunate members of the staff who get to work on Eid, please come on down and say hello to me and give me an Eid hug. Of course, the event itself is always fun for the kids because I hear that there is a camel ride and free ice-cream for those who can answer a skill-testing question on Islamic Finance. Be sure to bring your friends and family, it will be an excellent opportunity to meet new people and reconnect with some long-lost acquaintances.

Useless fact of the day:
Regulators: Government-employed lawyers who, having failed to get employment on Wall Street, have trouble understanding what is happening on Wall Street.- (Edward Chancellor)

__________

Finance News:

1. And then there were none ... Investment Banking as a standalone business becomes pretty much obsolete ... read more here

2. The Doctor's bill for the US economy ... read more here

3. How AIG went bankrupt ... read more here

Economic News:

1. Harper says your home equity is safe. Phew, he had me worried there for a bit ... read more here

2. The Swedish approach to 'resolving' the financial crisis ... read more here

Islamic / Middle East / Emerging Markets:

1. Ruling from Islamic Finance Board cripples the Sukuk market ... read more here

2. The most popular Islamic Finance Shariah scholars in the world (hat-tip to Owais Qureshi... read more here

3. The background to story #1 in this section ... read more here

Interesting but not all Finance:

1. The Hadron collider breaks down ... (BTW - Absolute zero is -273 deg C) ... read more here

Wailing Wall Street

2008-09-22T12:41:00.000-04:00

Quote of the week:
'I do not feel obliged to believe that the same God who has endowed us with sense, reason and intellect has intended us to forego their use.' - Galileo Galilei.

Some previous articles from the IWB have been picked up by the International Business Times. Please click here and vote on how great you think they are. This way, perhaps the usual monotone coverage of Muslim issues found in the media will change for the better.

Commentary of the week:

Wailing Wall Street:

Once again, Wall Street has let us down. Here we were, planning to do an IWB on why taking a vacation is beneficial for the economy but have been dragged back from our fanciful musings into the nitty gritty of investment bank bankruptcies and Insurer fold-ups. It just seems that for all their education, smarts and financial sophistication, most people working in finance have perhaps missed their true calling as apprentices to donkey-cart drivers. Perhaps now they will have the opportunity to work in the field in which they should have been all along rather than wasting their lives brokering large deals between those who need to waste money and those with money to waste. The only question that keeps me up these days is - which section of idiot-financiers is dumber than the others? Is it the government regulators who have used up untold amounts of tax-payer money to shore up companies not worth their weight in cow-dung, or is it the people who spend years dreaming up complex, leveraged instruments only to pass them onto people just like them but with some more money?

So where did all this begin, you ask? Well, most things really begin after world war II, but we will skip over some decades and come to the early 70's. This is when President Nixon decoupled the US$ from gold and suddenly we could make as much or as little paper money as the banks that make up the Fed decided to at any time without necessarily having any gold to back it up. Of course, gold prices shot up (or rather, the worth of the US$ fell over the decade), but soon things became more predictable as people found a new way to do business. Everything suddenly became not just trade-able but a potential commodity to speculate with - Oil, Gold, Currencies, Wheat, Soyabeans and even the unmentionable animal. At the same time, some flawed geniuses in the US looked at bank (or savings and loans entities) balance sheets and realized that all these mortgages that people had, which were paying the lenders quite a bit of interest, but were essentially just sitting on the books (I am paraphrasing just a bit here). In the 1980's then, firms such as Bear Stearns (read the IWB obituary here) came up with ways to turn these mortgages back into cash by having one lender simply sell them as a package to investors looking for income. This is when the trading of fixed-income instruments (bonds) really took off and soon home-purchase payments your parents were paying diligently could actually be ending up at a small pension fund in Latin America that was unlucky enough to be a Bear Stearns customer.

Fast forward now to the present day and not only is it just the mortgage principals that are being traded, but interest payments and even the insurance on the mortgages. Actually, everything from credit card payments to the financing you have taken for your local mechanic's bill or marital furniture is ultimately being traded somewhere by a short man wearing glasses or by the computer program he has created to replace himself. All this works fine as long as no one cog in the machine creates problems, but alas, the machine was not made in Germany so breaks down. Since this one is American, lots of things break down and do so quite frequently.

Think of the US economy as a car, and money as gas. If a few people cannot pay their mortgages in the US, one of the cylinders in the engine is not really working and the car is not as efficient anymore. The Fed notices and jumps in to give it more power by giving it more gas. Since that doesn't solve the problem of the faulty cylinder, the car continues to run hotter than normal for bit and then the extra heat breaks something else down. This time, it is the mortgage-backed bond market, where nobody wants to invest anymore, and the Fed jumps in with yet more gas. Suddenly, all the bills for the companies that are involved in the mortgage market are unaffordable because they have no revenue - the Fed jumps in with yet more gas. Then the insurance companies that bought mortgages find that they are not getting paid - the Fed does the usual gas trick. After the insurance companies realize that they are toast (as per our views here), the investment banks realize that they have no customers - the Fed jumps in with High Octane gas. All this while, the car is slowing down because even though there are small explosions taking place in the engine, the engine is not really producing much power (think GM). Let us now suppose that the global political situation is such that the car has to travel uphill. So you have something with the shape of a car, with the engineering of a car, with the heat and sparks of a car, but the performance characteristics of a gas-tank with a lit fuse. It has lots of flammable gas, sparks but no real momentum. Clearly, the natural course would be for it to go screaming downhill while on fire.

The tragedy here is of course twofold. One, all of the gas the Fed, the Bank of Canada and others pour into this American junker is stolen from our cars as governments have one source of revenue and that is the taxes we pay either obviously or through the silent avenue of inflation. Two, many of the donkeys that were previously free will now be stuck with over-eager donkey-cart drivers looking to prove that it wasn't their fault.

Credit to Shahzad Siddiqui for suggesting the topic (and title) and Siddiq Mohamed for forcing me to say something about the tax implications.
Ramadan Mubarak - May this month be full of blessings for you all IA.

--------------
Upcoming Events:
You can watch our newly married (alas ladies), VP of Private Client Services, Mr. Firaaz Azeez, explaining some of the reasons why Ittihad exists and what we stand for as a company between 2 and 3 pm on Saturday the 27th of September on the Faith of Life Network on the CTS channel. Tune in for the depth of the ideas, but if that does not interest you, then perhaps I should also tell you that he has a dreamy voice and very pleasing appearance. Please tune in, listen to what the Private Client Division at Ittihad is up to these days and then call the Faith Of Life people to ask for a repeat or two.

Office for Rent:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of just sitting there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here or calling Mr. Azeez at (416) 412 3999 ext. 115.

Useless fact of the day:
Campestral: something or someone that thrives in open countryside and under open skies, as opposed to the usual growth found in cubicles.

__________

Finance News:

1. Two for the price of one ... both Lehman Brothers and Merrill Lynch go under (but in different ways) ... read more here

2. Bill gates buys $32B worth of Garbage, and we are not even talking about Windows ... read more here

3. Time for many Investment Bankers to realize their true calling and become donkey-cart drivers ... read more here

Economic News:

1. I think the Chinese might end up 'saving' Wall Street ... read more here

2. The Economist opines (finally) on why things are so bad ... read more here

3. Why the underwriting of $62Trillion worth of derivatives may be a bad thing ... read more here

Islamic / Middle East / Emerging Markets:

1. One of the foremost Economists of Islamic Economics (a person who has researched the relative efficiency of debt vs. equity on an economy-wide basis) has written a piece on Ethical Investing. A must read ... read more here

2. Why the Sovereign Wealth Funds have not jumped in to save Wall Street (well, not yet anyway) ... read more here

Interesting but not all Finance:

1. Is there a food shortage in the world, or is there a water shortage? ... read more here

2. Teaching kids a financial lesson ... read more here

Casino Finance

2008-09-17T10:54:00.000-04:00

Quote of the week:
'If the industry introduces too many new products, cynics will argue that sharia is being twisted for economic ends-the scholars are being paid for their services, after all. But if it fails to innovate, the industry may look too medieval to play a full part in modern finance.' - The Economist.
Please read this article about the industry and notice how smoothly, coolly and with such great perceived expertise on the matter, The Economist has painted us as medievalists unfit for modern finance. Too funny really ... as if modern finance is somehow better than medieval finance.

Some articles from the IWB have been picked up by the International Business Times. Please click here and vote on how great the articles are. Do be shameless and liberal with your praise.

Commentary of the week:

'Quick and Easy' Islamic Finance:

Regular readers of the IWB know that letting yours truly in at Financial industry conferences is always a bit risky so imagine my surprise when I was invited to the World Alternative Investment Summit held at the very plush, very luxurious Fallsview resort in Niagara Falls. At first, it was questionable whether I would be allowed to go after the cutlery fiasco that took place some decades ago (described here), but after many empty promises of good behaviour, permission was reluctantly granted and I had my bags packed and ready before the authorities could change their mind (or even finish the 'k' part of 'okay, you can go'). On the way there, I realized that in my excitement at being taken along, I had overlooked to read the agenda of the 'Summit'.

Reading the agenda while doing my best impression of a docile passenger had two effects. First, it made yours truly quite incredulous that the conference (which had a significant component devoted to Islamic Finance), was being held at a Casino (yes, that is correct), in the middle of Ramadan. Second, once I got over the shock of that realization, the predictability of the topics under discussion put me into a deep kind of sleep. Fast forwarding past our arrival at the venue and the sheer decadence of the surroundings, let me tell you what most of the conference was dedicated to.

As this was an 'Alternative' investment conference, you had the usual suspects in attendance. Lots of hedge funds, some real estate LP's, lots of lawyers, some back-office suppliers and of course, yet more lawyers. The salient themes of the conference were twofold, with a session on Islamic Finance thrown it at the end. First, as the liquidity crisis is having its way with public markets, the order of the day is to find assets that are uncorrelated with major stock market indices. This is supposed to create some predictability in your rapidly shrinking portfolio. Second, as there is very little gain to be had if funds just buy and hold stocks, the order of the day is to borrow from banks at prime and invest at prime + infinity% so we can all get rich quicker than we can resolve whether strawberry milk shake is better than chocolate. As we at Ittihad have heard this story again and again and have already decided on strawberry, we of course know that using borrowed money to invest is fine and dandy in this life only some of the time, but can be quite problematic for our next life - so we try and steer clear of this whole idea. As two of my fellow Ittihad geniuses were with me, I quietly nodded my head as if I agreed and did not make a scene by pulling out the hair in my beard at the insanity of it all. But alas, this sense of forced calm did not last - and the session on Islamic Finance broke all pretence at self-control.

While I will not bore you with all the ways in which I came away offended and quite hurt at the shallow way in which many people treat and think of Islamic Finance, there is an exchange that I would like to leave you with that is quite instructive. After describing to the audience how anything that our friendly hedge-fund types usually did or wanted to do could be structured in an 'Islamic' or 'Shariah-compliant' way, some members of the audience were left a bit confused. One question, which was 'well, if you can structure anything 'Islamically', then what is the difference, and why bother?' was answered along the lines of the thought that Muslims need to be liberated from their money (which I thought was a very clever way to put it). The second question (asked by my associate) was along the lines of whether what these practitioners were proposing was in line at all with the letter and spirit of Islam? The answer to this was such that I almost fell out of my chair and had to be first propped up and then restrained before I ran up onto stage, held the speaker's collar and then gently fixed the alignment of his tie before walking back calmly as if nothing had happened, but I digress.

The answer to this beautiful question was quite illuminating indeed. It was that the responsibility of the spirit of Islam, if there is such a thing that can be agreed upon, did not lie with those who create these products and structures, but with the Shariah Boards that approve them. Of course, when this question is asked of Shariah Boards, they simply turn around and say that it is not their responsibility to structure genuine solutions, it is their responsibility to pass on the legalese of individual contracts. Since three or four individual contracts can be combined to reproduce conventional finance quite well, both parties pass the buck to each other on the entire solution and make a mockery of whatever little Islam there is in Islamic Finance.

As we usually find that the only one's at these panels that make a direct link between Ethics and Islamic Finance are people from the Ittihad tribe (at this one it was our Dear Leader - God Bless him for introducing some integrity and dignity to the proceedings), I think it may be time to take some responsibility for what happens in Canada on our own shoulders. As such, let me humbly suggest that I hope you all will not allow anyone to 'liberate you from your savings' unless you are an aware, willing and educated participant in this grand liberation being planned at the Casinos of the world.

Ramadan Mubarak - May this month be full of blessings for you all IA.

--------------
Upcoming Events:
You can watch our newly married (alas ladies), VP of Private Client Services, Mr. Firaaz Azeez, explaining some of the reasons why Ittihad exists and what we stand for as a company between 2 and 3 pm on Saturday the 27th of September on the Faith of Life Network on the CTS channel. Tune in for the depth of the ideas, but if that does not interest you, then perhaps I should also tell you that he has a dreamy voice and very pleasing appearance. Please tune in, listen to what the Private Client Division at Ittihad is up to these days and then call the Faith Of Life people to ask for a repeat or two.

Office for Rent:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of just sitting there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here or calling Mr. Azeez at (416) 412 3999 ext. 115.

Useless fact of the day:
Conniption: flirting with a stroke-like state due to intense anger or excitement. The feeling of being emotionally overwhelmed such that self-control falls below the top 3 on the list of one's priorities in life. Not recommended during Ramadan.

__________

Finance News:

1. The US Govt. decides to own everyone's home also ... welcome to the USSR, no, no - I mean the new USA ... (quite possibly the best news for Gold investors but don't quote me) ... read more here

2. After the fall of Bear Stearns, another large investment bank is having a delayed reaction ... read more here

3. Who bears the cost of mortgage bailouts ... read more here

Economic News:

1. Economist Paul Krugman speaks about the paradox of deleveraging ... read more here

2. An excellent article on the background of why the creation of credit in an economy is fraught with danger ... read more here

3. The problems with deposit insurance and how this creates issues for the industry ... read more here

4. What the instability of the US$ means for US policy-makers ... read more here

Islamic / Middle East / Emerging Markets:

1. An article on Islamic Finance from The Economist (must read article of the week) ... read more here

Interesting but not all Finance:

1. Introducing the Ramadan Phone. If only it could cook before sunrise also ... (hat-tip to Husein Kirefu) ... read more here

Ramadan & Economic Sustainability

2008-09-08T12:47:00.000-04:00

Quote of the week:
'I am as My servant thinks I am. I am with him when he makes mention of Me. If he makes mention of Me to himself, I make mention of him to Myself; and if he makes mention of Me in an assembly, I make mention of him in an assembly better than his. And if he draws near to Me an arm's length, I draw near to him a fathom's length. And if he comes to Me walking, I go to him at speed.' - Hadith Qudsi

Commentary of the week:

Ramadan and Sustainability:

As you can see, the Ramadan theme continues this week (and depending on responses, perhaps for the month). This could be because it is difficult to summarize in a single IWB the various strands of thought that being famished and dreaming of samosas all day forces upon weak minds such as yours truly or it could be that there is something unexplored about the subject still left to say. The thirst for something cool, refreshing and liquidy does not allow me the latitude to use the overtaxed brain matter too much today so I will leave this particular question for now. What I will share with you though, is a thought that is becoming more and more impossible for me to get away from as I reflect a bit on the first few days of fasting.

Perhaps it is also appropriate for me to describe exactly the circumstances in which this thought was forcibly put into my head. It sort of happened as I was huffing and puffing my way up the last hill to perform my various cleaning duties at the glass castle that is Ittihad on my two-wheeled human powered vehicle that I began to day dream about not having to huff and puff back home after work and instead thought of driving back in the red Porsche that had just overtaken me at something approaching light-speed at a distance so close as to almost take my bushy, flowing and truly impressive beard with it while I progressed at a pace approaching that of a particularly slow snail on her way to visit reluctant in-laws. Of course, it should not have been so easy for me to lose focus on what is truly important in life but what can I say - the car was the exact shade of cherry red it should have been and I was suffering from severe dehydration. The thought in question though, as I was deciding between making a sincere prayer for a drink of water or wishing for the Porsche itself, was driven home in quite violent fashion as my poor vehicle suddenly fell into what is perhaps the largest pothole east of the Grand Canyon. As my bones, wrists, knees, elbows, neck and torso felt the impact of a bicycle travelling upwards towards a fairly heavy body travelling downwards, I was reminded again of many things that I had foolishly forgotten. One was that there is language one must not use during fasting, or ever really. The second was that on the road of life, it is not the usual smoothness that is memorable, but the violence of the potholes. Once I recovered (if that is indeed the word), I also realized a deeper truth - which is that it is exactly such thoughts as the ones I was having for the Porsche and the vicious cycle of longing for things only to be bored with them later that festivals such as Ramadan are supposed to protect people such as me from.

Even if on the face of things we think of Ramadan as a particularly Muslim month, there is no denying that there are many religions, faiths and viewpoints that advocate the sacrifice of both some our petty needs and some of our deepest longings in order to develop something of a more refined personal and societal character. Festivals such as Lent come to mind, but I am sure that there are many others with whom we share some of the concepts of Ramadan. One reason this is important for one as obsessed with finance as me is that Ramadan to me is perhaps one of the most anti-consumption ideas to take some hold in a society bent on consuming itself and in theory this holds great promise for the development of a sustainable economy. To truly take advantage of this month and it's insights promises to let us break out from the mental prison of personal needs and take us through to the liberation of generosity and compassion instead. This is an important point because one of the things that we need at a societal level is a system or way of life that allows us to live as part of the world, not as parasites upon it. While one has to be very careful about promising grand solutions to the world's problems and we as Muslims certainly cannot claim to have everything figured out (the disagreements about the sighting of the moon come to mind), there is nevertheless a deep wisdom at work here in building a society that is willing to sacrifice personally for at least some part of the year in order to give the rest of the planet a bit of a break from their personal needs.

As this is not a very obvious topic for discussion (I think), I am somewhat sure that there has been very little research that has been done to determine whether widespread societal fasting such as that during Ramadan contributes to the sustainability of that particular economy. Of course - it may be difficult to gather evidence because we could be so far gone as Muslims that we simply shift our consumption to the evenings instead of during the day and thereby do not really change much except just our patterns, not the amount or kind of our consumption. If the latter is true, then perhaps this loss of the deeper meaning and transformational promise of Ramadan is a tragedy even larger than that of the pothole. One feels though, that that all of you fine IWB readers are better than that, and it is only moi that needs the bone-crushing reminders.

Ramadan Mubarak - May this month be full of blessings for you all IA.

--------------
Upcoming Events:
Go ahead, invite us ...

Office for Rent:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of just sitting there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here or calling Mr. Azeez at (416) 412 3999 ext. 115.

__________

Finance News:

1. For those of you wondering what the Private Equity industry is up to ... read more here

2. An interesting story about the emerging nexus between Finance and the Army in Canada ... read more here

3. Is Commercial Banking the next in line for losses? ... read more here

Economic News:

1. Municipal Bond market in a bit of a pickle. Can't have cities and townships going bankrupt now can we ... read more here

2. Another Green Revolution with implications for a sustainable economy ... read more here

Islamic / Middle East / Emerging Markets:

1. Looking just beyond the headlines of a booming Indian economy ... read more here

2. Abu Dhabi is getting into the movie business. Can this mean that the next Superman will have a beard, or will wear his underwear on the inside?! Stay tuned ... read more here

3. Almost everything that is wrong with the field of Islamic Finance in one short paragraph (hat-tip to Sikander Ali) ... read more here

Interesting but not all Finance:

1. An excellent write-up on how universities contribute to local (and global) economies. A case study of the Perimeter Institute, funded by the founder of RIM (hat-tip to Suhail Ahmad) ... read more here

2. Absolutely and positively a must read for anyone that is fasting this Ramadan (hat-tip to Fariha Naqvi-Mohamed)... read more here

3. A piece of ice larger than the size of most countries breaks off the Arctic Ice-Shelf ... Hummer, anyone? read more here

Colour of Ramadan

2008-08-30T15:49:00.000-04:00

Quote of the week:
'None of us will ever accomplish anything excellent or commanding except when he listens to this whisper which is heard by him alone.' - Ralph Waldo Emerson.
One assumes it works the same way for women, but I cannot be sure. I thought to share this quote because I thought the idea of listening for whispers amongst all the shouting in life is a powerful one - I hope all of you have an excellent Ramadan, devoid of loud disturbances and full of whispers that inspire you.

Commentary of the week:

The Colour of Ramadan:

As many of us know, the month of Ramadan is just around the corner. Some of us are stocking up on the ice cream and the parathas (exquisitely made fried pita) for those midnight cravings, some of us are planning cricket matches in parking lots at mid-night and some of us are even looking forward to the annual redevelopment of the discipline involved in the denial or control of our various appetites, such as the one for food and drink from sunrise till sunset. This is thus a special time, because we force ourselves to think of things in a different context. It is no longer about what we need to eat or feel like eating or doing on a daily basis, but rather about how best to spend the month reconnecting with our own spirituality and to the family and community around us. It is a time that we force ourselves to be generous, courteous and sensitive to others such that we begin to remember what it is like to be the genuine people that we really are but perhaps forget to be for the rest of the year because of our sometimes pedestrian, work-a-day lives. One wonders of course, and perhaps this is a question for all of us, about what would happen to our lives if we were able to apply the same consciousness and spirituality that we try and re-discover every year during Ramadan to our lives for the rest of the year as well.

So here are my top 3 suggestions for a special Ramadan experience - it may be wise to ignore them completely as I am no scholar of any faith, but perhaps something here will resonate with you as well.

1. Sacrifice not just food, but the appetite for living a consumptive life. This simply means that instead of planning to just cut down a bit on the eating during the day and then making up for it by frying up a few cows or sheep in the evening, try to actually consume less over the month. If you are feeling particularly adventurous and really want to get into the spirit of things, consume less of even stuff such as gas, electricity, water etc. for the duration of the month. Too often we deny only one aspect of consumption by eating no food during the day but then make up for that by polishing off a few defenceless chickens in the evening. Try to spare the chickens, the eggs and the water in an absolute sense. Not only will you have saved some holiday money as your various utility, gas and junk food bills come down, you will also have built up habits of modesty in those areas of life where our modesty is not usually applied.

2. Reconnect with not just the Divine, but also the signs of the Divine that are present around us all year. We are blessed in the sense that we have an infrastructure of places where we can worship but in some ways, even the sincere appreciation of something beautiful is a form of worship. So spend some time with your family visiting beautiful parks that we gladly pay for with our taxes between prayer times. If you have kids, get to know their dreams and aspirations so you have a better idea of how you can help them grow into excellent people that you would be proud to know even if they were not related to you. If you are young, spend some quiet and gentle moments with your parents getting to really know them again. Try and be helpful to friends, smile at yourself and others even though you are hungry and want ice cream. Forgive yourself for those mistakes for which you can and ask Divine Forgiveness for those that are beyond just you and those around you. The idea of Ramadan is meant to be something of a renewal of the beautiful aspects of your life so surround yourself with your beautiful neighbours, teachers, friends and the lush greenery and beauty that we are blessed with here in Toronto (and Canada) when you have a moment or two. Let the colour of this Ramadan be green.

3. Remember the big deal we made about the Olympics? Think of this Ramadan now as a spiritual, physical and mental Olympics that is open and accessible to everyone, not just the religious or even the Muslim elite. There are no obvious medals for success and just a genuine try to be better than the petty circumstances of our lives is a win. Also, nobody has to lose in order for others to feel successful. This is a challenge for ourselves to be better than we were a month ago, not for us to be better than others. It is also a time of inclusion such that we reach out make friends with our neighbours and co-workers regardless of differences in faiths. It is meant to be a time when we stretch beyond any petty tribalism and really connect with people.

