Quote of the week:
"When the Fed is worried about the state of the economy, it basically responds by printing more of that green paper, and using it to buy bonds from banks. The banks then use the green paper to make more loans, which causes businesses and households to spend more, and the economy expands. This process can be almost magical in its effects: a committee in Washington gives some technical instructions to a trading desk in New York, and just like that, the economy creates millions of jobs. But sometimes the magic doesn't work. And this is one of those times." - Paul Krugman in the NY Times.
A carefully chosen, selective misquote. Just in case you didn't believe those of us who have said that the overleveraged financial system doesn't really work.
Commentary for the Week:
How to judge an Investment ...
Judging whether something is a good investment for your hard earned money is a skill that is critical in importance but seems to be in quite short supply. Especially from the way the markets have developed in the last year, it is obvious that with the exception of some truly good asset managers, most financial types that portray themselves as experts are quite clueless. They get away with this because their clients, us, are equally unsophisticated when it comes to financial matters. This is compounded by the complexity of our economy, which ensures that people who are geniuses at their non-financial jobs, turn to mush as soon as they begin to discuss their finances. In order to rectify this problem as much as one can, here are my humble suggestions for a few characteristics one should look for when judging the quality of a potential investment.
Most investments can be judged according to 5 fairly straightforward criteria. A perfect investment for you would be one in which all 5 qualities of the investment match perfectly with your particular needs. Also, there is no such thing as a perfect investment (perhaps because Ittihad hasn't developed one yet, and if we can't do it, I am sure you know that other's have little chance). More seriously though, even a 'perfect' investment will require you to make tradeoffs because sometimes the criteria work against each other - so you can have some of one and some of another, but not all of all. Anyway, good criteria against which investments should be judged are:
1. Income: Does the investment provide you with regular income?
2. Growth: Will the investment grow over time? Will it grow to what you want it to grow to? (Infinity is NOT a good answer here)
3. Liquidity: Will you be able to sell the investment quickly for a fair price if you have to sell in a hurry?
4. Safety: Is this a safe investment? Is your principal protected in some way? Will the investment be volatile?
5. Responsibility: Will your investment harm society or will it be beneficial?
Usually, you can find an investment that performs decently in maybe two or three criteria. A real estate investment for example, can provide you with rental income, some growth and some safety. But you cannot sell a house efficiently for its full price in the middle of February for example. Similarly, mining exploration stocks can provide you with a lot of growth if the companies in question find resources, but the environmental damage of a mine and the lack of safety keeps most investors away. This is all fine and dandy you say, for simple investments such as stocks and houses, but how would this model work for complex derivatives such as CDO's, you ask? Well, let's try - and then you can be the judge of whether the model can help you the next time someone tries to sell you something that is the 'Best Thing Since Google'.
CDO - Collateralised Debt Obligations (of subprime fame)
1. Income: Yes, they provided higher income than Bonds of similar credit rating (this rating was found to be problematic later but let us imagine that we are not judging in hindsight).
2. Growth: Absolutely Not. Growth was usually quite limited through embedded call options that allowed the seller to buy them back if they started increasing in price.
3. Liquidity: Yes, the promise of liquidity was always there (even though in practice it turned out that nobody wanted to buy the things)
4. Safety: Yes and No. Credit rating suggested yes. Exotic nature of products suggested that safety was lacking. Definitely not an unqualified Yes.
5. Responsibility: Extremely Irresponsible. Loan products do not add benefit to the economy, they add debt, which has to be repaid at a much faster increase than the rise of wages. Also, the introduction of complexity for the sake of hoodwinking investors is hardly an ethical practice.
I think it is safe to say that the model has some potential. If you begin to apply it with discipline to the things that you are thinking of buying for investment purposes, it might help bring out some features of the investment that are not-so-shiny under that gloss. In other cases, it might actually show you how good a potential investment really is, just the way it happened here at Ittihad this morning. But then saying anything more would be telling ...
Finance News:
1. The Storm before the Lull? ... The Dow climbs 400 pts in one day ... If it takes $200Billion of free money to buy you 400 pts ... how much to break the Dow Record? ... read more here
2. This is priceless ... The notorious Carlyle Group (of elder Mr. Bush fame), leverages its initial capital 32X (this means borrowing an amount 32X larger than one's own equity) for one of its investments ... with somewhat predictable results ... read more here
3. Say hello to the 40-Yr Mortgage. Home affordability the lowest it has been since 1990 ... read more here
Economic News:
1. Investors looking away from US$ investments ... the question to ask your broker / financial advisor is - how much of my retirement savings is invested in the US? ... read more here
2. The CDN federal government proposes changes in immigration policy ... may have grave effects on economic growth ... less capital inflow / less housing demand = lesser growth ... read more here
3. S&P says that the market panic is almost over ... 'pure hogwash' - as they say in the land below us ... read more here
4. Why the Fed's recent actions might fail to produce a recovery ... read more here
Islamic & Middle East Finance:
1. All the 'Islamic' countries of the world have gotten together to build an anti-poverty fund (which is less than 1/6th the size of the Bill and Melinda Gates Foundation) ... well, it's a start ... let's see how they help the people they say they want to help ... read more here
Miscellaneous:
1. Essential advice for Small and Medium business - owners from the Harvard Business Review ... read more here
2. Yet more entrepreneurial advice ... from a more personal perspective this time ... read more here
Tuesday, May 6, 2008
Banking on Islam?
Quote of the week:
"While Goldman's structure has remained the same, other banks have been changed by the crisis, at least temporarily. Merrill's CEO Thain, for example, has said the bank will exit the subprime-related securitization business. Citigroup may get broken up and there is talk about Bear Stearns getting sold. In addition, many banks are now answerable to sovereign wealth funds from the Middle East and Asia. At Citi, for example, Crittenden helped secure US$7.5 billion from Abu Dhabi Investment Authority." - Avital Louria Hahn - Senior Editor at CFO in the U.S.
Imagine undoing and breaking apart one of the largest banks in the world. Probably lots of fees and profits to be made for that series of transactions also. Must disagree with the statement about being answerable to sovereign funds though ... ME investors are notoriously hands-off when it comes to investing in the US ... willing to provide the money, but not willing to call the shots.
Commentary for the Week:
Banking on 'Islam' in Canada?
I recently had the opportunity to attend a seminar on 'Islamic Banking' and how this industry can be grown in Canada. While I was initially both inspired and excited about being able to learn something, I am very sorry to say that the feeling did not last. I came away extremely disappointed with the ideas that were discussed and completely disenchanted with the mindset of the people who have taken it upon themselves to grow the field. So much of what is beautiful in Islam or Ethical finance was just spoken of as a problem to get around in order to make money while taking zero risk. As such, the whole discourse was demoralizing in the extreme.
Most of the discussion rested upon one crucial point. Whether this point was an assumption or whether many millions went into researching the issue, I could not tell. The point itself however, was quite simple. It was that the Muslims in Canada are so unintelligent (and I am being charitable with my words here), that they can easily be taken advantage of. The entire focus of the discussion seemed to be that if the financial industry designed products (esp. Mortgages) that were the same as usual but hired some 'scholars' to approve them as Islamic, large financial institutions could probably get away with charging Muslim customers more than normal. Furthermore, since Islam requires that 'the financier' and 'the financed' actually share some risk, there were lender protections built into Ontario regulations that could be applied to Islamic products also in order to protect 'the lender' at the cost of 'the borrower'. If that wasn't bad enough, there was also discussion of how once 'Islamic' loans were forwarded to the unsuspecting Muslim public, the lenders would still be able to include those loans in 'structured investment products' that would then be sold to investors for speculation and trading purposes (ala subprime). As such, these products would be indistinguishable from the conventional at the back end and more expensive and risky to the Muslim customer at the front.
As you can no doubt see, this is heady information indeed. Not only am I, as a Muslim customer, being thought of as a proverbial fool who cannot tell when I am being taken for a ride, but I am also about to be charged extra for that dubious privilege. If you are outraged now at reading this, imagine how outraged I was when these thoughts were going through my mind Live, so to speak. Needless to say, I did not appreciate the disrespect inherent in their view of Muslims, and was quite incensed at being implicitly called a fool (esp. because if you are familiar with Ittihad, you are no doubt aware that from top to bottom, we are only staffed by geniuses).
So this leads us to the inevitable realization. In some way, shape or form, things are about to be marketed to us as Islamic. Money is being spent on researching trends, price inflexion points and identifying scholars' who would be willing to lend their services to institutions and practices that they do not understand fully. As sure as the night that follows day, 'Islamic' banking is coming. The question then, for us as a community is - will we be ready? Will Muslims accept the marketing campaigns, clever advertising and end up paying more for something that is demonstrably less Islamic than the norm? Or will we be able to call a spade a spade and refuse to be taken for an expensive ride?
I hope, my friends, Romans, Torontonians, Canadians, people of all stripes, colours, faiths and political proclivities - you will not stand idly by as this travesty is perpetrated upon unsuspecting people. A 1-2% extra interest rate (even if you call it something else) on a mortgage (which seems to be the product of choice), can translate into tens of thousands of extra dollars in needless expense for a family. There is nothing Islamic about that. There are some fabulous contributions that Muslims can make to the Canadian Financial system - expensive mortgages are not one of them.
The primary solution to this state of affairs is of course education; and as an immediate measure, I encourage you to invest some time and effort in educating yourself about both Finance and Islamic Finance. That way both you and circle of friends will be prepared if any big Multinational bank or other local entity were to ask for your business on the basis of Islam. The idea here is that collectively, if we turn ourselves into a community that is educated about such things, stiffing us will not be so easy for those who are trying. I have some ideas about hurrying this education process along, but if you think of something as well, then I look forward to hearing from you on the matter. The refinement of education and thought is always a time-intensive endeavour and it seems that we have little time left to lose ... ideas, anyone?
