Watching Facebook 'co-founder' Mark Zuckerberg last week stand and explain to an audience his company's latest software developments at their annual f8 conference (in an odd attempt to imitate Steve Jobs unveiling the next iPhone), a thought came to my mind: has the purpose of Facebook changed so much from the original intent that its best years are now behind it?
To try and answer this question, we need to go back to understand why Facebook came about in the first place.
Growing up in the early 1990s, I was part of a generation yearning for a greater connection with the world outside the four walls of my bedroom. The difference between my generation and that preceding it was that now we finally had the tools (i.e. the Internet) to actually do something about it.
Now in an era of ubiquitous Internet, social media has become the 'great enabler' to people young and old; it has allowed us to interact with people in ways that were previously impossible.
To what extent the introduction of social media websites, especially Facebook, has on balance made the world a better place, would seem a moot point. Surely the opportunity to make more connections and spread our personal network across the globe can only make us better off?
In theory yes, but in practice, maybe not.
For social media (the way of meeting and interacting with other people) to be based 'online' and not 'offline', a fundamental question needs to be answered: how much can you trust someone who you have never met in person?
Ask anyone with more experience offline and you get a frank reply: not that much. Certainly not enough to tell them your entire life story. How someone can effectively make this judgment themselves after spending most of their childhood online is a troubling question.
However, there is one potentially self-correcting mechanism in place: people, especially young people, get bored. They want to try new things. After a while, no matter how much fun anything is, everyone wants to try something new. This is why Facebook is trying to change into something else, to keep up with the times.
Unfortunately, this need to adapt to the changing needs of its consumers may ultimately sow the seeds of its own demise.
For Facebook to continue to grow at the breakneck speed it has done so far, it will have to give people the opportunity to do something new. Something different. The latest innovation offers users an easy way to show people everything about their life in one continuous page. An open book, if you will.
Does anyone see a problem with somebody showing everything about themselves to the rest of the world? If you had asked someone this question growing up in the 1990s (or any decade before for that matter), they might look at you in a slightly odd way. Why would I want to do something like that??
Why indeed.
After giving anyone and everyone the opportunity to meet and interact with whoever, however they like, Facebook now has to go a step further in the quest to keep consumers interested. Unfortunately, this may be a step too far for some and may signal a point in time when the seemingly neverending growth of Facebook may be past its peak. Logging off is not that hard to do.
Friday, September 30, 2011
Thursday, April 09, 2009
The idle investor
I've recently started reading a book called How to be Idle. The title should be enough to ensure its success as more and more people have unemployment thrust upon them.
However, the main idea behind the book - that doing less is more - is extremely pertinent for anyone now thinking of dipping their toe in the stock market.
Over eight weeks ago I recommended buying stocks and selling bonds. It just so happens the US stock market is at exactly the same level today as it was then.
In between the S&P 500 fell by 20% and then rose by 25% (unfortunate rule of investing: things need to rise by more than they fall to get back to where they started).
If you were caught out by this sudden fall and rapid recovery in the stock market, don't worry, you weren't alone.
In fact you were in very good company indeed.
Most, if not all, of the the greatest living (and still active) investors have remained confident throughout the past 18 months, and especially at the end of last year, that the stock market was past the worst.
While most of us are fed up watching the stock market fall (and the rest just don't want to look at the stock market at all) there is something very interesting happening at the moment: a turning point.
Turning points are the hardest things to predict and almost impossible to identify in real time. This is why the current situation is so favourable to the investor who is willing to wait. In other words, be an idle investor.
By doing less, you will earn more.
Find a market you like and leave your money there for a year.
You will be amazed at how productive doing nothing can become.
However, the main idea behind the book - that doing less is more - is extremely pertinent for anyone now thinking of dipping their toe in the stock market.
Over eight weeks ago I recommended buying stocks and selling bonds. It just so happens the US stock market is at exactly the same level today as it was then.
In between the S&P 500 fell by 20% and then rose by 25% (unfortunate rule of investing: things need to rise by more than they fall to get back to where they started).
If you were caught out by this sudden fall and rapid recovery in the stock market, don't worry, you weren't alone.
In fact you were in very good company indeed.
Most, if not all, of the the greatest living (and still active) investors have remained confident throughout the past 18 months, and especially at the end of last year, that the stock market was past the worst.
While most of us are fed up watching the stock market fall (and the rest just don't want to look at the stock market at all) there is something very interesting happening at the moment: a turning point.
Turning points are the hardest things to predict and almost impossible to identify in real time. This is why the current situation is so favourable to the investor who is willing to wait. In other words, be an idle investor.
By doing less, you will earn more.
Find a market you like and leave your money there for a year.
You will be amazed at how productive doing nothing can become.
Wednesday, February 04, 2009
Investment recommendation: buy stocks, sell bonds
Whenever you see anyone on TV or in the press offering free investment advice, three questions should come to your mind:
1) What are they selling?
2) What is their past performance?
3) Why are they giving away free advice?
Firstly, I am not selling anything. I was working for an investment bank but now have enough time on my hands to be able to sit and home and write this blog, without any fear of conflict of interest between myself and my employer.