Someone asked me recently why I wrote something against the Olympics. I tried to clarify that what I wrote was not against the Olympics as much as it was against an intense focus on the events to the detriment of other things. Perhaps I should have added that we have an annual event of our own that deserves some focus as well. Many athletes tell us that the Olympics is a special time for them because they push themselves physically and they have to wait for it for four years. This Ramadan, we again have an opportunity to push ourselves on not just a physical level, but a spiritual and mental one as well. Let us then - take this opportunity to be good, to be well, and to be helpful to those that cross the path of our lives for even a short time. After all, we don't really have to wait for four years to push ourselves a little more.

Ramadan Mubarak - May this month be full of blessings for you all IA.

--------------
Upcoming Events:
Go ahead, invite us ...

Office for Rent:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of just sitting there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here or calling Mr. Azeez at (416) 412 3999 ext. 115.

__________

Finance News:

1. CIBC still can't get all the bad news out ... read more here

2. Gotta love the banks. Information Privacy at its best ... read more here

3. World's largest bank getting even larger ... read more here

Economic News:

1. Business bankruptcies in the US surge more than 42% from last year ... read more here

2. An excellent, short, simple (but not too oversimplified) column on the link between inflation and standard living (using the US as a case study) ... read more here

Islamic / Middle East / Emerging Markets:

1. For many countries less blessed with fresh water than Canada, water is the new oil ... read more here

2. Chinese companies in Iraq? ... read more here

3. Saudi Arabia allows foreign ownership of their public stocks ... read more here

Interesting but not all Finance:

1. The 'Big Bang' experiment is about to be held under the mountains of Switzerland ... read more here

2. The not-so-secret Brain Food behind Ittihad's genius. Please, stick with the Green Tea ... read more here

Olympic Goals

2008-08-22T12:18:00.000-04:00

Quote of the week:
'We live in an age when unnecessary things are our only necessities.' - Oscar Wilde

Office for Rent Immediately:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As a sweetener, there is even a nice, clean and neat private washroom that we will throw in for free. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of just sitting there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here or calling Mr. Azeez at (416) 412 3999 ext. 115.

Commentary of the week:

Torching the Olympics (but not literally):

As the world's athletes gather in Beijing and China showcases the organizational abilities the state has gained after many years of central planning even minute details of people's lives, many of us are watching the Olympics with a mixture of awe and regret. Awe because we realize that the athletes are indeed talented and regrets because of course if we had spent all our waking hours either running, walking or swimming from point A to B, or throwing oddly shaped objects here, there and everywhere, we would not be sitting in front of a computer right now thinking about finance. Someone would probably sponsor our clothes, our sunglasses, our shoes, our nail polish (if you are into that kind of thing) and our trip to China where we would put on a good show and forever call ourselves Olympians.

But alas, regrets of such kind do not get us far, and keep us away from the issue at hand - which is, how much money, really, do we have to spend on relatively frivolous pursuits in order to be entertained, when we could actually solve some of the world's problems? For example, while the ability to run from point A to point B quickly might have been useful in an age without bicycles, or is perhaps useful in situations where the neighbourhood's mad dog is chasing you at the tail end of your weeknight jog - is it really a humungous achievement to be able to do it in 9.63 seconds rather than in 9.64? Of course, this question may be envy disguised as profundity from someone who would probably not make it to point B if he was asked to actually run at all, but I hope you see that there is a valid point somewhere in there.

The other thing about the Olympics (other than the triviality of the events) is that they take attention and resources away from genuine problems. We have a finite amount of attention that we can bring to bear on issues and every time we begin to lose focus, we end up just a little further off the straight and narrow path that we perhaps should be following. For example, as we worry about whether the world record for the number of medals to a single contestant will or has been broken, there have quite possibly been gross human rights violations committed in Iraq and Georgia, preparations have been made for war against Iran and worst of all, the ravages of disease in parts of Africa that remain underserved with health care workers has devastated quite a few families. Of course, all this is happening just outside the horizon of our attention while we provide non-stop coverage to events as applicable to our daily lives as the 'discus throw' and the 'pole vault' - as if we were all just about to throw our briefcases from one end of the parking lot to where our car is parked, or as if we were about to pole vault into our 7th floor office through the windows instead of taking the coffin-like elevator like reasonable people. Suffice it to say that the whole system of our priorities seems to be a bit off-kilter sometimes and every four years, the Olympics reminds us of not how far we have come as humanity, but how little we have really changed from the warring tribes we were centuries ago.

Nevertheless, lest you think I am trying to put a damper on this global celebration, I assure you that I am not. I just think we should get a bit of a grip, because it is not as if it's the World Cup. Also, one notices that the Olympics and the constant entertainment that we and our impressionable children are force-fed, really takes us away from being present in the lives of our neighbours and families and reduces our conversations to how fast someone we have never met, who probably spends 17 hours a day running, can get from point A to point B. It would still be okay if watching the Olympics motivated us to actually get up off the couch that is strategically placed in front of the big screen and made us try out whether we are still able to run the 100M in less than 12 without having a coronary, but how often does watching other people huffing and puffing on TV motivate one to do that?

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Upcoming Events:

Barzakh Cemetery Services, a charitable, non-profit organization led by Muslim women, is hosting an event to discuss family financial matters from a Muslim perspective at 3:00 pm on the 23rd of August at the Northwood Community Centre, 15 Clubhouse Court, located here. The event is designed to address issues such as Wills, Taxes and the way to approach the complete financial planning process - so it may be worthwhile for you to attend. Sh. Yusuf Badat from the IFT will speak about the importance of Wills and the technicalities of Inheritance Laws, followed by Br. Ahmad Abdullah who will speak about the impact of Taxes during life and also at someone's passing. As for moi, usually one is invited to speak about Islamic Finance, but this presentation will IA be about Financial Planning in general and some of the challenges involved for us as Muslims. I have been told that one of the severest problems within the Muslim community is not really the lack of wealth, but the lack of financial sophistication - so this event should go some way towards addressing this critical issue. Lastly, as this is an educational presentation and we are just helping BCS, you will not need to write Ittihad a cheque at the end. You might still want to support BCS as a community organization however, so please don't leave your chequebook at home altogether. As seating is limited, please RSVP by replying to this email.

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Finance News:

1. The Economist that built his reputation by analyzing the market for used cars in a novel and extremely insightful way brings his intellect to bear on financial services (let us not hold his stint at the IMF against him) ... read more here

2. Conditions at Fannie and Freddie continue to worsen, making lenders twitchy about loaning out money for homes, making home-buyers twitchy about buying homes and thereby playing havoc with home prices even in Canada ... read more here

3. How Bank and Investment firm losses lead to changes in management ... read more here

4. Another ticking time bomb in the Real Estate market ... read more here

Economic News:

1. Russia saves up some of its Oil money for darker days ... read more here

2. Sovereign Wealth Funds cutting exposure to US$ (hat-tip to Mansoor Ullah) ... read more here

3. Food inflation in the UK goes to 10% ... read more here

Islamic / Middle East / Emerging Markets:

1. Credit crisis wary investors turning to Islamic Finance (hat-tip to Imtiyaz Ahmed) ... read more here

Interesting but not all Finance:

1. The entrepreneur behind the cream in your Tim Horton's coffee. This is what you call a self-made man ... read more here

2. Meeting etiquette at work ... read more here

3. Succession planning advice for small business-owners ... read more here

4. Example of creative, peaceful resistance to aggression ... read more here

Financing War

2008-08-15T16:02:00.000-04:00

Quote of the week:
'To be clever enough to get all that money, one must be stupid enough to want it.' - G. K. Chesterton.

Office for Rent Immediately:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As a sweetener, there is even a nice, clean and neat private washroom that we will throw in for free. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of training on how to just sit there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here. Please do not email or call me directly - if you do, we will fiddle with the lock such that it does not open from the outside in emergencies.

Commentary of the week:

The Financing of War:

With the Russian advance into Georgia almost complete, our topic for the week suggests itself in a manner too difficult to ignore. Although we cannot determine from our plush offices here in Toronto what exactly went on in the Kremlin and why exactly our Russian friends decided to destroy half a country named after George W. and whether there is any symbolism involved here, we could either ignore the subject completely or find an opportunity here to discuss an area of finance that is usually swept under the rug. The choice is obvious, really and the question we have to explore is not really why this has happened, but how exactly these, and other hostilities, are sustained financially. In other words, how do Wars like this get financed, and what can we learn from this particular case.

By now everyone knows that the Russian army has pretty much settled down in some areas of their previous colony, and that it is unlikely that they will simply get up and go back as if all of this never happened or as if this was just a mistake. Money was spent planning this venture out and money will be spent keeping the army on a war-footing. How was this financed, and where will the money continue to come from? The case of Russia is a bit complex so let us tackle the simpler example first, which is that of the US and their adventure in Iraq.

For the US - it is quite simple. More or less the entire financial structure is built on Govt. bonds. Every time a foreign misadventure is planned, the govt. simply plans to sell more bonds at around 5% and the majority of the world, including your pension fund managers, simply line up and buy all they can afford. In this way, the government is able to borrow a practically unlimited amount for any expenditure they would like to make in order to get re-elected, and because the US actually does have a somewhat sophisticated knowledge based economy that keeps producing googles, Microsofts, Apples etc., the taxes are usually enough to at least pay off the interest on the bonds. Very simple.

For Russia, things are a bit more complex. There is no real tax base because the population has been through a decade plus of poverty resulting from the breakup of the USSR. Economic activity and production is limited and manufacturing exports are virtually nil (ever driven a Lada?). There is just one bright spot in the economy and that is energy production. Even though it is ironic that it is the US adventure in Iraq that has caused energy prices to rise to a level that has the Russian war planning department jumping with glee at the infinite possibilities available now that they can actually pay their troops, this is a heady moment for Russia. The barrel of Oil they were selling for $50 just a few years ago, is bringing in more than double that amount. Furthermore, since expenditures have been contained thanks to privatization and the retreat of the public sector, Russia's exports of gas and oil to Europe and China are profitable in the extreme. This already wonderful state of affairs is made even better for Kremlin by the fact that unlike the way it is in Canada, in Russia it is actually government entities and companies that control and own most of the oil and gas fields.

So for us now, what can we learn from this situation (other than the fact that war is a wasteful activity)? The first thing is that governments really shouldn't be borrowing. The borrowing of the US has created a mess in the US, Iraq, in Georgia and a mess in even my small bank account because of my frequent trips to the gas station. The second thing is that governments that do not depend on people's taxes or their consent for government, can do pretty much anything they want without the population's prior knowledge or approval. The third is that the gas we put in our cars for quick jaunts here and there and the omelettes that my German friend Hans (I kid you not - that is actually his name) makes every morning using the gas imported from Russia really pays for a lot more than just warm eggs. The fourth is that looking at the state of the world in this way means that it is not just the Russians or even the Americans that are to blame for all this. The simple fact of living in a gas-consuming, over-dependent-on-energy lifestyle makes us a party to much that is faulty around the world. Perhaps one solution is to disengage as much as possible from over-consumption so it is not so easy for Russia to sell its gas and for the US to sell Treasury Bonds; but that would require actual changes in the way we live and what we buy. Much better to pin the blame elsewhere - as you have probably noticed from what passes for 'news' these days - it is easy to blame others when we ourselves are a part of the problem.

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Upcoming Events:

Barzakh Cemetery Services, a charitable, non-profit organization led by Muslim women, is hosting an event to discuss family financial matters from a Muslim perspective at 3:00 pm on the 23rd of August at the Northwood Community Centre, 15 Clubhouse Court, located here. The event is designed to address issues such as Wills, Taxes and the way to approach the complete financial planning process - so it may be worthwhile for you to attend. Sh. Yusuf Badat from the IFT will speak about the importance of Wills and the technicalities of Inheritance Laws, followed by Br. Ahmad Abdullah who will speak about the impact of Taxes during life and also at someone's passing. As for moi, usually one is invited to speak about Islamic Finance, but this presentation will IA be about Financial Planning in general and some of the challenges involved for us as Muslims. I have been told that one of the severest problems within the Muslim community is not really the lack of wealth, but the lack of financial sophistication - so this event should go some way towards addressing this critical issue. Lastly, as this is an educational presentation and we are just helping BCS, you will not need to write Ittihad a cheque at the end. You might still want to support BCS as a community organization however, so please don't leave your chequebook at home altogether. As seating is limited, please RSVP by replying to this email.

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Finance News:

1. Even though we don't like debt, there is nevertheless a half-decent framework here to evaluate which kinds of debt are better for you financially (we won't get into the spiritual aspects this time around). If you are going to go into debt, at least be somewhat smart about it ... read more here

2. A good deconstruction of coat-tail investing ... read more here

3. House prices in Ontario now falling also ... read more here

4. A film about National Debt ... read more here

Economic News:

1. Inflation in the US at the highest level in 17 years (and these are just the official numbers) ... read more here

2. Trade protectionism is back, starting with agricultural exports from developing countries ... read more here

Islamic / Middle East / Emerging Markets:

1. China allows the listing of foreign companies on its stock exchange ... read more here

Interesting but not all Finance:

1. Farming practices better than organic? ... read more here

2. Definitely a 'why didn't I think of that?!' moment ... read more here

3. Loblaw's going into local produce (yes, but will grocery be cheaper?) ... read more here

Globalization of Chaos

2008-08-11T18:39:00.001-04:00

Quote of the week:
'Do a Goodly Act and cast it into the river; the Divine will recompense thee in the desert'. - Muslihuddin Abu Muhammad Abdullah ibn Mushrifuddin Sa'di

Office for Rent Immediately:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous, non-glass enclosed office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is so minimal that I don't think we should even talk about it - much better to speak about how gorgeous the office is. As for the salient features of the space, other than the beautiful windows, the spacious Board-Room, the Corner offices and the nice faux mahogany furniture, there is even a nice, clean and neat private washroom that we will throw in for free. As this is a Professional Building (not just any building mind you, this one is a professional), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here. Please do not email or call me directly - if you do, we will charge extra for the washroom.

Commentary of the week:

Globalization of Chaos:

So much has been written about the credit crunch that it is difficult to add anything to our understanding of what has happened and what is happening in financial markets without being drowned out by the voice of the crowd. Although it is difficult to add anything new to the debate without seeming totally off the wall; being categorized in that manner has never fazed your humble correspondent before and as all of you have no doubt been waiting for the IWB for 2 weeks now, noblesse oblige.

While many people ascribe our latest economic woes to improper lending practices in the US and the overinvestment into overvalued real estate, the meaning of all this is not usually discussed within a global framework. While links between a home-buyer who is buying an overpriced home in a Floridian swamp, the price of food and Central Bank interest rate policy within the US and Canada have perhaps been addressed in previous IWB's, there is another angle we may have missed until now. A news item came out recently that spoke about how Central Bankers from across the Globe had gotten together and were fretting about the risks to the 'financial system' as a whole and were encouraging each other to act in some kind of controlled, harmonious manner in order to complement each other's moves and guide their local systems through this crisis in a manner that causes the least amount of pain to their respective constituents. The idea here is that as long as the Banks continue to sing the same song, nobody will be left holding the bag at the end and they will all be able to pass the buck without anyone going out of business and (this is key here) without any major political upheaval. To us enlightened few of the IWB readership of course, surely this sounds too good to be true.

While it is true that international cooperation on financial issues has come a long way from the failure of the Hertstatt Bank in the 1970's and has become fairly seamless for the quick hither-thither movement of money, it is much less harmonious during times of trouble. Furthermore, as relations become less harmonious (and there was a hint of this as Asian CB's became openly critical of the Fed), the buck gets passed onto the most unlikeliest of candidates. So while the fault began in the US perhaps, the people suffering the most for example, may be seniors on fixed incomes in Sub-Saharan Africa; or it may be the Palestinians, who have to contend with hyperinflation in food prices to further compound all their other problems.

This is what I mean when I speak of the Globalization of Chaos. We have slowly opened up our local economies to each other's goods and services in order to enjoy lower prices and better variety of products, have allowed an uncontrolled globalization of vital commodity markets; and have also allowed consolidation of entire sectors within large conglomerates. We have not however, loosened the grip of local currencies, interest rates and the infrastructure of monetary control on the imagination of our local authorities and they continue to labour under the assumptions that tinkering here and there with short-term rates will guide our economies towards even growth. As such, we are now left in the twilight zone of being able to control local economic policy, but not the local economic outcome of those policies (let alone the outcomes for the global economy). Furthermore, because of the uneven ways in which globalization has worked - we only control the financial, no longer the real.

Even if local authorities act in concert, it remains questionable whether they can manage inflation, economic growth and their local financial sectors at the same time. Furthermore, as the tightening of credit necessitates absolutely the sacrifice of some unsuspecting party, we have to figure out who the unfortunate people or countries that will be left holding the bag are likely to be. One has theories of course, so here is one that is somewhat plausible. As the larger, more powerful countries of the G-8 try and control inflation, keep their financial sectors from imploding and keep the economy growing to boot - they will necessarily create further pressure on real markets such as the ones for agriculture, transportation and resources, which are fully globalized already. While the political skill and management infrastructure within the G-8 might be able to put a damper on population unhappiness here at home, the effects of our economic policies here will create unrest in countries that are politically weak. This is already happening in areas of Sub-Saharan Africa and places in the Middle East and is likely to get much worse as the lack of an economic cushion in poorer countries creates deep unhappiness and perhaps even something more in a people squeezed between declining incomes due to faltering economies and higher food and fuel prices. If one remembers correctly, the consolidated bailout for the banks in the US has been to the order of almost $200B, but given who is most likely to suffer at the end of all this - at what price really, are we saving our beloved lenders?

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Upcoming Events:

Barzakh Cemetery Services, a charitable, non-profit organization led by Muslim women, has invited yours truly to speak about family financial matters from a Muslim perspective at 3:00 pm on the 23rd of August at the Northwood Community Centre, 15 Clubhouse Court, located here. The event is designed to address issues such as Wills, Taxes and the way to approach the complete financial planning process - so it may be worthwhile for you to attend. Usually I am invited to speak about Islamic Finance, but this presentation will IA be about Financial Planning in general and some of the challenges involved for us as Muslims. I have been told that one of the severest problems within the Muslim community is not really the lack of wealth, but the lack of financial sophistication - so this event should go some way towards addressing this critical issue. Lastly, as this is an educational presentation and we are just helping BCS, you will not need to write Ittihad a cheque at the end. You might still want to support BCS as a community organization however, so please don't leave your chequebook at home altogether. As seating is limited, please RSVP by replying to this email.

__________

Finance News:

1. Is this the future of home prices in North America? ... read more here

2. 5 mistakes to avoid in Real Estate ... read more here

3. UBS settles a case with the State Regulators for $19B over deceptive sales practices towards average consumers ... read more here

4. Seven websites to 'make you a better investor' ... read more here

5. Did you know your CPP funds were invested in Tobacco stocks?! ... shocking really ... read more here

6. A risk manager explains the Credit Crunch from an 'insider's' perspective ... read more here

Economic News:

1. Inflation in the US is now showing up in the official numbers also ... read more here

2. Merrill Lynch economist has terrible outlook for the Canadian Housing Market, particularly in the West ... read more here

3. Warren Buffett, one of the richest people in the world because of his investing abilities, lambasts US economic policies ... read more here

4. A report on the way out of the financial crisis. (Sheer hubris, of course) ... read more here

Islamic / Middle East / Emerging Markets:

1. Dubai buys into Cirque Du Soleil ... read more here

2. Middle East stock markets the only ones with positive outlooks? ... read more here

Interesting but not all Finance:

1. Nice profile of one of the better financial authors in the world these days ... read more here

2. The bribery and corruption case against Saudi officials in Britain ends with a miscarry of justice ... read more here

3. Game Theory - In Theory and in Practice ... read more here

4. The largest machine in the world is about to come online. Funny that it is designed to find the smallest 'things' in the universe ... read more here

Dealing with Losses

2008-07-31T12:59:00.000-04:00

Quote of the week:
'Logic will get you from A to B. Imagination will take you everywhere.' - Albert Einstein.

Commentary of the week:

Dealing with Losses:

In most kinds of financial journalism, the story we are told as consumers is that investment losses are possible, but unlikely over the long term. We are told that the world (and the stock market in particular) will probably continue to 'go up' and that if we are investing in something for the long term, there is little reason to worry. As somewhat unsophisticated consumers of this financial fiction, we have very little idea of what it means to 'go up' and what exactly it is that is going to go up. We worry about just our dollars, and hope that each dollar we have put into the 'market' will come back either as a happy family of dollars, or at least as a dollar with smaller kids in tow. Yet even though we believe this to be true, and even though the markets cooperate by indeed going up most of the time in Canada, there is always the inevitable bust every few years that most financial commentators can only explain in hindsight. As you know, we are a bit different here at Ittihad, and take economic uncertainty and the unpredictability of public markets as more of a given. Also given the present investment climate, I think it is best to really begin to prepare for the possibility of monetary losses as the full impact of the bank failures in the US comes to light. This does not mean people pull out their savings, just that loss is as much a part of life as gain is and if we can presume to educate people about how to react when they make money, we should also try and do the same when they end up losing a bit. As it is, we have to be very careful about what is happening in the North American markets right now, so a discussion of some coping strategies to take away the stress of being invested are probably in order.

So, here are the top 5 things you can do (but don't have to) when you see the TSX (and your savings) dropping like the temperature in winter or like a stone in water:

1. Stop worrying already and just Panic - It is after all, your money and if you don't panic, who will? Also, call up your broker, call him names and warn him that you will sue him if he does not personally drive over in the car that you paid for and give back your money in old $20 bills. At the very least, this will calm you down, make you feel like you are in the movies and will thereby make you feel better about the loss. If you actually decide to follow through with your threat, it might also keep your lawyer friend in business while his investments go down even more than yours.

2. Become unreasonable with your kids - Kids love parents who are unpredictable and twitch nervously when the business news comes on. This gives them an opportunity to rebel in even more unreasonable and childish ways so they can thereby become more mature over time. Without this training of how to be unreasonable people, how would they survive in civilized society?

3. Become sullen and / or abrasive at work - Your boss is clearly unhappy at the TSX's lack of spirit because he has even more of his money invested than you, so why should you be nice while he gets to be the bully? Do some bullying of your own, hide someone's mouse or disconnect their keyboard and watch the fiasco as they complain to the IT people, who will no doubt misdiagnose the problem. Do not however, mess with the coffee - that would be mean.

4. Tell yourself the market dip is only temporary - Don't worry, what goes down must come up also, shouldn't it? (or was it the other way around?). History shows that after every bust, there was a boom. So what if you have to suffer through a few years of losses in order to enjoy the good times again? Remember, until the hope is gone, there is always hope.

5. Sell everything else that you own and buy more public stocks - This is for professionals only. Do not attempt this at home, or outside the home. Above all, do not attempt this anywhere near home, or with your home.

What I really like about this list is that the top 3 can be applied in your personal life as well. There is nothing like a bit of panic to wake you up, the kids are there to be pushed around anyway and having fun at work between the meetings is always helpful to overcome the monotony of being bullied.

Of course, the best way to deal with the issue of financial losses is to take some time out of our needlessly busy and cluttered lives and learn how these things really work so we can understand a little bit of what is really going on. In this way, both gains and / or losses will be more expected and so we will have calmer lives rather than becoming emotionally subject to the latest financial rumour. In my humble view, our faith in the financial markets and banks has been so solid for so long that we have become fundamentally unprepared to make decisions about our financial health on our own. To use a particularly timely analogy - if our car kept breaking down, we would either change the car or learn why it keeps breaking down on us. Why then, do we accept both a faulty financial system and such deep public ignorance of it as a part of our life that cannot be changed?

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Upcoming Events:

Barzakh Community Services, a charitable, non-profit organization led by Muslim women, has invited yours truly to speak about family financial matters from a Muslim perspective. The event is designed to address issues such as Wills, Taxes and the way to approach the complete financial planning process - so it may be worthwhile for you to attend. Usually I am invited to speak about Islamic Finance, but this presentation will IA be about Financial Planning in general and some of the challenges involved for us as Muslims. I have been told that one of the severest problems within the Muslim community is not really the lack of wealth, but the lack of financial sophistication - so this event should go some way towards addressing this critical issue. Lastly, as this is an educational presentation and we are just helping BCS, you will not need to write Ittihad a cheque at the end. You might still want to support BCS as a community organization however, so please don't leave your chequebook at home altogether.