Finance News:
1. Some of our CPP pension funds are about to be invested in China. Better hope China is still doing as well when the time comes for us to retire ... read more here
2. The Economist reviews Warren Buffett's letter to Berkshire Hathaway shareholders ... read more here
3. The Globe and Mail helps make a financial plan for Aisha, who wants to go to Mecca for the Pilgrimage ... read more here
4. An insightful look into how bank's manage risk, or rather, how they fail to manage risk ... read more here
Economic News:
1. Follow-up to last week's commentary. Oil is now at its highest level even inflation adjusted terms - beating the oil embargo price from 1980. ... read more here
2. This story is too good. For decades there has been a very cooperative nexus between governments and big business in the form of how public money is raised and spent. With the advent of subprime, some municipal governments are trying to break out of these shackles. Ever wonder why your property taxes are so high? ... read more here
Islamic & Middle East Finance:
1. A very good introductory article on Sukuks, as the 'Islamic' version of bonds are currently known. If you read between the lines a bit, you can see the major fault-lines between the various camps on the acceptability of these instruments. The article is also novel because it speaks from the perspective of the issuer, not the broker, and so is somewhat free of advertorial baggage ... read more here
Miscellaneous:
1. Will this mining project get approval to move a quarter of a town in Quebec? ... read more here
2. The Founder of Infosys Technologies shares the best advice he ever got ... read more here
3. Vermont towns vote to arrest both the President and VP of the US ... read more here
"While Goldman's structure has remained the same, other banks have been changed by the crisis, at least temporarily. Merrill's CEO Thain, for example, has said the bank will exit the subprime-related securitization business. Citigroup may get broken up and there is talk about Bear Stearns getting sold. In addition, many banks are now answerable to sovereign wealth funds from the Middle East and Asia. At Citi, for example, Crittenden helped secure US$7.5 billion from Abu Dhabi Investment Authority." - Avital Louria Hahn - Senior Editor at CFO in the U.S.
Imagine undoing and breaking apart one of the largest banks in the world. Probably lots of fees and profits to be made for that series of transactions also. Must disagree with the statement about being answerable to sovereign funds though ... ME investors are notoriously hands-off when it comes to investing in the US ... willing to provide the money, but not willing to call the shots.
Commentary for the Week:
Banking on 'Islam' in Canada?
I recently had the opportunity to attend a seminar on 'Islamic Banking' and how this industry can be grown in Canada. While I was initially both inspired and excited about being able to learn something, I am very sorry to say that the feeling did not last. I came away extremely disappointed with the ideas that were discussed and completely disenchanted with the mindset of the people who have taken it upon themselves to grow the field. So much of what is beautiful in Islam or Ethical finance was just spoken of as a problem to get around in order to make money while taking zero risk. As such, the whole discourse was demoralizing in the extreme.
Most of the discussion rested upon one crucial point. Whether this point was an assumption or whether many millions went into researching the issue, I could not tell. The point itself however, was quite simple. It was that the Muslims in Canada are so unintelligent (and I am being charitable with my words here), that they can easily be taken advantage of. The entire focus of the discussion seemed to be that if the financial industry designed products (esp. Mortgages) that were the same as usual but hired some 'scholars' to approve them as Islamic, large financial institutions could probably get away with charging Muslim customers more than normal. Furthermore, since Islam requires that 'the financier' and 'the financed' actually share some risk, there were lender protections built into Ontario regulations that could be applied to Islamic products also in order to protect 'the lender' at the cost of 'the borrower'. If that wasn't bad enough, there was also discussion of how once 'Islamic' loans were forwarded to the unsuspecting Muslim public, the lenders would still be able to include those loans in 'structured investment products' that would then be sold to investors for speculation and trading purposes (ala subprime). As such, these products would be indistinguishable from the conventional at the back end and more expensive and risky to the Muslim customer at the front.
As you can no doubt see, this is heady information indeed. Not only am I, as a Muslim customer, being thought of as a proverbial fool who cannot tell when I am being taken for a ride, but I am also about to be charged extra for that dubious privilege. If you are outraged now at reading this, imagine how outraged I was when these thoughts were going through my mind Live, so to speak. Needless to say, I did not appreciate the disrespect inherent in their view of Muslims, and was quite incensed at being implicitly called a fool (esp. because if you are familiar with Ittihad, you are no doubt aware that from top to bottom, we are only staffed by geniuses).
So this leads us to the inevitable realization. In some way, shape or form, things are about to be marketed to us as Islamic. Money is being spent on researching trends, price inflexion points and identifying scholars' who would be willing to lend their services to institutions and practices that they do not understand fully. As sure as the night that follows day, 'Islamic' banking is coming. The question then, for us as a community is - will we be ready? Will Muslims accept the marketing campaigns, clever advertising and end up paying more for something that is demonstrably less Islamic than the norm? Or will we be able to call a spade a spade and refuse to be taken for an expensive ride?
I hope, my friends, Romans, Torontonians, Canadians, people of all stripes, colours, faiths and political proclivities - you will not stand idly by as this travesty is perpetrated upon unsuspecting people. A 1-2% extra interest rate (even if you call it something else) on a mortgage (which seems to be the product of choice), can translate into tens of thousands of extra dollars in needless expense for a family. There is nothing Islamic about that. There are some fabulous contributions that Muslims can make to the Canadian Financial system - expensive mortgages are not one of them.
The primary solution to this state of affairs is of course education; and as an immediate measure, I encourage you to invest some time and effort in educating yourself about both Finance and Islamic Finance. That way both you and circle of friends will be prepared if any big Multinational bank or other local entity were to ask for your business on the basis of Islam. The idea here is that collectively, if we turn ourselves into a community that is educated about such things, stiffing us will not be so easy for those who are trying. I have some ideas about hurrying this education process along, but if you think of something as well, then I look forward to hearing from you on the matter. The refinement of education and thought is always a time-intensive endeavour and it seems that we have little time left to lose ... ideas, anyone?
Finance News:
1. Some of our CPP pension funds are about to be invested in China. Better hope China is still doing as well when the time comes for us to retire ... read more here
2. The Economist reviews Warren Buffett's letter to Berkshire Hathaway shareholders ... read more here
3. The Globe and Mail helps make a financial plan for Aisha, who wants to go to Mecca for the Pilgrimage ... read more here
4. An insightful look into how bank's manage risk, or rather, how they fail to manage risk ... read more here
Economic News:
1. Follow-up to last week's commentary. Oil is now at its highest level even inflation adjusted terms - beating the oil embargo price from 1980. ... read more here
2. This story is too good. For decades there has been a very cooperative nexus between governments and big business in the form of how public money is raised and spent. With the advent of subprime, some municipal governments are trying to break out of these shackles. Ever wonder why your property taxes are so high? ... read more here
Islamic & Middle East Finance:
1. A very good introductory article on Sukuks, as the 'Islamic' version of bonds are currently known. If you read between the lines a bit, you can see the major fault-lines between the various camps on the acceptability of these instruments. The article is also novel because it speaks from the perspective of the issuer, not the broker, and so is somewhat free of advertorial baggage ... read more here
Miscellaneous:
1. Will this mining project get approval to move a quarter of a town in Quebec? ... read more here
2. The Founder of Infosys Technologies shares the best advice he ever got ... read more here
3. Vermont towns vote to arrest both the President and VP of the US ... read more here
The Price of Gold
Quote of the week:
"You have to ask yourself why OFHEO is letting them take on more mortgages. The last thing the Fed, or the administration wants is for the companies to go out and buy more mortgages and blow up." - David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management.
David connects the War on Terror with mortgages. Personally, I didn't think it could be done.
I can just picture it now ... Person A looks up and says 'What was that Noise? Was it a bomb?'. Person B replies, 'What world are you living in friend? Bombs are so 90's. It was a mortgage company!'
Commentary for the Week:
Why is the price of Gold so high?
The price of Gold has recently shot up above $970 US. Many intelligent people have opined and argued that this is because of the shortage of supply and the increase in demand from Asia. What they really mean to say is that at the rate people from China and India are growing up, getting married and buying jewellery for the aforesaid marriages, the shiny stuff going to be all gone before you and I will be able to say 'I do' in Mandarin or Hindi. This is of course, not entirely accurate. Not only is it quite easy and beautiful to say 'I do' in Mandarin and Hindi, it is also inaccurate because they have framed the question the wrong way around. While it may be true that the price of Gold is getting higher and higher by the day due to demand and supply pressures, it is more true that it is the value of the printed paper we call money that is actually falling drastically. The market for Gold is just one of the areas where we are seeing the effects first.
What evidence do I have for this, you ask? One's innate genius aside, there is of course, the price of oil, the price of bread, the price of wheat and the price of milk that we can take a look at. While I haven't actually been grocery shopping in a while and am surviving on the various flora such as mushrooms that are fed to me by my better half; and I haven't actually filled in any gas in months because the car is in my garage protesting the unprecedented severity of Winter, I am told by reliable sources that the price of things that are Real is rising quite quickly. What this means of course, is that while we feel it is the price of our consumables that is rising, it is actually the fact that intangibles such as paper money and the hours we spend at work that are being devalued in terms of purchasing power. This is even worse for our elders and seniors, or those who are on a fixed income, who get a certain dollar amount a month to spend but are being confronted with prices that have risen beyond all recognition. While I don't mean to be alarmist, the time when Gas Pumps prices and Ittihad's toll free phone no. below will perhaps contain the same number of digits. So what does all this mean for you anyway? You already know that prices are going up. Here are a couple of suggestions for you to think about:
1. To ensure that your paycheque keeps current with reality, I suggest that you ask your HR department at work for an extra zero at the end of the monthly paycheque. To argue your case, you can share with them your pop-corn receipt from the last movie you saw and observe to them gently, but with the air of an Expert, that if this keeps up, we as a society might have to add a couple of zeros to the five dollar bill for it to be enough to buy pop-corn.
2. While you may be tempted to call your broker (who btw did not tell you to short Insurance stocks) and demand some Gold in your portfolio, perhaps you should make a call to your MP instead. You should demand that the Bank of Canada stop 'loaning' money hand over fist to subprime lenders because that excess printing of money is costing you some good pop-corn.