Secondly, I have not invested my own money in any financial market for months. Since last summer I have been invested in either cash or bonds and most recently, entirely in cash.
Thirdly, I am giving this advice away for free as I have nothing to lose in doing so and everything to gain, in terms of reputation.
************************************
There are a number of reasons why now is the best time to buy equities and sell government bonds. Apart from the obvious fact that this is what the current direction of both markets are suggesting (the most common reason why people recommend what they do), there are a number of very compelling reasons for doing so:
- We now know that global equity markets halved in value months before the start of the global recession.
- Global equity markets always rise before the end of a recession
- As global equity markets become more and more attractive, global bond markets will become less and less attractive.
- The strength of every downward trend is always followed by an upward trend that is equally as strong.
The only way is up (in the long-run) for equities...
It is important not to underestimate the length and depth of the sell-off in global markets for risk. This has accompanied a process of deleveraging that has recently taken the most visual form: job cuts.
Unemployment is the last resort for any company and almost every company in the world has been forced into taking this decision.
Borrowing money from the government is one option, drawing down inventory is another, but once workers are made redundant either they never come back or new workers require training to do the job. This is a very expensive process which is weighed against the benefit of saving money from not paying wages. This process cannot and will not last forever.
************************************
Before any good news arrives on the economy, equity markets will have to rise.
Time is running out before the appetite for risk returns.
The fact that the "safety" of government bonds has disappeared makes risky assets look the most attractive in a decade (and more importantly, than throughout this entire financial crisis).
The question of whether interest rates are low enough and when a strong recovery in equity markets will take place this year is less important for long-term investors. The most important decision is that something is done sooner rather than too late.
1) What are they selling?
2) What is their past performance?
3) Why are they giving away free advice?
Firstly, I am not selling anything. I was working for an investment bank but now have enough time on my hands to be able to sit and home and write this blog, without any fear of conflict of interest between myself and my employer.
Secondly, I have not invested my own money in any financial market for months. Since last summer I have been invested in either cash or bonds and most recently, entirely in cash.
Thirdly, I am giving this advice away for free as I have nothing to lose in doing so and everything to gain, in terms of reputation.
************************************
There are a number of reasons why now is the best time to buy equities and sell government bonds. Apart from the obvious fact that this is what the current direction of both markets are suggesting (the most common reason why people recommend what they do), there are a number of very compelling reasons for doing so:
- We now know that global equity markets halved in value months before the start of the global recession.
- Global equity markets always rise before the end of a recession
- As global equity markets become more and more attractive, global bond markets will become less and less attractive.
- The strength of every downward trend is always followed by an upward trend that is equally as strong.
The only way is up (in the long-run) for equities...
Government bond yields are unlikely to go much lower
It is important not to underestimate the length and depth of the sell-off in global markets for risk. This has accompanied a process of deleveraging that has recently taken the most visual form: job cuts.
Unemployment is the last resort for any company and almost every company in the world has been forced into taking this decision.
Borrowing money from the government is one option, drawing down inventory is another, but once workers are made redundant either they never come back or new workers require training to do the job. This is a very expensive process which is weighed against the benefit of saving money from not paying wages. This process cannot and will not last forever.
************************************
Before any good news arrives on the economy, equity markets will have to rise.
Time is running out before the appetite for risk returns.
The fact that the "safety" of government bonds has disappeared makes risky assets look the most attractive in a decade (and more importantly, than throughout this entire financial crisis).
The question of whether interest rates are low enough and when a strong recovery in equity markets will take place this year is less important for long-term investors. The most important decision is that something is done sooner rather than too late.
Tuesday, January 20, 2009
Barak Obama's alternate inauguration speech
My fellow citizens:
Thank you so much for coming out today, many of you waiting for hours in the freezing cold, to hear me deliver this, the forty-forth Presidential inauguration speech in American history.
Today is a very special day for many of you, especially those with African-American families. With you, I share in what has been a most historic of victories. With so many, including myself four years ago, not expecting me to even run for office, the fact that I stand here today ready to take on the most powerful job in the world must seem like a fairytale.
And indeed it is a story that will be told to children up and down this great land for generations to come. How one man stood up to all those who were ready to do everything in their power to prevent him from achieving his dream. It should, and will, inspire many to do the same in future.
My life is a shining example of why you should never stop working to achieve you dreams. Dreams are there to be realised one day, not to wonder what it might be like if they came true. Dreams can come true. Look at me, standing here in front of millions of people and billions watching on their televisions at home all over the world. Hello to everyone out there. We are here and we are ready to do business with you. AMERICA IS OPEN FOR BUSINESS!
Now, many of you may be asking, what do I have planned for the coming weeks, months and years. Well, let me tell you first off, everything is on the table. I will rule nothing out. The only thing I will insist on is that anything we do is affordable.
These words may not sound inspiring but they will make a difference to this country in the long run. Yes, my fellow Americans, the next few years will be painful, they will involve tremendous sacrifice. Jimmy may have to wait for his new train set and Sally will not be going to summer camp this year. And Bob, you will have to see about that new car you've had your eye on for months. It's all gotta be put aside for now. From now we will be prudent!