__________

Finance News:

1. Seems the Globe is a couple of days behind us at Ittihad (hat-tip to Kamran Niazi) ... read more here

2. Excellent column on the future for the home finance market in the US ... read more here

3. This column shows you everything (or almost everything) that is wrong with financial journalism ... read more here

Economic News:

1. Title of the week - ' Do Economists Need Brains?' (I would have asked whether they had brains but then realized that I have economist pretensions as well) ... read more here

2. Inflation is up in Canada also ... read more here

3. The situation in Britain is becoming a bit dire ... read more here

4. Article on whether Inflation or deflation is on the cards ... read more here

Islamic / Middle East / Emerging Markets:

1. Prices in Asia rise as Central Banks fail to agree on measures to contain inflation (as if this is within their power now) ... read more here

2. A new Asian Financial Crisis on the cards? ... read more here

Interesting but not all Finance:

1. The effects of a family feud on business (or business feud on family) ... read more here

2. Why Green and Islamic are somewhat different ... read more here

3. A 'cuil' story about a challenger to Google ... read more here

Homes and Economic Vulnerability

2008-07-29T01:07:00.003-04:00

Quote of the week:
'Only six months ago, politicians were counting on Fannie Mae and Freddie Mac, the country's mortgage giants, to bolster the housing market by buying more mortgages. Now the rescuers themselves have needed rescuing.' - The Economist.

Commentary of the week:

Homes & Economic Vulnerability:

By now only the most ardent of optimists are still hanging on to the view that the N. American economy (both financial and real) is on a solid footing and will come through this Credit Crisis relatively unscathed. Indeed, the entire financial sector is in the kind of upheaval that many of us are not fortunate (unfortunate?) enough to live through more than a few times in our lives. While there are many theories about how we got here and what must be done to get out of this tight space, there are few that connect where we find ourselves with the very structure of the economy. What I mean to say here is actually quite simple. The point here is that there is a very strong link between dependency and vulnerability, such that it is the very things that we depend on that make us vulnerable. This is true in our personal lives, in our professional lives (think Microsoft's various and crashes at work) and in the broader economy also.

Starting with the personal, imagine for a moment that you are planning in life to become the King of China. To do this, you have chosen the path of working in Islamic Finance until you are simply offered the throne by those who read your newsletter. You work hard, make things happen and when you get home, all you really want is one plate of steamed broccoli and for your better half to stay out of your way until you unwind from these lofty goals a bit. This continues for long enough that you forget to thank God for the broccoli and your wife for boiling it alive. One day though, you arrive and see raw broccoli on the table next to a folded note. Now you are afraid - you read the note and it confirms your fears. It says: 'I have had it - steam your own damn veggies'. This creates complications - your lofty plans are now toast. There will be no throne of China and there will be no more steamed broccoli. That which you depend on without thinking has made you intensely vulnerable.

The US economy is undergoing the pangs of something similar. The US economy is a pretty simple engine (at least for our purposes today). It depends on cheap goods for consumers, cheap investment from foreigners which helps keep consumer credit cheap at home and finally consumer spending for economic growth. This chain now seems to be broken. Furthermore, what is worse and really unnerving for people is that the chain has broken at a point where not many people (ahem) predicted that it would. Most people who did not believe the US growth model was sustainable thought that foreign parties would pull the plug on the party. In actuality, it has been the breakdown in esoteric real estate investments instead that has proved somewhat fatal (foreign funds and entities are inexplicably still buying up American Assets and Treasury Bills as quick as ever). Why this last part is so can be the topic for another day, but let me reiterate and clarify a bit.

One of the ways in which consumer credit has been kept cheap is through credit against the 'solid' and tangible asset that is the family home (ever heard the marketing about consolidating all your debt?). As people have asked to borrow for homes and then re-finance those homes, lenders have forwarded them funds but then sold these loans to others such as the semi-government agencies lovingly called Fannie Mae and Freddie Mac. Once these loans are on Fannie and Freddie's books as assets, these organizations package the loans up as investments that pay out a stream of income (read interest) and sell them to the highest bidder. These investments, we now find, are in over-priced homes and have been made with the optimistic expectations that consumers will keep paying their interest payments forever.

For the longest time, this assumption has held up quite well - just like the plate of broccoli, you could depend on it. This financial engineering did very well for investors, the government and home-buyers in the past. It kept the cost of borrowing down and because the investments are almost guaranteed by Fannie and Freddie, & investors both foreign and local thought that they were solid. Of course, we realize now that almost half of Freddie and Fannie's present assets might be tainted because they are now non-performing (I don't mean to alarm you but we are talking $2Trillion+). The US govt. has been called in to guarantee up to $5Trillion of real estate assets. Even if my numbers are off by a bit because info is sketchy, this is the largest assumption of private debt that a government has probably ever taken up upon its books, or almost definitely ever. Now, not only do you owe taxes to the government, but in a roundabout way you owe it your mortgage payment as well. And since the government only gets its money to backstop all these bad loans from taxes anyway, guess who pays at the end? It is almost enough to make your mind spin, which is perhaps why reasonable people usually work outside finance.

I think we are witnessing the end of something that has almost been a fixture in world affairs for as long as I have been around (many, many decades). One of them was the robustness and dependability of the American Economy, another was the American Dream. There used to be this idea that it was best to be a Free - Market Democracy. This used to mean a Government of the People, by the People, for the People. Whether or not you agree with the idea, it had a certain panache and our neighbours sometimes pulled it off despite themselves. Now I am not so sure - they have developed a new definition of a Free Market Democracy. It now means Taxes from the People, Mortgages for the People, Profits to the Financial People. We have depended on US excess for our economic prosperity for so long that I wonder now if this makes us vulnerable as well.

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Upcoming Events:

N/A

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Finance News:

1. Asian Monetary Authorities speak openly about a crisis in the 'financial system' (their phrase not mine) as brought to light by the Freddie and Fannie Crisis ... read more here

2. Excellent column on the Fannie Mae and Freddie Mac situation ... read more here

3. IndyMac (one of the largest lenders in California) is collapsing ... read more here

4. A sobering, person-centric story on how debt and the marketing of debt solutions really works ... read more here

5. The FED protests at critics and insists that the banking system is 'sound' ... read more here

Economic News:

1. House Prices fall for first time in 9 years ... read more here

2. The Economist puts securitization and Home Finance in perspective ... read more here

Islamic / Middle East / Emerging Markets:

1. N / A

Interesting but not all Finance:

1. Funny and pithy column on Love and Economics (he must have stolen the topic from my short-list of future IWB titles) ... read more here

2. Saving Ontario's Boreal Forrest or setting off a mad rush to the North? ... read more here

3. Interesting column on gene sequencing / analysis and what it may mean for medical treatments in the future ... read more here

4. A special Report on the future of Energy ... read more here

The Porsche Economy - Part II

2008-07-14T14:56:00.001-04:00

Quote of the week:
'In Bradford all nurseries have been ordered to convert their dolls' houses into miniature mosques so that Muslim teddies have somewhere to pray'. - Mark Steel in a column about being Muslim in Britain.

Commentary of the week:

What is 'Finance'? (Part II - contd. from last week):

Now that all of you budding Islamic Financiers know how an Economy works, we should start drilling down a bit into how Finance works as well. Most people think you need to wear an over-priced suit and drive a Porsche to prove that you know anything about financial matters (who am I to argue with that?), but sometimes, just sometimes this knowledge seeps out and finds its way into the hands of bicyclists, paddlers and slow & short walkers like me who refuse to pay more for a suit than they would for a bad hair-cut - and who in turn, pass the protected word on to discerning readers like you in order to give you the tools you need to deflate the next overblown financial ego you meet.

As the sheer brilliance of last week's commentary is probably seared onto your minds, you will of course remember that one of the factors of production in an economy is Capital. Within the larger factor of capital is the field of finance, which is the name given to the movement of some kinds of capital between various actors in an economy. For example, if you have ever played Monopoly, you know that there is a lot of Property / Railways / Hotels / Houses available in that economy. These are the solid assets that we can call capital. There is also a 'bank' (not a real bank in the modern sense of the word), but the entity that holds the cash and really allows players to trade money, rents, property etc. with each other. That 'bank' in Monopoly does many of the things that the financial sector does in the real economy. Building on this only somewhat oversimplified example, Capital can include things such as buildings, plants, machinery and of course, the popcorn that Spengler asked us to invest in last week. Finance on the other hand, is more limited in the sense that finance should really only include the more liquid kinds of capital that are either in the form of cash already (both electronic and actual), or is instantly or somewhat easily convertible into cash (some definitional latitude please). The world of Finance then, has two main categories that sometimes leach into each other a bit with hybrid products, but which will be treated as distinct for our purposes here because they carry different legal rights and are easier to understand that way. The two categories then, are Debt Finance and Equity Finance.

Debt Finance is the movement of capital (or money) between Savers (people who have saved money) and Borrowers (people who are lo and behold, borrowing money in some way to finance something they cannot or do not buy with their own money). This is usually done through the medium of banks or credit unions or secondary lenders. The way this works is that I deposit $100 into a bank and then the bank turns around and loans >$1000 (not a typo) to my neighbour or my neighbour's company as some kind of debt. The account or product I use to make a deposit into the bank can include things such as cheque-ing accounts, savings accounts, GIC's and most other kinds of guaranteed deposits. For the borrower, my neighbour in this case, this includes things such as Mortgages, lines of credit, Mezzanine (the cool word of the day) Debt, Project financing and all manner of interest-bearing loans that my neighbour, may God Bless him, can use to finance something he cannot afford and is willing to pay some extra fee for as he uses and repays the funds that don't really belong to him, the bank, or even me (think about this one a bit).

Equity Finance is the movement of capital (or money) between Investors (people who are buying some portion of a commercial enterprise) and Entrepreneurs or Partners (people who are willing to give up some ownership of their enterprise in return for funds in order to run it). This is usually done through the medium of capital markets such as the TSX (now you know what an IPO is), or private markets (now you know what I do at Ittihad) that facilitate investment of private capital into companies or projects. The obvious examples of this kind of finance includes things like Stocks, Mutual Funds, Seg Funds, Principal Protected Notes (PPN's), ETF's (which are technically shares), LP units and all manner of other jargonic things that pass for financial non-solutions which people like you and me invest in because someone told us it was a good idea and we believed their expertise at the time because our 24th baby was crying and the season finale of 'Little Mosque on the Prairie' was on TV and besides - how many things is one person really supposed to know?

Just one more thing this week my friends - hang in there. You should also know that while Finance is divided into Debt and Equity, the ratio between them is quite skewed. The debt in an 'advanced' economy at any given moment in time is more than 10 times the amount floating around in equity (don't ask me how I know this). This is why when people like the Fed or Bank of Canada Governor speak, markets hang on their every word. What moves markets and the economy is the debt portion of finance and the interest rate on that debt. Think of this as an inverted pyramid, with a small amount of actual cash at the bottom, but a progressively large amount of debt as you move higher. This is one reason why the financial sector is more unstable than postal workers who have had almost enough but cannot decide decisively.

So where does this fit in with Islamic Finance? Well, you have to actually take a step further back and ask what kind of an economy would enhance our various Faiths and allow us to live sustainable and contributory lives rather than the predatory ones we perhaps have to live today - but since we are on the topic of finance, let's talk about the cash. True Islamic Finance then, would simply not have a debt component, there would be no inverted pyramid (no $1000 loans on $100 deposits) and no government would be able to borrow money in order to go to war because the population would simply not buy the bonds necessary for such an enterprise. Of course, this would also perhaps mean that there would be no shiny new Porsche in every garage even if we all try really hard because bicycles might be the way to go instead. Perhaps that is why we continue to work within a debtor thought-process that impoverishes us spiritually - because having no debt is fine and dandy, but the drive up to Northern Ontario in a Porsche my friends, is probably priceless.

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Upcoming Events:

N/A

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Finance News:

1. RBC entering the Islamic Finance space! - How exciting, now we will finally get to see if Canadian Muslims are actually as smart as they seem and whether they will defeat this (major hat-tip to Hisham Rahman) ... read more here

2. CDN bank to declare more losses? It seems that the end is nowhere in sight as far as the credit crunch is concerned ... read more here

3. Ottawa tightens up the mortgage rules they just loosened in 2006. Can you say - 'No Foresight'? ... read more here

Economic News:

1. Some more evidence about how Oil prices and Inflation are affecting small farmers in some rural areas (example of India) ... read more here

2. The domino effect in currencies after the fall of the US$. This has the potential to be a huge depressor of living standards across much of the world ... read more here

3. Does Free Trade help poor people? (or do more poor people help Free Trade?) ... read more here

4. How securitization often results in situations of 'moral hazard' ... read more here

5. How the UK has managed to take on more debt than its GDP ... read more here

Islamic / Middle East / Emerging Markets:

1. N / A

Interesting but not all Finance:

1. How the backdoor to Peace in difficult situations is sometimes held open by Faith ... read more here

2. 'Goodbye from the World's Biggest Polluter' ... read more here

3. For Muslims in the audience who think the media is unfair ... must read

The Porsche Economy - Part I

2008-07-14T13:27:00.005-04:00

Quote of the week:
'My advice to individual investors? Invest in some popcorn, because the next six months will be something to watch'. - Spengler speaks about problems in the banking sector (www.atimes.com).

Commentary of the week:

What is an 'Economy'? (Part I):

A young person whose intelligence and knowledge I respect quite a bit admitted to me on Friday that she knew nothing about economics and finance. As this young person will probably grow to be the President of the World Bank one day, I have taken it upon myself to ensure that something of economics and finance penetrates the consciousness of young people (and those who are young at heart) before they begin to make up for themselves a definitive picture of how the world really works. After all, it is never too early to fill young minds with economic propaganda - there was Adam Smith (who is rumoured to have been a bestseller in Victorian high schools), there was David Ricardo, there was Karl Marx, now there is Ittihad.

As such, today we begin to define what people really mean when they speak about an 'Economy'. As your humble correspondent lives and breathes this stuff, I sometimes forget that people actually have real lives and don't always know (or care) exactly what pseudo-experts like me are saying when we propound our theories on 'what must be done' to the economy. Usually, the lens through which we look at the world is not economic, but rather has a political, social or justice bent. This is usually because many people do not actually study Economics as a subject and choose instead to become doctors, lawyers, engineers, professors and all manner of other (I feel like adding 'useless' here but that would be too much of a blow to people's self-esteem) things that allow them to contribute to society in great ways but leaves them generally clueless about the gravity of our economic situation.

So here is my half-page summary of everything you need to know about an economy to impress your spouse into a stunned silence with your considerable grasp on why exactly you were laid off and cannot meet the mortgage due at the end of the month (go bi-weekly - you will save money) because you bought too much Kawartha Dairy Ice Cream with your inadequate severance package in order to make yourself feel better about the injustice of it all. After all, heating up the divine Biryani you brought with you (because a Subway sandwich is too bland) in the corporate head office is not an objectionable offence in Canada and there must have been a deeper economic factor working against you.

The economy then, is simply a construct that economists have made up to help make sense (or nonsense) of the actual Economy (read this as many times as it takes). It is a concept that has some basis in reality of course, but seeks to describe a complex web of commercial relationships by reducing them to simpler factors. Each economy is made up of these factors, much like a cake is made up of certain simpler ingredients. These factors (and there is some disagreement but not much) are 1. Land, 2. Capital, 3. Labour, 4. Technology. These inputs combine to produce what is called 'Wealth', which is measured in monetary terms ($'s) and is also called GDP and / or GNP by those inclined towards pretence at expertise.

The first factor - Land, is obviously a no-brainer. Without land, we would all be fish and there would be no Ittihad Weekly Briefing over email. I would still probably broadcast through sonar waves, but God knows best. Also, there would be no agriculture, no food, and no oil. Even if we were able to live without food, we wouldn't be able to drive our SUV's and Mini-Vans because they would sink and that is just plain wrong and does not bear thinking about. The second factor, Capital, is a bit more complex. This factor includes money (and finance) and the capital stock of factories / machinery / infrastructure / resources etc. available to an economy at any given moment. When people speak about investing in order to create jobs, this is what they mean - creating factories and companies with infrastructure in order to staff them with minions such as yours truly. Capital also includes the financial infrastructure that moves money between people who have it and the people who need it (perhaps this should be a commentary topic on its own). The third factor, Labour, is where you and I come in. We come to work, are given a computer (which is capital, not technology), we type away and create something of value (unless its spam) and thereby grow the economy. People better than us do better things - some actually make beautiful things like architecture and some do the noblest thing of all and teach beautiful ideas. There are of course, other more complex and elegant theories of how labour is really the one factor that brings dignity to others, but this is neither the time nor the space. Lastly, we come to Technology - which does not include the latest computers or gadgets we use to strategically interrupt our Friday prayers. Technology in the economic sense is the way in which the other 3 factors combine in order to produce Wealth. In this way, two economies with the same amount of land, capital (including gadgets) and labour can still produce different amounts of wealth because of a more effective combination - better technology.

To complete the lesson, we should also speak a bit about measuring an economy. The only universally accepted measure of an economy at the moment is the amount of wealth it produces on an annual basis using the factors we have discussed. This wealth includes all manner of commercial transactions but little else. On a planet that is cut up into little (and big) countries, we are all just competing with each other to produce (read consume because they are the same) more stuff. As the field of economics simplifies life for us, it also simplifies us into one-dimensional people. Of course, this does not mean that we all move to the Yukon and live off the land (I have heard that there is an economy there as well). It just means that we should sometimes reflect a bit and not take at face value the demands put on us as people to produce and consume in this value-less way. But alas, we are all in the same boat here, and the fiction that all of us should and can have a red Porsche if we just try hard enough is just too persuasive. Since smarter people than me came up with this system, I am convinced. Are you?

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Upcoming Events:

N/A

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Finance News:

1. Almost makes you wish short-selling was allowed in Islamic Finance (almost) ... read more here

2. The next time someone tells you the stock market is the place to be in order to stay ahead of inflation, quote the Economist ... read more here

3. This is too funny. First, the Fed puts $100's of Billions into the Asset Backed Security (ABS) market. Then they help JP Morgan buy Bear Stearns and put the support of a main street bank behind a wall street company. Then they move assets off Bear Stearns' books. After that they themselves value the assets and declare that there has been no loss. So much fun playing when you are the striker, the goalie and the referee all in one isn't it?! ... read more here

4. Warren Buffett losing money?! ... must be propaganda ... read more here

5. The continuing saga of the $52B Bell Canada buyout ... read more here

Economic News:

1. The price of economic progress in Kenya and social progress in Florida ... read more here

2. How the slowdown in the housing sector affects the Economy (a nifty chart) ... read more here

Islamic / Middle East / Emerging Markets:

1. N / A

Interesting but not all Finance:

1. Want to lock in your gas price for the year? ... read more here

2. What does it really mean to be green? ... read more here

Seminar Feedback

2008-07-07T16:11:00.004-04:00

Quote of the week:
'In theory there is no difference between theory and practice. In practice there is.' - Yogi Berra. (Hat-tip to Ms. Imtiaz)

Commentary of the week:

Seminar Feedback:

As you know, we presented a seminar on our ideas about Islamic Finance to the community at the TARIC masjid this past weekend. It was well attended by lots of men (alas, the sisters don't want to know about money even though they control most of it), who came armed with excellent questions and strong views on the subject. I have received many feedback forms which are full of praise for my good self (that is the official story and I am sticking with it) but they seem to fall into two camps. This divergence is worth analyzing a bit deeply because I think it speaks volumes about human nature. The respective camps are:
1. The Seminar was great. We loved that it was educational, interactive and had nothing to do with products and sales. It made us think, which God knows we don't do enough of.
2. The Seminar was terrible. We already know all we need to know about the idea of Islamic Finance, we want to know about Halal products that we can use right now. We mean NOW. Did we say NOW?

And there you have it - the community has philosophers and it has practical, action-oriented people (credit to our good Sr. Pappano for this insight). The first camp thrives in the world of ideas. The second flourishes in a structured, predictable action-oriented environment. To me the question is not who is right (obviously only I am right), but which section of the community is more dangerous? This is not as simple a question as it sounds, so let me explain a bit.

Like any other industry, Islamic Finance is subject to the whims of Supply and Demand. There is a growing Muslim population (some people say too quickly growing but we will leave that aside for now) and an even larger population of people interested in Ethical Finance. Voices from section 2 (the practical people) demand that their 'needs' (which somehow are the same as everyone else's commercial needs) be met in an Islamic manner. Then others from section 2 also, decide to do something about it and create products and services to Supply the needs of the people who demanded Islamic solutions. Before you know it, thanks to people from section 2, Muslims across the world are demanding Islamic Financial services and the type 2's are in business big-time. But in their rush to produce a new reality and choices for themselves, what have the type 2's really done?

In my opinion (and lots of people tell me I am wrong J), while we have a huge Islamic Finance industry, we have much less Islamic Finance going on (read this again if you didn't get it). As the problem is being both defined and solved by practical, action-oriented people, Islamic Finance is becoming a field of technical sophistication but philosophic bankruptcy. The whole point of Islam was to help instil justice, fairness and a fairly equitable distribution of wealth in society while protecting the balance of Nature. Instead, we have reduced Islam to a tool with which we solve petty financial issues such as credit cards and collateralised loans with which to buy things we cannot afford on our own. There is something deeply elegant about running an economy without debt. This elegance is being tarnished if we think we can 'do Islamic Finance' by removing references to 'interest' in contracts to make things 'Halal'. Our sense of practicality is leading us into waters charted quite well by other communities who got around usury laws using similar tricks in the medieval past.

So what is the solution (cause you know I am one of the practical types that worries about solutions)? All this while, the people from the first section (the philosopher types), have had nothing really to do. They sit around, call the type 2's disrespectful names and are generally cynical and pessimistic about the problems faced by Muslims and people of Faith these days. As they are frequently confused with academics, they feel they no place in the industry and feel left to one side as matters of great import such as the appropriate benchmark rate is determined by the type 2's. This situation is a mistake. Islamic Finance does not belong to the type 2's of the world that want to solve problems NOW, come what may. It belongs really, if there is such a thing as belonging, to the world and all within it as a rich, textured and fundamentally elegant way in which to manage the problems of an economy.

This should include the Type 1's who are struggling with this marginalization at seminars. Every seminar they go to, people ask them for a cheque at the end. The educational, community service aspect of the information is subsumed by the drive for relationships to be commercial and ratified to be so by the transfer of money. This is injustice of a very deep kind. We must allow people to have access to knowledge about Islamic Finance without asking them for money at the end. For the people who attended the session last Saturday and asked for product details, this is why I didn't answer your pointed questions. This particular seminar series is for people who want to discuss ideas. If you want a financial solution to your particular problem, call me at work and I will try and help. Better yet, come to our investment seminars. Don't complain about more education - even the first word of the Holy Book was 'Read'.

For those who missed the seminar, I hope you will come out to the next one. For those who came, I hope you recognize that both you and I are truly blessed to be involved in some manner with Ittihad and this initiative, where there is the freedom to do things with integrity. I look forward to seeing you all the next seminar. For the record, people loved the samosas and the turnout was humbling in terms of both numbers and the intelligence of the discussion. We are a beautiful community with much to contribute to Canada and the world, and I want to thank the administration at TARIC once again for inviting us and having the courage to allow us to engage the community directly on issues where usually their input is just monetary. I look forward (quite shamelessly) to being invited back.

