Quote of the week:
'Besides being a leader in genetic engineering, Monsanto is one of the largest suppliers of seeds in the world. It also sells the widely used herbicide Roundup, use of which has grown with the adoption of genetically engineered crops resistant to Roundup.' - The NY Times lets slip how the Agri-Food business really works.
The Ittihad Weekly Briefing is now archived at: www.ittihadsecurities.blogspot.com
Commentary of the week:
Does Ethical Investing Work? (Part II - contd. from the last issue):
As promised, this week sees us beginning to tackle the idea of Ethical or Socially Responsible Investing (SRI), which are actually slightly different from each other but which I will knowingly treat as two peas in a pod for the purpose of most of our discussion. The actual difference is that SRI is typically a negative screen which roots out bad apples in the corporate sector, whereas Ethical Investing is a search for the 'good apples' in the stock market in which we can invest. For the purposes of our discussion today, think of them as identical twins - they might be different in theory, but to us they look the same (this is called the problem of reductionism in logic - a severe logical fallacy for lesser mortals).
As we discussed last week, one of severest problems we face as people who believe that we are responsible and accountable for our wealth (or debts), not just our actions - is the inability to control what uses our funds are put to if we plug into the conventional financial system in any meaningful way. Given that we 'need' to have mortgages, savings, credit cards etc. simply in order to live 'normally', how are we to ensure that the hard-earned money we earn and save for our kids is not actually going towards poisoning the very Earth and the water that will be left for our Grand-kids? In a system that functions according to its own value-less logic, how do we live and function with the values that we do have without feeling like hypocrites who talk a lot but whose money is still part of the problem. After all, nobody really believes that we should spread poisons like cyanide in their own backyard, so then why is okay if it is done 2000 km away (and we ignore it) if the rivers will simply carry it to your neighbourhood (if not your cousin's) in a matter of weeks? How much is clean water really worth? The economists of the world have a really good answer to this question - so good that it is not even worth discussing.
Our answer has to be different. We must of course, begin to impose some limits (did someone say values) on how capital is taken from our savings, put into companies that do damage, and then given back to us in a sanitized manner without us really knowing what it has been up to in the meantime. This is the moral disintermediation problem we discussed two weeks ago and even though I was away for more than a whole week, I return to see it still has not been solved (come on people ...).
One possible proposed solution has been the movement towards Socially Responsible (SRI) or Ethical Investing. This is the movement where individuals and investment companies screen and focus their investment activities by first screening out 'bad' corporate citizens from their portfolios and then investing instead in companies that are either improving their image or practices, as the case may be. This is supposed to have two effects (at least). One, it signals to companies and governments (perhaps) that they need to have policies and governance mechanisms in place that will protect egregious abuses and that someone is always watching. Two, it is supposed to deny capital to the 'bad' companies and deny much needed liquidity to their shares in the stock markets so that the stock collapses and the company is sold to someone with a better handle on both business and morals.
This sectors has now grown to over $500B in Canada (which is big) and there seems to be a groundswell of interest in the subject. People from all backgrounds are now asking their financial advisor questions about whether there is anything available which makes them money and is also not damaging to the environment. God only knows how this question is being handled in your household my advisor is very shifty with his answers. One suspects that he knows less about this sector that he lets on, but I digress (and embellish). The question for us is whether SRI does what it intends to do? Does SRI solve the problem of disintermediation? Does it signal the right thing to companies? Does it deny capital to corporate offenders?
The answers to these questions are, from my humble perspective - Yes and no, no, yes & then finally - no. Clear as mud? Let me explain. SRI as a sector is only partly successful (to date) given its intentions. It does not solve the problem of moral disintermediation because we still do not know what our money is up to and where it actually goes (transparency is still an issue). It does signal extremely well to companies that investors are waking up, but ultimately it does not really deny capital to companies with faulty records and dubious future plans. This is because the top holdings for many SRI funds and portfolios in Canada are the banks. This would not ordinarily be a problem except for the fact that in Canada, the banks are actually the largest producers and channels of capital (no, not the government). Even though some investment capital is moving away from companies directly, the same investment capital finds its way to companies through the banks in the form of debt instead. The SRI fund invests in a new offering of bank shares, the bank turns around and loans this money to Company G. Cyanide still finds its way into the water supply. The difference though, is that Company G has a more difficult time (sometimes) selling its shares. Is this success?