Can we prudent with the public finances? YES WE CAN!
When we start to learn about what it means to live within our means, then it will be possible to re-build this great nation upon the value which made it so great: innnovation, education and affordable healthcare!
I think you will come to understand that government finances are important, just as your own finances are important. If you want to borrow money to buy something, then from now on you will have to borrow directly from government-owned banks!
This is an exciting time for our country, the country we all hold dear. We will not be indebted to the Chinese for the rest of our lives and depend upon the Saudi's to ship us oil each day. Oh no, those days are numbered, and from today I will make it one of my (many) top priorities to see to it that we will not make the same mistakes that so many of my predecessors have made. BELIEVE IT OR NOT, IT WILL BE DIFFERENT THIS TIME!!
I bless you and bless America.
Thank you so much for coming out today, many of you waiting for hours in the freezing cold, to hear me deliver this, the forty-forth Presidential inauguration speech in American history.
Today is a very special day for many of you, especially those with African-American families. With you, I share in what has been a most historic of victories. With so many, including myself four years ago, not expecting me to even run for office, the fact that I stand here today ready to take on the most powerful job in the world must seem like a fairytale.
And indeed it is a story that will be told to children up and down this great land for generations to come. How one man stood up to all those who were ready to do everything in their power to prevent him from achieving his dream. It should, and will, inspire many to do the same in future.
My life is a shining example of why you should never stop working to achieve you dreams. Dreams are there to be realised one day, not to wonder what it might be like if they came true. Dreams can come true. Look at me, standing here in front of millions of people and billions watching on their televisions at home all over the world. Hello to everyone out there. We are here and we are ready to do business with you. AMERICA IS OPEN FOR BUSINESS!
Now, many of you may be asking, what do I have planned for the coming weeks, months and years. Well, let me tell you first off, everything is on the table. I will rule nothing out. The only thing I will insist on is that anything we do is affordable.
These words may not sound inspiring but they will make a difference to this country in the long run. Yes, my fellow Americans, the next few years will be painful, they will involve tremendous sacrifice. Jimmy may have to wait for his new train set and Sally will not be going to summer camp this year. And Bob, you will have to see about that new car you've had your eye on for months. It's all gotta be put aside for now. From now we will be prudent!
Can we prudent with the public finances? YES WE CAN!
When we start to learn about what it means to live within our means, then it will be possible to re-build this great nation upon the value which made it so great: innnovation, education and affordable healthcare!
I think you will come to understand that government finances are important, just as your own finances are important. If you want to borrow money to buy something, then from now on you will have to borrow directly from government-owned banks!
This is an exciting time for our country, the country we all hold dear. We will not be indebted to the Chinese for the rest of our lives and depend upon the Saudi's to ship us oil each day. Oh no, those days are numbered, and from today I will make it one of my (many) top priorities to see to it that we will not make the same mistakes that so many of my predecessors have made. BELIEVE IT OR NOT, IT WILL BE DIFFERENT THIS TIME!!
I bless you and bless America.
*************************************
My Worldle:
Barak Obama's wordle:
Monday, January 12, 2009
Open letter to the Financial Times
Even though the Financial Times has seen fit not to publish my letter, sent (e-mailed) on January 5th, the beauty of the internet means that I get to post it on my blog whenever I want!
Below is the original letter.
(N.B. Since Janaury 5th, the US stock market has fallen by 7%.)
**********************************
From Mr. Wesley Fogel
Sir, Anthony Bolton appears to have had his "Buy American, I am" moment in his column last weekend "How to spot the market’s turning point" (January 3).
Just as fellow-veteran investor Warren Buffett, who endorsed buying American stocks in October only to see the S&P 500 fall a further 20%, Mr. Bolton still has faith in his ability to do what nobody else can: identify a turning point in the market.
However, the three factors which Mr. Bolton uses to determine such a turning point and the one he does not should reveal why his advice will prove at best unhelpful and at worst damaging to investors in 2009. Contrary to his argument, it will be improved visibility on the state of the economy and not the performance of markets relative to the long run or some other technical factors that will help define a turning point. Whilst it may seem foolhardy to challenge the views of either Mr. Bolton or Mr. Buffett, neither gentleman would be at odds with the principle that past performance is no indication of future returns. Now is not the time to see who is right and who is wrong, just who is solvent. The same rules apply to them as they do to us.
Wesley Fogel,London SE10, UK
Below is the original letter.
(N.B. Since Janaury 5th, the US stock market has fallen by 7%.)
**********************************
From Mr. Wesley Fogel
Sir, Anthony Bolton appears to have had his "Buy American, I am" moment in his column last weekend "How to spot the market’s turning point" (January 3).
Just as fellow-veteran investor Warren Buffett, who endorsed buying American stocks in October only to see the S&P 500 fall a further 20%, Mr. Bolton still has faith in his ability to do what nobody else can: identify a turning point in the market.