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Upcoming Events:

N/A

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Finance News:

1. An interesting analysis of short-sellers (A borrows stock from B, sell lots of it to drive down its price and then buys it back at the lower price. A then returns the stock to B - pocketing the money made in the process). Unfortunately, there are issues in Islam about selling stuff you don't own so this is questionable. A very interesting article nevertheless ... read more here

2. The perils of the joint-ownership strategy for inheritance purposes ... read more here

3. Now the Global Banks are casting aspersions and questioning each other's balance sheets ... read more here

4. The Bank of Canada will accept US treasuries as security for loans ... (Might as well accept rolls of toilet paper too) ... read more here

5. People finally make the connection between Socially Responsible Investing and Islam ... read more here

Economic News:

1. The Future of Energy ... read more here

2. The Washington Post uses the R-word for the US economy ... read more here

3. Good analysis of the disagreements between Central Banks ... read more here

Islamic / Middle East / Emerging Markets:

1. N / A

Interesting but not all Finance:

1. US Company asks US court to use Shariah to decide a claim. I believe this is called Shariah Arbitrage ... (major hat-tip to Mansoor Ullah) - read more here

2. If you are chased by the police, you get to pay for their gas also (hat-tip to Siddiq Mohamed) ... read more here

Fooled by Randomness - Executive Summary

2008-06-17T19:56:00.001-04:00

Quote of the week:
'Once you have the satisfying experience of this product, you will find you can't do without it.' - The reason why Japan is the second largest economy in the world - (PG-13 alert) Ahem ...
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Help Wanted:

Ittihad is looking for an authentic genius (not like me - a real one) to work at our shining, pristine, glass enclosed cage (I mean Head Office) in Toronto for the summer (July / August). This genius will be called an Administrative Assistant and will be responsible for organizing the office and our infrastructure in a way that will allow Ittihad to take over the world one cubicle at a time. Ideally the person will be a University Student / Graduate who is willing to help administer, organize and help out with the many projects we have on the go while also interacting with the many illustrious CEO's and assorted big-wigs that drop in for a chat and Orange Juice from time to time. As such, excellent verbal, written and numerical skills are par for the course. The hourly pay is unlikely to be very high but the job satisfaction of working here will stay with you forever and will more than make up for the two months of poverty. An abiding interest in Islamic Finance or Ethical Finance would be an asset. Please send your resume directly to info@ittihadcapital.com . Do not call me or send me an email - if you do, I will become vindictive and ensure you do not get the job. I will also hide all your pens, put salt in your coffee and secretly put viruses on your computer if I am unable to get you fired in the unlikely event that you do get the job despite my wishes. Just try me.
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Commentary of the week:

Fooled By Randomness - by Nassim Nicholas Taleb (Book Report):

I read a pretty fascinating book recently whose ideas I would like to share with you all (yes, I do read even though it seems to you that I only write long emails). I think it will serve you all very well in life and it is perhaps one of the most intelligent books on the nature of knowledge, particularly financial knowledge that I have ever come across. Unfortunately, it is intentionally written sometimes in an offhand manner so one has to be a bit weird and resolute to get through it. Thankfully for you, your humble correspondent has those qualities in droves. What I am about to tell you though, may cause you to think about this a bit so be careful. I may butcher the point or it may come across as less profound than it is so if you like truth, you might want to get the book and read it in order to double-check the beautiful lies I am about to tell you.

The book is fundamentally about the nature of knowledge, how we come to know things, how we really come to believe that we know things and then how we keep acting on that knowledge even though it may not be entirely accurate. In the interest of action, we take short-cuts in analysis. Furthermore, even if we were to take no short-cuts, some forms of knowledge are fundamentally unknowable. You cannot for example tell me what the price of oil will be tomorrow, next year or ten years from now with any kind of intentional correctness (I can tell you, but this is about you, not me). One cannot not just tell the future, but cannot also not tell what rules will be in place at that time that will determine its lived reality. In that sense, we are double-blind, not only can we not predict the future with any degree of planned accuracy, we cannot also assume that today's parameters will work the same way. Nassim calls this problem the Turkey problem. I can pass on turkeys but love Cows. I will call it the Cow problem.

Let us say that we have a cow that we own and love and feed every day. It was born on the Ittihad farm and we are trying to keep it healthy by giving it lots of exercise and lots of food. From the cow's perspective, this is a great life. Not only are the geniuses at Ittihad neglecting finance, they are giddily procuring hay and whatever else this cow loves and feeding it with great care. Let us say then that this continues for a matter of 2000 days. The cow has evidence over the 2000 days of its existence that the Ittihad tribe means it no harm. It continues bonding and nuzzling with us as if we were friends. On the 2001st day however, it is the Big Eid. The Ittihad tribe breaks out the sharp steel and heaven becomes richer by one cow-soul and the Earth becomes poorer by one cow. Now, from the perspective of the cow, was there ever any evidence that we did not have its best interests at heart? Let us make this even scarier, even if the cow knew we were secretly cow-killers, did the cow ever know which day Eid was going to be? You are right, I think not. In the way things really work, we are the cow. We are fundamentally unprepared for the nature of Reality. We only live in our own smaller realities but are subject to the larger Reality that is known only by the Divine.

From a financial perspective, the question of whether the markets will go up or down tomorrow is a somewhat similar situation. We tell ourselves a story and make up reasons for our actions once we are committed to the concept of investing. Nobody really knows and nobody really causes anything. There are so many reasons and causes that we would exhaust ourselves with 'paralysis by analysis' if were to try and understand Everything before we did anything. I don't want to depress you about things because even though I have spoken of this 'randomness', as he called it, in a negative sense, we could also have set the cow free on the 2001th day. That would take away from the gravity of the situation however, so we stick with the negative for a bit more.

So on a practical basis then, what can be done to get out of this situation of unknowing? The first thing of course, is to recognize the fallibility of what he calls 'scientism'. Much of the 'expertise' on display (guilty as charged?!) cannot be trusted to produce a result in all circumstances. It can only be expected to give a plausible story to explain what perhaps happened or what might happen. If something actually does happen the way it was explained, then that still does not mean that the explanation and the cause are the same. For example, for the longest time, much of Europe believed that the Sun revolved around the Earth and that caused sunrise and sunset. This was a perfectly good explanation for centuries that stood the test of time. But the cause of sunrise today is known to be the fact that I wake up in the morning and need to find my slippers so the light is helpful. Similarly, I want to sleep at night and God is infinitely merciful and provides me with night.

So what does any of this have to do with Finance? Well, the way he describes the idea is that most of what happens in the financial markets on a daily basis is not driven by any long-term mechanics but by daily occurrences which are fundamentally unpredictable and unknowable. In such a context, investing for the long-term makes about as much sense as applying for a job as a cow on the Ittihad farm. Yet we do it, and we are usually okay because usually it is not Eid, and usually it is not our turn to become steak anyway. I am oversimplifying his point here a bit but I think it is better to give you the extreme scenario in order for you all be a bit more discerning in the way you invest. But let us move to the applications of this idea in other areas of your life.

On some days then, life itself must change. We either become inspired by something that makes us alive, never to be the same again; or we lose something or someone of great value. We are thus constantly called to be present in a way that is devoid of foreknowledge. As people of Faith then, or no Faith but spirituality, we trust this foreknowledge and ascribe it to the Divine. When we trust just ourselves and lose the momentary nature of our being, crashes in both our structures of knowledge and in the public markets are usually just around the corner. I don't mean to belabour this point, but perhaps it is much better to simply prepare yourself not for any outside reality that you cannot really predict, but simply to prepare yourself for yourself. Maybe all the struggles are just internal, and the rest is just noise ... but my thoughts become random, just as was accurately predicted by the Book. You decide.

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Upcoming Events:

We have been invited by TARIC mosque (located here) to present our views on Islamic Finance on Saturday, the 21st of June at 7:00 pm. I encourage everyone to attend with friends as the discussion will focus on the place that Islam does or does not have in our financial choices. By the end of the discussion, attendees should have a good idea about how to judge the IF field for themselves. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-books at home, we will accept Halal Credit Cards instead (Relax, I'm kidding). Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds.

__________

Finance News:

1. Want to know what really happens to your mortgage after you sign it at the bank? ... read more here

2. Think your company pension plan is safe? Check again. I don't mean to alarm you but I have heard a lot of complaints on the issue ... read more here

3. We have not discussed the credit crisis for a while but here it is once more. It's not over yet ... read more here

Economic News:

1. I thought we were in a new age where words like stagflation were relics of the past, but I guess not

2. Canada's housing market cools ... read more here

Islamic / Middle East / Emerging Markets:

1. The UK Financial Services Authority about to announce its strategy vis a vis Islamic Finance soon ... read more here

Interesting but not all Finance:

1. Canada apologizes to the First Nations for a Century of abuse (hat-tip to Siddiq Mohamed) ... read more here

2. Harvard finally figures out what makes people happy. Took them long enough to find out about Zakat, eh? ... read more here

3. A car that runs on water, well not on water, but with water instead of gas. Again, it's the Japanese ... read more here

Does Ethical Investing Work? (Part II)

2008-06-15T17:26:00.000-04:00

Quote of the week:
'Besides being a leader in genetic engineering, Monsanto is one of the largest suppliers of seeds in the world. It also sells the widely used herbicide Roundup, use of which has grown with the adoption of genetically engineered crops resistant to Roundup.' - The NY Times lets slip how the Agri-Food business really works.

The Ittihad Weekly Briefing is now archived at: www.ittihadsecurities.blogspot.com

Commentary of the week:

Does Ethical Investing Work? (Part II - contd. from the last issue):

As promised, this week sees us beginning to tackle the idea of Ethical or Socially Responsible Investing (SRI), which are actually slightly different from each other but which I will knowingly treat as two peas in a pod for the purpose of most of our discussion. The actual difference is that SRI is typically a negative screen which roots out bad apples in the corporate sector, whereas Ethical Investing is a search for the 'good apples' in the stock market in which we can invest. For the purposes of our discussion today, think of them as identical twins - they might be different in theory, but to us they look the same (this is called the problem of reductionism in logic - a severe logical fallacy for lesser mortals).

As we discussed last week, one of severest problems we face as people who believe that we are responsible and accountable for our wealth (or debts), not just our actions - is the inability to control what uses our funds are put to if we plug into the conventional financial system in any meaningful way. Given that we 'need' to have mortgages, savings, credit cards etc. simply in order to live 'normally', how are we to ensure that the hard-earned money we earn and save for our kids is not actually going towards poisoning the very Earth and the water that will be left for our Grand-kids? In a system that functions according to its own value-less logic, how do we live and function with the values that we do have without feeling like hypocrites who talk a lot but whose money is still part of the problem. After all, nobody really believes that we should spread poisons like cyanide in their own backyard, so then why is okay if it is done 2000 km away (and we ignore it) if the rivers will simply carry it to your neighbourhood (if not your cousin's) in a matter of weeks? How much is clean water really worth? The economists of the world have a really good answer to this question - so good that it is not even worth discussing.

Our answer has to be different. We must of course, begin to impose some limits (did someone say values) on how capital is taken from our savings, put into companies that do damage, and then given back to us in a sanitized manner without us really knowing what it has been up to in the meantime. This is the moral disintermediation problem we discussed two weeks ago and even though I was away for more than a whole week, I return to see it still has not been solved (come on people ...).

One possible proposed solution has been the movement towards Socially Responsible (SRI) or Ethical Investing. This is the movement where individuals and investment companies screen and focus their investment activities by first screening out 'bad' corporate citizens from their portfolios and then investing instead in companies that are either improving their image or practices, as the case may be. This is supposed to have two effects (at least). One, it signals to companies and governments (perhaps) that they need to have policies and governance mechanisms in place that will protect egregious abuses and that someone is always watching. Two, it is supposed to deny capital to the 'bad' companies and deny much needed liquidity to their shares in the stock markets so that the stock collapses and the company is sold to someone with a better handle on both business and morals.

This sectors has now grown to over $500B in Canada (which is big) and there seems to be a groundswell of interest in the subject. People from all backgrounds are now asking their financial advisor questions about whether there is anything available which makes them money and is also not damaging to the environment. God only knows how this question is being handled in your household my advisor is very shifty with his answers. One suspects that he knows less about this sector that he lets on, but I digress (and embellish). The question for us is whether SRI does what it intends to do? Does SRI solve the problem of disintermediation? Does it signal the right thing to companies? Does it deny capital to corporate offenders?

The answers to these questions are, from my humble perspective - Yes and no, no, yes & then finally - no. Clear as mud? Let me explain. SRI as a sector is only partly successful (to date) given its intentions. It does not solve the problem of moral disintermediation because we still do not know what our money is up to and where it actually goes (transparency is still an issue). It does signal extremely well to companies that investors are waking up, but ultimately it does not really deny capital to companies with faulty records and dubious future plans. This is because the top holdings for many SRI funds and portfolios in Canada are the banks. This would not ordinarily be a problem except for the fact that in Canada, the banks are actually the largest producers and channels of capital (no, not the government). Even though some investment capital is moving away from companies directly, the same investment capital finds its way to companies through the banks in the form of debt instead. The SRI fund invests in a new offering of bank shares, the bank turns around and loans this money to Company G. Cyanide still finds its way into the water supply. The difference though, is that Company G has a more difficult time (sometimes) selling its shares. Is this success?

Of course, it is too early to say and I think that we should all as people still investigate it for ourselves, but in my opinion, and I fully recognize that I am both a bit weird and in the minority, but we need something a little more drastic. At the very least, the SRI sector needs to begin to demand that the banks begin to include SRI considerations in their loan criteria. That will send shockwaves through the corporate board-rooms where the environment is considered little more than a garbage dump because they know they can always get a bigger loan. It will also begin to address the seriousness of the situation in a way that will change practices quickly, rather than at the leisurely pace that things are usually done in Canada. Of course, as believers, we do not think that the banks' business models are good for society at all, but that is no reason to think that they could not have better practices than they do at the moment. I leave it up to you to decode where IF fits into all this, but from my perspective, we really have to stop thinking about just money when we talk about money. As thinking, feeling people, we are called to a deeper existence.

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Upcoming Events:

We have been invited by TARIC mosque (located here) to present our views on Islamic Finance on Saturday, the 21st of June at 7:00 pm. I encourage everyone to attend with friends as the discussion will focus on the place that Islam does or does not have in our financial choices. By the end of the discussion, attendees should have a good idea about how to judge the IF field for themselves. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-books at home, we will accept Halal Credit Cards instead (Relax, I'm kidding). Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds.
__________

Finance News:

1. Wonderful Q/A session with a serial entrepreneur (hat-tip to K Niazi) ... read more here

2. Remember how Dr. Yunus from Bangladesh got the Nobel Prize for Micro-finance a few years ago? Well, this article looks at some recent happenings in the world of Micro-finance. I believe the word used was 'shocking' ... read more here

Economic News:

1. The Economist's analysis of the prospects for the Oil markets ... read more here

2. House prices fall faster than in the depression ... read more here

3. Some insights about what drives Innovation in an economy ... read more here

4. The companies whose tinkering with our food supply contributed to the food crisis in the first place now say they have a solution ... this news is most disturbing ... read more here

Islamic / Middle East / Emerging Markets:

1. In case you were still wondering where Oil Money usually goes ... read more here

2. The definitive and final reason on why Japan is the absolute and most advanced civilization on Earth (ever) ... read more here

Interesting but not all Finance:

1. In case you're wondering where to go for the summer ... read more here

2. A new way to clean up oil spills? ... read more here

3. A new site to help you analyze your business ... read more here

4. A wonderful play about a girl from the US who died under tragic circumstances in Palestine recently. A must see for those interested in how wars affect people's livelihoods and why Ethical Investing has an aversion to investing in defence related industries ... read more here

Investing and Ethical Investing (Part I)

2008-06-04T15:28:00.001-04:00

Quote of the week:
'It is what you read when you don't have to that determines what you will be when you can't help it.' - Oscar Wilde

The Ittihad Weekly Briefing is now archived at: www.ittihadsecurities.blogspot.com

Commentary of the week:
Difference between Investing & Ethical Investing (Part I):

For regular readers of the briefing, you all know how I usually nitpick and split hairs in order to arrive at any deep insight (or any insight for that matter). This week is a bit different, and it is not some esoteric minutiae of finance that is under discussion but rather what we do with our money on a practical basis all day, every day, all night, every night - for even though we are all sleeping, the stereotypical financial corporation is wide awake and thinking of your money. I don't mean this is a bad way of course, you all know by now how deeply I respect the world of finance (hmm). I just mean that even though you think your money is safely laying golden eggs in a bank account, GIC, mutual fund, hedge fund, LP, Stock or Bond, it is actually nowhere close to any such entity. It is lost in a sea of electrons, moving from your corner bank branch, brokerage or financial advisor, through public markets such as the TSX and into and out of the pockets of actual people and companies again somewhere else, only to show up on your bank / investment statement at the required end of the month exactly as scheduled. In this sense, your dollars are like me when I was in high school: registered, but not always present (ah, those were the days).

For example, if you invest in a mutual fund and the mutual fund participates in the IPO of a mining company, then a portion of your money has actually found its way into the coffers of the mining company. Let us then also suppose that this Gold Mining company is imaginatively called Company G. A portion of that portion then, went into the purchase and use of cyanide (yes, the poison) which is used in the separation the gold from the sulphurous rocks in which it is usually found. This cyanide then, after the gold has been extracted, then finds its way sometimes (some say always, it is only a matter of time) into the local water supply. Company G then gets sued and in order to protect your hard earned savings from seizure in legal claims, you now find yourself on the wrong side of a legal case involving poor farmers from some foreign country whose livestock and children are sadly no more and whose lands are no longer safe for the growing of food. Your financial health and moral imperative are now in conflict and this causes you great trouble. You read about the issue, go the Annual General Meeting (AGM) and demand that the company change its practices and begins to use a safer chemical than cyanide for the extraction of Gold. But wait a second, you are not a shareholder of the company. What!!!, you ask? How can that be? They have your money after all and surely you can do something to make them stop poisoning the Earth, can't you? Alas, my friends, you invested in a brand name mutual fund, not in Company G. Not only do you not know which companies you have invested in beyond the top ten, you also do not know which countries each of those then are involved in and what it is that they do once they are there. After all, you need to see the 10+% return on investment every year that the Financial Advisor promised you and also, you are not in finance - so how is all this your problem? Surely, someone else is supposed to be making sure your money is spent in good things while making good money. Isn't that why you pay your advisors? (and trust me, you do pay).

Excellent answer. This is indeed not your problem because you cannot solve it. Your mutual fund solves this dilemma for you quite neatly. You neither ask what it is that they do with your money and they oblige your intense curiosity by not telling you. But even if they did tell you, what could you do? You are not a full shareholder in the companies in which you have invested. You are just a unit-holder of the mutual fund. The mutual fund doesn't have the mandate to actually prevent the use of cyanide even if they knew what the devil it was; the mutual fund wants the company to extract as much gold as possible for the least amount of costs without getting into too much trouble with the authorities. You provide the money, the bank provides a loan, the mutual fund provides 'intermediation', the government(s) provides the mining license and company G provides the returns. The farmers provide just collateral damage. Since they are not Canadian / American / European and they don't make the 6:00 pm news and because Company G has great lawyers and a large advertising budget that keeps the story from getting to us - you and I don't have to think about where the returns came from. All parties are able to sleep at night without use of Xanax, except for the poor farmers for whom all sleep is short and whose insomnia is spent in remembrance of that which brought them such joy in a land that existed a long time ago.

This, in a nutshell is called Investing. While I have picked (perhaps unfairly) on mutual funds and mining this week, this story applies to other sectors and savings / investment vehicles as well. Also, the major point here is not that mining is terrible (which it might well be), but that we are constantly plugged into a system (for lack of a better word that describes the movement of money) that has no moral values as such. I say this because any moral outcome that results is little more than an accident. As people, we all have some moral code we follow, yet our finances are strangely liberated from this need to be good. There is in the financial sector no aim greater than that of taking some money and making some more money out of it. This is the sole measure of success. Back when I was a psychology student a few decades ago, having no values was considered psychopathic. Now that I am a student of finance, having no values is called efficiency.

Nevertheless, I don't say all this to make you depressed. We have to get over ourselves and our petty emotions, we have to pray for those we have hurt unknowingly and think deeply about how we want to move forward (and then perhaps actually move forward). The whole problem with humanity is that when we see a complex problem, we lose heart even before we understand all of it. We need realistic, determined enthusiasm driven by something approaching Love to change the world (even if that makes you nervous). We do not need the half-hearted, depressional funk that people like me can get you into so easily. We must never allow the search for an accurate description of our circumstances to confuse our internal apparatus of hope - each has its place in life. Wake up, shape up & grow up - more rests on our attitude towards life than on our money.

Next, we shall have to tackle Ethical Investing - which some people say is the antidote to moral disintermediation in finance. In the meantime, enjoy the caviar at the next AGM - it is the least damage we can do to the companies we 'own' but have no sway over.

The IWB will return two weeks from now IA as I will be away on vacation. Be good, make me proud, write some responses on the Blog and start a conversation amongst yourselves.

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Upcoming Events:

The Crescent Entrepreneurial Association (CEA) is hosting a business plan competition that I think many of you will enjoy attending. This is a volunteer organization that is helping the community get a better handle on its economic future. The exposure and insights gained at the competition will be quite priceless IA so if you have daughters, sons, younger nieces and nephews, cousins etc., try and bring them out to this event on the 31st of May. We at Ittihad are both fans and supporters of CEA and would like to see a large turnout. This wonderful organization will help the community build a critical mass of good, ethical businesses that will contribute to society IA. Please register here.