Alternatively of course, you could not believe me and move to China, find someone to marry and learn to say 'I do'. I am thinking then that the Gold would just magically appear, and all the political machinations at our Central Bank would just be a memory, just like $0.50 gas.
Finance News:
1. As I suggested not-so-humbly two weeks ago, the largest Insurance company in the world confesses to huge losses of untold proportions ... all you short-sellers out there owe me a dinner ... read more here
2. The largest IPO in US history is going to be a credit card company ... go figure ... read more here
3. For all those that thought Ethanol was a good investment ... read more here
Economic News:
1. Corporate bankruptcies are forecasted to rise in the next year. Now, remember the recent investments that GCC sovereign funds made into banks? What effects will these bankruptcies have on bank stocks? Not positive I fear. Much better not to have invested of course, but if they had to invest, better to have waited a bit more, let them sweat a bit more instead of jumping in at the first sign of trouble ... read more here
2.
Islamic & Middle East Finance:
1. Funny how most outbound Middle Eastern money is going to the UK, but UK is the worst positioned country vis-a-vis the US$ ... read more here
Miscellaneous:
1. 1% of the US population is in prison ... Wasn't the difference between the Republicans and Democrats less than 1% during the last election? And don't people in prison vote for Democrats? Hmmm ... if only I was a conspiracy theorist ... read more here
"You have to ask yourself why OFHEO is letting them take on more mortgages. The last thing the Fed, or the administration wants is for the companies to go out and buy more mortgages and blow up." - David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management.
David connects the War on Terror with mortgages. Personally, I didn't think it could be done.
I can just picture it now ... Person A looks up and says 'What was that Noise? Was it a bomb?'. Person B replies, 'What world are you living in friend? Bombs are so 90's. It was a mortgage company!'
Commentary for the Week:
Why is the price of Gold so high?
The price of Gold has recently shot up above $970 US. Many intelligent people have opined and argued that this is because of the shortage of supply and the increase in demand from Asia. What they really mean to say is that at the rate people from China and India are growing up, getting married and buying jewellery for the aforesaid marriages, the shiny stuff going to be all gone before you and I will be able to say 'I do' in Mandarin or Hindi. This is of course, not entirely accurate. Not only is it quite easy and beautiful to say 'I do' in Mandarin and Hindi, it is also inaccurate because they have framed the question the wrong way around. While it may be true that the price of Gold is getting higher and higher by the day due to demand and supply pressures, it is more true that it is the value of the printed paper we call money that is actually falling drastically. The market for Gold is just one of the areas where we are seeing the effects first.
What evidence do I have for this, you ask? One's innate genius aside, there is of course, the price of oil, the price of bread, the price of wheat and the price of milk that we can take a look at. While I haven't actually been grocery shopping in a while and am surviving on the various flora such as mushrooms that are fed to me by my better half; and I haven't actually filled in any gas in months because the car is in my garage protesting the unprecedented severity of Winter, I am told by reliable sources that the price of things that are Real is rising quite quickly. What this means of course, is that while we feel it is the price of our consumables that is rising, it is actually the fact that intangibles such as paper money and the hours we spend at work that are being devalued in terms of purchasing power. This is even worse for our elders and seniors, or those who are on a fixed income, who get a certain dollar amount a month to spend but are being confronted with prices that have risen beyond all recognition. While I don't mean to be alarmist, the time when Gas Pumps prices and Ittihad's toll free phone no. below will perhaps contain the same number of digits. So what does all this mean for you anyway? You already know that prices are going up. Here are a couple of suggestions for you to think about:
1. To ensure that your paycheque keeps current with reality, I suggest that you ask your HR department at work for an extra zero at the end of the monthly paycheque. To argue your case, you can share with them your pop-corn receipt from the last movie you saw and observe to them gently, but with the air of an Expert, that if this keeps up, we as a society might have to add a couple of zeros to the five dollar bill for it to be enough to buy pop-corn.
2. While you may be tempted to call your broker (who btw did not tell you to short Insurance stocks) and demand some Gold in your portfolio, perhaps you should make a call to your MP instead. You should demand that the Bank of Canada stop 'loaning' money hand over fist to subprime lenders because that excess printing of money is costing you some good pop-corn.
Alternatively of course, you could not believe me and move to China, find someone to marry and learn to say 'I do'. I am thinking then that the Gold would just magically appear, and all the political machinations at our Central Bank would just be a memory, just like $0.50 gas.
Finance News:
1. As I suggested not-so-humbly two weeks ago, the largest Insurance company in the world confesses to huge losses of untold proportions ... all you short-sellers out there owe me a dinner ... read more here
2. The largest IPO in US history is going to be a credit card company ... go figure ... read more here
3. For all those that thought Ethanol was a good investment ... read more here
Economic News:
1. Corporate bankruptcies are forecasted to rise in the next year. Now, remember the recent investments that GCC sovereign funds made into banks? What effects will these bankruptcies have on bank stocks? Not positive I fear. Much better not to have invested of course, but if they had to invest, better to have waited a bit more, let them sweat a bit more instead of jumping in at the first sign of trouble ... read more here
2.
Islamic & Middle East Finance:
1. Funny how most outbound Middle Eastern money is going to the UK, but UK is the worst positioned country vis-a-vis the US$ ... read more here
Miscellaneous:
1. 1% of the US population is in prison ... Wasn't the difference between the Republicans and Democrats less than 1% during the last election? And don't people in prison vote for Democrats? Hmmm ... if only I was a conspiracy theorist ... read more here
Sustainability and Finance
Quote of the week:
'Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody's Economy.com.' - Edmund L. Andrews and Louis Uchitelle at the NY Times: Rescues for Homeowners
Commentary for the Week:
Sustainability and Finance:
We have recently been hearing quite a bit about how we need to begin to live sustainable lives and create sustainable economies. There are even many movements that have been spawned from this imperative, including 'The Inconvenient Truthers' and Socially Responsible Investing (SRI). But what is sustainability, really? If it means plundering the Earth for all we can on an annual basis while hoping oil prices stay down, then surely we want no part of it. If however, sustainability means living lives that contribute at least as many resources to posterity as the amount we take out, then sure - we are all for it. Framed in this way, finance - which essentially underwrites and monetizes resources, has an important part to play in sustainability. Looking at it in other ways, even if they are Carbon-Neutral, simply confuses the issue.
The problem as it exists today is twofold. First, we are addicted to economic growth. If our economies do not expand by a certain percentage, the worthwhile-ness of life comes into question. People start jumping off bridges, the latest Ferrari remains un-leased and politicians get voted out by a vengeful public. What binds us to this addiction is of course inflation, which slowly and steadily saps our purchasing power such that the lordly sums we survived on as kids seem quite piddly and insignificant with the wisdom of old age. The second problem is our incessant borrowing from future generations. We borrow today, that which we can never pay back tomorrow. Governments borrow to finance wars, corporations borrow to extract or re-order allocation of resources and people borrow to live in houses and drive cars that they cannot afford.
While many focus on consumer behaviour as a large driver of environmental damage, very few have made the connection to how the practice of borrowing on interest speeds up our usage of the planet's resources and ends us up with inflation too boot. The philosophy of 'Why wait to consume tomorrow what you can borrow for and consume today' is facilitated and encouraged by our financial system. It is not just a matter of inexplicable and irrational 'Consumer Behaviour'. We are able to over-consume and over-spend because we have to borrow to merely be 'normal'. So the question now arises about who it is that we are borrowing from. Although the more regular readers among you will be bracing for yet another perhaps inappropriate harangue against our beloved banks, the reality is sadly a bit more complex. Although Banks and other lenders are the face of the loan, the ultimate lender is not an institution. The lenders are future generations. As we borrow gynormous (I am told that this word means even bigger than enormous) sums and mis-spend them, the resources available to future generations come under enormous pressure and are reduced. Will they pay back our loans or will they be able to invest in their own future? The last thing we should want to leave them with is having to repay government, corporate and personal debt though further borrowing from their future generations - which is sadly how we operate today.
A lot of people ask me why usury is forbidden in Islam (and also other faiths). This may be one of the good reasons why. As you make lending more and more profitable, you skew the payoffs to market participants. If you add to that the fact that it is not the market that is dictating this but rather the Central Authorities who keep pumping money into the scheme so that lenders are never chastised (subprime anyone?), you see how the game is rigged. Looking at it this way gives a whole new meaning to the old adage that we have not inherited the Earth from our ancestors, we have borrowed it from our children. I wonder what interest rate is enough to satisfy an unborn child ...
Finance News:
1. A glimpse into one the company founded by the most successful money manager in Canada ... must read ... read more here
2. Yet another successful Canadian company sold to private buyers ... read more here
3. The Caisse declares a $2B loss on its 'investments' ... read more here
4. Excellent article on who gets left holding the bag when derivative trading goes bad ... read more here
Economic News:
1. What happens when funds that promise an absolute return uncorrelated with public markets begin to suffer absolute losses all together ... read more here
2. Battling the coming Bear market ... read more here
Islamic & Middle East Finance:
1. Morgan Stanley says GCC banks with Shariah assets will hold 18% of world financial system assets by 2012 ... read more here
Miscellaneous:
1. Beautiful story about Toyota's founding family ... (are you the best in the world, your country or the best in town?) ... read more here
2. The Cartoon that captures it all ... see it here
'Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody's Economy.com.' - Edmund L. Andrews and Louis Uchitelle at the NY Times: Rescues for Homeowners
Commentary for the Week:
Sustainability and Finance:
We have recently been hearing quite a bit about how we need to begin to live sustainable lives and create sustainable economies. There are even many movements that have been spawned from this imperative, including 'The Inconvenient Truthers' and Socially Responsible Investing (SRI). But what is sustainability, really? If it means plundering the Earth for all we can on an annual basis while hoping oil prices stay down, then surely we want no part of it. If however, sustainability means living lives that contribute at least as many resources to posterity as the amount we take out, then sure - we are all for it. Framed in this way, finance - which essentially underwrites and monetizes resources, has an important part to play in sustainability. Looking at it in other ways, even if they are Carbon-Neutral, simply confuses the issue.