However, the three factors which Mr. Bolton uses to determine such a turning point and the one he does not should reveal why his advice will prove at best unhelpful and at worst damaging to investors in 2009. Contrary to his argument, it will be improved visibility on the state of the economy and not the performance of markets relative to the long run or some other technical factors that will help define a turning point. Whilst it may seem foolhardy to challenge the views of either Mr. Bolton or Mr. Buffett, neither gentleman would be at odds with the principle that past performance is no indication of future returns. Now is not the time to see who is right and who is wrong, just who is solvent. The same rules apply to them as they do to us.
Wesley Fogel,London SE10, UK
Monday, December 15, 2008
Sterling goes Loonie
It's been another year to forget for Queen Elizabeth II.
Not only has she had to rein in extravagances as the family budget was squeezed but her face has been on the front of two currencies that have massively depreciated, namely the British pound and the Canadian dollar (commonly called Loonie).
But there is more in common between Canada and the UK than a monarch.
Both countries also export large amounts of crude oil. This has resulted in each currency closely tracking the price of oil as well as each other.
The close correlation between the Loonie and Sterling is an inconvenient fact for those who believe that government failure is at the heart of the pound's weakness.
To guage whether the collapse of the pound or the Loonie will continue, it would be worthwhile to monitor the direction of both over the coming days and weeks. Should there be any deviation between the two, it might signal a move in either direction.
Of course, you could just look at the price of oil, since that will determine where both are going. My guess is up, but maybe not immediately.
Either way, the Queen should have a better year in 2009.
Not only has she had to rein in extravagances as the family budget was squeezed but her face has been on the front of two currencies that have massively depreciated, namely the British pound and the Canadian dollar (commonly called Loonie).
But there is more in common between Canada and the UK than a monarch.
Both countries also export large amounts of crude oil. This has resulted in each currency closely tracking the price of oil as well as each other.
The close correlation between the Loonie and Sterling is an inconvenient fact for those who believe that government failure is at the heart of the pound's weakness.
To guage whether the collapse of the pound or the Loonie will continue, it would be worthwhile to monitor the direction of both over the coming days and weeks. Should there be any deviation between the two, it might signal a move in either direction.
Of course, you could just look at the price of oil, since that will determine where both are going. My guess is up, but maybe not immediately.
Either way, the Queen should have a better year in 2009.
Monday, November 17, 2008
Greenspan's monster eats Goldman's BRICs
The business cycle, as we have so vociferously been reminded, is not dead.
Not only is it alive, but it's now bigger and stronger than ever!
For over a decade, it had become conventional wisdom to assume that rapid growth among the developing economies of, inter alia, Brazil, Russia, China and India (or BRICs, as Goldman Sachs coined them) had become a permanent feature of the global landscape and would be strong enough to compensate for any slowdown that might occur in advanced economies.
Not only would a slowdown in, say, Germany or the US be mitigated by growth overseas in India or Brazil but that such a period would bring with it a redistribution of wealth from rich to poor (i.e. if one group of economies is growing while others are shrinking then a rebalancing of wealth would follow).
And up until the middle of this year everything was going according to plan.
Then oil stopped rising and everything went into reverse, especially among the BRICs.
Two questions now arise (to which you will struggle to find anyone capable of providing a clear and convincing answer):
1) Why did oil prices rise to $150/barrel?
2) Why did oil prices then more than halve in four months?
A third question, to which it's always fun to see people attempt to provide an answer which they can believe:
3) Where will oil prices go from here?
While it would be tempting to try and predict where oil prices will go or explain why they have risen and fallen in such dramatic fashion, it's more important to realise what just happened in the context of oil's gyrations, since much of this backdrop helps to explain why movements in oil and other financial assets follow the paths they do. This will also explain the meaning that's hiding behind the title of this post.
****************************
In 2001, Goldman Sachs economist Jim O'Neill predicted that the BRICs would be among the world's most dominant economies by 2050.
This ambitious prognostication helped create one of the largest proverbial bandwagons in history.
The number of people searching for the term "BRIC" on Google has grown every year. With a growing intellectual curiosity came a growing financial interest. The smart money started going South and East.
Then the stupid money followed.
At the same time as money was flowing into emerging markets, the US was facing the prospect of deflation (falling prices everywhere), something it hadn't seen since the Great Depression.
As now Fed Chairman Ben Bernanke, said at the time, interest rates could and should fall more rapidly than in normal times to avoid such a thing from happening.
And that's exaclty what they did. Until mid-2004, US interest rates remained at 1%.
What then Fed Chairman Alan Greenspan didn't realise what that investors would use the money they could borrow so cheaply to invest in emerging markets, which Jim O' Neil had predicted would offer sustained economic growth for at least the next generation.
Greenspan was creating a monster, and it's color would be green.
****************************
With the volatility we are now seeing in financial markets it has become a fruitless endevour to bet on the next move, up or down.
However, it's important to not lose sight of the fact that we are seeing something no different to the bursting of any bubble gone before.
What caused the bubble in oil and emerging markets was a combination of a low cost of borrowing and gullible investors.
While all bubbles teach a different lesson, they all result in the same thing: the search for a new bubble. But you can't burst the same bubble twice. And oil prices and emerging markets have both now clearly burst.