We have been invited by TARIC mosque (located here) to present our views on Islamic Finance on Saturday, the 21st of June at 7:00 pm. I encourage everyone to attend with friends as the discussion will focus on the place that Islam does or does not have in our financial choices. By the end of the discussion, attendees should have a good idea about how to judge the IF field for themselves. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-books at home, we will accept Halal Credit Cards instead (Relax, I'm kidding). Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds.
__________

Finance News:

1. Five steps to a better financial future ... read more here

2. The Guardian's introduction to Ethical Investing (hat-tip Br. Alim) ... read more here

3. Investing in inflationary times ... read more here

Economic News:

1. The Fed raises their inflation projections. Did someone finally send them the Ittihad Weekly? ... read more here

2. An extremely disturbing (if you are a consumer) development on the Oil front. Seems that futures prices have increased so much that even the Oil companies want to start stockpiling oil rather than selling it ... this should be an interesting political battle. No way the consumer can win this one with the kinds of spineless politicians we have ... read more here

3. A great short article on the interplay between the US$ and Chinese Yuan ... read more here

4. Outlook for the Real Estate and Housing in different countries ... read more here

5. One usually doesn't publicize such things, but I feel a bit like Mary Poppins must have when she opened up her umbrella and flew around town. The IWB of three weeks ago makes the cover of the Economist ... read more here

Islamic / Middle East / Emerging Markets:

1. N/A

Interesting but not all Finance:

1. Is mining still ethical if some lakes are destroyed? ... read more here

1. This is what happens to fertilizers after we use them so liberally to grow mostly bland food ... read more here

2. Brazil's minister for the environment resigns, but her life story is quite inspiring (although too short) ... read more here

3. Getting energy from Garbage ... read more here

Local Roots of a Global Crisis

2008-05-23T17:13:00.002-04:00

Quote of the week:

1 - 'Crises are now different in that they involve very large amounts of very short-term money. That is one aspect. Second, that the economy is highly leveraged around that money, so that when something happens, the whole house of cards collapses. And thirdly, the world economy is deeply global, through the financial structures and that means that when something happens anywhere, it happens everywhere. So that of course makes international financial crises today something really interesting.' - Rudi Dornbusch (Source)
2 - 'The Argentine case would thus seem to call into question just how valuable a modernized banking sector and capital markets actually are for developing countries.' - The Economist (Source)

Commentary of the week:
The Local Roots of a Global Crisis:

Sticking with our favourite cynical theme that the financial world is coming to an ignominious end then, how are we to make sense of this moment in financial history? After all, financial crises are nothing new and if it wasn't for the fact that correspondents like me have to write commentary, there is some merit in the suggestion that these crises would not even make the midnight news. What a simple life we would have then, if we actually didn't have to worry about our savings and investments and could simply outsource that worrying to earnest young men and women whose sole purpose in life was to make untold fortunes for clients such as us. Yes, a worry-free life. But alas my good friends, this financial nirvana escapes us, perhaps for some fault of our own.
What we do have is the exact opposite. Nobody really knows anymore if house prices are going to keep going up in Canada, why the stock markets are so 'up' here but not so 'up' just South of us or even in China anymore and if there is one theme that is evident from the recent spate of bad news, it is that the financial sector (which sadly includes me I think) is hardly as smart as it would have us believe. Such an economic context is of course crippling for any rational (or even pretend rational) long-term decision-making. As some accomplished speakers at a recent conference told us recently (yes, after many promises of good behaviour regarding cutlery [see the Blog], Ittihad is letting me go to conferences again), the Public markets are quite skittish and so private businesses are avoiding an Initial Public Offering (better known as an IPO - where companies raise money for themselves by selling their shares to the general public through exchanges such as the TSX). The one IPO of note, Sprott Asset Management, did not go off as the huge success that it would have been if they had waited for more certain times. As an exquisite and definitive example of what I mean by uncertainty, any Tom, Dick and Harry can now have an opinion on our financial future that is taken seriously (case in point); and you know that we are on dangerous territory indeed when people like me start second-guessing people like Eric Sprott (of the Sprott Business School fame). So why all this uncertainty then, and where does it come from?
Well, my theory is quite simple (and probably just as wrong, but bear with me). The reason there is such institutional paranoia and experiential deficit as to 'what is to be done' about this present crisis, is that this is really the first time since the 1930's that a North American financial crisis has its roots (both obvious and latent) within North America itself. The first crisis after the depression was really in the 40's and driven by events in WWII Europe and I don't really remember anything remarkable about the 50's except for the Korean War and the storied youth of Baby Boomers so we will have to skip that decade. In the 60's (and 70's) we had the Vietnam war which led to the decoupling of Gold and the US Dollar in the early 70's (a seminal event in finance that generates much contemplation and vituperation). Soon after the Gold Standard was abolished (Gold used to be $35/ounce) we had the Yom Kippur War (1974?) and then the Oil Embargo which did some short-term damage to the North American economy through higher energy prices and inflation. There was also the Revolution in Iran in 1979 which created yet higher oil prices and then the Afghan War in the 1980's where you had untold amounts of illicit drug money enter the financial system along with the already enormous amounts of Oil Money. These funds were of course very methodically deposited with large Western banks because they were simply the best at banking, people didn't know any better and also because there were some Faustian bargains made. These banks then turned around and lent this money to poor third world countries where many politicians' pockets and grandiose, no-use pet projects suddenly found 'cheap' funding. These self-same borrowers then, became subject to interest-rate policies of the US Fed and became unable to service their debt once Paul Volcker raised interest rates in 1986 (?) in order to combat the inflation resulting from the higher Oil prices we already mentioned. This debt and the unconscionable interest payments involved then put spending cramps on poor foreign governments and resulted in poor quality of life in debtor countries. These poor countries could not then spend money on health and infrastructure and this in turn increased immigration to the West, creating both a brain drain and other social problems in the West. It also resulted in many musical concerts and campaigns for Debt-forgiveness (such as Bono's Jubilee 2000), which break out and then peter out from time to time because forgiving astronomical amounts of debt really sets bad precedents in International Finance.
This now, is where the plot thickens, so follow closely. In the 1980s' then, we are on the cusp of having a truly global, technologically interlinked financial system; and even though this is a historic achievement for humanity (questionable, but let us concede this point for now), it just seems that this system is quite prone to unforeseen crises that begin from far-flung areas of the world. In Imperial terms, if the capital of world finance is New York, then the many far-flung provinces such as Tokyo, Moscow, London and Buenos Aires have been quite twitchy and problematic over the years. After 1986, there has been the crash in the Japanese Nikkei (1989), the USSR + Ruble Collapse (1991), the British Pound and ERM crisis (1992-3) the Mexican Peso crisis (1994), the Asian Financial Crisis (1997), the LTCM scandal (which was the loudest crash you never heard - 1998), then the Tech crash (2000-1) which was within the US but dismissed as a sectoral failing and the Argentine Collapse in 2002-3. Now, you have the crowning achievement of this financial era in the SubPrime debacle, which has only somewhat inexplicably, not yet turned into a crash.
Yet what we have now is somewhat different in another way as well. In the long history and story of financial episodes, you have many localized crashes in one market or another. In the short history of this kind of a technical, globalized financial system, you have never had a viral attack that started at the heart of the system. We have only had stress and blow-ups at its extremities, never the pervasive crunch at the absolute Center. Each time something like this has happened before, technocrats even more knowledgeable about such things than yours truly (hard to believe but there you have it) are dispatched from the corridors of Washington's own World Bank and IMF to solve the latest problem that those pesky foreign countries have gotten us into this time around. This time, there is no 'foreign' country at fault. The system rots from within its core. Wall Street has nobody else to blame, no sector, no country, no war, no crisis and not even Main Street (which continues to rack up both spending and debt). This time, it is the very business practice of selling off people's loans to others at the back end (technically called securitization) and the explosive addition of leverage to the mix (primarily in the form of derivatives) that are to blame. It is the very thing that has made Wall Street so successful in the past that is causing it such exacting problems today. Who can they send to fix those? Where will they get the required expertise when the expertise itself is questionable? More importantly, what will be the effect on the periphery or economic provinces that we now console ourselves by calling countries, if the capital itself is found to be on shaky ground? The acute crisis in food supply (see Blog) is one effect perhaps, but what will the others be?
At the moment of course, these are somewhat rhetorical questions. There is really nobody that can say how this will turn out in the end with any degree of planned accuracy. What I have tried to do is situate this particular episode historically, not be tastelessly triumphal in the face of peoples' hardship. I think that there is this difference this time around of rottenness even at the core; whether this small difference becomes amplified as further mistakes are made through the blunt instrument of interest rate policy is for the future to reveal. For us, while much of this is out of our hands and over our heads personally, it nevertheless bears some careful collective thought. I won't be trite and ask you to be careful out there, I am sure you are thinking the same thing if you haven't found a chink in this theory already (and no, the Tech bust does not count). As our friend Ms. Schneider would say, 'Sane Finance' anyone?

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The Crescent Entrepreneurial Association (CEA) is hosting a business plan competition that I think many of you will enjoy attending. This is a volunteer organization that is helping the community get a better handle on its economic future. The exposure and insights gained at the competition will be quite priceless IA so if you have daughters, sons, younger nieces and nephews, cousins etc., try and bring them out to this event on the 31st of May. We at Ittihad are both fans and supporters of CEA and would like to see a large turnout. This wonderful organization will help the community build a critical mass of good, ethical businesses that will contribute to society IA. Please register here.

There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be 'Ethical Dimensions of Islamic Finance' and how Islamic Finance and Socially Responsible investing are two pieces of a beautiful solution to many of our financial ailments. It is time for the two movements to learn from each other and collaborate. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please register Here for your 15% discount.

We have been invited by TARIC mosque (near the 400/401) to present our views on Islamic Finance. This seminar will be held on the 21st of June at 7:00 pm. I encourage both brothers and sisters to attend. The interactive discussion will focus on the place that Islam does / does not and perhaps should have in both 'Islamic' Finance and also in our personal financial choices. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-book at home. Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds. I will be sending out a flyer shortly with directions and the program - I apologize in advance to all the readers outside Toronto who will no doubt be upset about receiving an invitation to an event halfway across the country or the world.

Finance News:

1. Is this the next crisis? Trouble in foreign exchange markets? ... read more here

2. Why is the TSX breaking record highs? Are you confident about this economy? Think about this question a bit ... read more here

3. Trading in Carbon credits takes off in a big way as US companies join the movement ... read more here

4. This is why mining stocks are so risky ... their hold over their mining claims is so tenuous (and borderline illegal pending judgement) that investing in them sometimes approaches pure speculation ... read more here

Economic News:

1. A Harvard Business School article on the future of state-led capitalism ... read more here

2. An FT report on the Economics of Food ... excellent follow-up to the last commentary ... read more here

3. An Economist Special Report on International Banking ... too funny sometimes ... read more here

Islamic / Middle East / Emerging Markets:

1. If you are new to financial economics and want to know in 5 minutes why 'interest' is considered wrong by so many people from so many different faiths and political views (Hat-tip to Siddiq Mohamed) ... read more here

2. This is what happens when Sovereign Wealth Funds invest on the way down. Yes, a whole lot of nothing. Nobody is disciplined, nobody is fired, it all taxpayer money after all and there is plenty more where that came from, except nobody in the ME pays tax and all this is Oil money ... read more here

3. Even China has it's own indigenous cars while we drive Gas-Guzzling Gizzards to and fro from work. Interview with Cherry's CEO ... read more here

4. How did Islamic Finance become a human interest story as opposed to a finance story? (Hat-tip to Imtiaz Ahmed) ... read more here

5. The race is on for investment in Africa. I do not know if you have ever travelled over the grasslands of the Rift Valley, but you better go soon. Before yet more plunder of a beautiful continent ... read more here

Interesting but not all Finance:

1. This article from MIT seeks to answer whether it pays for Companies to be ethical. Of course, I take severe issue with the way this question is framed. Ethics are hardly meant to be a cost to take into account when designing a product, but who in their right mind listens to me? ... Also, this article shows how it really is the fault of the consumer that companies are able to get away with so much ... read more here

2. Startling stats on which countries have the highest cultures of private philanthropy ... read more here
3. Who's to blame for the food crisis? ... read more here or here

Letters Edition #3 - Letter from Law Student interested in 'Sane Finance'

2008-05-09T17:49:00.006-04:00

Quote of the week:
‘Now that China is such an engine of global growth, it urgently needs to improve its economic data. Only a madman would drive a juggernaut at full speed with a faulty speedometer, a cracked rear-view mirror and a misty windscreen.’ – The Economist

Of course, The Economist is never really wrong, just not totally right this time. Just add USA after China in the above quote and voila - you have the Global Economy encapsulated in a short, pithy quote that you can use at your next dinner party to impress your future spouse with your intimate knowledge of high finance. I say add the US because the Fed stopped reporting some money supply data some time ago that was too embarrassing. China, on the other hand, is never embarrassed; and there you have two sides of the same coin.

Also, the Ittihad Weekly is now also available as a Blog at: http://www.ittihadsecurities.blogspot.com/ . You can add your comments directly onto the website, but I would be most pleased if you continue to write directly to me as well. We must not allow technology make me obsolete just yet.

Letter of the Week (Commentary will be back next week for sure IA):

Letter No. 1:

Mr. Jawad:

I hope I am not wasting your time, but I would like to reply to the individual who sent you the letter.

I am not a Muslim, nor am I a Canadian; I am an American, with a Bachelor's degree in Accounting, working on a JD. The reason I point that out is that my professors in undergraduate studies constantly tried to tell us all, "Change your thinking. Debt is not bad. Debt is good; debt is necessary."

As a rational person, I found this reasoning uncomfortable, after all, what is debt but selling tomorrow to indulge today? But with a grain of salt, I accepted that this was the way my world worked.

I started talking to one of your employees, Siddiq, many years ago, and he patiently explained the concept of Islamic Finance, something completely alien to the financial education I had been indoctrinated into. I still don't understand everything, but I do know one thing: My professors lied to me, debt IS bad.

I can illustrate that with frightening certainty. I'm in an American law school as we speak and I watch the evils of debt there every day. The average American law student graduates with more than $50,000 in student loans on top of the debt Americans find necessary to survive. This debt changes the very pattern of the lawyer's reasoning. Many can't afford to work helping low income families, or work for the government prosecuting criminals or defending the innocent. Instead, they flock to giant corporate law firms or start businesses trying to bleed money out of the innocent through personal injury lawsuits. Lawyers have a terrible reputation for being immoral, social parasites. But the irony of it is, it's not the nature of the people in the profession causing this-- IT'S THE DEBT!

Thanks to my exposure to your company and its ideas, I'm completely atypical for a law student. I have no student loans at all, and I just finished paying off and cancelling my last credit card. I still have a mortgage, but it will be the next to go, as quickly as I can get out from under it. That gives me the freedom to pursue the law in a moral way, defending the innocent and standing up for what is right. To me, that is a far greater luxury than a bigger house or steak on the table.

I love your newsletter, and reading it is the high point of my week. You really shouldn't call it "Islamic Finance," you should call it "Sane Finance," because the way we do business in the western world really is insane. It's not about religious ideas, it's about logic. A good idea is a good idea no matter its source.

I love your witty, intelligent cynicism. To me it is a sign that you truly care about Islamic Finance because you care more about its future than its present reputation. I also love having something to read that challenges my mind, something that I find quite rare.

Keep up the good work, I'll be waiting for the next issue, and I'll put down everything to read it, even though I'm studying for finals.

J Schneider
---
Response to Letter No. 1:

Dear Ms. Schneider,

Hope you are well. I am beyond merely thankful for your exceedingly generous and insightful email. One hardly knows where to begin, so I guess the beginning will have to do. Your letter is not a waste of my time - it actually speaks to the very reason for why we are given time in this life at all. I found your letter both inspiring and humbling - your idea and expression of how the freedom to pursue a moral end in life is a luxury beyond mere wealth, is intensely powerful. I pray that we will be able to learn from your example and apply this philosophy in our own lives.

While I am humbled and turn to water with embarrassment that you find both enjoyment and value in the ideas that we try and discuss, I am consoled by the fact that I am quite undeserving of this praise. I truly think that most of the ideas I regurgitate in my admittedly cute fashion are actually timeless truths that have survived the onslaught of both religion (in the narrow sense of the word) and Logic (even at its most expansive). In this sense, my contribution is miniscule compared to my responsibilities as a ‘financial-type’. I think it is much more accurate to say that it is the inherent elegance of the subject matter we call Islamic Finance that forces itself upon our minds and hearts with such clarity. This is despite, not because of, my feeble attempts at being convincing. Since we are on the subject of praise however, it is much better to recognize the contributions of Siddiq, who introduced (re-introduced?) you to the subject, and the rest of the team here that actually tries to develop solutions while I provide comic relief. Above all though, credit is due to our shareholders, who had the foresight to put their hard-earned savings into our company when we were just an idea that carried no guarantee of monetary success. It is truly their vision and their ‘walking the walk’ that allows us the luxury to speak about these issues today. Their original investment of time and money allows us to strive for a moral life even while working in Finance, which is a gift for which no amount of thanks or credit is adequate repayment.

Nevertheless, since I am unable to leave things well enough alone, I would like to expand on your letter and nitpick just a wee bit. Your example of how debt works its way into the lives of young lawyers and thus affects the development of Law is indeed a frightening and eye-opening example of how debt take us away from what we really want to be doing with our lives. Indeed, if we were only to ask ourselves whether we go to work in order to fulfill our human potential or to pay the mortgage, the results would probably be shameful.

Also, your tongue-in-cheek suggestion that we should start calling this ‘Sane Finance’ (a term that I think you should copyright ASAP) is gratifying, but ultimately a bit problematic. One problem is that my sanity is in such obvious short supply that my calling this type of finance ‘Sane’ will undermine its credibility, not add to it. The second and main reason I insist on not allowing the concept of sanity to take over from Islam though, is that in my opinion, there is something deeper at work here than either logic or sanity. The idea that usury is not a healthy use of money is contentious depending on which system of logic is being used so this is an argument that is somewhat unwinnable with an appeal to pure logic. At the end of the day, it really is about values such as economic justice and I do not think that the removal of the term ‘Islam’ from the conversation would be fair on that score. The fact of the matter is that even though as Muslims we have been no better than our brothers and sisters from other faiths (for whom usury was also forbidden) in our involvement with conventional finance, ‘Islam’ as a body of knowledge or as a source of inspiration still has not compromised on the issue of usury. This point bears careful repeating: ‘Islam’, as one of the bodies of knowledge and law in the world still has not compromised on the unacceptability of usury and is therefore one of the last conceptual / religious or faith-based challenges to its widespread institutionalization. Many Muslims (and many value-less institutions) are sadly trying to get around the rules, but the rules are still there, plain for all to see. Removing the word ‘Islam’ from the discussion would be a disservice to a Faith that has brought us to this point. It would also do harm to our ability to connect with groups such as the Christian Council for Monetary Justice on the basis of Faith. Also, even though Islam is an Abrahamic faith that is sort of taking a stand on this crucial issue, the fact is that this stand is somewhat tenuous these days. This should encourage us to keep both sanity and Islam within Islamic Finance, not disavow Islam as one of the most proximate sources of our moral logic. Finally, please rest assured that I do not say any of this with a sense of superiority or self-congratulation, but rather with a sense of tragedy. The road is long and in the grand scheme of things, we have only just begun to understand how our present debt-based system sells out all our tomorrows. I only wish that we were better at fulfilling the potential of economic justice that is plainly there in our faiths, not in a narrow, exclusionary sense, but as good people, for all people; regardless of source, as you say.

I thank you once again for your thoughtful, insightful and exceedingly generous letter and wish you the very best in a long, meaningful career that God-willing will remain unsullied by the ravages of both debt and compromise. I also wish you the best of success in your finals. Your letter and success with your debt situation inspires me personally and I know will resonate with and inspire other readers as well. Perhaps through such dialogue, we can all learn to make the connection between our astronomically high levels of debt and our equally unforgivable failure at fulfilling our responsibilities to one another and the Divine.

--------------
MAP Canada is hosting an event for young businesses on the 10th of May (tomorrow). 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 many of you will attend. My contribution to the festivities are supposed to address the question of ‘How to Raise Capital for Your Business’, so you know there will be some 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. Please register here

There is also a conference in NY that our Senior Management will be attending. Our CEO’s topic of discussion will be on the ‘Ethical Dimensions of Islamic Finance’ and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.

Finance News:

1. The ROB collects some of the best financial blogs in one convenient place ... read more here

2. UBS declares yet another $10+B loss and cuts 5,500 jobs ... I wonder if all the Aunties that proudly tell me ‘My son is a banker!’ and ask me ‘why don’t you work for a bank?’ are quivering in their sandals at the thought of banking becoming less than fashionable ... read more here

3. The Economist makes a case for caution when thinking of investing green ... a very interesting (and short) read ... read more here

4. Best argument yet for letting women run the family finances ... research shows that is much more difficult to defraud women than it is to defraud men. Men, it seems, always getting caught up in the heat of the moment and investing / losing money based on emotions ... read more here

Economic News:

1. Rob Carrick wakes up and sees inflation ahead ... the timing of his columns would be comical if it wasn’t so tragic ... read more here

2. The Chairman of the FED has a plain-speaking style, but he seems to be making a career out of stating the obvious ... he thinks home foreclosures would hurt the economy, you think? ... read more here

3. It is not usual for the Ittihad Weekly Briefing to be ahead of The Economist but I think we managed it by two weeks this time on the subject of commodity prices and the falling dollar. Nevertheless, this is yet another excellent article from the good folks at my favourite source of economic analysis. It is just too bad that their political leanings are so totally messed up ... read more here

Islamic / Middle East / Emerging Markets:

1. This hardly made the news, but that is because in North America, we are fascinated by North America. A Bahraini fund investing in Eastern Europe? Does that mean Eastern Europe has peaked? ... read more here

Interesting but not all Finance:

1. What! Such a strong link between Finance and Warfare?! ... Including juicy news about the US political system? - and here we thought financial decisions were all politically-neutral, or was it that all political decisions were financially neutral? ... read more here

2. Albertan Oil Sand companies on trial for environmental damage ; a case that has riled up the public after the recent death of over 500 ducks as they landed on an open toxic pond. Perhaps one of you can find some meaning in the fact that China is having a similar problem at what was once one of its most beautiful lakes .

3. Wondering what our best and brightest political minds think about on Parliament Hill? No, not the economy. No, not the various wars we are involved in. No, not the First Nations colonial situation. No, not even the lack of a coherent trade policy with the BRIC countries. Think of something to do with toilets and plumbing .

4. One of the best short articles on communication I have ever read ... lays out core principles of communication (defined as the delivery and the receipt of the intended message) for those in business, but can be adapted for other circumstances ... read more here

Letters Edition #2

2008-05-06T16:20:00.000-04:00

Quote of the week:
'The critic has to educate the public. The artist has to educate the critic.' - Oscar Wilde

Alas, I have been accused below of being a mere critic. I received a letter from someone at a company that that has an Islamic Finance 'window' in addition to their regular business. The person takes exception to the irreverent way in which I seem to be discussing 'Islamic Finance' and the companies that are trying to inhabit this space in Canada. Although our two companies are not competitors (who could possibly compete with us, or them for that matter?), we cohabit this contentious space. I have included both the letter in question and my inevitable response below. Don't worry, it has passed our PG-13 screen.

Letters Edition (Commentary will be back next week):
Letter No. 1:
Brothers salams... I am very saddened to see your firms on-going critical and cynical outlook on the current state of Islamic Finance. It would be prudent for you to tone it down a bit and perhaps highlight articles like the one below that does not make a mockery of our deen. With idots (sic) like the MCC criticizing Islamic Finance we don't need Ittihad being perceived as joining such ranks... Please forgive me if I have hurt your feelings but I am getting very very fed up with this on-going unnecessary distribution of e-mails and rumors in the community. Especially given the fact that I heard first hand from a Bay Street broker of a large Institution that your staff is concerned about some details on our prospectus. We need to work together as a Ummaah and NOT be perceived as divided especially amongst the non-Muslims professionals. This is very sad indeed and makes us look really really foolish as a Umaah that was suppose to be together as a brotherhood and not be indulging in such blatent Back-biting. IF we have issues with our respective businessess we should make a first effort to content each other before disseminating information to 3rd parties.p.s. Article: 'Islamic finance could have prevented subprime crisis' by Amy Glass on Thursday, 24 April 2008 read more here
---
Response to Letter No. 1:

Thank you for your email. Your letter was the best I have received in many months and I look forward to much more of such praise couched within the facade of criticism. Our super-genius readership will no doubt read between the lines and see your all-too-apparent awe of our policy to be transparent and open about things that many others would rather gloss over or sweep under the rug. In order that no professional harm comes to your career, I have removed your name and that of your company. I trust that this will be acceptable to you.

Your letter, article link and 'need' to be happy raises several existential issues for us, which I will discuss below. I must, however, clarify that the newsletter (inasmuch as it is the source of your beef) is my personal production. I am of course, blessed to be at a firm that allows me to engage readers in this way, but you should know that Ittihad Policy may or may not be the same as mine, depending on the issue and circumstances. There is actually a very cute disclaimer at the end of all IWB issues that says this in the required legalese.

Although I am honoured at all your underlying praise of our company, I will take you up on your offer to respond to some surface criticisms first.