The problem as it exists today is twofold. First, we are addicted to economic growth. If our economies do not expand by a certain percentage, the worthwhile-ness of life comes into question. People start jumping off bridges, the latest Ferrari remains un-leased and politicians get voted out by a vengeful public. What binds us to this addiction is of course inflation, which slowly and steadily saps our purchasing power such that the lordly sums we survived on as kids seem quite piddly and insignificant with the wisdom of old age. The second problem is our incessant borrowing from future generations. We borrow today, that which we can never pay back tomorrow. Governments borrow to finance wars, corporations borrow to extract or re-order allocation of resources and people borrow to live in houses and drive cars that they cannot afford.
While many focus on consumer behaviour as a large driver of environmental damage, very few have made the connection to how the practice of borrowing on interest speeds up our usage of the planet's resources and ends us up with inflation too boot. The philosophy of 'Why wait to consume tomorrow what you can borrow for and consume today' is facilitated and encouraged by our financial system. It is not just a matter of inexplicable and irrational 'Consumer Behaviour'. We are able to over-consume and over-spend because we have to borrow to merely be 'normal'. So the question now arises about who it is that we are borrowing from. Although the more regular readers among you will be bracing for yet another perhaps inappropriate harangue against our beloved banks, the reality is sadly a bit more complex. Although Banks and other lenders are the face of the loan, the ultimate lender is not an institution. The lenders are future generations. As we borrow gynormous (I am told that this word means even bigger than enormous) sums and mis-spend them, the resources available to future generations come under enormous pressure and are reduced. Will they pay back our loans or will they be able to invest in their own future? The last thing we should want to leave them with is having to repay government, corporate and personal debt though further borrowing from their future generations - which is sadly how we operate today.
A lot of people ask me why usury is forbidden in Islam (and also other faiths). This may be one of the good reasons why. As you make lending more and more profitable, you skew the payoffs to market participants. If you add to that the fact that it is not the market that is dictating this but rather the Central Authorities who keep pumping money into the scheme so that lenders are never chastised (subprime anyone?), you see how the game is rigged. Looking at it this way gives a whole new meaning to the old adage that we have not inherited the Earth from our ancestors, we have borrowed it from our children. I wonder what interest rate is enough to satisfy an unborn child ...
Finance News:
1. A glimpse into one the company founded by the most successful money manager in Canada ... must read ... read more here
2. Yet another successful Canadian company sold to private buyers ... read more here
3. The Caisse declares a $2B loss on its 'investments' ... read more here
4. Excellent article on who gets left holding the bag when derivative trading goes bad ... read more here
Economic News:
1. What happens when funds that promise an absolute return uncorrelated with public markets begin to suffer absolute losses all together ... read more here
2. Battling the coming Bear market ... read more here
Islamic & Middle East Finance:
1. Morgan Stanley says GCC banks with Shariah assets will hold 18% of world financial system assets by 2012 ... read more here
Miscellaneous:
1. Beautiful story about Toyota's founding family ... (are you the best in the world, your country or the best in town?) ... read more here
2. The Cartoon that captures it all ... see it here
Takes 2 to Tango
Dear Friends,
I know that many of you have probably missed the Ittihad Briefing so much that these last two weeks have been lost in a haze of both depression and disorientation. I assure you that this was not a planned attempt to prove how valuable the Briefing is by taking it away from you. The reason for our absence from your Inbox was quite pedestrian. It was just that I was moving my office to a new location, which resulted in a back injury which required further time off. As that logistical odyssey has now come to an end, my humble self is back at your service. I hope you will forgive this unannounced hiatus.
Quote of the week:
'Particularly egregious, at least to me, was the implicit claim that the capital markets are there in large part to help people save for old age. No they're not, and if regulators or governments ever decided to enforce that particular view we would likely have a market crash. The markets are there to provide liquidity. Period. And if by doing that people are able to buy stock and bonds in companies whose value appreciate, that's great. But markets whose core notion is wealth accumulation for individual savers, and markets whose main object is liquidity creation, are very, very different things, ...' - Paul Kedrosky from Infectious Greed.
People may not like this view but amid the confusion and noise relating to 'the Market', this is an important distinction between the primary function of markets and what we use them for.
Commentary for the Week:
Banks around the world announce more than $100B of losses, but what's the Bad News?
In these past couple of months we have witnessed many admissions of guilt by financial sector types. The CEO of Citigroup resigned, Bear Stearns has announced major write-downs, UBS, Credit-Suisse and now even Societe Generale has announced losses in the tens of Billions. These admissions of losses are meant to reassure investors that company managements are forthright about issues and that problems are being dealt with. This is all well and good, but is it the 'Truth'? More specifically, if the banks and Hedge Fund types are finally being truthful, who is not? You will of course remember that many of these banks spent quite some time denying that the softening real estate situation would have 'significant' effect. $100 Billion and counting in losses later, lawyers are now googling 'significant'. The question for us is - where else in the economy are there undeclared losses that are festering?
To get to the bottom of this, or nearer to the bottom anyway, we have to first discuss what has caused these losses in the first place. This is not generally a simple discussion, but I will attempt the impossible and keep it both brief and somewhat intelligent. Institutions that forward credit used to have a simple role in the economy. They used to take in deposits and advance loans to people based on those deposits. This simple equation has been changing over the last century. Where we are today is that institutions now take in deposits, lend a lot more money than they have on deposit, and then package the loans and sell the package to someone else as an investment. Where it gets positively mind-blowing and makes people dizzy, is that the 'investment' (package of loans) that Bank A just sold to Bank B, can be treated by Bank B as a 'deposit', against which more loans can be forwarded, and more 'Investments' can be manufactured. Also, as these packages were designed to produce income, anyone with a fixed-income need has been a regular buyer. Indeed, one doesn't know whether to laugh or to cry at the ridiculousness of this scheme that passes for the N. American financial sector. As to why people would do this, well - even though simple lending is still profitable, the packaging and selling of loans at inflated prices is where profits are obscene.
This almost makes one wish for a simpler time when the banker was making some money but he was still your friend. Now there are no friends and no enemies, just electrons and financial models. The funny thing about financial models is that they are only worth money if they can show growth. Therefore, guess what most financial models show? If you said growth, you are a genius. If you said the 'Truth', you get to be an Investment Banker - which is yet another kind of genius altogether.
The recent problem of course stems from the fact that the financial models and thus the 'investments' that rest upon them depend on a few simple variables to drive growth. The important ones are 1. cheap credit, or low interest rates; 2. Ready buyers for the investment and 3. Debtors making their loan payments. What has been immensely demoralizing for financial types recently has been that none of these fairly simple assumptions have held. There are few buyers for 'loan packages', interest rates have been cut but by too little too late, and broad swathes of US homeowners are unable to pay the interest on their loans. To add to the general misery, since almost everyone has been using similar models for investment planning, almost everyone has lost money because the assumptions don't hold.
What is truly fascinating in this story, and what makes one's nose all itchy with bad smell, is that only the banks and investment houses (for the most part) have declared losses. This means that only the people who sold these packages and kept a few for themselves are admitting losses. The regular buyers are quite mum. Most of these packages were fixed-income products, which means Insurance Companies and Pension Funds would have been natural buyers. This leads to the inevitable question of why the quietude? If the sellers of a rotten product are declaring losses on their inventory, why are the people who have been buying these for years not saying anything at all? As I am sure the more astute among us realize, it takes two to tango, two hands to clap, and two parties to complete a trade.
Of course, this does not mean that you all go out tomorrow and start to short Insurance Company stocks on margin. That would be exceedingly foolish. Unless, of course, you made lots of money doing that, in which case it would exceedingly brilliant. Just remember, the losses are from the same packages that were called 'Financial WMD's' by Warren Buffet. As WMD's, they have a long radioactive, half-life. The bank losses are only the first stage and you already know my suspicions for stage 2. One could be wrong of course, but I still feel a bit like Hamlet - 'Something is rotten in the state of Denmark ...'
Finance News:
1. The ability of banks to package and sell off their loans to others comes under more stress ... Private Equity firms refuse to back Bond insurers ... read more here
2. Remember the Rio Tinto buyout I spoke about in a previous issue? ... Well, the price just went to $150 Billion. What is interesting is that Rio Tinto management is still rejecting the offer as too low ... read more here
3. Thinking of borrowing for your RRSP this year ... read this first ... read more here
4. The CPP announces very meagre gains for the year. I thought they were the 'smart money' ... read more here
Economic News:
1. National Bank catches up to my opinion of the Gold Price ... (Refer to Issue 3.) ... read more here
2. The Loonie listens to wisdom and crosses back over into above-par territory ... read more here
3. After more than 10-15 yrs plus of overspending, US consumers are taking a break, throwing all sorts of financial forecasts, models and assumptions off kilter. Does the Japan scenario look more likely? ... read more here
4. The funniest financial 'journalist' writes about the connection between interest rates, inflation, the US$, Gold and about the American Economy ... absolutely priceless ... read more here
Islamic & Middle East Finance:
1. One particular and not very well-known vision of the future of 'Islamic Finance' definitely becoming an agenda item in the US election ... not exactly light reading but very interesting nevertheless ... read more here
Miscellaneous:
1. How often do you make a mistake and learn from it? ... read more here
2. A very nice story on a Canadian retailing competitor to the Bay. Many of you who go cottaging or camping up north will recognize the name ... read more here
I know that many of you have probably missed the Ittihad Briefing so much that these last two weeks have been lost in a haze of both depression and disorientation. I assure you that this was not a planned attempt to prove how valuable the Briefing is by taking it away from you. The reason for our absence from your Inbox was quite pedestrian. It was just that I was moving my office to a new location, which resulted in a back injury which required further time off. As that logistical odyssey has now come to an end, my humble self is back at your service. I hope you will forgive this unannounced hiatus.