Of course, it is too early to say and I think that we should all as people still investigate it for ourselves, but in my opinion, and I fully recognize that I am both a bit weird and in the minority, but we need something a little more drastic. At the very least, the SRI sector needs to begin to demand that the banks begin to include SRI considerations in their loan criteria. That will send shockwaves through the corporate board-rooms where the environment is considered little more than a garbage dump because they know they can always get a bigger loan. It will also begin to address the seriousness of the situation in a way that will change practices quickly, rather than at the leisurely pace that things are usually done in Canada. Of course, as believers, we do not think that the banks' business models are good for society at all, but that is no reason to think that they could not have better practices than they do at the moment. I leave it up to you to decode where IF fits into all this, but from my perspective, we really have to stop thinking about just money when we talk about money. As thinking, feeling people, we are called to a deeper existence.
--------------
Upcoming Events:
We have been invited by TARIC mosque (located here) to present our views on Islamic Finance on Saturday, the 21st of June at 7:00 pm. I encourage everyone to attend with friends as the discussion will focus on the place that Islam does or does not have in our financial choices. By the end of the discussion, attendees should have a good idea about how to judge the IF field for themselves. This is a discussion that will IA take place outside the logic of a sales presentation so you can leave your cheque-books at home, we will accept Halal Credit Cards instead (Relax, I'm kidding). Come with friends and come with difficult questions - hopefully, we will trade in good ideas that will profit our minds.
__________
Finance News:
1. Wonderful Q/A session with a serial entrepreneur (hat-tip to K Niazi) ... read more here
2. Remember how Dr. Yunus from Bangladesh got the Nobel Prize for Micro-finance a few years ago? Well, this article looks at some recent happenings in the world of Micro-finance. I believe the word used was 'shocking' ... read more here
Economic News:
1. The Economist's analysis of the prospects for the Oil markets ... read more here
2. House prices fall faster than in the depression ... read more here
3. Some insights about what drives Innovation in an economy ... read more here
4. The companies whose tinkering with our food supply contributed to the food crisis in the first place now say they have a solution ... this news is most disturbing ... read more here
Islamic / Middle East / Emerging Markets:
1. In case you were still wondering where Oil Money usually goes ... read more here
2. The definitive and final reason on why Japan is the absolute and most advanced civilization on Earth (ever) ... read more here
Interesting but not all Finance:
1. In case you're wondering where to go for the summer ... read more here
2. A new way to clean up oil spills? ... read more here
3. A new site to help you analyze your business ... read more here
4. A wonderful play about a girl from the US who died under tragic circumstances in Palestine recently. A must see for those interested in how wars affect people's livelihoods and why Ethical Investing has an aversion to investing in defence related industries ... read more here
Showing posts with label Commodities. Show all posts
Showing posts with label Commodities. Show all posts
Sunday, June 15, 2008
Tuesday, May 6, 2008
Economic Complexity and the Price of Food
Quotes of the week:
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -
The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...
Commentary for the Week:
Economic Complexity and the Price of Food:
Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?
One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.
Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.
So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
____
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
Finance News:
1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here
Economic News:
1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here
2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here
3. Home sales in the US fall 2% in March ... read more here
4. The property market in Spain falters as well ... read more here
Islamic / Middle East / Emerging Markets:
1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here
2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here
3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here
Interesting but not Finance:
1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here
2. The economics of the federal government's despicable policy on the seal hunt ... read more here
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -
The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...
Commentary for the Week:
Economic Complexity and the Price of Food:
Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?
One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.
Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.
So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
____
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
Finance News:
1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here
Economic News:
1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here
2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here
3. Home sales in the US fall 2% in March ... read more here
4. The property market in Spain falters as well ... read more here
Islamic / Middle East / Emerging Markets:
1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here
2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here
3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here
Interesting but not Finance:
1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here
2. The economics of the federal government's despicable policy on the seal hunt ... read more here
Economics of Stealing Cutlery
Quotes of the week:
"To some degree it's a very gigantic version of Las Vegas" - Gary Burtless, an economist at the Brookings Institution, speaking about either Wall Street or Hedge Funds (Is there much difference these days?).