Just a few points for you to consider:

1. As Ittihad exists as a local firm without ties to established multinationals or foreign parties, it is in our nature to cause both sadness and happiness to people. There are people we are committed to making happy and then some people about whose happiness we are unfortunately not mandated to worry as much. I know this might come as a bit of a surprise since you are in the financial industry yourself, but Ittihad actually exists to make it's shareholders / directors / clients / investors & regulators happy, not the 'Islamic Finance' industry. It would be difficult at this point for us to re-jig the structure of the firm and our mandate to include your happiness as our goal, but I will do the needful and try and get this onto the Board's agenda. As we Muslims say - InshAllah (God-willing).
2. I assure you that Ittihad is neither cynical nor critical of Islamic Finance. We are blessed to be able to work in the field on our own terms and are fully seized of the great responsibility on our shoulders when we use the words Islam and Finance in the same phrase. Personally, I am at a loss to understand why you would think me 'cynical' and 'critical' - I will stubbornly console myself with the thought that you perhaps meant to say 'thoughtful' and 'astute'. Reading between the lines of your letter confirms my view.
3. With regard to your reference to being 'prudent', I do not understand how can it be 'prudent' to accept wholesale and unthinkingly what the conventional system labels as Islamic? In my opinion, that is called 'Foolishness' at best and 'Hypocrisy' at its worst. Also, it is not a small, humble newsletter that few Muslims read that makes a mockery of our religion but rather the injudicious and gratuitous use of Islam as a marketing gimmick and advertising tool. Just calling ourselves 'Islamic' does not remove the onus from us to actually be Islamic, it is meant to be the other way around. Let us agree then, to disagree on who does more damage to Islamic Finance.
4. I did not know that the MCC (Melbourne Cricket Club??) had uncharitable views on Islamic Finance, but I assure you that ours are our own. Canada is Alhamdullillah (Praise be to God), a free country and we both love and celebrate the free exchange of debate and ideas.
5. As you no doubt know already, a prospectus is a public document mandated by the Ontario Securities Commission. If yours is embarrassing or was meant to be secret, perhaps it should be renamed or withdrawn from the public record. I see no reason why two people should not be able to discuss a public document candidly, especially as our concerns have been brought up in person with members of your Shariah Board and yourself already.
6. The article that you have sent us is insipidly named but does indeed merit a read. It ends by saying '... (Islamic) banks only look to maximize their profits. They know that there is no real difference between conventional banks and Islamic Finance'. I did not get a clear picture of your views on this, but is this practice not making a mockery of Islam? Furthermore, it is not at all true and quite besides the point that what passes for 'Islamic' Finance these days 'could have prevented SubPrime'. The whole point of Islamic Finance is that subprime issues would not even arise. I am sure that this crucial distinction will not escape you as you read more of the Ittihad Weekly with an open mind.

I hope that I have not hurt your feelings, but like you, I am also getting fed-up with businesses whose purpose seems to be getting as much Muslim money under their belts as possible, using any and all means necessary. Furthermore, I am beyond fed-up with this tiptoe-ing around the problematic issues within Islamic Finance in the interests of a false consensus that large companies want to dictate. If this is what Islamic Finance is, then I want no part of it. Please feel free to use your position in the industry to have me excommunicated.

Finally, I wish you great success in uniting the 'Ummah' and keeping it from looking foolish. I am sure that the various tricks 'Islamic' Finance professionals devise to profit from 'interest' makes Muslims look like geniuses instead. Thank you for writing.

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MAP Canada is hosting an event for young businesses 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 many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some 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. Please register here

There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be on the 'Ethical Dimensions of Islamic Finance' and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.

Finance News:

1. Good article (too short though) on what young people starting out in life absolutely must know about their finances ... read more here

2. Who says that the financial sector learns from its mistakes? These are the same hedge fund people that caused the Multi-Billion loss when they were at Long Term Capital Management in the late 1990's ... read more here

Economic News:

1. Following up last week's commentary ... the environmental impact of food transportation ... read more here

2. North American Food Processing companies are having a field day. High profits, high share prices, lots of hungry people, what more can we ask for? ... read more here

3. Is Canada Recession-Proof? ... read more here

4. I can't believe at the sheer gall of this plan. The new BOC Governor wants taxpayers to allow him to buy all sorts of non-performing investments on their behalf in order to relieve pain for the private sector ... read about it, think about it, call your MP and 'Just Say No' ... read more here

5. This is how recessions start ... with the closing of retail stores ... read more here

Islamic / Middle East / Emerging Markets:

1. A primarily Canadian (but not exclusively so) company on how to make it big in Islamic Finance ... read more here

Interesting but not Finance:

1. Issues with wind energy? Say it ain't so ... read more here

2. The price of Oil is $120 a barrel, but what is the price of water? ... read more here

Economic Complexity and the Price of Food

2008-05-06T16:19:00.003-04:00

Quotes of the week:
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -

The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...

Commentary for the Week:
Economic Complexity and the Price of Food:

Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?

One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.

Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.

So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
____

MAP Canada is hosting an event for young businesses 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 many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some 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. Please register here

Finance News:

1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here

Economic News:

1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here

2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here

3. Home sales in the US fall 2% in March ... read more here

4. The property market in Spain falters as well ... read more here

Islamic / Middle East / Emerging Markets:

1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here

2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here

3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here

Interesting but not Finance:

1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here

2. The economics of the federal government's despicable policy on the seal hunt ... read more here

Economics of Stealing Cutlery

2008-05-06T16:16:00.000-04:00

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

Miscellaneous:

1. N/A

Why care about Islamic Finance?

2008-05-06T16:15:00.000-04:00

Quotes of the week:
"EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy." - John Bryant of Operation HOPE, an evangelist for financial literacy.
This why we have announced our first Educational Seminar on Islamic Finance in Toronto for 2:30 pm tomorrow April 12th at the Radisson East Hotel (55 HallCrown Place, Toronto). The seminar is designed to explore the place Islam occupies in our financial lives. We will not be selling anything other than ideas and you will get the unusual and unprecedented chance to meet your humble correspondent in person ...

P.S. The column below does speak of God, but not in an exclusionary or exclusively Islamic sense and I think that people of all faiths, no faiths and no interest in faith whatsoever on this list will still find something there to appreciate. I do apologize for any offense - I assure you that none was intended. I do look forward to seeing some of you at the seminar tomorrow (Free but no real Food - sorry).

Commentary for the Week:
Why should I care about Islamic Finance?

Many people are of the opinion that Islam and Finance should not really mix. It is said that Islam is about values, morals and duties whereas finance is about making money. As money is a great 'evil', necessary but ultimately impure, never the twain shall meet. If we add to this the argument that our fellow Muslims (and perhaps us - God only knows), have not really done much in service to humanity while professing to be Islamic Finance professionals, we begin to understand the argument. Indeed, our contributions pale in comparison to even mining magnates in just Canada - whose companies use up and destroy large tracts of land in the search for jewellery and telephone wires. Even though their companies use chemical leaching and other destructive extraction processes, many are themselves the greatest personal donors and benefactors of hospitals / universities / charities and the like. In comparison to that, what has Islamic Finance really done, and why should you really care? After all, your mortgage is well on its way to being paid off, you have a good job, family and bills to be worried about. Why should you take Islamic Finance seriously? Why should you care?
Well, this is a difficult question, and ultimately it will of course be a personal choice. Let me share with you though, some of my humble thoughts and maybe you can share with me some of yours. First, the question as we have framed it above, is a bit misleading. The question is not really whether we should start to care about Islamic Finance, it is about how we came to stop caring about God in the realm of our financial choices. In essence, we are asking ourselves when and why we lost sight of God as we saw money. Does our sinking into materiality have something to do with that connection to God such that our absorption in one, leads to loss of the other? Is there a balance then, that we should be hoping to achieve?
Personally, I myself am totally off kilter. I wouldn't know Piety even if it hit me in the face while I was supersonic. But learned minds have explained to me that there is something of a balance that people can sometime find. Instead of either chasing money or either chasing God, perhaps it is possible to use money as a powerful means to do Good. How is this Islamic you ask, and what about money being 'evil', and what about never the twain shall mix? Well, without harping on the details, it is unthinkable to me that our faith would address so many mundane aspects of our daily lives and yet leave the profundity of wealth management unaddressed beyond charity. There must be then, something about how we spend our wealth and conceive of finance that we have not paid any real attention to.
In my limited and imperfect research, there are two major themes that come to mind. First, one feels that at its core, Islamic Finance should be about Social Improvement. It should be about leaving the world a better place than we found it. There is so much that there is to do and improve and fix, that we really have no lack of opportunity. We also have no lack of resources. We have been entrusted by God with land, intellect, muscle, capital, technology and of course, thanks to NAFTA (cannot blame God for that) - cheap Mexican labour. So the second theme really is whether we have been good Stewards of all the amazing things, including our hard working and underpaid Mexican brothers, that we have been entrusted with. Between the concept of a moral use of our money and the concept of a careful stewardship for all the wealth that we coexist with which is not money, is perhaps the place that we have been searching for. It is perhaps the place that we will find another connection to God. It is also perhaps the place we really want to mean when we speak of Islamic Finance.
Going back to the question of why we should care then - let me ask you a question to counter yours. I know that we usually share a few not-so-funny jokes that still make you laugh, but today is perhaps a day to be a bit reflective. Let me then overstep my bounds and ask you a personal question. What then, is the purpose of your life? Is it not to be at the same place that we have just discovered? Let me get even closer then, to the heart of the matter and to you. Close your eyes my friend, and ask yourself this question: Do you really need a reason to care, or can you feel that we are past reasons now?

Finance News:

1. Mortgage foreclosures start in the richer neighbourhoods and areas of US as well ... read more here

2. As was humbly predicted here a couple of weeks ago, some hedge fund payouts are truly amazing ... read more here

3. Some strategies and insight into how debt affects your financial plans ... read more here

4. Video interview of George Soros discussing this crisis. He is the man that 'broke the Bank of England' in the 90's (?) ... read more here

Economic News:

1. For a long time now, the US has been importing deflation from abroad in the form of cheaper goods. That tide seems to be turning with the precipitous fall in the US$ ... read more here

2. The IMF reports that losses from the credit crunch will top $945B ... read more here

3. In case you were wondering some of the real decisions of the world are made (hint: It's not the UN) ... read more here

4. The gambling industry says they generate almost 300,000 jobs and create lots of value to the economy. Hmm ... all those lives, time, energy and resources spent robbing Peter to pay very little to Paul? ... Value indeed ... what is unconscionable is that the Government is actually in on the act ... read more here

5. House Prices in Britain are now falling ... read more here

Islamic & Middle East Finance:

1. N/A

Miscellaneous:

1. Excellent column and advice for job-seekers ... the idea is to create the opportunity rather than waiting for one to fall in your lap ... read more here

2. A physicist disputes the naming of the 'God Particle' that is supposed to explain a bit about how mass was created early in the universe ... read more here

The Nature of Risk

2008-05-06T16:14:00.002-04:00

Quotes of the week:
"The first of April is the day we remember what we are the other 364 days of the year." - Mark Twain.

In Honour of April and the financial crisis. (I wouldn't take the quote personally. After all, Mark Twain was an American).

Commentary for the Week:
The Nature of Risk:

Risk is one of those phenomena that leap into any and all discussions on finance even before logic can intrude. When we ask of someone what the Risks vs. Rewards of certain actions are going to be, we are frequently clear on what we mean by rewards but are usually not so clear about what we mean by risk. We frequently confuse risk with uncertainty, volatility and general gut-feeling. These are all important factors on their own, but surely Risk means a bit more. It is not enough to say that things will go up and down, or that one kind of action is 'secure' whereas another is 'risky'. The Truth (and you know that your humble correspondent is all about the Truth) is that there is always risk. Risk is even more pervasive than body odour at my gym, or smelly socks at Juma (no thanks to me I might add - I do my bit for the environment).
Two weeks ago, I recommended to you all a simple (but hopefully not simplistic) model for judging investments. But how does one go about categorizing and defining the risk factor within that model? Usually, there is reference made to words and phrases such as 'secure', 'guaranteed', 'not likely', 'not guaranteed', 'past performance is no guarantee', 'phenomenal', 'spectacular' and my all-time favourite - 'risk-neutral'. But what does all this mean and how can we as investors make some sense out of this? After all, people are paid millions to manage risk at Insurance companies, Trust Companies, Investment Banks and even at our favourite Actual Banks (I know - InshAllah). What makes me think we can second-guess them when they say 'secure' or worse - when they say nothing at all?
Well, it's simple really, the money around which they manage all this Risk is ours, and although one would like to think that they know what they are doing better than us, that is not exactly 'guaranteed', so to speak. So how do we manage Risk for our own money, ourselves - even before we seek help from 'professionals'?

5 Simple questions come to mind:
1. Do I understand the investment, how it works, how my money is supposed to grow, what makes it grow? etc.
a. Failing at this question is called the Risk of Ignorance. It is usually very expensive. If not in this world, then definitely in the next. To guard against it, we must understand fully how something grows in value. If the investment is Real Estate, why that particular location will increase in value more than one 17 blocks away for example. If it is a stock, why that company as opposed to its competition. If it is a mutual fund, why that particular fund manager or strategy as opposed to the other 4000. If it is a portfolio, why each component fits with the others.

2. How many ways are there in which what is being said to me can turn out to be false, or if not false then at least not Totally True?
a. Failing at this question means you are at Risk for False Expectations. For those of us who are married, we are very familiar with this risk. In financial matters, however, this risk is frequently overlooked when discussions about Rewards begin (again, just like marriage). My advice would be to rewind a bit and go over whether you understand how many ways the rewards can be undermined by fairly common situations. Think of it as buying a cow - if it doesn't pass on into Bovine heaven immediately (which would be a catastrophe such as the one we discussed last week), it will still produce milk. But if someone is feeding the cow pop-corn instead of hay, it will not perform by producing Grade 'A' milk but by producing manure. Definitely not the reward we were hoping for.

3. How likely is it that any of these 'Reward-reducing' situations will arise?
a. This question begins to quantify the Risk of Loss and its probability. The loss can be of faith, of returns, of principal or of face - the key is to figure out the probability for each situation that can reduce rewards. Using our beloved cow once again, what is the probability that someone will sneak into the barn and substitute hay with pop-corn? On the other hand, what is the probability that the hay is genetically-modified and may induce madness? Once you have these probabilities figured out, you can determine what the most likely scenario for the cow really is - whether it is reasonable to expect that the cow will actually produce the Grade 'A' milk you desperately want.

4. How severe will the loss be if it is 'Reward-reducing'?
a. This question leads us to determining whether we are at Risk for Catastrophic Loss - which is perhaps the most important determination of all. This is when amounts at risk or issues at risk are of the kind that induce butterflies in our tummies even when we are already full of Biryani. Usually, these involve some form of leverage / loans / margin. They can also involve life-savings. For those who are some way along life like my balding, grey-haired self, this becomes more and more of an issue. Personally, I try and stay away from anything that exposes me to catastrophe, particularly cows. One must try and spread one's nest-egg into a few baskets that one understands fully. Personally, I do not always succeed, but at least I know that the responsibility, decisions and blame are mine alone.

5. What is my alternative?
a. Failing at this question puts us at Risk of Opportunity Loss. If we dither, over-analyze and over-complexify, we will lose the opportunity to act in a timely manner. Ideally we want to buy the cow when it is reaching milk-producing age, not when it is entering its pop-corn driven Madness. Similarly, if we are in the path of an oncoming train, whether we jump to the right or the left, or whether it is expected to reach the next station on time is quite besides the point.

Armed with this knowledge and framework, I am sure you will make if not Trillions, then at least better decisions. You can even take the last two questions and make a nifty 2x2 Risk-Matrix. Please don't get excited about Cows as the investment vehicle of choice - send me neither Milk, nor the other By-product, I am partial to Soya Milk myself.

Finance News:

1. Have no fear, new regulations are here. Too bad more power is being given to the people who got us into this mess in the first place ... Even though we protest to the contrary at every opportunity, I guess at heart, we really believe that the politicians know what they are doing ... Just like marriage, a triumph of 'Hope over Experience' ... read more here

2. Blanket immunity is about to be granted for the Canadian version of the Sub-Prime mess ... read more here

3. Lehmann Brothers, the investment bank that is just larger than Bear Stearns was, raises over $3B (I think it took Bear Stearns something like 80 years to become worth $3B) ... read more here

4. Useful advice to guard against identity theft ... a growing problem in North America ... read more here

Economic News:

1. Some evidence that food prices have been bid-up by small scale investors. An interesting but ultimately unsatisfying explanation ... read more here

2. An excellent article on how Alberta's Oil Sands are using up both Natural Gas and the Province's fresh water. Did you know that the largest dammed (as in water-dam) pool in the world right now is not the Three Gorges in China but rather Syncrude's pool of contaminated water? ... Shocking ... read more here

3. Are Student Loans going to be the new sub-prime? ... (hat-tip to Suhail Ahmad) ... read more here

4. Story about some homes in the US that are worth less than their copper pipes ... read more here

Islamic & Middle East Finance:

1. An insight into Saudi Arabia's economic debates ... the burning issue of the day is not the almost suicidal peg to the US$ but whether women should be allowed to drive ... come on people ... read more here

2. UAE Takaful Company IPO oversubscribed 43X ... irrational exuberance anyone? ... read more here

Miscellaneous:

1. How to start up your own country ... (recommended only for reading purposes, not for hatching actual plans) ... read more here

2. The best advice that the CEO of PIMCO - William Thompson ever received ... (this is particularly good for young readers starting out in life) ... read more here

The Miraculous Catastrophe of Bear Stearns

2008-05-06T16:14:00.001-04:00

Quotes of the week:
1. "Notionally called hedges, in reality they were a series of free-standing bets that Bear executives dubbed The Chaos Trade"
2. "The Fed's role in the deal suggests federal officials fear a systemic collapse of the U.S. financial system were Bear Stearns to fail. The fear stems from Bear central role in a multitrillion-dollar web of interconnecting derivative contracts." - Roddy Boyd on CNN Money.
3. "Bear is a counterparty to some $10 trillion of over-the-counter swaps. With the broker's collapse, the fear that these and other contracts would no longer be honoured would have infected the world's derivatives markets." - The Economist

Quote 1 is how Bear Stearns was financing its cash flow once their losses became known internally. They were making trades betting against their other portfolios and betting (sorry, 'investing') on things to go really haywire. I think some hedge funds that bet against the financial sector are going to announce amazing results in the next few weeks.

Commentary for the Week:
The Miraculous Catastrophe:

Something so awesome happened over the last two weeks that quite possibly every human on Earth has been adversely affected. No, it was not Godzilla's escape from its wintery prison, nor was it yet another discovery of King Kong. It was something that sounds so innocuous that it probably escaped most people's work-a-day attention. Of course, if I had a life outside that of finance, it would have escaped mine as well, but I am chained to the desk here at Ittihad and am required to know such things. On the surface, what happened was quite simple. An investment bank in the US called Bear Stearns was bought out by a full-fledged bank called JP Morgan for a relatively small amount. This was reported in many places and some surface treatment was given to how there were several 'Risks' in the financial system which were brought to light by the whole episode. The exact nature of the risks, however, was generally left to our imaginations, so here I go.

Let me start by saying that the annual GDP (nominal basis 2008) of the entire world is around $57 Trillion. This means that all of our collective effort as humanity over the course of a year adds up (if one were to use money as a yardstick) to $57,000 Billion. Relative to that, the Bear Stearns buyout, at a mere $1.5B is of course peanuts and quite unremarkable.

But try and look at it from this perspective for a minute and see if you feel a sinking feeling in your gut. Had Bear Stearns not been bought out by JP Morgan and had JP Morgan not guaranteed Bear's obligations, there would have been a ... wait for it ... a bit more ... a $10 Trillion hole in the financial system. How can this be, you ask? Surely it cannot be, you say? How can a company that is worth $1.5B now (and was worth $3.5B before the crisis) create a $10 Trillion gap in the entire system of what passes for wealth, you ask yet again? Well, the official answer is that these are all unsophisticated questions and we shouldn't worry our pretty little heads about it too much. It is best to go back to refinancing the house so we can buy the Broccoli that now costs almost as much as a pound of Silver. The big men (such as Big Ben) are in charge and with their humungous brains, surely they can find a way out of this mess. So much for the official answer. The only-somewhat-varnished truth is quite different, and your earlier questions may not be so unintelligent after all.

A company with less than a few hundred million in actual assets (which were also quite faulty to begin with) is a counterparty to over $10Trillion of derivatives. If you suddenly remove this company from the system, all of humanity would have to work for two whole months to make up for the just the first order loss. As other, second-order losses would surely follow, this calculation does not even include any downstream and domino effects. To your earlier questions, I would add two more - How can be this be a sane way of handling humanity's finances? Isn't there something wrong with a system that allows one company (which was only the 5th largest Investment bank in the US) the ability to enter into performance contracts worth more than 75% of the US economy?

One reason this is difficult to wrap our heads around is that we have been conditioned into thinking that finance is complicated and best left to experts with many ill-fitting consonants behind their name. The other reason that this seems unreal is the fact that there are more zeroes in these figures than there are hairs on my head, which is confusing us needlessly. So let us un-complicate this Gordian Knot and get to the heart of the matter. Let us say I have $200 in my chequing account, which is all I have to pay for all sorts of bills such as the lights, heat, Broccoli etc. Let us then say that I calmly and coolly write people 'certificates' (an easier way to think about derivatives) in the amount of $10,000,000. Even though these 'certificates' are strange in the sense that only a limited amount of people actually submit them for actual payment back to me (think Canadian Tire Money or gift cards), the fact that I have promised $10 Million when I have only $200 to my name is boldness bordering on lunacy. In simpler times, it was called fraud.

In the modern economy, however, what happens if people suddenly wise up to my irresponsibility and stop accepting my 'certificates'? What if they actually ask me to pay up on some of the ones outstanding? Furthermore, what happens to all the people who have used my 'certificates' as assets upon which to write IOU's of their own? In theory of course, there should be a catastrophe of the 'Plagues of Egypt' proportion, but what we have is a miracle instead. This is because, if you are American, even if you make a $ 10,000,000 hole in the assets of the world with your $200, there are no severe ramifications. Instead, someone actually pays you $100 and then takes over the business of writing your 'certificates'. The fact that this someone has also been given a $30B 'loan' from public money makes for the Mother of all Financial Miracles.

Welcome to the even newer economy, where a private $10Trillion loss can be papered over with $30Billion of taxpayer money. This is the New World, where a crack that would bring down the World economy is papered over by empty promises. May God protect us from the crushing blow of Inevitability. But don't panic just yet, this is all probably just my imagination.

Finance News:

1. Bear Stearns was bought out by JP Morgan for less than 20% of the value (Price?) of its Head Office Building ... this is an intelligent discussion of why ... read more here

2. A beautiful and succinct explanation of why Hedge Fund collapses are always spectacular ... (hat-tip to Michael Gassner) ... read more here

3. What a juicy piece of news for those following the Bear Stearns buyout! ... It seems that JP Morgan will have to raise its bid to $10/share from $2/share because the CEO did not read the 'merger' agreement carefully before it was signed ... read more here

4. This came out just as I wrote #3 above ... Its official at $10 / share. The mechanics of the transaction are quite funny though ... It seems JP Morgan does not need the approval of a majority of today's shareholders for the deal to go through ... read more here

Economic News:

1. Prospects for the US$ ... The info on the amount of leverage used by Goldman Sachs and Merrill Lynch is astounding ... read more here

2. The US Treasury congratulates the Fed for putting $30Billion of public money on the line during the Bear Stearns buyout ... (if anyone needed more confirmation that the game is rigged) ... this is the 'Too Big to Fail' philosophy on steroids. Friends bailing out other friends using public money ... read more here

3. Excellent Column on the 'End of Capitalism on Wall Street' ... too funny ... read more here

4. The Economist suggests (a mere hint of a suggestion) that JP Morgan Chase has swallowed a whale / bitten off more than it can chew with the buyout of Bear Stearns ... read more here

Islamic & Middle East Finance:

1. 'Islamic' Bond listed on the London Stock Exchange ... read more here

Miscellaneous:

1. And you thought that we were a developed economy that was beyond worrying about food prices ... read more here

2. Does this mean the end is near? ... The US Defence Department may not know where all its Nukes are ... No less an authority than CNN folks ... read more here

How to judge an Investment ...

2008-05-06T16:10:00.000-04:00

Quote of the week:
"When the Fed is worried about the state of the economy, it basically responds by printing more of that green paper, and using it to buy bonds from banks. The banks then use the green paper to make more loans, which causes businesses and households to spend more, and the economy expands. This process can be almost magical in its effects: a committee in Washington gives some technical instructions to a trading desk in New York, and just like that, the economy creates millions of jobs. But sometimes the magic doesn't work. And this is one of those times." - Paul Krugman in the NY Times.