Quote of the week:
'Particularly egregious, at least to me, was the implicit claim that the capital markets are there in large part to help people save for old age. No they're not, and if regulators or governments ever decided to enforce that particular view we would likely have a market crash. The markets are there to provide liquidity. Period. And if by doing that people are able to buy stock and bonds in companies whose value appreciate, that's great. But markets whose core notion is wealth accumulation for individual savers, and markets whose main object is liquidity creation, are very, very different things, ...' - Paul Kedrosky from Infectious Greed.
People may not like this view but amid the confusion and noise relating to 'the Market', this is an important distinction between the primary function of markets and what we use them for.
Commentary for the Week:
Banks around the world announce more than $100B of losses, but what's the Bad News?
In these past couple of months we have witnessed many admissions of guilt by financial sector types. The CEO of Citigroup resigned, Bear Stearns has announced major write-downs, UBS, Credit-Suisse and now even Societe Generale has announced losses in the tens of Billions. These admissions of losses are meant to reassure investors that company managements are forthright about issues and that problems are being dealt with. This is all well and good, but is it the 'Truth'? More specifically, if the banks and Hedge Fund types are finally being truthful, who is not? You will of course remember that many of these banks spent quite some time denying that the softening real estate situation would have 'significant' effect. $100 Billion and counting in losses later, lawyers are now googling 'significant'. The question for us is - where else in the economy are there undeclared losses that are festering?
To get to the bottom of this, or nearer to the bottom anyway, we have to first discuss what has caused these losses in the first place. This is not generally a simple discussion, but I will attempt the impossible and keep it both brief and somewhat intelligent. Institutions that forward credit used to have a simple role in the economy. They used to take in deposits and advance loans to people based on those deposits. This simple equation has been changing over the last century. Where we are today is that institutions now take in deposits, lend a lot more money than they have on deposit, and then package the loans and sell the package to someone else as an investment. Where it gets positively mind-blowing and makes people dizzy, is that the 'investment' (package of loans) that Bank A just sold to Bank B, can be treated by Bank B as a 'deposit', against which more loans can be forwarded, and more 'Investments' can be manufactured. Also, as these packages were designed to produce income, anyone with a fixed-income need has been a regular buyer. Indeed, one doesn't know whether to laugh or to cry at the ridiculousness of this scheme that passes for the N. American financial sector. As to why people would do this, well - even though simple lending is still profitable, the packaging and selling of loans at inflated prices is where profits are obscene.
This almost makes one wish for a simpler time when the banker was making some money but he was still your friend. Now there are no friends and no enemies, just electrons and financial models. The funny thing about financial models is that they are only worth money if they can show growth. Therefore, guess what most financial models show? If you said growth, you are a genius. If you said the 'Truth', you get to be an Investment Banker - which is yet another kind of genius altogether.
The recent problem of course stems from the fact that the financial models and thus the 'investments' that rest upon them depend on a few simple variables to drive growth. The important ones are 1. cheap credit, or low interest rates; 2. Ready buyers for the investment and 3. Debtors making their loan payments. What has been immensely demoralizing for financial types recently has been that none of these fairly simple assumptions have held. There are few buyers for 'loan packages', interest rates have been cut but by too little too late, and broad swathes of US homeowners are unable to pay the interest on their loans. To add to the general misery, since almost everyone has been using similar models for investment planning, almost everyone has lost money because the assumptions don't hold.
What is truly fascinating in this story, and what makes one's nose all itchy with bad smell, is that only the banks and investment houses (for the most part) have declared losses. This means that only the people who sold these packages and kept a few for themselves are admitting losses. The regular buyers are quite mum. Most of these packages were fixed-income products, which means Insurance Companies and Pension Funds would have been natural buyers. This leads to the inevitable question of why the quietude? If the sellers of a rotten product are declaring losses on their inventory, why are the people who have been buying these for years not saying anything at all? As I am sure the more astute among us realize, it takes two to tango, two hands to clap, and two parties to complete a trade.
Of course, this does not mean that you all go out tomorrow and start to short Insurance Company stocks on margin. That would be exceedingly foolish. Unless, of course, you made lots of money doing that, in which case it would exceedingly brilliant. Just remember, the losses are from the same packages that were called 'Financial WMD's' by Warren Buffet. As WMD's, they have a long radioactive, half-life. The bank losses are only the first stage and you already know my suspicions for stage 2. One could be wrong of course, but I still feel a bit like Hamlet - 'Something is rotten in the state of Denmark ...'
Finance News:
1. The ability of banks to package and sell off their loans to others comes under more stress ... Private Equity firms refuse to back Bond insurers ... read more here
2. Remember the Rio Tinto buyout I spoke about in a previous issue? ... Well, the price just went to $150 Billion. What is interesting is that Rio Tinto management is still rejecting the offer as too low ... read more here
3. Thinking of borrowing for your RRSP this year ... read this first ... read more here
4. The CPP announces very meagre gains for the year. I thought they were the 'smart money' ... read more here
Economic News:
1. National Bank catches up to my opinion of the Gold Price ... (Refer to Issue 3.) ... read more here
2. The Loonie listens to wisdom and crosses back over into above-par territory ... read more here
3. After more than 10-15 yrs plus of overspending, US consumers are taking a break, throwing all sorts of financial forecasts, models and assumptions off kilter. Does the Japan scenario look more likely? ... read more here
4. The funniest financial 'journalist' writes about the connection between interest rates, inflation, the US$, Gold and about the American Economy ... absolutely priceless ... read more here
Islamic & Middle East Finance:
1. One particular and not very well-known vision of the future of 'Islamic Finance' definitely becoming an agenda item in the US election ... not exactly light reading but very interesting nevertheless ... read more here
Miscellaneous:
1. How often do you make a mistake and learn from it? ... read more here
2. A very nice story on a Canadian retailing competitor to the Bay. Many of you who go cottaging or camping up north will recognize the name ... read more here
The Anatomy of an Islamic Finance Deal
Quote of the Week:
'Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.' - Paul Waldie in the Globe and Mail.
Simple Calc. - 1,200,000 (No. of homes) x 300,000 (avg. price of home) = $360,000,000,000 - or $360 Billion. These are the obvious, expected loan losses. As the loans are called in, other assets will be affected as they are sold to meet debt payments etc. This general contraction will thus have a negative multiplier effect. As people begin to price assets for pennies on the dollar, the big question will be whether consumers continue to buy assets thinking they are 'cheap', or whether consumers delay purchases because they think things will get 'cheaper'. The first choice leads to a recovery, the second to deflation and stagnation as in Japan. Sort of puts the $145 Billion aid package in perspective, which explains why the markets fell so drastically after this announcement.
Commentary for the Week:
The Anatomy of an Islamic Finance Deal:
Many people ask me simple sounding questions such as 'How is Islamic Finance different?', or 'What makes Islamic Finance 'Islamic'?. This usually happens at a dinner or event where I have about 20 seconds to summarize and answer questions that people spend years researching. What is worse is that sometimes people ask me these just as I am about to launch into a delectable main course, so there is a clear conflict of interest between me doing justice to the question, and me doing justice to the cook's labours. This usually results in a mumbled response about how 'interest' is almost as bad as mushrooms, which results in a confused audience that is unable to focus until dessert. I exaggerate of course, but only just. Recently however, someone asked me to give them not an overview but an example of how Islamic Finance is different. I thought that was a brilliant question and what follows is an example that makes the difference strikingly clear.
Instead of launching into theories on Finance again, lets imagine a simple scenario. Abu the Architect and Bill the Builder have an idea and concept for a Green building. They identify the property, land, the subcontractors and the buyer. The buyer puts down a deposit and agrees to buy the building after construction, which will take one year. Now all they need is to finance the project so they can commence with the digging and construction. The land and construction is slated to cost $1.1M and the building concept has been sold to the buyer for $1.5M. The deposit is $100k and Abu and Bill have the option to seek conventional, or Islamic financing, for the rest.
Scenario 1 - Conventional:
Abu and Bill seek conventional project financing. They are given a line of credit or mezzanine facility at a floating 12% interest. This means that they will have to pay 1% of whatever they have borrowed every month. As they will probably not borrow the full amount up front, their interest payments will be low in the beginning and balloon quickly as the cumulative amount they have spent increases and the project construction comes to a close. Let us assume that they will borrow $350k for the land and $350k for the first phase of construction up-front. In another 6 months, they will borrow the last $300k. For the first six months, they will be paying $7000/mth. After 6 months, they will be paying $9000 / mth. This means that the total they will have paid in interest will be $96,000 and the profit on the deal would be $304,000 ($1.5M - $1.1M - $96k). If Abu and Bill default on their monthly cash obligation, they will lose the entire project as the creditors will seize the property to retrieve their $1M. If the uncompleted property sells for less than $1M, they will be sued for the difference. From their perspective, this is a high stakes game. There is possibility for large gains, but the risk to them is not negligible either. As the property itself does not generate cash on a monthly basis, the interest costs must be part of the initial borrowing.
Scenario 2 - Islamic Finance:
Abu and Bill seek funding on a profit and loss sharing basis. They require $1.1M for the land and construction, out of which they have $100K already (the buyer's deposit). Abu and Bill are introduced to 10 investors by Islamic financiers such as yours truly. Each investor puts in $100k, sharing in a percentage of the profits / losses at the end. Let us say that the Builders and Islamic Finance co. are given 50% of the profits between them, and investors are to enjoy 50%. The building is completed on time (just as in scenario 1) and the buyer pays the rest of the balance in a year. The profit is in this scenario is $400k ($1.5M - $1.1M), of which 50%, or $200k goes to the 10 investors in addition to their capital. This translates into $20,000 profit on the deal per investor, representing a 20% Return on Investment over the year in question.
