Hot issues / thoughts about markets and the economy

pi-egg.gif  Some thoughts about:

1) The future of financial analysts

2) Behavioral warfare and behavioral finance 
    (Peter Greenfinch, 28th March 2003)

What I see common to warfare and financial trading are some similarities of cognitive / emotional biases:

* Overconfidence, which makes for insufficient preparation and contingency plans,

* Commitment and loss aversion, which makes for not pulling out early enough when things go wrong,

* Mental anchoring, with the tendency to repeat the strategy of previous battles with similar weapons and methods, etc...

Of course any likeness with existing war of finance operations would be fortuitous ;-)

Maybe behavioral finance can find other similarities and thus help understand some *Murphy's law* phenomena occurring in wars, which might be puzzling if we don't integrate those biases in the analysis.

Maybe there is an opportunity to launch a new branch of knowledge:*behavioral-warfare*. Wonder if this kind of *strategy 501* course exists in military academies.

And there is the added complication that wars are often launched by political civilians and desk strategists who don't have the least idea of what kind of enemy fire to expect once you are on the battlefield, and what academic course the other side followed.

And, as if often said, any war plan becomes obsolete after the first day of the first battle.

3) Is finance undergoing a genetic mutation?
    (Peter Greenfinch, 4th October 2006)

Every day new financial instruments are born, new kind of funds are launched, new commodities becomes tradable, new types of sophisticated deals are taking place.

Private equity, hedge funds, derivatives of all kinds, LBOs, M&As are all over the place. leverage is everywhere.

Also, markets are global. Central banks finance huge amounts of other countries debts via the international bonds market.

The financial village is sprawling into a huge and complex megalopolis, or a huge communication network. One of the key clusters of the knowledge society that our world has become.

Is finance undergoing a genetic mutation? Or it is just a bubble?

Are new traits emerging that change the system into something new? You know, percolation, self-organization, disentropy, leading to something which combines at the same time more complexity and more organization?

Or is just exuberance? Leading to chaos?

Is it a boost for the economy? Is it a new dynamism coming from the financial sphere, which multiplies useful tools to allocate economic resources and improve safety? Or is it a source of new dangers, instabilities, uncertainties?

What are, as management consultants use to say, the SWOT (strengths, weaknesses, opportunities, threats) of the financial system nowadays?

What will finance be in 1 year, 5 years, 10 years? And practically, how can every one of us can get prepared to that future?

4) Chaotic information (subprime issue and others)
    (Peter Greenfinch, 19th August 2007)

Chaotic information brings distrust and uncertainty.

Presently, markets face a leaking and unsorted basket of subprime crisis, private equity overleveraging, and hedge / quant funds hardships. They get chaotic information about

- which overexposed banking and financial institutions could become final casualties,

- and which one will pick up the spoils after the battle.

This has two results:

- every institution suspect all others, which froze the interbank money market (I talked about the "liquidity doors" some time ago).

- every stock investor suspects everybody. The banking crisis has contaminated the stock market into a kind of wobbling semi-crash.

Some time might be needed before clarification about the real damages happens

and as a consequence before rough market volatility subsides.

Information and liquidity are the food and drink of finance.

The world of finance seems a bit starving those days. The pittance is not too good at the moment in the financial restaurant.

Even if some chefs (the central banks) are rushing to deliver some needed staples to the kitchen.

What seems lacking is the appetite.

Good period to test BF effects and choose thesis topics ;-))

5) Overconfidence in regulations (what the subprime crisis teaches)
(Peter Greenfinch, 21st September 2008)

The temptation, after a crisis like the subprime crisis, is to create new and stricter regulations
A paradox as one of the causes of the crisis was ...a regulation.

The capital adequacy rules for banks gave them the incentive to transfer loans, and above all dubious loans, from inside to outside their balance sheet.

They were repackaged as financial securities (what is called securitization) and sold. other banks usually.

This opened the door to subprime loans, miraculously transformed in apparently safe investment and meeting the solvency criteria so as not to deteriorate the balance sheet of banks.