A carefully chosen, selective misquote. Just in case you didn't believe those of us who have said that the overleveraged financial system doesn't really work.

Commentary for the Week:
How to judge an Investment ...

Judging whether something is a good investment for your hard earned money is a skill that is critical in importance but seems to be in quite short supply. Especially from the way the markets have developed in the last year, it is obvious that with the exception of some truly good asset managers, most financial types that portray themselves as experts are quite clueless. They get away with this because their clients, us, are equally unsophisticated when it comes to financial matters. This is compounded by the complexity of our economy, which ensures that people who are geniuses at their non-financial jobs, turn to mush as soon as they begin to discuss their finances. In order to rectify this problem as much as one can, here are my humble suggestions for a few characteristics one should look for when judging the quality of a potential investment.
Most investments can be judged according to 5 fairly straightforward criteria. A perfect investment for you would be one in which all 5 qualities of the investment match perfectly with your particular needs. Also, there is no such thing as a perfect investment (perhaps because Ittihad hasn't developed one yet, and if we can't do it, I am sure you know that other's have little chance). More seriously though, even a 'perfect' investment will require you to make tradeoffs because sometimes the criteria work against each other - so you can have some of one and some of another, but not all of all. Anyway, good criteria against which investments should be judged are:

1. Income: Does the investment provide you with regular income?
2. Growth: Will the investment grow over time? Will it grow to what you want it to grow to? (Infinity is NOT a good answer here)
3. Liquidity: Will you be able to sell the investment quickly for a fair price if you have to sell in a hurry?
4. Safety: Is this a safe investment? Is your principal protected in some way? Will the investment be volatile?
5. Responsibility: Will your investment harm society or will it be beneficial?

Usually, you can find an investment that performs decently in maybe two or three criteria. A real estate investment for example, can provide you with rental income, some growth and some safety. But you cannot sell a house efficiently for its full price in the middle of February for example. Similarly, mining exploration stocks can provide you with a lot of growth if the companies in question find resources, but the environmental damage of a mine and the lack of safety keeps most investors away. This is all fine and dandy you say, for simple investments such as stocks and houses, but how would this model work for complex derivatives such as CDO's, you ask? Well, let's try - and then you can be the judge of whether the model can help you the next time someone tries to sell you something that is the 'Best Thing Since Google'.

CDO - Collateralised Debt Obligations (of subprime fame)

1. Income: Yes, they provided higher income than Bonds of similar credit rating (this rating was found to be problematic later but let us imagine that we are not judging in hindsight).
2. Growth: Absolutely Not. Growth was usually quite limited through embedded call options that allowed the seller to buy them back if they started increasing in price.
3. Liquidity: Yes, the promise of liquidity was always there (even though in practice it turned out that nobody wanted to buy the things)
4. Safety: Yes and No. Credit rating suggested yes. Exotic nature of products suggested that safety was lacking. Definitely not an unqualified Yes.
5. Responsibility: Extremely Irresponsible. Loan products do not add benefit to the economy, they add debt, which has to be repaid at a much faster increase than the rise of wages. Also, the introduction of complexity for the sake of hoodwinking investors is hardly an ethical practice.

I think it is safe to say that the model has some potential. If you begin to apply it with discipline to the things that you are thinking of buying for investment purposes, it might help bring out some features of the investment that are not-so-shiny under that gloss. In other cases, it might actually show you how good a potential investment really is, just the way it happened here at Ittihad this morning. But then saying anything more would be telling ...

Finance News:

1. The Storm before the Lull? ... The Dow climbs 400 pts in one day ... If it takes $200Billion of free money to buy you 400 pts ... how much to break the Dow Record? ... read more here

2. This is priceless ... The notorious Carlyle Group (of elder Mr. Bush fame), leverages its initial capital 32X (this means borrowing an amount 32X larger than one's own equity) for one of its investments ... with somewhat predictable results ... read more here

3. Say hello to the 40-Yr Mortgage. Home affordability the lowest it has been since 1990 ... read more here

Economic News:

1. Investors looking away from US$ investments ... the question to ask your broker / financial advisor is - how much of my retirement savings is invested in the US? ... read more here

2. The CDN federal government proposes changes in immigration policy ... may have grave effects on economic growth ... less capital inflow / less housing demand = lesser growth ... read more here

3. S&P says that the market panic is almost over ... 'pure hogwash' - as they say in the land below us ... read more here

4. Why the Fed's recent actions might fail to produce a recovery ... read more here

Islamic & Middle East Finance:

1. All the 'Islamic' countries of the world have gotten together to build an anti-poverty fund (which is less than 1/6th the size of the Bill and Melinda Gates Foundation) ... well, it's a start ... let's see how they help the people they say they want to help ... read more here

Miscellaneous:

1. Essential advice for Small and Medium business - owners from the Harvard Business Review ... read more here

2. Yet more entrepreneurial advice ... from a more personal perspective this time ... read more here

Banking on Islam?

2008-05-06T16:08:00.002-04:00

Quote of the week:
"While Goldman's structure has remained the same, other banks have been changed by the crisis, at least temporarily. Merrill's CEO Thain, for example, has said the bank will exit the subprime-related securitization business. Citigroup may get broken up and there is talk about Bear Stearns getting sold. In addition, many banks are now answerable to sovereign wealth funds from the Middle East and Asia. At Citi, for example, Crittenden helped secure US$7.5 billion from Abu Dhabi Investment Authority." - Avital Louria Hahn - Senior Editor at CFO in the U.S.
Imagine undoing and breaking apart one of the largest banks in the world. Probably lots of fees and profits to be made for that series of transactions also. Must disagree with the statement about being answerable to sovereign funds though ... ME investors are notoriously hands-off when it comes to investing in the US ... willing to provide the money, but not willing to call the shots.

Commentary for the Week:
Banking on 'Islam' in Canada?

I recently had the opportunity to attend a seminar on 'Islamic Banking' and how this industry can be grown in Canada. While I was initially both inspired and excited about being able to learn something, I am very sorry to say that the feeling did not last. I came away extremely disappointed with the ideas that were discussed and completely disenchanted with the mindset of the people who have taken it upon themselves to grow the field. So much of what is beautiful in Islam or Ethical finance was just spoken of as a problem to get around in order to make money while taking zero risk. As such, the whole discourse was demoralizing in the extreme.
Most of the discussion rested upon one crucial point. Whether this point was an assumption or whether many millions went into researching the issue, I could not tell. The point itself however, was quite simple. It was that the Muslims in Canada are so unintelligent (and I am being charitable with my words here), that they can easily be taken advantage of. The entire focus of the discussion seemed to be that if the financial industry designed products (esp. Mortgages) that were the same as usual but hired some 'scholars' to approve them as Islamic, large financial institutions could probably get away with charging Muslim customers more than normal. Furthermore, since Islam requires that 'the financier' and 'the financed' actually share some risk, there were lender protections built into Ontario regulations that could be applied to Islamic products also in order to protect 'the lender' at the cost of 'the borrower'. If that wasn't bad enough, there was also discussion of how once 'Islamic' loans were forwarded to the unsuspecting Muslim public, the lenders would still be able to include those loans in 'structured investment products' that would then be sold to investors for speculation and trading purposes (ala subprime). As such, these products would be indistinguishable from the conventional at the back end and more expensive and risky to the Muslim customer at the front.
As you can no doubt see, this is heady information indeed. Not only am I, as a Muslim customer, being thought of as a proverbial fool who cannot tell when I am being taken for a ride, but I am also about to be charged extra for that dubious privilege. If you are outraged now at reading this, imagine how outraged I was when these thoughts were going through my mind Live, so to speak. Needless to say, I did not appreciate the disrespect inherent in their view of Muslims, and was quite incensed at being implicitly called a fool (esp. because if you are familiar with Ittihad, you are no doubt aware that from top to bottom, we are only staffed by geniuses).
So this leads us to the inevitable realization. In some way, shape or form, things are about to be marketed to us as Islamic. Money is being spent on researching trends, price inflexion points and identifying scholars' who would be willing to lend their services to institutions and practices that they do not understand fully. As sure as the night that follows day, 'Islamic' banking is coming. The question then, for us as a community is - will we be ready? Will Muslims accept the marketing campaigns, clever advertising and end up paying more for something that is demonstrably less Islamic than the norm? Or will we be able to call a spade a spade and refuse to be taken for an expensive ride?
I hope, my friends, Romans, Torontonians, Canadians, people of all stripes, colours, faiths and political proclivities - you will not stand idly by as this travesty is perpetrated upon unsuspecting people. A 1-2% extra interest rate (even if you call it something else) on a mortgage (which seems to be the product of choice), can translate into tens of thousands of extra dollars in needless expense for a family. There is nothing Islamic about that. There are some fabulous contributions that Muslims can make to the Canadian Financial system - expensive mortgages are not one of them.
The primary solution to this state of affairs is of course education; and as an immediate measure, I encourage you to invest some time and effort in educating yourself about both Finance and Islamic Finance. That way both you and circle of friends will be prepared if any big Multinational bank or other local entity were to ask for your business on the basis of Islam. The idea here is that collectively, if we turn ourselves into a community that is educated about such things, stiffing us will not be so easy for those who are trying. I have some ideas about hurrying this education process along, but if you think of something as well, then I look forward to hearing from you on the matter. The refinement of education and thought is always a time-intensive endeavour and it seems that we have little time left to lose ... ideas, anyone?

Finance News:

1. Some of our CPP pension funds are about to be invested in China. Better hope China is still doing as well when the time comes for us to retire ... read more here

2. The Economist reviews Warren Buffett's letter to Berkshire Hathaway shareholders ... read more here

3. The Globe and Mail helps make a financial plan for Aisha, who wants to go to Mecca for the Pilgrimage ... read more here

4. An insightful look into how bank's manage risk, or rather, how they fail to manage risk ... read more here

Economic News:

1. Follow-up to last week's commentary. Oil is now at its highest level even inflation adjusted terms - beating the oil embargo price from 1980. ... read more here

2. This story is too good. For decades there has been a very cooperative nexus between governments and big business in the form of how public money is raised and spent. With the advent of subprime, some municipal governments are trying to break out of these shackles. Ever wonder why your property taxes are so high? ... read more here

Islamic & Middle East Finance:

1. A very good introductory article on Sukuks, as the 'Islamic' version of bonds are currently known. If you read between the lines a bit, you can see the major fault-lines between the various camps on the acceptability of these instruments. The article is also novel because it speaks from the perspective of the issuer, not the broker, and so is somewhat free of advertorial baggage ... read more here

Miscellaneous:

1. Will this mining project get approval to move a quarter of a town in Quebec? ... read more here

2. The Founder of Infosys Technologies shares the best advice he ever got ... read more here

3. Vermont towns vote to arrest both the President and VP of the US ... read more here

The Price of Gold

2008-05-06T16:08:00.001-04:00

Quote of the week:
"You have to ask yourself why OFHEO is letting them take on more mortgages. The last thing the Fed, or the administration wants is for the companies to go out and buy more mortgages and blow up." - David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management.
David connects the War on Terror with mortgages. Personally, I didn't think it could be done.
I can just picture it now ... Person A looks up and says 'What was that Noise? Was it a bomb?'. Person B replies, 'What world are you living in friend? Bombs are so 90's. It was a mortgage company!'

Commentary for the Week:
Why is the price of Gold so high?

The price of Gold has recently shot up above $970 US. Many intelligent people have opined and argued that this is because of the shortage of supply and the increase in demand from Asia. What they really mean to say is that at the rate people from China and India are growing up, getting married and buying jewellery for the aforesaid marriages, the shiny stuff going to be all gone before you and I will be able to say 'I do' in Mandarin or Hindi. This is of course, not entirely accurate. Not only is it quite easy and beautiful to say 'I do' in Mandarin and Hindi, it is also inaccurate because they have framed the question the wrong way around. While it may be true that the price of Gold is getting higher and higher by the day due to demand and supply pressures, it is more true that it is the value of the printed paper we call money that is actually falling drastically. The market for Gold is just one of the areas where we are seeing the effects first.
What evidence do I have for this, you ask? One's innate genius aside, there is of course, the price of oil, the price of bread, the price of wheat and the price of milk that we can take a look at. While I haven't actually been grocery shopping in a while and am surviving on the various flora such as mushrooms that are fed to me by my better half; and I haven't actually filled in any gas in months because the car is in my garage protesting the unprecedented severity of Winter, I am told by reliable sources that the price of things that are Real is rising quite quickly. What this means of course, is that while we feel it is the price of our consumables that is rising, it is actually the fact that intangibles such as paper money and the hours we spend at work that are being devalued in terms of purchasing power. This is even worse for our elders and seniors, or those who are on a fixed income, who get a certain dollar amount a month to spend but are being confronted with prices that have risen beyond all recognition. While I don't mean to be alarmist, the time when Gas Pumps prices and Ittihad's toll free phone no. below will perhaps contain the same number of digits. So what does all this mean for you anyway? You already know that prices are going up. Here are a couple of suggestions for you to think about:

1. To ensure that your paycheque keeps current with reality, I suggest that you ask your HR department at work for an extra zero at the end of the monthly paycheque. To argue your case, you can share with them your pop-corn receipt from the last movie you saw and observe to them gently, but with the air of an Expert, that if this keeps up, we as a society might have to add a couple of zeros to the five dollar bill for it to be enough to buy pop-corn.

2. While you may be tempted to call your broker (who btw did not tell you to short Insurance stocks) and demand some Gold in your portfolio, perhaps you should make a call to your MP instead. You should demand that the Bank of Canada stop 'loaning' money hand over fist to subprime lenders because that excess printing of money is costing you some good pop-corn.

Alternatively of course, you could not believe me and move to China, find someone to marry and learn to say 'I do'. I am thinking then that the Gold would just magically appear, and all the political machinations at our Central Bank would just be a memory, just like $0.50 gas.

Finance News:

1. As I suggested not-so-humbly two weeks ago, the largest Insurance company in the world confesses to huge losses of untold proportions ... all you short-sellers out there owe me a dinner ... read more here

2. The largest IPO in US history is going to be a credit card company ... go figure ... read more here

3. For all those that thought Ethanol was a good investment ... read more here

Economic News:

1. Corporate bankruptcies are forecasted to rise in the next year. Now, remember the recent investments that GCC sovereign funds made into banks? What effects will these bankruptcies have on bank stocks? Not positive I fear. Much better not to have invested of course, but if they had to invest, better to have waited a bit more, let them sweat a bit more instead of jumping in at the first sign of trouble ... read more here

2.

Islamic & Middle East Finance:

1. Funny how most outbound Middle Eastern money is going to the UK, but UK is the worst positioned country vis-a-vis the US$ ... read more here

Miscellaneous:

1. 1% of the US population is in prison ... Wasn't the difference between the Republicans and Democrats less than 1% during the last election? And don't people in prison vote for Democrats? Hmmm ... if only I was a conspiracy theorist ... read more here

Sustainability and Finance

2008-05-06T16:05:00.000-04:00

Quote of the week:
'Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody's Economy.com.' - Edmund L. Andrews and Louis Uchitelle at the NY Times: Rescues for Homeowners

Commentary for the Week:

Sustainability and Finance:

We have recently been hearing quite a bit about how we need to begin to live sustainable lives and create sustainable economies. There are even many movements that have been spawned from this imperative, including 'The Inconvenient Truthers' and Socially Responsible Investing (SRI). But what is sustainability, really? If it means plundering the Earth for all we can on an annual basis while hoping oil prices stay down, then surely we want no part of it. If however, sustainability means living lives that contribute at least as many resources to posterity as the amount we take out, then sure - we are all for it. Framed in this way, finance - which essentially underwrites and monetizes resources, has an important part to play in sustainability. Looking at it in other ways, even if they are Carbon-Neutral, simply confuses the issue.
The problem as it exists today is twofold. First, we are addicted to economic growth. If our economies do not expand by a certain percentage, the worthwhile-ness of life comes into question. People start jumping off bridges, the latest Ferrari remains un-leased and politicians get voted out by a vengeful public. What binds us to this addiction is of course inflation, which slowly and steadily saps our purchasing power such that the lordly sums we survived on as kids seem quite piddly and insignificant with the wisdom of old age. The second problem is our incessant borrowing from future generations. We borrow today, that which we can never pay back tomorrow. Governments borrow to finance wars, corporations borrow to extract or re-order allocation of resources and people borrow to live in houses and drive cars that they cannot afford.
While many focus on consumer behaviour as a large driver of environmental damage, very few have made the connection to how the practice of borrowing on interest speeds up our usage of the planet's resources and ends us up with inflation too boot. The philosophy of 'Why wait to consume tomorrow what you can borrow for and consume today' is facilitated and encouraged by our financial system. It is not just a matter of inexplicable and irrational 'Consumer Behaviour'. We are able to over-consume and over-spend because we have to borrow to merely be 'normal'. So the question now arises about who it is that we are borrowing from. Although the more regular readers among you will be bracing for yet another perhaps inappropriate harangue against our beloved banks, the reality is sadly a bit more complex. Although Banks and other lenders are the face of the loan, the ultimate lender is not an institution. The lenders are future generations. As we borrow gynormous (I am told that this word means even bigger than enormous) sums and mis-spend them, the resources available to future generations come under enormous pressure and are reduced. Will they pay back our loans or will they be able to invest in their own future? The last thing we should want to leave them with is having to repay government, corporate and personal debt though further borrowing from their future generations - which is sadly how we operate today.
A lot of people ask me why usury is forbidden in Islam (and also other faiths). This may be one of the good reasons why. As you make lending more and more profitable, you skew the payoffs to market participants. If you add to that the fact that it is not the market that is dictating this but rather the Central Authorities who keep pumping money into the scheme so that lenders are never chastised (subprime anyone?), you see how the game is rigged. Looking at it this way gives a whole new meaning to the old adage that we have not inherited the Earth from our ancestors, we have borrowed it from our children. I wonder what interest rate is enough to satisfy an unborn child ...

Finance News:
1. A glimpse into one the company founded by the most successful money manager in Canada ... must read ... read more here

2. Yet another successful Canadian company sold to private buyers ... read more here

3. The Caisse declares a $2B loss on its 'investments' ... read more here

4. Excellent article on who gets left holding the bag when derivative trading goes bad ... read more here

Economic News:
1. What happens when funds that promise an absolute return uncorrelated with public markets begin to suffer absolute losses all together ... read more here

2. Battling the coming Bear market ... read more here

Islamic & Middle East Finance:
1. Morgan Stanley says GCC banks with Shariah assets will hold 18% of world financial system assets by 2012 ... read more here

Miscellaneous:
1. Beautiful story about Toyota's founding family ... (are you the best in the world, your country or the best in town?) ... read more here

2. The Cartoon that captures it all ... see it here

Takes 2 to Tango

2008-05-06T16:02:00.001-04:00

Dear Friends,

I know that many of you have probably missed the Ittihad Briefing so much that these last two weeks have been lost in a haze of both depression and disorientation. I assure you that this was not a planned attempt to prove how valuable the Briefing is by taking it away from you. The reason for our absence from your Inbox was quite pedestrian. It was just that I was moving my office to a new location, which resulted in a back injury which required further time off. As that logistical odyssey has now come to an end, my humble self is back at your service. I hope you will forgive this unannounced hiatus.

Quote of the week:
'Particularly egregious, at least to me, was the implicit claim that the capital markets are there in large part to help people save for old age. No they're not, and if regulators or governments ever decided to enforce that particular view we would likely have a market crash. The markets are there to provide liquidity. Period. And if by doing that people are able to buy stock and bonds in companies whose value appreciate, that's great. But markets whose core notion is wealth accumulation for individual savers, and markets whose main object is liquidity creation, are very, very different things, ...' - Paul Kedrosky from Infectious Greed.
People may not like this view but amid the confusion and noise relating to 'the Market', this is an important distinction between the primary function of markets and what we use them for.

Commentary for the Week:

Banks around the world announce more than $100B of losses, but what's the Bad News?

In these past couple of months we have witnessed many admissions of guilt by financial sector types. The CEO of Citigroup resigned, Bear Stearns has announced major write-downs, UBS, Credit-Suisse and now even Societe Generale has announced losses in the tens of Billions. These admissions of losses are meant to reassure investors that company managements are forthright about issues and that problems are being dealt with. This is all well and good, but is it the 'Truth'? More specifically, if the banks and Hedge Fund types are finally being truthful, who is not? You will of course remember that many of these banks spent quite some time denying that the softening real estate situation would have 'significant' effect. $100 Billion and counting in losses later, lawyers are now googling 'significant'. The question for us is - where else in the economy are there undeclared losses that are festering?

To get to the bottom of this, or nearer to the bottom anyway, we have to first discuss what has caused these losses in the first place. This is not generally a simple discussion, but I will attempt the impossible and keep it both brief and somewhat intelligent. Institutions that forward credit used to have a simple role in the economy. They used to take in deposits and advance loans to people based on those deposits. This simple equation has been changing over the last century. Where we are today is that institutions now take in deposits, lend a lot more money than they have on deposit, and then package the loans and sell the package to someone else as an investment. Where it gets positively mind-blowing and makes people dizzy, is that the 'investment' (package of loans) that Bank A just sold to Bank B, can be treated by Bank B as a 'deposit', against which more loans can be forwarded, and more 'Investments' can be manufactured. Also, as these packages were designed to produce income, anyone with a fixed-income need has been a regular buyer. Indeed, one doesn't know whether to laugh or to cry at the ridiculousness of this scheme that passes for the N. American financial sector. As to why people would do this, well - even though simple lending is still profitable, the packaging and selling of loans at inflated prices is where profits are obscene.

This almost makes one wish for a simpler time when the banker was making some money but he was still your friend. Now there are no friends and no enemies, just electrons and financial models. The funny thing about financial models is that they are only worth money if they can show growth. Therefore, guess what most financial models show? If you said growth, you are a genius. If you said the 'Truth', you get to be an Investment Banker - which is yet another kind of genius altogether.

The recent problem of course stems from the fact that the financial models and thus the 'investments' that rest upon them depend on a few simple variables to drive growth. The important ones are 1. cheap credit, or low interest rates; 2. Ready buyers for the investment and 3. Debtors making their loan payments. What has been immensely demoralizing for financial types recently has been that none of these fairly simple assumptions have held. There are few buyers for 'loan packages', interest rates have been cut but by too little too late, and broad swathes of US homeowners are unable to pay the interest on their loans. To add to the general misery, since almost everyone has been using similar models for investment planning, almost everyone has lost money because the assumptions don't hold.

What is truly fascinating in this story, and what makes one's nose all itchy with bad smell, is that only the banks and investment houses (for the most part) have declared losses. This means that only the people who sold these packages and kept a few for themselves are admitting losses. The regular buyers are quite mum. Most of these packages were fixed-income products, which means Insurance Companies and Pension Funds would have been natural buyers. This leads to the inevitable question of why the quietude? If the sellers of a rotten product are declaring losses on their inventory, why are the people who have been buying these for years not saying anything at all? As I am sure the more astute among us realize, it takes two to tango, two hands to clap, and two parties to complete a trade.

Of course, this does not mean that you all go out tomorrow and start to short Insurance Company stocks on margin. That would be exceedingly foolish. Unless, of course, you made lots of money doing that, in which case it would exceedingly brilliant. Just remember, the losses are from the same packages that were called 'Financial WMD's' by Warren Buffet. As WMD's, they have a long radioactive, half-life. The bank losses are only the first stage and you already know my suspicions for stage 2. One could be wrong of course, but I still feel a bit like Hamlet - 'Something is rotten in the state of Denmark ...'