As you can see, the payout scenarios, risk profile and economic consequences of the two scenarios are quite different. Both scenarios are profitable for the parties concerned, but distribute profits in different ways. The first concentrates both wealth and risk such that the decision as to whether capital should be allocated to this endeavour rests with primarily the builders and a creditor. The second allows a broader section of the public to decide whether this project will be beneficial and for them to participate as partners. Also, the second scenario spreads wealth around the community while minimizing the risk inherent in monthly debt obligations. Both solutions work, but for different kinds of people.
The first scenario appeals to people who enjoy quick success. The second appeals to people who enjoy a shared success even more. The first appeals to people willing to take risks for quick success, the second to those that want to grow sustainably. One builds individuals and then a sense of community through them. The other builds community first and foremost, which is kind of the whole point of society, isn't it?
___________________
Scenario two is actually a close approximation of a deal that we are currently involved with, so it is not an ideal type that exists in books only. For those who want to judge whether Islamic Finance can really be different, I invite you to investigate further. Islamic Finance frequently comes under a lot of vituperation based on the folly of large, multinational institutions and their quest for new customers and our small company always gets lumped in with them for undeserved abuse as well. Although we are a small company, our intent and endeavour is to enhance the quality of choices available to all Canadians, not to display a thin veneer of piety over questionable ethics. I hope you will keep that mind and judge for yourself as you read the 3rd article in section 3 below.
Finance News:
1. Trader causes $7Billion loss at France's SG. Still think banks make money just buy the spread between what they pay to depositors and what they charge to lenders? ... read more here
2. How time engineers the best comebacks ... Mittal is doing to Europe what Europe and the East India Company did to India ... sending dividends back home ... read more here
Economic News:
1. Is the US housing mess headed our way? ... read more here
2. Talk about throwing money at a problem ... the US President unveils a $145B plan to 'spur' the US economy ... read more here
Islamic & Middle Eastern Finance:
1. Some changes on the horizon for OPEC members? ... Abu Dhabi investing $15B into clean energy ... read more here
2. Excellent article on what effect the concentration of Oil Wealth has on the world economy. The research on where this money has been invested recently is both timely and interesting. I don't think this is even close to the full picture because there is money cycled through the World Bank and IMF also. Plus there are official aid flows and investments into offshore funds that were not addressed in the 'Fueling Liquidity' section of the report. Nevertheless, a must read article because it summarizes things quite well ... read more here
3. A well-known commentator argues against Islamic Finance. While parts of the argument hold for many multinational banks getting into this space in a hurry, there are several problems with his view. First, he again misses the point that if we look at almost 5000 yrs of recorded history, all Abrahamic faiths and others as well were not confused on how Interest=Usury. It is only the last couple of centuries that fractional reserve banking has taken over and confused the issue. Second, he oversimplifies and mischaracterizes the argument made by the two authors he mentions. Dr. Saleem is not against Islamic Finance, he is against the fact that standards in the industry are so loose and what passes for Islamic Finance is frequently just marketing. Dr. Kuran's critique is a deeper questioning of whether finance and faith can mix and what happens when they do. Neither of them reduces Islamic Finance to a Mullah inspired industry, which is a gross oversimplification. Finally, Hassan Al-Banna and Maududi had about as much to do with Islamic Finance as a kangaroo does with Global warming - (which is minimal, as I understand it). Perhaps one of you will tell our newly-minted, self-appointed, 'financial expert' that Islamic Finance cannot be summed up in a shoddily researched newspaper column. Well, not intelligently anyway ... read more here
Miscellaneous / Personal Finance:
1. How to make a million! - even though the headline is cheapish and sensational, the article is refreshingly free of easy gimmicks and is quite good for the younger generation ... people over 40 have to work a bit harder though ... read more here
'Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.' - Paul Waldie in the Globe and Mail.
Simple Calc. - 1,200,000 (No. of homes) x 300,000 (avg. price of home) = $360,000,000,000 - or $360 Billion. These are the obvious, expected loan losses. As the loans are called in, other assets will be affected as they are sold to meet debt payments etc. This general contraction will thus have a negative multiplier effect. As people begin to price assets for pennies on the dollar, the big question will be whether consumers continue to buy assets thinking they are 'cheap', or whether consumers delay purchases because they think things will get 'cheaper'. The first choice leads to a recovery, the second to deflation and stagnation as in Japan. Sort of puts the $145 Billion aid package in perspective, which explains why the markets fell so drastically after this announcement.
Commentary for the Week:
The Anatomy of an Islamic Finance Deal:
Many people ask me simple sounding questions such as 'How is Islamic Finance different?', or 'What makes Islamic Finance 'Islamic'?. This usually happens at a dinner or event where I have about 20 seconds to summarize and answer questions that people spend years researching. What is worse is that sometimes people ask me these just as I am about to launch into a delectable main course, so there is a clear conflict of interest between me doing justice to the question, and me doing justice to the cook's labours. This usually results in a mumbled response about how 'interest' is almost as bad as mushrooms, which results in a confused audience that is unable to focus until dessert. I exaggerate of course, but only just. Recently however, someone asked me to give them not an overview but an example of how Islamic Finance is different. I thought that was a brilliant question and what follows is an example that makes the difference strikingly clear.
Instead of launching into theories on Finance again, lets imagine a simple scenario. Abu the Architect and Bill the Builder have an idea and concept for a Green building. They identify the property, land, the subcontractors and the buyer. The buyer puts down a deposit and agrees to buy the building after construction, which will take one year. Now all they need is to finance the project so they can commence with the digging and construction. The land and construction is slated to cost $1.1M and the building concept has been sold to the buyer for $1.5M. The deposit is $100k and Abu and Bill have the option to seek conventional, or Islamic financing, for the rest.
Scenario 1 - Conventional:
Abu and Bill seek conventional project financing. They are given a line of credit or mezzanine facility at a floating 12% interest. This means that they will have to pay 1% of whatever they have borrowed every month. As they will probably not borrow the full amount up front, their interest payments will be low in the beginning and balloon quickly as the cumulative amount they have spent increases and the project construction comes to a close. Let us assume that they will borrow $350k for the land and $350k for the first phase of construction up-front. In another 6 months, they will borrow the last $300k. For the first six months, they will be paying $7000/mth. After 6 months, they will be paying $9000 / mth. This means that the total they will have paid in interest will be $96,000 and the profit on the deal would be $304,000 ($1.5M - $1.1M - $96k). If Abu and Bill default on their monthly cash obligation, they will lose the entire project as the creditors will seize the property to retrieve their $1M. If the uncompleted property sells for less than $1M, they will be sued for the difference. From their perspective, this is a high stakes game. There is possibility for large gains, but the risk to them is not negligible either. As the property itself does not generate cash on a monthly basis, the interest costs must be part of the initial borrowing.
Scenario 2 - Islamic Finance:
Abu and Bill seek funding on a profit and loss sharing basis. They require $1.1M for the land and construction, out of which they have $100K already (the buyer's deposit). Abu and Bill are introduced to 10 investors by Islamic financiers such as yours truly. Each investor puts in $100k, sharing in a percentage of the profits / losses at the end. Let us say that the Builders and Islamic Finance co. are given 50% of the profits between them, and investors are to enjoy 50%. The building is completed on time (just as in scenario 1) and the buyer pays the rest of the balance in a year. The profit is in this scenario is $400k ($1.5M - $1.1M), of which 50%, or $200k goes to the 10 investors in addition to their capital. This translates into $20,000 profit on the deal per investor, representing a 20% Return on Investment over the year in question.
As you can see, the payout scenarios, risk profile and economic consequences of the two scenarios are quite different. Both scenarios are profitable for the parties concerned, but distribute profits in different ways. The first concentrates both wealth and risk such that the decision as to whether capital should be allocated to this endeavour rests with primarily the builders and a creditor. The second allows a broader section of the public to decide whether this project will be beneficial and for them to participate as partners. Also, the second scenario spreads wealth around the community while minimizing the risk inherent in monthly debt obligations. Both solutions work, but for different kinds of people.
The first scenario appeals to people who enjoy quick success. The second appeals to people who enjoy a shared success even more. The first appeals to people willing to take risks for quick success, the second to those that want to grow sustainably. One builds individuals and then a sense of community through them. The other builds community first and foremost, which is kind of the whole point of society, isn't it?
___________________
Scenario two is actually a close approximation of a deal that we are currently involved with, so it is not an ideal type that exists in books only. For those who want to judge whether Islamic Finance can really be different, I invite you to investigate further. Islamic Finance frequently comes under a lot of vituperation based on the folly of large, multinational institutions and their quest for new customers and our small company always gets lumped in with them for undeserved abuse as well. Although we are a small company, our intent and endeavour is to enhance the quality of choices available to all Canadians, not to display a thin veneer of piety over questionable ethics. I hope you will keep that mind and judge for yourself as you read the 3rd article in section 3 below.