Commentary for the Week:
The Economics of Stealing Cutlery
Recently I attended yet another seminar on yet another obscure topic in Finance. True to form, it confirmed my worst suspicions and most uncharitable of analyses about the field. The food though, was excellent and I consoled myself with a healthy helping of Zaafrani Rice topped with some exquisite chicken. Once I had had more than my fair fill, I looked up to see fellow geniuses in the audience also using the same strategy to tune out the proceedings.
As the lectures droned on however, and I began to fear becoming even more corrupted by listening to speeches about zero-coupon bonds and 16% interest, I began to focus on the more mundane aspects of my surroundings. In order to shut my not-so-pious ears, I began to fidget (as curious people often do) with the cutlery on my table, becoming lost in the intricate patterns and designs on my fork. Noticing this fascination, the distinguished gentleman sitting beside me leaned over indulgently and conspiratorially observed: 'Relax, it's stainless steel. I checked already ...'.
Initially, I was shocked at being mistaken for a cutlery pilferer masquerading as a finance genius and began to think of stabbing the chicken on the man's plate using the fork in question with such force as to send a timeless message about the limits of my tolerance for inconvenient questions about my character. As I weighed the impact of such an action on my only $1000/suit however, my calmer self prevailed and I realized the humour and novelty present in the situation, letting the unfounded comment pass with a haughty smile. I also realized that the man was flat wrong about the value of the cutlery.
While it is true that silver is more expensive than steel to buy, steel is a more valuable or sought after commodity at the moment; and as you and I are arguing about knives and forks, there is a $150 Billion buyout offer from BHP Billiton on the table for Rio Tinto. The No. 2 company for iron ore production (an input for steel) is proposing to buy No. 3. for $150Billion. This is of interest to us for three reasons. First, we have to bury the news about how I was almost caught stealing a fork in more meaningful commentary. Second, cheap steel is an essential input for a growing consumer and industrial economy such as China, which is doing everything possible to guarantee predictable supplies. Third, and this the key for me, is that this buyout may be a signal for the turning of the tide as far as the boundaries between the financial economy and real economy are concerned. The first two are beyond our scope for today, but let me explain the last one a bit more.
For at least a couple of decades now, the real economy has been overshadowed by the financial sector. It has been 'cooler' to speak about stocks, bonds, derivatives (although very few speak on this one without looking foolish) and interest rates than it has been to speak about grains, gold, rice and other real commodities. This has been a departure from most of human history, where it has not been the price of IBM stock that has been a topic of discussion at the dinner table, but the price of food. In essence, the financial superstructure that we have built over and above that of the real economy of trading in goods has skewed our attentions, priorities and expertise. As a sector, finance sits in an octopus-like repose atop the real, with its tentacles at each node of the economy, always present and always growing. It used to be that the role of finance was to intermediate capital between real sectors. More recently, it has become an economy in and of itself, with little or no connection to reality. What is worse is that people had begun to believe the hype and feel that way as well.
In my opinion, this is changing now in spectacular fashion. Governments, corporations and financial types are realizing something they should have known all along - that reality takes no prisoners and however much you believe that paper (cash / stocks / bonds) is worth something, it is actually the something in question that is worth more than paper. In the case that we are discussing here, Rio Tinto shareholders have flatly refused to accept $150Billion in cash and stock, for a company that hammers and processes rocks for a living. Around this transaction, governments and sovereign wealth funds are circling with untold amount of funds to support one side over the other. Gone are platitudes about the 'free-market' and the open economy. It is now about ensuring ownership of iron ore supplies; cordial relations and corporate commercial law be damned.
Even though one case does not a trend make, I encourage you to think of things using this framework of the real vs. the mere financial for a few months. I think that you will notice that human concerns such as food, gas, heating, cooling and even cutlery will be on people's minds a bit more. You will also notice that while powers-that-be are going to be speaking much about how they are bringing stability back into the financial system, you will notice that we are actually in the hunt to carve up the real world and it's treasures in obvious manner once again.