Finance News:
1. The ability of banks to package and sell off their loans to others comes under more stress ... Private Equity firms refuse to back Bond insurers ... read more here

2. Remember the Rio Tinto buyout I spoke about in a previous issue? ... Well, the price just went to $150 Billion. What is interesting is that Rio Tinto management is still rejecting the offer as too low ... read more here

3. Thinking of borrowing for your RRSP this year ... read this first ... read more here

4. The CPP announces very meagre gains for the year. I thought they were the 'smart money' ... read more here

Economic News:
1. National Bank catches up to my opinion of the Gold Price ... (Refer to Issue 3.) ... read more here

2. The Loonie listens to wisdom and crosses back over into above-par territory ... read more here

3. After more than 10-15 yrs plus of overspending, US consumers are taking a break, throwing all sorts of financial forecasts, models and assumptions off kilter. Does the Japan scenario look more likely? ... read more here

4. The funniest financial 'journalist' writes about the connection between interest rates, inflation, the US$, Gold and about the American Economy ... absolutely priceless ... read more here

Islamic & Middle East Finance:
1. One particular and not very well-known vision of the future of 'Islamic Finance' definitely becoming an agenda item in the US election ... not exactly light reading but very interesting nevertheless ... read more here

Miscellaneous:
1. How often do you make a mistake and learn from it? ... read more here

2. A very nice story on a Canadian retailing competitor to the Bay. Many of you who go cottaging or camping up north will recognize the name ... read more here

The Anatomy of an Islamic Finance Deal

2008-05-06T16:01:00.000-04:00

Quote of the Week:

'Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.' - Paul Waldie in the Globe and Mail.

Simple Calc. - 1,200,000 (No. of homes) x 300,000 (avg. price of home) = $360,000,000,000 - or $360 Billion. These are the obvious, expected loan losses. As the loans are called in, other assets will be affected as they are sold to meet debt payments etc. This general contraction will thus have a negative multiplier effect. As people begin to price assets for pennies on the dollar, the big question will be whether consumers continue to buy assets thinking they are 'cheap', or whether consumers delay purchases because they think things will get 'cheaper'. The first choice leads to a recovery, the second to deflation and stagnation as in Japan. Sort of puts the $145 Billion aid package in perspective, which explains why the markets fell so drastically after this announcement.

Commentary for the Week:

The Anatomy of an Islamic Finance Deal:

Many people ask me simple sounding questions such as 'How is Islamic Finance different?', or 'What makes Islamic Finance 'Islamic'?. This usually happens at a dinner or event where I have about 20 seconds to summarize and answer questions that people spend years researching. What is worse is that sometimes people ask me these just as I am about to launch into a delectable main course, so there is a clear conflict of interest between me doing justice to the question, and me doing justice to the cook's labours. This usually results in a mumbled response about how 'interest' is almost as bad as mushrooms, which results in a confused audience that is unable to focus until dessert. I exaggerate of course, but only just. Recently however, someone asked me to give them not an overview but an example of how Islamic Finance is different. I thought that was a brilliant question and what follows is an example that makes the difference strikingly clear.

Instead of launching into theories on Finance again, lets imagine a simple scenario. Abu the Architect and Bill the Builder have an idea and concept for a Green building. They identify the property, land, the subcontractors and the buyer. The buyer puts down a deposit and agrees to buy the building after construction, which will take one year. Now all they need is to finance the project so they can commence with the digging and construction. The land and construction is slated to cost $1.1M and the building concept has been sold to the buyer for $1.5M. The deposit is $100k and Abu and Bill have the option to seek conventional, or Islamic financing, for the rest.

Scenario 1 - Conventional:
Abu and Bill seek conventional project financing. They are given a line of credit or mezzanine facility at a floating 12% interest. This means that they will have to pay 1% of whatever they have borrowed every month. As they will probably not borrow the full amount up front, their interest payments will be low in the beginning and balloon quickly as the cumulative amount they have spent increases and the project construction comes to a close. Let us assume that they will borrow $350k for the land and $350k for the first phase of construction up-front. In another 6 months, they will borrow the last $300k. For the first six months, they will be paying $7000/mth. After 6 months, they will be paying $9000 / mth. This means that the total they will have paid in interest will be $96,000 and the profit on the deal would be $304,000 ($1.5M - $1.1M - $96k). If Abu and Bill default on their monthly cash obligation, they will lose the entire project as the creditors will seize the property to retrieve their $1M. If the uncompleted property sells for less than $1M, they will be sued for the difference. From their perspective, this is a high stakes game. There is possibility for large gains, but the risk to them is not negligible either. As the property itself does not generate cash on a monthly basis, the interest costs must be part of the initial borrowing.

Scenario 2 - Islamic Finance:
Abu and Bill seek funding on a profit and loss sharing basis. They require $1.1M for the land and construction, out of which they have $100K already (the buyer's deposit). Abu and Bill are introduced to 10 investors by Islamic financiers such as yours truly. Each investor puts in $100k, sharing in a percentage of the profits / losses at the end. Let us say that the Builders and Islamic Finance co. are given 50% of the profits between them, and investors are to enjoy 50%. The building is completed on time (just as in scenario 1) and the buyer pays the rest of the balance in a year. The profit is in this scenario is $400k ($1.5M - $1.1M), of which 50%, or $200k goes to the 10 investors in addition to their capital. This translates into $20,000 profit on the deal per investor, representing a 20% Return on Investment over the year in question.

As you can see, the payout scenarios, risk profile and economic consequences of the two scenarios are quite different. Both scenarios are profitable for the parties concerned, but distribute profits in different ways. The first concentrates both wealth and risk such that the decision as to whether capital should be allocated to this endeavour rests with primarily the builders and a creditor. The second allows a broader section of the public to decide whether this project will be beneficial and for them to participate as partners. Also, the second scenario spreads wealth around the community while minimizing the risk inherent in monthly debt obligations. Both solutions work, but for different kinds of people.

The first scenario appeals to people who enjoy quick success. The second appeals to people who enjoy a shared success even more. The first appeals to people willing to take risks for quick success, the second to those that want to grow sustainably. One builds individuals and then a sense of community through them. The other builds community first and foremost, which is kind of the whole point of society, isn't it?

___________________
Scenario two is actually a close approximation of a deal that we are currently involved with, so it is not an ideal type that exists in books only. For those who want to judge whether Islamic Finance can really be different, I invite you to investigate further. Islamic Finance frequently comes under a lot of vituperation based on the folly of large, multinational institutions and their quest for new customers and our small company always gets lumped in with them for undeserved abuse as well. Although we are a small company, our intent and endeavour is to enhance the quality of choices available to all Canadians, not to display a thin veneer of piety over questionable ethics. I hope you will keep that mind and judge for yourself as you read the 3rd article in section 3 below.

Finance News:

1. Trader causes $7Billion loss at France's SG. Still think banks make money just buy the spread between what they pay to depositors and what they charge to lenders? ... read more here

2. How time engineers the best comebacks ... Mittal is doing to Europe what Europe and the East India Company did to India ... sending dividends back home ... read more here

Economic News:

1. Is the US housing mess headed our way? ... read more here

2. Talk about throwing money at a problem ... the US President unveils a $145B plan to 'spur' the US economy ... read more here

Islamic & Middle Eastern Finance:

1. Some changes on the horizon for OPEC members? ... Abu Dhabi investing $15B into clean energy ... read more here

2. Excellent article on what effect the concentration of Oil Wealth has on the world economy. The research on where this money has been invested recently is both timely and interesting. I don't think this is even close to the full picture because there is money cycled through the World Bank and IMF also. Plus there are official aid flows and investments into offshore funds that were not addressed in the 'Fueling Liquidity' section of the report. Nevertheless, a must read article because it summarizes things quite well ... read more here

3. A well-known commentator argues against Islamic Finance. While parts of the argument hold for many multinational banks getting into this space in a hurry, there are several problems with his view. First, he again misses the point that if we look at almost 5000 yrs of recorded history, all Abrahamic faiths and others as well were not confused on how Interest=Usury. It is only the last couple of centuries that fractional reserve banking has taken over and confused the issue. Second, he oversimplifies and mischaracterizes the argument made by the two authors he mentions. Dr. Saleem is not against Islamic Finance, he is against the fact that standards in the industry are so loose and what passes for Islamic Finance is frequently just marketing. Dr. Kuran's critique is a deeper questioning of whether finance and faith can mix and what happens when they do. Neither of them reduces Islamic Finance to a Mullah inspired industry, which is a gross oversimplification. Finally, Hassan Al-Banna and Maududi had about as much to do with Islamic Finance as a kangaroo does with Global warming - (which is minimal, as I understand it). Perhaps one of you will tell our newly-minted, self-appointed, 'financial expert' that Islamic Finance cannot be summed up in a shoddily researched newspaper column. Well, not intelligently anyway ... read more here

Miscellaneous / Personal Finance:

1. How to make a million! - even though the headline is cheapish and sensational, the article is refreshingly free of easy gimmicks and is quite good for the younger generation ... people over 40 have to work a bit harder though ... read more here

Spring, Summer, Fall, Winter and RRSP

2008-05-06T15:59:00.000-04:00

Quote of the week:
'If half the available farmland in Germany were used to grow rapeseed, the total production would be 1,500 million litres of biodiesel, less than five percent of the total annual consumption of gasoline in Germany. On that same land it is possible to grow 6.8 million tonnes of wheat, or 41 million tonnes of potatoes. Germany has to choose between producing food or vegetable oil to run its cars.' - Michael Hopf from Greenpeace speaks about Biodiesel crops in Germany.

Surely this cannot be ... a choice no civilized nation should be asked to make! Drive on the autobahn, or eat food?

Commentary for the Week:

Spring, Summer, Fall, Winter and RRSP

Get ready my friends, RRSP season has arrived. This is the time of the year that most of us suddenly realize that the daily grind we go through to get out of our warm, cosy beds will come to an end one fine day. We will retire, - and no, I do not mean to a better place, although that too. I mean retire to the carefree, unemployed, cruising lifestyle that the TV and the millions spent in advertising the latest investments promise us as soon as we develop enough grey hair. For that remote hope, and our somewhat shameless tax-avoidance tendencies, every year we break out the cheque-book and spend 1 hour with our financial advisors investing our money. The TV and the ads with beautiful people assure us that we are on the right track and this RRSP season, we are good in hands. Alas, if only this were true.

For most of us, the RRSP is just a tax avoidance tool, a 2008 deadline to invest if we want to save 2007 tax, so that we can enjoy watching TV for the rest of the year without being asked for money by people too beautiful to say no to. People who, in my opinion, are so gorgeous and maddeningly happy that they have probably never been in finance, don't know a thing about the economy and don't know that the markets are crashing and that all our savings depend on what happens to the TSX, the DOW and maybe even an unknown Cow that is slowly and secretly going Mad (as in BSE) in an impossible place such as Shropshire, England. Also, these people cannot have my best interests at heart as they are always telling me that I want something sickeningly fatty to eat, or that I want to go for a speeding-ticket inducing drive in a tank-inspired SUV that probably needs a quarter of Kuwait's oil to get me to work tomorrow, even though they know that its already 8:30 pm and I just ate and the traffic was so terrible that it took me 40 minutes to cover the distance that would have taken me 4 minutes if I was in Germany and that there is no army on God's green Earth that can make me get into anything with wheels again this day ... but I digress.

Let's get back to RRSP's ... and the myths that surround their complexities. I know that we will all be bombarded with RRSP advice over the next month - I just think we should be prepared for battle.

RRSP's are a legal, 'approved by the government', tax-sheltered, trust account that allow us to save taxes while at the same time saving for retirement. Essentially a trust account held by a third-party for the purpose of providing us income during our retirement, RRSP's are like a basket that someone else is holding for you. Pushing this analogy a little bit more, think of me dutifully pushing around a shopping cart at the grocery store as my wife buys the latest organic mushrooms with the money I was saving for migration to Germany. My wife is the proverbial client, the shopping cart is the RRSP and I am the third party custodian of both the shopping cart and whatever she decides to put in it. She can fill it with good stuff like chocolate, or mouldy growths called mushrooms that pass for agricultural output in our advanced economy. What is in the cart is the actual food, whereas the cart itself is a mere vehicle. Similarly, what are placed inside an RRSP are the actual investments, the RRSP account itself is just a receptacle. The advantage of this receptacle is that whatever one puts in, can be written off against one's income for taxation purposes. This decreases one's taxable income, resulting in a larger tax refund because we have a progressive income tax regime. The other advantage is that whatever is placed in the RRSP also grows tax-free until withdrawal. This means that all growth of the investments inside the RRSP are tax-sheltered and no tax is payable on their growth and rebalancing on a yearly basis. This is true even if there is buying and selling within the RRSP and whether the growth is interest, capital-gains or dividends. Once you withdraw money however, the story changes quite a bit. Withdrawals are considered income by the CRA and so even if most of the growth in the investments held inside the RRSP is from capital gains, you will be taxed as if your withdrawal is income and at your marginal income tax rate. The idea here is to make your original investment grow to such an extent that this higher taxation still leaves you better off.

The other myth about RRSP's is that they have a season (this year's only goes to Feb 28th by the way, not March 1st). Saying that an RRSP contribution should have a season is like saying retirement will have a season, or that 1hr / year thinking about this stuff will allow you to live like the non-people on TV. I find this philosophy extremely problematic. Suppose your investments were like mushrooms instead of stocks or mutual funds, but that you still had to pay for them with your hard-earned money - this will make it more fun. For the first 2 months of the year, everyone else along with their Grandfather buys mushrooms. If the price of mushrooms is high at this time, you overpay for the mushrooms; if the price is low, you buy them at discount. You do not however, know whether the price is high or low at the time you are buying because you do not know if the price will be higher or lower the next month, the next year etc. etc. If you have consistently overpaid for mushrooms over 20-30 years of your working life, not only do you have a biggish collection of mushrooms, you have also spent relatively more to buy them. If you have underpaid relative to the average price however, you have mushrooms as far as your eye can see and they did not even cost you as much as they did in the earlier scenario. This last scenario allows you to either buy more mushrooms (so you can be even more comfortable), or have extra cash lying around. Since there is no predictable way or easy secret that I can give you about how to always be in the underpaying category - you have to be creative. Instead of risking all your cash in one go in Jan or Feb for the previous year's taxes, you have to be pro-active. Instead of buying $19,000 (this year's max contribution limit for some people) of mushrooms in Feb, buy only $1583.3 of mushrooms every month instead. This will ensure that you are buying mushrooms not at one price that might be high, but at an average yearly price. You gamble less with your money this way.

To me, the average price method called Dollar-Cost Averaging (you can ask Sheikh Google) is safer, otherwise you might be stuck with only a few mushrooms in retirement. Surely, having many is better.

(Please do not be offended if you are one of the non-people on TV, I listen to the radio and I am pretty sure that there are some non-people in there as well. Also, for those who did not like the mushroom analogy, I reply that many investments are just like mushrooms - quite mouldy. If you prefer, you can read the name of your favourite stock instead of the word mushroom whenever you come across it because the principle still stands. Also, for those who need discuss their RRSP strategy, if you can get 5 new people to subscribe to this newsletter, I will help you for mere mushrooms - we are sitting at around 1800 subscribers, I would like to get at least another 200 soon).

Finance News:

1. The geniuses that invested in Citi last month are probably not too pleased with this piece of news ... a $10 Billion loss at Citibank with an $18 Billion write-down of assets ... (in addition to all the others that they have announced already) ... http://www.nytimes.com/2008/01/15/business/16citi.html?fta=y

2. Must read story of the week ... about the fund manager who made over 500% for his investors over the subprime issue ... http://online.wsj.com/article/SB120036645057290423.html?mod=hpp_us_pageone ... and how he has hired Alan Greenspan, the man many blame for that mess in the first place ... http://online.wsj.com/article/SB120036783112890507.html?mod=hpp_us_whats_news

3. Who was it that said that subprime would have no effect on the TSX? ... Jeffrey Rubin - Chief Economist at CIBC? ... (refer to IWB issue 3. or http://www.advisor.ca/news/article.jsp?content=20071108_152122_5120 ) ... and now for more of the truth ... http://www.financialpost.com/story.html?id=242110 ... (although since it is the Post, I use the term truth quite loosely) ...

4. Doing an Alwaleed? ... the investment behind the Saudi Prince's fortune ... http://www.economist.com/daily/columns/businessview/displaystory.cfm?story_id=10522716&fsrc=nwl

Economic News:

1. Shocking ... a good article from Marcus Gee?! ... shocking ... do read the article of course because it speaks to how Canadian businesses can begin to expand into foreign markets using the HR resources they have at here at home ... still can't believe it was written by Marcus Gee though ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080116.wibasia0116/BNStory/robColumnsBlogs/home?cid=al_gam_mostview

2. Need some explanation about currency movements and what the loonie's rise means for the Canadian economy? ... a thought-provoking article about a professor with whom many would disagree. Nevertheless, there is some insight here that we can learn from ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080116.wrreynolds0116/BNStory/robColumnsBlogs/home

3. Notional amount of credit derivatives = $43Trillion (yes, trillion), declared losses to date = $100 Billion (approx) ... How much of the former will be recognized as the latter? - Remember, our RRSP's, company pensions, taxes and standard of living depend on the answer ... http://www.economist.com/finance/displaystory.cfm?story_id=10498541

4. US inflation highest in 17 years. Do you remember now that Rio Tinto shareholders walked away from $150B (US)? Do you see why? In the present fight between US money and Gold / Oil / Real Stuff ... which would you pick? ... http://www.canadianbusiness.com/markets/market_news/article.jsp?content=b011628A

Islamic / Middle East Finance:

1. Has Islamic Finance become an issue in the 2008 US presidential election? ... maybe just a little bit ... http://www.ronpaul2008.com/issues/inflation-tax/

2. Mr. Usmani says that 85% of 'Islamic Bonds' are not Islamic, setting off a debate in Bahrain and the international Islamic standards setting body ... http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20080114/BUSINESS/688156932/wt.test@yahoo.com

Miscellaneous:

1. Time to become vegetarian my friends ... the US has allowed the entry of cloned animals into the food chain ... be afraid - very afraid ... http://www.reuters.com/article/healthNews/idUSN1444947520080116?feedType=nl&feedName=ushealth1100&sp=true

Island Paradise II

2008-05-06T15:58:00.000-04:00

Quote of the day:
'Inflation will reduce Americans' purchasing power. Deflation will collapse the value of their assets. Between the anvil of falling prices ... and the hammer of rising ones - the American middle class is going to get smashed.' - Bill Bonner from The Daily Reckoning

Bonner makes the case that what is happening South of the border today, is very similar to what happened in Japan during the 1990's. What this would mean for Canada is the big question. We have Oil of course, but that seems like a bit of a shallow defence if our only customer for our exports no longer has money to buy our stuff. Remember all the times we took sides against China? India? Brazil?

Commentary for the Week:

Island Paradise - Part II

This week we go back to the island paradise of last year (IWB Issue 8) to resolve some outstanding questions. On a loan to each of John, Jacob and Jaffer of $1000 Absurdodollars at 5% simple annual interest, the outstanding questions were:

1. How many years will it take for John, Jacob and Jaffer to pay me back?
2. How much am I guaranteed to make in a year? How much are the boys guaranteed to make?
3. If the boys just have to pay interest at the end of every year and there are no bankruptcy courts, what will happen to all productive assets on the island?
4. How many years before one of them runs out of money? How many years before all of them run out?

Since not many of our dear readers were perhaps quite busy over the holiday season, many did not attempt these brain-teasers. As such, I will try my best, but please correct me if you think I am wrong.

1. John, Jacob and Jaffer will actually never be able to pay me back. Between the three of them, they have $3000 only. On top of this, they must pay me pack $450 ($150 each). As I am the only one with an extra supply of Absurdodollars, one or more of them will have to declare his inability to pay me back.
2. Even though I have done very little productive work such as farming, carpentry or baking, in theory I am guaranteed a return of $450. The J-boys are not even guaranteed $1 in theory. In fact, they are guaranteed to lose money because they have to compete amongst themselves for the extra $150 that each needs. They cannot get that extra $150 they have to pay me back with except from each other's original $3000. Instead of a collegial atmosphere of working together, you can rest assured that in some ways, they are now working against each other. The island paradise, with the introduction of debt-based money, soon becomes quite stressful. Each day they wake, they know that they have to make around $0.41 AbsurdoCents ($150/365 days) to meet their year-end obligations.
3. They own or control real assets such as an oven, land and tools, whereas I own some printed paper on a deserted island. At the end of the year however, once I know which one or two of them will be short of $150, I can easily ask one of them to give me his tools/assets instead of the $150. In this way, I become not only the arbiter of financial services but also the mechanism through which real assets in the economy are traded or controlled.
4. At least one of them is guaranteed to be short the $150 that he needs to pay me back by next year. Let us however, make this question more interesting. Let us assume that I tell them that they can pay me only interest if they wish. That means that they can pay me $150/yr each and I will let them keep the capital of $1000 as long as they wish. Even in this apparently liberal debt regime, it will take less than 7 years for me to claim everything on the island ($3000/$450) because that is when the J-boys will simply run out of AbsurdoDollars.

As you can see, this is a pretty extreme result of what started off as a service to the community. Simply by the virtue of having some printed paper, in 7 slothful years, I can own all productive assets. While this is a grossly oversimplified model of an economy, this model does have some lessons for us. First and foremost, we have to realize that indebtedness is not necessarily a natural state of being - we got here because of our choices, not evolution. The second is that speculative sectors of the economy do not add value in the same way that real skills do. There is big difference between sectors that create value, and those that shift it around. The final lesson of course, is inescapable - I must move to Paradise Island.

(I apologize for the typos in Issue 8, I failed to recheck the commentary before I emailed it.)

Finance News:

1. Looking behind the $100/barrel price of Oil ... only a 1000 barrels were traded at $100 ... but it made news ... http://www.theglobeandmail.com/blogs/wenergyblog0613

2. Merrill Lynch is going to post a $15B loss from subprime ... but guess who they are going after to make up the capital? ... http://www.reuters.com/article/fundsFundsNews/idUST29249020080111

3. Some of the politics behind Carbon offsets ... http://www.nytimes.com/2008/01/09/business/09offsets.html?_r=1&oref=slogin

4. Guess where else Tony Blair is working in addition to 'solving' the Middle East Crisis ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wblairbank0110/BNStory/Business/?cid=al_gam_nletter_maropen and guess what his first deal is ... http://www.nytimes.com/reuters/business/reuters-northernrock.html?ex=1357707600&en=5576193f0e6b35ff&ei=5088&partner=rssnyt&emc=rss

Economic News:

1. Many people think that economic growth in China is dependent on exports. This means that if the US economy tanks, China's economy will not be far behind. This article argues something different - that China's economy has actually reached a point such that an export slowdown will not slow economic growth appreciably. Very interesting analysis with all sorts of political implications if it is true ... http://www.economist.com/finance/displaystory.cfm?story_id=10429271

2. Good News from Merrill Lynch about your mortgage, but not so good for your income ... Recessionary fears are made public ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080109.wecooutlook0109/BNStory/robNews/home

3. CIBC says gas will be $1.50 soon ... This is funny, I've never really thought that CIBC can be right on anything but there you have it. You heard it from CIBC first ... http://www.financialpost.com/story.html?id=228661

4. News about the Loonie ... this speaks to the theory that regardless of our Oil and resources, the Loonie will be dragged down by the US relative to Asian / European currencies ... Perhaps this explains a little bit about how dependence on one customer for exports generates all kinds of vulnerabilities ... http://www.blackswantrading.com/files/3d9b61b67aa06a6/bsccc011108.pdf

Islamic / Middle East Finance:

1. Thinking of investing in solar energy? ... Some factors and companies to consider ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wrchinasun10/BNStory/SpecialEvents2/home

Miscellaneous:

1. Tata's $2500 car is unveiled ... a good discussion of how it may affect climate change but I didn't expect the Globe to be so negative. I think they would have been full of praise if this car was American instead of Indian ... then it would have been Progress ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wtatacar0110/BNStory/Business/home