Finance News:
1. Trader causes $7Billion loss at France's SG. Still think banks make money just buy the spread between what they pay to depositors and what they charge to lenders? ... read more here
2. How time engineers the best comebacks ... Mittal is doing to Europe what Europe and the East India Company did to India ... sending dividends back home ... read more here
Economic News:
1. Is the US housing mess headed our way? ... read more here
2. Talk about throwing money at a problem ... the US President unveils a $145B plan to 'spur' the US economy ... read more here
Islamic & Middle Eastern Finance:
1. Some changes on the horizon for OPEC members? ... Abu Dhabi investing $15B into clean energy ... read more here
2. Excellent article on what effect the concentration of Oil Wealth has on the world economy. The research on where this money has been invested recently is both timely and interesting. I don't think this is even close to the full picture because there is money cycled through the World Bank and IMF also. Plus there are official aid flows and investments into offshore funds that were not addressed in the 'Fueling Liquidity' section of the report. Nevertheless, a must read article because it summarizes things quite well ... read more here
3. A well-known commentator argues against Islamic Finance. While parts of the argument hold for many multinational banks getting into this space in a hurry, there are several problems with his view. First, he again misses the point that if we look at almost 5000 yrs of recorded history, all Abrahamic faiths and others as well were not confused on how Interest=Usury. It is only the last couple of centuries that fractional reserve banking has taken over and confused the issue. Second, he oversimplifies and mischaracterizes the argument made by the two authors he mentions. Dr. Saleem is not against Islamic Finance, he is against the fact that standards in the industry are so loose and what passes for Islamic Finance is frequently just marketing. Dr. Kuran's critique is a deeper questioning of whether finance and faith can mix and what happens when they do. Neither of them reduces Islamic Finance to a Mullah inspired industry, which is a gross oversimplification. Finally, Hassan Al-Banna and Maududi had about as much to do with Islamic Finance as a kangaroo does with Global warming - (which is minimal, as I understand it). Perhaps one of you will tell our newly-minted, self-appointed, 'financial expert' that Islamic Finance cannot be summed up in a shoddily researched newspaper column. Well, not intelligently anyway ... read more here
Miscellaneous / Personal Finance:
1. How to make a million! - even though the headline is cheapish and sensational, the article is refreshingly free of easy gimmicks and is quite good for the younger generation ... people over 40 have to work a bit harder though ... read more here
Spring, Summer, Fall, Winter and RRSP
Quote of the week:
'If half the available farmland in Germany were used to grow rapeseed, the total production would be 1,500 million litres of biodiesel, less than five percent of the total annual consumption of gasoline in Germany. On that same land it is possible to grow 6.8 million tonnes of wheat, or 41 million tonnes of potatoes. Germany has to choose between producing food or vegetable oil to run its cars.' - Michael Hopf from Greenpeace speaks about Biodiesel crops in Germany.
Surely this cannot be ... a choice no civilized nation should be asked to make! Drive on the autobahn, or eat food?
Commentary for the Week:
Spring, Summer, Fall, Winter and RRSP
Get ready my friends, RRSP season has arrived. This is the time of the year that most of us suddenly realize that the daily grind we go through to get out of our warm, cosy beds will come to an end one fine day. We will retire, - and no, I do not mean to a better place, although that too. I mean retire to the carefree, unemployed, cruising lifestyle that the TV and the millions spent in advertising the latest investments promise us as soon as we develop enough grey hair. For that remote hope, and our somewhat shameless tax-avoidance tendencies, every year we break out the cheque-book and spend 1 hour with our financial advisors investing our money. The TV and the ads with beautiful people assure us that we are on the right track and this RRSP season, we are good in hands. Alas, if only this were true.
For most of us, the RRSP is just a tax avoidance tool, a 2008 deadline to invest if we want to save 2007 tax, so that we can enjoy watching TV for the rest of the year without being asked for money by people too beautiful to say no to. People who, in my opinion, are so gorgeous and maddeningly happy that they have probably never been in finance, don't know a thing about the economy and don't know that the markets are crashing and that all our savings depend on what happens to the TSX, the DOW and maybe even an unknown Cow that is slowly and secretly going Mad (as in BSE) in an impossible place such as Shropshire, England. Also, these people cannot have my best interests at heart as they are always telling me that I want something sickeningly fatty to eat, or that I want to go for a speeding-ticket inducing drive in a tank-inspired SUV that probably needs a quarter of Kuwait's oil to get me to work tomorrow, even though they know that its already 8:30 pm and I just ate and the traffic was so terrible that it took me 40 minutes to cover the distance that would have taken me 4 minutes if I was in Germany and that there is no army on God's green Earth that can make me get into anything with wheels again this day ... but I digress.
Let's get back to RRSP's ... and the myths that surround their complexities. I know that we will all be bombarded with RRSP advice over the next month - I just think we should be prepared for battle.
RRSP's are a legal, 'approved by the government', tax-sheltered, trust account that allow us to save taxes while at the same time saving for retirement. Essentially a trust account held by a third-party for the purpose of providing us income during our retirement, RRSP's are like a basket that someone else is holding for you. Pushing this analogy a little bit more, think of me dutifully pushing around a shopping cart at the grocery store as my wife buys the latest organic mushrooms with the money I was saving for migration to Germany. My wife is the proverbial client, the shopping cart is the RRSP and I am the third party custodian of both the shopping cart and whatever she decides to put in it. She can fill it with good stuff like chocolate, or mouldy growths called mushrooms that pass for agricultural output in our advanced economy. What is in the cart is the actual food, whereas the cart itself is a mere vehicle. Similarly, what are placed inside an RRSP are the actual investments, the RRSP account itself is just a receptacle. The advantage of this receptacle is that whatever one puts in, can be written off against one's income for taxation purposes. This decreases one's taxable income, resulting in a larger tax refund because we have a progressive income tax regime. The other advantage is that whatever is placed in the RRSP also grows tax-free until withdrawal. This means that all growth of the investments inside the RRSP are tax-sheltered and no tax is payable on their growth and rebalancing on a yearly basis. This is true even if there is buying and selling within the RRSP and whether the growth is interest, capital-gains or dividends. Once you withdraw money however, the story changes quite a bit. Withdrawals are considered income by the CRA and so even if most of the growth in the investments held inside the RRSP is from capital gains, you will be taxed as if your withdrawal is income and at your marginal income tax rate. The idea here is to make your original investment grow to such an extent that this higher taxation still leaves you better off.
The other myth about RRSP's is that they have a season (this year's only goes to Feb 28th by the way, not March 1st). Saying that an RRSP contribution should have a season is like saying retirement will have a season, or that 1hr / year thinking about this stuff will allow you to live like the non-people on TV. I find this philosophy extremely problematic. Suppose your investments were like mushrooms instead of stocks or mutual funds, but that you still had to pay for them with your hard-earned money - this will make it more fun. For the first 2 months of the year, everyone else along with their Grandfather buys mushrooms. If the price of mushrooms is high at this time, you overpay for the mushrooms; if the price is low, you buy them at discount. You do not however, know whether the price is high or low at the time you are buying because you do not know if the price will be higher or lower the next month, the next year etc. etc. If you have consistently overpaid for mushrooms over 20-30 years of your working life, not only do you have a biggish collection of mushrooms, you have also spent relatively more to buy them. If you have underpaid relative to the average price however, you have mushrooms as far as your eye can see and they did not even cost you as much as they did in the earlier scenario. This last scenario allows you to either buy more mushrooms (so you can be even more comfortable), or have extra cash lying around. Since there is no predictable way or easy secret that I can give you about how to always be in the underpaying category - you have to be creative. Instead of risking all your cash in one go in Jan or Feb for the previous year's taxes, you have to be pro-active. Instead of buying $19,000 (this year's max contribution limit for some people) of mushrooms in Feb, buy only $1583.3 of mushrooms every month instead. This will ensure that you are buying mushrooms not at one price that might be high, but at an average yearly price. You gamble less with your money this way.
To me, the average price method called Dollar-Cost Averaging (you can ask Sheikh Google) is safer, otherwise you might be stuck with only a few mushrooms in retirement. Surely, having many is better.
(Please do not be offended if you are one of the non-people on TV, I listen to the radio and I am pretty sure that there are some non-people in there as well. Also, for those who did not like the mushroom analogy, I reply that many investments are just like mushrooms - quite mouldy. If you prefer, you can read the name of your favourite stock instead of the word mushroom whenever you come across it because the principle still stands. Also, for those who need discuss their RRSP strategy, if you can get 5 new people to subscribe to this newsletter, I will help you for mere mushrooms - we are sitting at around 1800 subscribers, I would like to get at least another 200 soon).
Finance News:
1. The geniuses that invested in Citi last month are probably not too pleased with this piece of news ... a $10 Billion loss at Citibank with an $18 Billion write-down of assets ... (in addition to all the others that they have announced already) ... http://www.nytimes.com/2008/01/15/business/16citi.html?fta=y
2. Must read story of the week ... about the fund manager who made over 500% for his investors over the subprime issue ... http://online.wsj.com/article/SB120036645057290423.html?mod=hpp_us_pageone ... and how he has hired Alan Greenspan, the man many blame for that mess in the first place ... http://online.wsj.com/article/SB120036783112890507.html?mod=hpp_us_whats_news
3. Who was it that said that subprime would have no effect on the TSX? ... Jeffrey Rubin - Chief Economist at CIBC? ... (refer to IWB issue 3. or http://www.advisor.ca/news/article.jsp?content=20071108_152122_5120 ) ... and now for more of the truth ... http://www.financialpost.com/story.html?id=242110 ... (although since it is the Post, I use the term truth quite loosely) ...
4. Doing an Alwaleed? ... the investment behind the Saudi Prince's fortune ... http://www.economist.com/daily/columns/businessview/displaystory.cfm?story_id=10522716&fsrc=nwl
Economic News:
1. Shocking ... a good article from Marcus Gee?! ... shocking ... do read the article of course because it speaks to how Canadian businesses can begin to expand into foreign markets using the HR resources they have at here at home ... still can't believe it was written by Marcus Gee though ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080116.wibasia0116/BNStory/robColumnsBlogs/home?cid=al_gam_mostview
2. Need some explanation about currency movements and what the loonie's rise means for the Canadian economy? ... a thought-provoking article about a professor with whom many would disagree. Nevertheless, there is some insight here that we can learn from ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080116.wrreynolds0116/BNStory/robColumnsBlogs/home
3. Notional amount of credit derivatives = $43Trillion (yes, trillion), declared losses to date = $100 Billion (approx) ... How much of the former will be recognized as the latter? - Remember, our RRSP's, company pensions, taxes and standard of living depend on the answer ... http://www.economist.com/finance/displaystory.cfm?story_id=10498541
4. US inflation highest in 17 years. Do you remember now that Rio Tinto shareholders walked away from $150B (US)? Do you see why? In the present fight between US money and Gold / Oil / Real Stuff ... which would you pick? ... http://www.canadianbusiness.com/markets/market_news/article.jsp?content=b011628A
Islamic / Middle East Finance:
1. Has Islamic Finance become an issue in the 2008 US presidential election? ... maybe just a little bit ... http://www.ronpaul2008.com/issues/inflation-tax/
2. Mr. Usmani says that 85% of 'Islamic Bonds' are not Islamic, setting off a debate in Bahrain and the international Islamic standards setting body ... http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20080114/BUSINESS/688156932/wt.test@yahoo.com
Miscellaneous:
1. Time to become vegetarian my friends ... the US has allowed the entry of cloned animals into the food chain ... be afraid - very afraid ... http://www.reuters.com/article/healthNews/idUSN1444947520080116?feedType=nl&feedName=ushealth1100&sp=true
'If half the available farmland in Germany were used to grow rapeseed, the total production would be 1,500 million litres of biodiesel, less than five percent of the total annual consumption of gasoline in Germany. On that same land it is possible to grow 6.8 million tonnes of wheat, or 41 million tonnes of potatoes. Germany has to choose between producing food or vegetable oil to run its cars.' - Michael Hopf from Greenpeace speaks about Biodiesel crops in Germany.