Once the pretence and confusion over what is truly at stake is gone, all sorts of magical things can happen. To make sense of these, you will have to keep an open mind and reinvigorate your curiosity. Most important of all, the next time you see cutlery, ask yourself whether you knew that hammering away at a steely rock could lead to so much fun.
MAP Canada is hosting an event for young businesses and people looking to take their businesses to next level on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that most of you will attend, I promise you both insight and even a few fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served, sans any silver forks. Please Register Here
Finance News:
1. This story is too good (and quintessentially Canadian). Around 300 grannies are forcing the bankers / brokers / lawyers involved in the credit crunch 'fix-up' to be more responsive to small investor needs ... read more here
2. Some things to consider if you are thinking of moving to a fee-based personal financial advisory model ... (this is not a condemnation, it is something to know) ... read more here
3. Even more high payouts for hedge fund managers ... Such are the wonders of leverage, it can make geniuses out of normal people that bet the 'right' way ... read more here
4. Where most global banking decisions are made ... read more here
Economic News:
1. Our old friend, Chief Economist at the CIBC, comes up with another 'analysis' on the strength of the Canadian Economy. It is not so much that his conclusion is wrong, but the sheer chutzpah of consistently shoddy reasoning is very endearing. Keep up the ... ummm ... the work! ... read more here
2. At the end of the day, all talk, economics and politics is about gas ... (and not the Pepto-Bismol kind) ... read more here
3. A dissenting view on the US$ ... Is this denial or the turning of the tide? ... read more here
4. The Economist (which strangely remains my favourite source of news) discovers that there is a food allocation problem in the world ... read more here
Islamic / Middle East / Emerging Markets:
1. Asian Policy-makers having a tough time with inflation. What's funny is that this time, they are importing inflation in the form of US$'s that simply don't buy what they used to anymore ... read more here
2. Recasting futures and commodity trading role as a price-signalling mechanism ... problem is that this trading also in fact interferes with the price. It is not just a signal ... read more here
3. Is there a role for gender in finance? A normative question and a descriptive (yet quite probing) article ... read more here
4. Middle-East money moving to Asia instead of the West ... read more here
Miscellaneous:
1. N/A
"To some degree it's a very gigantic version of Las Vegas" - Gary Burtless, an economist at the Brookings Institution, speaking about either Wall Street or Hedge Funds (Is there much difference these days?).
Commentary for the Week:
The Economics of Stealing Cutlery
Recently I attended yet another seminar on yet another obscure topic in Finance. True to form, it confirmed my worst suspicions and most uncharitable of analyses about the field. The food though, was excellent and I consoled myself with a healthy helping of Zaafrani Rice topped with some exquisite chicken. Once I had had more than my fair fill, I looked up to see fellow geniuses in the audience also using the same strategy to tune out the proceedings.
As the lectures droned on however, and I began to fear becoming even more corrupted by listening to speeches about zero-coupon bonds and 16% interest, I began to focus on the more mundane aspects of my surroundings. In order to shut my not-so-pious ears, I began to fidget (as curious people often do) with the cutlery on my table, becoming lost in the intricate patterns and designs on my fork. Noticing this fascination, the distinguished gentleman sitting beside me leaned over indulgently and conspiratorially observed: 'Relax, it's stainless steel. I checked already ...'.
Initially, I was shocked at being mistaken for a cutlery pilferer masquerading as a finance genius and began to think of stabbing the chicken on the man's plate using the fork in question with such force as to send a timeless message about the limits of my tolerance for inconvenient questions about my character. As I weighed the impact of such an action on my only $1000/suit however, my calmer self prevailed and I realized the humour and novelty present in the situation, letting the unfounded comment pass with a haughty smile. I also realized that the man was flat wrong about the value of the cutlery.
While it is true that silver is more expensive than steel to buy, steel is a more valuable or sought after commodity at the moment; and as you and I are arguing about knives and forks, there is a $150 Billion buyout offer from BHP Billiton on the table for Rio Tinto. The No. 2 company for iron ore production (an input for steel) is proposing to buy No. 3. for $150Billion. This is of interest to us for three reasons. First, we have to bury the news about how I was almost caught stealing a fork in more meaningful commentary. Second, cheap steel is an essential input for a growing consumer and industrial economy such as China, which is doing everything possible to guarantee predictable supplies. Third, and this the key for me, is that this buyout may be a signal for the turning of the tide as far as the boundaries between the financial economy and real economy are concerned. The first two are beyond our scope for today, but let me explain the last one a bit more.