Only time will tell what Bernanke's monster will destroy...
Not only is it alive, but it's now bigger and stronger than ever!
For over a decade, it had become conventional wisdom to assume that rapid growth among the developing economies of, inter alia, Brazil, Russia, China and India (or BRICs, as Goldman Sachs coined them) had become a permanent feature of the global landscape and would be strong enough to compensate for any slowdown that might occur in advanced economies.
Not only would a slowdown in, say, Germany or the US be mitigated by growth overseas in India or Brazil but that such a period would bring with it a redistribution of wealth from rich to poor (i.e. if one group of economies is growing while others are shrinking then a rebalancing of wealth would follow).
And up until the middle of this year everything was going according to plan.
Then oil stopped rising and everything went into reverse, especially among the BRICs.
Two questions now arise (to which you will struggle to find anyone capable of providing a clear and convincing answer):
1) Why did oil prices rise to $150/barrel?
2) Why did oil prices then more than halve in four months?
A third question, to which it's always fun to see people attempt to provide an answer which they can believe:
3) Where will oil prices go from here?
While it would be tempting to try and predict where oil prices will go or explain why they have risen and fallen in such dramatic fashion, it's more important to realise what just happened in the context of oil's gyrations, since much of this backdrop helps to explain why movements in oil and other financial assets follow the paths they do. This will also explain the meaning that's hiding behind the title of this post.
****************************
In 2001, Goldman Sachs economist Jim O'Neill predicted that the BRICs would be among the world's most dominant economies by 2050.
This ambitious prognostication helped create one of the largest proverbial bandwagons in history.
The number of people searching for the term "BRIC" on Google has grown every year. With a growing intellectual curiosity came a growing financial interest. The smart money started going South and East.
Then the stupid money followed.
At the same time as money was flowing into emerging markets, the US was facing the prospect of deflation (falling prices everywhere), something it hadn't seen since the Great Depression.
As now Fed Chairman Ben Bernanke, said at the time, interest rates could and should fall more rapidly than in normal times to avoid such a thing from happening.
And that's exaclty what they did. Until mid-2004, US interest rates remained at 1%.
What then Fed Chairman Alan Greenspan didn't realise what that investors would use the money they could borrow so cheaply to invest in emerging markets, which Jim O' Neil had predicted would offer sustained economic growth for at least the next generation.
Greenspan was creating a monster, and it's color would be green.
****************************
With the volatility we are now seeing in financial markets it has become a fruitless endevour to bet on the next move, up or down.
However, it's important to not lose sight of the fact that we are seeing something no different to the bursting of any bubble gone before.
What caused the bubble in oil and emerging markets was a combination of a low cost of borrowing and gullible investors.
While all bubbles teach a different lesson, they all result in the same thing: the search for a new bubble. But you can't burst the same bubble twice. And oil prices and emerging markets have both now clearly burst.
Only time will tell what Bernanke's monster will destroy...
Tuesday, November 04, 2008
Be careful what you hope for
Hope can quickly turn into hopelessness.
The very act of hope brings with it an expectation that things can and will get better.
Each passing day that hope fails to deliver is one step closer to losing hope.
Can President Obama, with his promise of hope, make things better?
If it was 1982, perhaps. If it was 1992, perhaps. If it was 2002, perhaps.
It isn't. It's 2008 and things can and will only get worse.
Unfortunately, the situation will get worse for precisely the people to whom Barak Obama has offered his special brand of hope: the black, working class.
**********************
Obama's key pledge to the US electorate was to cut taxes for 95% of working Americans.
The key word here is working.
US jobs are currently being lost at a faster rate each month and are likely to continue to fall faster.
The greatest cause of poverty in any economy is not low wages or high taxes but unemployment.
The current environment is particularly severe as those people most at risk of losing their jobs have already lost, or are very likely to, lose their homes too.
**********************
In the coming months what we could see is the type of humanitarian disaster created by Hurricane Katrina but on a national (indeed international) scale.
How bad would an African-American President look if this occured on US soil?
Bad enough to lose the election in 2012.
The only question remaining is which lucky politician will inherit a situation in 2012 similar to that in 1982, 1992 or 2002? That's someone who Barak Obama can only hope to be.
Timing is everything after all...
The very act of hope brings with it an expectation that things can and will get better.
Each passing day that hope fails to deliver is one step closer to losing hope.
Can President Obama, with his promise of hope, make things better?
If it was 1982, perhaps. If it was 1992, perhaps. If it was 2002, perhaps.
It isn't. It's 2008 and things can and will only get worse.
Unfortunately, the situation will get worse for precisely the people to whom Barak Obama has offered his special brand of hope: the black, working class.
**********************
Obama's key pledge to the US electorate was to cut taxes for 95% of working Americans.
The key word here is working.
US jobs are currently being lost at a faster rate each month and are likely to continue to fall faster.
The greatest cause of poverty in any economy is not low wages or high taxes but unemployment.
The current environment is particularly severe as those people most at risk of losing their jobs have already lost, or are very likely to, lose their homes too.