A mountain of them was created, until people understood that their value was dubious and they became illiquid. Then the crisis broke out!

Some other "precaution practices" such as using rating agencies, and some accounting norms, such as the "mark to market" one contributed also.


How to avoid such crises in the future? By regulating those financial instruments? By adapting the capital adequacy rules?

Who can really think that regulating the cause of a past anomaly will avoid the next anomaly, which can be totally different?

When one reason of the crisis was the loophole / moral hazard created by a regulation?

A hazard all the financial authorities were blind to?


What to do?

The solution can only be to avoid such blindness.

It means to have smarter watchdogs who anticipate what new forms the biases would take, who know perfectly the system, in other world ...the best professionals. They should be highly paid as they would have to anticipate and understand what the other highly paid professionals are inventing to distort the system.

They should be high level professionals themselves, with experience of the game, and full authority, as real Caesars. And not low paid bureaucrats who are happy to see that the rules are apparently not broken, or when they understand the biased game and have the gut to intervene and try to stop it, do not have the power to do so.

This is a constitutional matter, known since Montesquieu: 

To control a power, in this case the power of markets, cannot just be a matter of regulating it.

It is also to build a democratic counter-power.


6) After the subprime crisis, what about a second crisis in the making, against which no preparation has been made?

See my May 2009 knol: Toxic debt and subprime crisis

pi-egg.gif  Some "Peter Greenfinch" Knols about current issues

          see also brouillons divers

pi-egg.gif  Some "Pgreen" Yahoo answers

Are there really any good trading systems ?

Usually a trading system that has worked well in a given period and situation becomes a lousy one in another period or situation.

How to predict a country's equity market performance?

There are more and more global companies which prospects are not linked to a specific country. Also markets around the world tend to move in sync, although at different speeds.

This said, you are quite right that a country GDP growth is a key indicator. This makes that emerging countries see usually better market performance than "mature" countries.

On the other hand it is sometimes difficult to get reliable information on their companies and there is a smaller choice of companies listed in their stock market. That makes a specific market risk (high volatility).

Morality : diversify geographically !

Was the Euro a good or bad idea?

It was a good idea

It avoided a lot of monetary instability and speculation between European countries and it gave price visibility for trade between them.

Also, it allowed for lower interest rates.

Another thing is that the Euro was managed in a more cautious and responsible way than the US dollar, which is less and less trusted by markets and investors.

Of course it makes things also easier for travelers, among them commuters who live at a country border. Distances in Europe are rather short and to change currency and to carry different purses when crossing 2 or 3 countries in a day by car was really ridiculous.

How to get rich?

How can I invest into share trading?

Start by considering that share investing is a way to understand economics and business, and also social psychology. To make (or lose) money is, at least at the start, a side effect. Therefore:

* Go see your bank as suggested by other contributors

* But don' commit too much, the goal of many banks is more to sell than to help.

* Invest little at the start, just to get practical experience, consider yourself as an apprentice

* But read books and mags on the topics to understand better what happens,

* See truly educational websites, not those that give you tips. You will easily make the difference. Start obviously with Yahoo finance

At least you will get, as a first reward, a knowledge about

* how the surrounding world works and evolves (economics and finance play a key part in that),

* what makes people tick, in money related matters and beyond.

Would Ludwig von Mises be considered as a Keynesian?

Keynes, who was a smart guy more than a dogmatic one, had many different "theories" (Churchill said that he never gave one advice but always several different ones)

Also, its followers, or pseudo-followers who like to be called "Keynesian's", have many reductive or far-fetched interpretations of his theories.

As everything goes, any other economist, whatever its own theories, can be said to have a few microscopic common genes with good old John Maynard.

Certainly JMK, more interventionist, and LVM (Ludwig von Mises), more anti-state, have rather distant DNA. but you might find some ancient parentship, going back to Bernoulli and his utility theory.

Luckily, JMK, does not care, as he rests in peace. Mises neither, I guess ;-).


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