Surely this cannot be ... a choice no civilized nation should be asked to make! Drive on the autobahn, or eat food?
Commentary for the Week:
Spring, Summer, Fall, Winter and RRSP
Get ready my friends, RRSP season has arrived. This is the time of the year that most of us suddenly realize that the daily grind we go through to get out of our warm, cosy beds will come to an end one fine day. We will retire, - and no, I do not mean to a better place, although that too. I mean retire to the carefree, unemployed, cruising lifestyle that the TV and the millions spent in advertising the latest investments promise us as soon as we develop enough grey hair. For that remote hope, and our somewhat shameless tax-avoidance tendencies, every year we break out the cheque-book and spend 1 hour with our financial advisors investing our money. The TV and the ads with beautiful people assure us that we are on the right track and this RRSP season, we are good in hands. Alas, if only this were true.
For most of us, the RRSP is just a tax avoidance tool, a 2008 deadline to invest if we want to save 2007 tax, so that we can enjoy watching TV for the rest of the year without being asked for money by people too beautiful to say no to. People who, in my opinion, are so gorgeous and maddeningly happy that they have probably never been in finance, don't know a thing about the economy and don't know that the markets are crashing and that all our savings depend on what happens to the TSX, the DOW and maybe even an unknown Cow that is slowly and secretly going Mad (as in BSE) in an impossible place such as Shropshire, England. Also, these people cannot have my best interests at heart as they are always telling me that I want something sickeningly fatty to eat, or that I want to go for a speeding-ticket inducing drive in a tank-inspired SUV that probably needs a quarter of Kuwait's oil to get me to work tomorrow, even though they know that its already 8:30 pm and I just ate and the traffic was so terrible that it took me 40 minutes to cover the distance that would have taken me 4 minutes if I was in Germany and that there is no army on God's green Earth that can make me get into anything with wheels again this day ... but I digress.
Let's get back to RRSP's ... and the myths that surround their complexities. I know that we will all be bombarded with RRSP advice over the next month - I just think we should be prepared for battle.
RRSP's are a legal, 'approved by the government', tax-sheltered, trust account that allow us to save taxes while at the same time saving for retirement. Essentially a trust account held by a third-party for the purpose of providing us income during our retirement, RRSP's are like a basket that someone else is holding for you. Pushing this analogy a little bit more, think of me dutifully pushing around a shopping cart at the grocery store as my wife buys the latest organic mushrooms with the money I was saving for migration to Germany. My wife is the proverbial client, the shopping cart is the RRSP and I am the third party custodian of both the shopping cart and whatever she decides to put in it. She can fill it with good stuff like chocolate, or mouldy growths called mushrooms that pass for agricultural output in our advanced economy. What is in the cart is the actual food, whereas the cart itself is a mere vehicle. Similarly, what are placed inside an RRSP are the actual investments, the RRSP account itself is just a receptacle. The advantage of this receptacle is that whatever one puts in, can be written off against one's income for taxation purposes. This decreases one's taxable income, resulting in a larger tax refund because we have a progressive income tax regime. The other advantage is that whatever is placed in the RRSP also grows tax-free until withdrawal. This means that all growth of the investments inside the RRSP are tax-sheltered and no tax is payable on their growth and rebalancing on a yearly basis. This is true even if there is buying and selling within the RRSP and whether the growth is interest, capital-gains or dividends. Once you withdraw money however, the story changes quite a bit. Withdrawals are considered income by the CRA and so even if most of the growth in the investments held inside the RRSP is from capital gains, you will be taxed as if your withdrawal is income and at your marginal income tax rate. The idea here is to make your original investment grow to such an extent that this higher taxation still leaves you better off.
The other myth about RRSP's is that they have a season (this year's only goes to Feb 28th by the way, not March 1st). Saying that an RRSP contribution should have a season is like saying retirement will have a season, or that 1hr / year thinking about this stuff will allow you to live like the non-people on TV. I find this philosophy extremely problematic. Suppose your investments were like mushrooms instead of stocks or mutual funds, but that you still had to pay for them with your hard-earned money - this will make it more fun. For the first 2 months of the year, everyone else along with their Grandfather buys mushrooms. If the price of mushrooms is high at this time, you overpay for the mushrooms; if the price is low, you buy them at discount. You do not however, know whether the price is high or low at the time you are buying because you do not know if the price will be higher or lower the next month, the next year etc. etc. If you have consistently overpaid for mushrooms over 20-30 years of your working life, not only do you have a biggish collection of mushrooms, you have also spent relatively more to buy them. If you have underpaid relative to the average price however, you have mushrooms as far as your eye can see and they did not even cost you as much as they did in the earlier scenario. This last scenario allows you to either buy more mushrooms (so you can be even more comfortable), or have extra cash lying around. Since there is no predictable way or easy secret that I can give you about how to always be in the underpaying category - you have to be creative. Instead of risking all your cash in one go in Jan or Feb for the previous year's taxes, you have to be pro-active. Instead of buying $19,000 (this year's max contribution limit for some people) of mushrooms in Feb, buy only $1583.3 of mushrooms every month instead. This will ensure that you are buying mushrooms not at one price that might be high, but at an average yearly price. You gamble less with your money this way.
To me, the average price method called Dollar-Cost Averaging (you can ask Sheikh Google) is safer, otherwise you might be stuck with only a few mushrooms in retirement. Surely, having many is better.
(Please do not be offended if you are one of the non-people on TV, I listen to the radio and I am pretty sure that there are some non-people in there as well. Also, for those who did not like the mushroom analogy, I reply that many investments are just like mushrooms - quite mouldy. If you prefer, you can read the name of your favourite stock instead of the word mushroom whenever you come across it because the principle still stands. Also, for those who need discuss their RRSP strategy, if you can get 5 new people to subscribe to this newsletter, I will help you for mere mushrooms - we are sitting at around 1800 subscribers, I would like to get at least another 200 soon).
Finance News:
1. The geniuses that invested in Citi last month are probably not too pleased with this piece of news ... a $10 Billion loss at Citibank with an $18 Billion write-down of assets ... (in addition to all the others that they have announced already) ... http://www.nytimes.com/2008/01/15/business/16citi.html?fta=y
2. Must read story of the week ... about the fund manager who made over 500% for his investors over the subprime issue ... http://online.wsj.com/article/SB120036645057290423.html?mod=hpp_us_pageone ... and how he has hired Alan Greenspan, the man many blame for that mess in the first place ... http://online.wsj.com/article/SB120036783112890507.html?mod=hpp_us_whats_news
3. Who was it that said that subprime would have no effect on the TSX? ... Jeffrey Rubin - Chief Economist at CIBC? ... (refer to IWB issue 3. or http://www.advisor.ca/news/article.jsp?content=20071108_152122_5120 ) ... and now for more of the truth ... http://www.financialpost.com/story.html?id=242110 ... (although since it is the Post, I use the term truth quite loosely) ...
4. Doing an Alwaleed? ... the investment behind the Saudi Prince's fortune ... http://www.economist.com/daily/columns/businessview/displaystory.cfm?story_id=10522716&fsrc=nwl
Economic News:
1. Shocking ... a good article from Marcus Gee?! ... shocking ... do read the article of course because it speaks to how Canadian businesses can begin to expand into foreign markets using the HR resources they have at here at home ... still can't believe it was written by Marcus Gee though ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080116.wibasia0116/BNStory/robColumnsBlogs/home?cid=al_gam_mostview
2. Need some explanation about currency movements and what the loonie's rise means for the Canadian economy? ... a thought-provoking article about a professor with whom many would disagree. Nevertheless, there is some insight here that we can learn from ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080116.wrreynolds0116/BNStory/robColumnsBlogs/home
3. Notional amount of credit derivatives = $43Trillion (yes, trillion), declared losses to date = $100 Billion (approx) ... How much of the former will be recognized as the latter? - Remember, our RRSP's, company pensions, taxes and standard of living depend on the answer ... http://www.economist.com/finance/displaystory.cfm?story_id=10498541
4. US inflation highest in 17 years. Do you remember now that Rio Tinto shareholders walked away from $150B (US)? Do you see why? In the present fight between US money and Gold / Oil / Real Stuff ... which would you pick? ... http://www.canadianbusiness.com/markets/market_news/article.jsp?content=b011628A
Islamic / Middle East Finance:
1. Has Islamic Finance become an issue in the 2008 US presidential election? ... maybe just a little bit ... http://www.ronpaul2008.com/issues/inflation-tax/
2. Mr. Usmani says that 85% of 'Islamic Bonds' are not Islamic, setting off a debate in Bahrain and the international Islamic standards setting body ... http://www.washingtontimes.com/apps/pbcs.dll/article?AID=/20080114/BUSINESS/688156932/wt.test@yahoo.com
Miscellaneous:
1. Time to become vegetarian my friends ... the US has allowed the entry of cloned animals into the food chain ... be afraid - very afraid ... http://www.reuters.com/article/healthNews/idUSN1444947520080116?feedType=nl&feedName=ushealth1100&sp=true
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