**********************
In the coming months what we could see is the type of humanitarian disaster created by Hurricane Katrina but on a national (indeed international) scale.
How bad would an African-American President look if this occured on US soil?
Bad enough to lose the election in 2012.
The only question remaining is which lucky politician will inherit a situation in 2012 similar to that in 1982, 1992 or 2002? That's someone who Barak Obama can only hope to be.
Timing is everything after all...
Monday, November 03, 2008
Prologue of a crash
It was over 18 months ago that I made the following prediction:
"The US economic cycle has reached the stage where a sharp slowdown is not only inevitable but likely. While the timing of such a slowdown remains uncertain, it is likely that any investor who remains heavily exposed to equities for the next 2-3 years is unlikely to see any gains over the period."
On that day (April 9th 2007) the S&P 500 closed at 1450. The market then rose by a further 7% to close at 1550 on July 9th.
It then fell and fell and fell.
The market's most recent low point of 850 on October 27th was 40% below where it was when I made my prediction last year and 45% below the high point on July 9th.
You're welcome.
*****************************
If history were the perfect guide then we would all be justified in piling everything we own into the equity market.
Some professional investors, like Warren Buffett, believe that American companies offer the most compelling valuation at this most difficult of times.
Of course, with global equity markets so highly correlated it shouldn't really matter which one you pick; they all go in the same direction sooner or later!
Unfortunately, there is only one direction in which equity markets will be going in the foreseeable future: down. Why?
For the same reasons I predicted last year and more, namely:
1) Uncertainty about how much lower US interest rates will go;
2) Uncertainty about how deep and how long the US (and global) recession will last;
3) Uncertainty about how much further the US housing market will deteriorate.
If there is one thing that financial markets hate it is uncertainty and the longer it takes for these issues to be resolved the harder it will be to justify rising equity markets.
*****************************
Willem Buiter, former member the Bank of England's Monetery Policy Committee and London School of Economics professor was quoted in today's Financial Times as saying of people who for months have been pessimistic about the economy:
"Hindsight is useless. One has to look at the information available at the time and the arguments used at the time."
I guess it might be helpful if he read this blog and my posting 18 months ago.
Watch this space, Willem!
"The US economic cycle has reached the stage where a sharp slowdown is not only inevitable but likely. While the timing of such a slowdown remains uncertain, it is likely that any investor who remains heavily exposed to equities for the next 2-3 years is unlikely to see any gains over the period."
On that day (April 9th 2007) the S&P 500 closed at 1450. The market then rose by a further 7% to close at 1550 on July 9th.
It then fell and fell and fell.
The market's most recent low point of 850 on October 27th was 40% below where it was when I made my prediction last year and 45% below the high point on July 9th.
You're welcome.
*****************************
If history were the perfect guide then we would all be justified in piling everything we own into the equity market.
Some professional investors, like Warren Buffett, believe that American companies offer the most compelling valuation at this most difficult of times.
Of course, with global equity markets so highly correlated it shouldn't really matter which one you pick; they all go in the same direction sooner or later!
Unfortunately, there is only one direction in which equity markets will be going in the foreseeable future: down. Why?
For the same reasons I predicted last year and more, namely:
1) Uncertainty about how much lower US interest rates will go;
2) Uncertainty about how deep and how long the US (and global) recession will last;
3) Uncertainty about how much further the US housing market will deteriorate.
If there is one thing that financial markets hate it is uncertainty and the longer it takes for these issues to be resolved the harder it will be to justify rising equity markets.
*****************************
Willem Buiter, former member the Bank of England's Monetery Policy Committee and London School of Economics professor was quoted in today's Financial Times as saying of people who for months have been pessimistic about the economy:
"Hindsight is useless. One has to look at the information available at the time and the arguments used at the time."
I guess it might be helpful if he read this blog and my posting 18 months ago.
Watch this space, Willem!
Tuesday, October 28, 2008
A crisis of biblical proportions!
One group of people who should do very well as a result of the current financial crisis are people who write finance textbooks.
While there's been no shortage of new books/blogs/news stories, attempting to explain the ubiquitous "credit crunch" in plain English, entire courses at universities around the world will need to be re-written.
Of course, that's assuming there will still be a demand for studying courses in finance. After all, what incentive do you currently have for studying a course with no career opportunities for the next year at least? Answer: not much.
But finance is more than just a course at university, as we are discovering each day. It actually matters to the lives of everyone.
Some of the people who graduated with a PhD in financial engineering decided to apply their skills in mathematics and computing to come up with a "new and innovative" ways to invest in financial markets. The result was a something like the vision that Joseph had of Egypt: seven years of plenty, followed by seven years of famine.
Perhaps clinging to religion might not seem like such a bad idea after all...
While there's been no shortage of new books/blogs/news stories, attempting to explain the ubiquitous "credit crunch" in plain English, entire courses at universities around the world will need to be re-written.
Of course, that's assuming there will still be a demand for studying courses in finance. After all, what incentive do you currently have for studying a course with no career opportunities for the next year at least? Answer: not much.
But finance is more than just a course at university, as we are discovering each day. It actually matters to the lives of everyone.
