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.
--------------
Upcoming Events:
N/A
__________
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
Tuesday, July 29, 2008
Monday, July 14, 2008
The Porsche Economy - Part II
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 $100 deposits) and no government would be able to borrow money in order to go to war because the population would simply not buy the bonds necessary for such an enterprise. Of course, this would also perhaps mean that there would be no shiny new Porsche in every garage even if we all try really hard because bicycles might be the way to go instead. Perhaps that is why we continue to work within a debtor thought-process that impoverishes us spiritually - because having no debt is fine and dandy, but the drive up to Northern Ontario in a Porsche my friends, is probably priceless.
--------------
Upcoming Events:
N/A
__________
Finance News:
1. RBC entering the Islamic Finance space! - How exciting, now we will finally get to see if Canadian Muslims are actually as smart as they seem and whether they will defeat this (major hat-tip to Hisham Rahman) ... read more here
2. CDN bank to declare more losses? It seems that the end is nowhere in sight as far as the credit crunch is concerned ... read more here
3. Ottawa tightens up the mortgage rules they just loosened in 2006. Can you say - 'No Foresight'? ... read more here
Economic News:
1. Some more evidence about how Oil prices and Inflation are affecting small farmers in some rural areas (example of India) ... read more here
2. The domino effect in currencies after the fall of the US$. 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
'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 $100 deposits) and no government would be able to borrow money in order to go to war because the population would simply not buy the bonds necessary for such an enterprise. Of course, this would also perhaps mean that there would be no shiny new Porsche in every garage even if we all try really hard because bicycles might be the way to go instead. Perhaps that is why we continue to work within a debtor thought-process that impoverishes us spiritually - because having no debt is fine and dandy, but the drive up to Northern Ontario in a Porsche my friends, is probably priceless.
--------------
Upcoming Events:
N/A
__________
Finance News:
1. RBC entering the Islamic Finance space! - How exciting, now we will finally get to see if Canadian Muslims are actually as smart as they seem and whether they will defeat this (major hat-tip to Hisham Rahman) ... read more here
2. CDN bank to declare more losses? It seems that the end is nowhere in sight as far as the credit crunch is concerned ... read more here
3. Ottawa tightens up the mortgage rules they just loosened in 2006. Can you say - 'No Foresight'? ... read more here
Economic News:
1. Some more evidence about how Oil prices and Inflation are affecting small farmers in some rural areas (example of India) ... read more here
2. The domino effect in currencies after the fall of the US$. 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
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?
--------------
Upcoming Events:
N/A
__________
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
'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?
--------------
Upcoming Events:
N/A
__________
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
Monday, July 7, 2008
Seminar Feedback
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.
--------------
Upcoming Events:
N/A
__________
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
'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.
--------------
Upcoming Events:
N/A
__________
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
Tuesday, June 17, 2008
Fooled by Randomness - Executive Summary
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 ...
______
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.
_________
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.
--------------
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
'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 ...
______
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.
_________
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.
--------------
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
Sunday, June 15, 2008
Does Ethical Investing Work? (Part II)
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.
--------------
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
'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.
--------------
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
Wednesday, June 4, 2008
Investing and Ethical Investing (Part I)
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.
--------------
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
'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.
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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
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