For at least a couple of decades now, the real economy has been overshadowed by the financial sector. It has been 'cooler' to speak about stocks, bonds, derivatives (although very few speak on this one without looking foolish) and interest rates than it has been to speak about grains, gold, rice and other real commodities. This has been a departure from most of human history, where it has not been the price of IBM stock that has been a topic of discussion at the dinner table, but the price of food. In essence, the financial superstructure that we have built over and above that of the real economy of trading in goods has skewed our attentions, priorities and expertise. As a sector, finance sits in an octopus-like repose atop the real, with its tentacles at each node of the economy, always present and always growing. It used to be that the role of finance was to intermediate capital between real sectors. More recently, it has become an economy in and of itself, with little or no connection to reality. What is worse is that people had begun to believe the hype and feel that way as well.
In my opinion, this is changing now in spectacular fashion. Governments, corporations and financial types are realizing something they should have known all along - that reality takes no prisoners and however much you believe that paper (cash / stocks / bonds) is worth something, it is actually the something in question that is worth more than paper. In the case that we are discussing here, Rio Tinto shareholders have flatly refused to accept $150Billion in cash and stock, for a company that hammers and processes rocks for a living. Around this transaction, governments and sovereign wealth funds are circling with untold amount of funds to support one side over the other. Gone are platitudes about the 'free-market' and the open economy. It is now about ensuring ownership of iron ore supplies; cordial relations and corporate commercial law be damned.
Even though one case does not a trend make, I encourage you to think of things using this framework of the real vs. the mere financial for a few months. I think that you will notice that human concerns such as food, gas, heating, cooling and even cutlery will be on people's minds a bit more. You will also notice that while powers-that-be are going to be speaking much about how they are bringing stability back into the financial system, you will notice that we are actually in the hunt to carve up the real world and it's treasures in obvious manner once again.
Once the pretence and confusion over what is truly at stake is gone, all sorts of magical things can happen. To make sense of these, you will have to keep an open mind and reinvigorate your curiosity. Most important of all, the next time you see cutlery, ask yourself whether you knew that hammering away at a steely rock could lead to so much fun.
MAP Canada is hosting an event for young businesses and people looking to take their businesses to next level on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that most of you will attend, I promise you both insight and even a few fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served, sans any silver forks. Please Register Here
Finance News:
1. This story is too good (and quintessentially Canadian). Around 300 grannies are forcing the bankers / brokers / lawyers involved in the credit crunch 'fix-up' to be more responsive to small investor needs ... read more here
2. Some things to consider if you are thinking of moving to a fee-based personal financial advisory model ... (this is not a condemnation, it is something to know) ... read more here
3. Even more high payouts for hedge fund managers ... Such are the wonders of leverage, it can make geniuses out of normal people that bet the 'right' way ... read more here
4. Where most global banking decisions are made ... read more here
Economic News:
1. Our old friend, Chief Economist at the CIBC, comes up with another 'analysis' on the strength of the Canadian Economy. It is not so much that his conclusion is wrong, but the sheer chutzpah of consistently shoddy reasoning is very endearing. Keep up the ... ummm ... the work! ... read more here
2. At the end of the day, all talk, economics and politics is about gas ... (and not the Pepto-Bismol kind) ... read more here
3. A dissenting view on the US$ ... Is this denial or the turning of the tide? ... read more here
4. The Economist (which strangely remains my favourite source of news) discovers that there is a food allocation problem in the world ... read more here
Islamic / Middle East / Emerging Markets:
1. Asian Policy-makers having a tough time with inflation. What's funny is that this time, they are importing inflation in the form of US$'s that simply don't buy what they used to anymore ... read more here
2. Recasting futures and commodity trading role as a price-signalling mechanism ... problem is that this trading also in fact interferes with the price. It is not just a signal ... read more here
3. Is there a role for gender in finance? A normative question and a descriptive (yet quite probing) article ... read more here
4. Middle-East money moving to Asia instead of the West ... read more here
Miscellaneous:
1. N/A
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