Some of the people who graduated with a PhD in financial engineering decided to apply their skills in mathematics and computing to come up with a "new and innovative" ways to invest in financial markets. The result was a something like the vision that Joseph had of Egypt: seven years of plenty, followed by seven years of famine.
Perhaps clinging to religion might not seem like such a bad idea after all...
Sunday, August 03, 2008
Dark Knight, false dawn?
To quote from the latest Batman movie:
"The night is always darkest before the dawn."
And it was getting pretty dark out there for the movie business. It's been over ten years since the classic Titanic managed to get every man, woman and child excited enough to pay to see a movie at the cinema.
And now it's The Dark Knight that could pick up the mantle of being the most lucrative movie ever made.
But how, I hear you ask, can this be in an age of downloads and 500-inch digital plasma home entertainment?
Well, just as General Motors is pulling out all the stops to compete with Nissan and Toyota, the movie companies are having to put down more of their own money to ensure enough bums on seats and not couches.
But just as it may be a matter of time before people decide that buying a GM ve-hicle is just not worth it anymore, despite however many bells and whistles are added, people may eventually decide that paying to see something at the cinema, no matter how dazzling, is just not worth it either.
*************************
Make no mistake, Warner Brothers took a huge risk with the DK. At a time when everyone is paying more at the pump, leaving less in their wallets and who-knows-what happening to their home, spending over $100 million to produce a movie is enough to keep anyone up at night.
But for now, the risk paid off, right?
Well, not quite.
The Dark Knight was more than the latest blockbuster. It was an opportunity to get people back into the cinema and remind them of the value of paying to see something rather than stay at home.
And was this enough to get people coming back for more?
I don't think so.
Two unfortunate reasons are:
1) the best actor in the film won't be in any movies ever again
but more importantly.
2) the story was ridiculously bad (for your reference, my opinion of a good story can be found in anything done by Pixar, which, yes, can be appreciated just as much on an i-phone as it can in an i-max cinema).
*************************
Movie companies are always weighing up the risk of producing an expensive movie with the likelihood that fans are willing to make the expense of going to see it.
These days, that risk has become harder to justify, hence the recent lack of blockbusting material.
Perhaps in 10 years from now, the next big production will be targeted at the only audience that will matter: the home audience.
"The night is always darkest before the dawn."
And it was getting pretty dark out there for the movie business. It's been over ten years since the classic Titanic managed to get every man, woman and child excited enough to pay to see a movie at the cinema.
And now it's The Dark Knight that could pick up the mantle of being the most lucrative movie ever made.
But how, I hear you ask, can this be in an age of downloads and 500-inch digital plasma home entertainment?
Well, just as General Motors is pulling out all the stops to compete with Nissan and Toyota, the movie companies are having to put down more of their own money to ensure enough bums on seats and not couches.
But just as it may be a matter of time before people decide that buying a GM ve-hicle is just not worth it anymore, despite however many bells and whistles are added, people may eventually decide that paying to see something at the cinema, no matter how dazzling, is just not worth it either.
*************************
Make no mistake, Warner Brothers took a huge risk with the DK. At a time when everyone is paying more at the pump, leaving less in their wallets and who-knows-what happening to their home, spending over $100 million to produce a movie is enough to keep anyone up at night.
But for now, the risk paid off, right?
Well, not quite.
The Dark Knight was more than the latest blockbuster. It was an opportunity to get people back into the cinema and remind them of the value of paying to see something rather than stay at home.
And was this enough to get people coming back for more?
I don't think so.
Two unfortunate reasons are:
1) the best actor in the film won't be in any movies ever again
but more importantly.
2) the story was ridiculously bad (for your reference, my opinion of a good story can be found in anything done by Pixar, which, yes, can be appreciated just as much on an i-phone as it can in an i-max cinema).
*************************
Movie companies are always weighing up the risk of producing an expensive movie with the likelihood that fans are willing to make the expense of going to see it.
These days, that risk has become harder to justify, hence the recent lack of blockbusting material.
Perhaps in 10 years from now, the next big production will be targeted at the only audience that will matter: the home audience.
Thursday, February 21, 2008
Minority report
The race to become US President has gone from the most exciting prospect for change in America to the same old politics.
But how is this possible? Isn't Barak Obama just the "change" the country needs?
He is. Unfortunately, the majority of voting Americans won't agree that someone from a minority group can lead the way.
With John Edwards now eliminated, two truly divisive candidates remain, neither of whom can convince enough voters to 'buy in' to their view of the world.
America's nightmare continues.
***************************
Last year I predicted that John Edwards would become the next US President. I also thought that Hillary Clinton would be his Vice President, taking the country one tolerable step closer to a female President.
Sadly, I was wrong about Edwards and I'll probably be proven wrong about Clinton.
Edwards as President was the only hope for Clinton to reach the While House. Now, with him out of the picture, she has absolutely no hope of becoming the Democratic nominee, let alone President.
This leaves Barak Obama, the candidate whose sole message can be summed up in a simple identity:
Hope=Change.
While these are two things the country has not enjoyed in a long time, they suggest nothing but empty promises. With extremely little experience in politics, Obama's message of hope will never be enough to convince enough Americans that he represents the potential for change. This will become painfully obvious in contrast to John McCain (b. 1936).
Instead, it was the message of Edwards that offered the most marketable solution to America's problems:
Change=Hope
Unfortunately for Edwards, he wasn't able to convince enough people of the need for the changes he was prepared to make.
Better luck next time.
***************************
If you were hoping that the 2008 Presidential election would herald a sea-change in American politics, you will be sadly disappointed come January 2009.
The likelihood now is that a Republican will be in the White House and the politics of old will resume.
There is one silver lining to all of this: the odds are against John McCain to win, so you still stand to gain something from the outcome of the election!
But how is this possible? Isn't Barak Obama just the "change" the country needs?
He is. Unfortunately, the majority of voting Americans won't agree that someone from a minority group can lead the way.
With John Edwards now eliminated, two truly divisive candidates remain, neither of whom can convince enough voters to 'buy in' to their view of the world.
America's nightmare continues.
***************************
Last year I predicted that John Edwards would become the next US President. I also thought that Hillary Clinton would be his Vice President, taking the country one tolerable step closer to a female President.
Sadly, I was wrong about Edwards and I'll probably be proven wrong about Clinton.
Edwards as President was the only hope for Clinton to reach the While House. Now, with him out of the picture, she has absolutely no hope of becoming the Democratic nominee, let alone President.
This leaves Barak Obama, the candidate whose sole message can be summed up in a simple identity:
Hope=Change.
While these are two things the country has not enjoyed in a long time, they suggest nothing but empty promises. With extremely little experience in politics, Obama's message of hope will never be enough to convince enough Americans that he represents the potential for change. This will become painfully obvious in contrast to John McCain (b. 1936).
Instead, it was the message of Edwards that offered the most marketable solution to America's problems:
Change=Hope
Unfortunately for Edwards, he wasn't able to convince enough people of the need for the changes he was prepared to make.
Better luck next time.
***************************
If you were hoping that the 2008 Presidential election would herald a sea-change in American politics, you will be sadly disappointed come January 2009.
The likelihood now is that a Republican will be in the White House and the politics of old will resume.
There is one silver lining to all of this: the odds are against John McCain to win, so you still stand to gain something from the outcome of the election!
Wednesday, October 17, 2007
Manias, Panics and Greenspan
In case you were thinking of reading the memoirs of former US Federal Reserve Chairman, Alan Greenspan, there are three things I can recommend:
1) buy it;
2) buy it on Amazon.com;
3) also buy a copy of Manias, Panics, and Crashes: A History of Financial Crises;
thereby:
1) greatly improving your understanding of how policymakers react to economic and financial market volatility;
2) saving you some money;
3) suggesting to other people that they buy the same combination, potentially enhancing their (and your) understanding of how financial markets behave.
Reading both books will help sharpen your understanding of how financial markets and economic policy interact, helping to ensure you make more money when others are struggling to stay afloat or worse, living in fear of losing money of their own.
Luckily for you, the key messages contained within both of these books are summarised below.
For those of you with enough time to get through both books, you can stop reading here and go buy them now.
********************************
Memoirs often give famous people the first chance in their life to "come clean", revealing facts and tidbits that had until then remained a secret.
The first half of Alan Greenspan's "The Age of Turbulence" provides an unusual amount of information that was for the most part deliberately kept from the public during a period of almost 20 years.
One of the most important confessions that Greenpan makes about many of the issues he was presumed to be all-knowing is this:
"I really had no idea."
While Greenspan would (understandably) have been extremely reluctant to make this statement while Fed Chairman, he is now all too willing to reveal many of his inadequacies.
And even though we are being told this "after the event", much of what Greenspan says offer important insights into the way his successor, Ben Bernanke, is likely to be thinking about approaching the current turmoil in the financial markets.
A good example of Greenspan in honest, frank talk-mode, comes on page 156:
"Knowing when to start tightening [monetary policy], and by how much, and most important, when to stop was a fascinating and sometimes nerve-racking intellectual challenge... it didn't feel like "Oh, let's execute a soft landing", it felt more like "Let's jump out of this sixty-story building and try to land on our feet.""
Note these remarks were made in the context of the challenges facing the Fed during 1996, when the economy was cruising along nicely. During periods of financial market crisis, this uncertainty balloons. Being able to understand the mentality of policymakers in these circumstances is critical to formulating an investment strategy at such times.
And remember, the implications for monetary policy in reaction to certain events in the financial markets can be as important as the events themselves.
********************************
Greenspan's tenure at the Fed was marked by two distinct events, seperated by almost exactly 10 years: the 1987 stock market crash and the Asian/Russian financial crises of 1997/8.
Both of these events, as catalogued by Greenspan, both tell a story of a severe shock to the financial system coming at a time of a resilient economic expansion.
As a result, the emergency easing of monetary policy on both occassions were enough to prevent a pronounced and pervasive problem from becoming persistent. As Greenspan reflects on page 191, about the period following the Russian default in 1998:
"[the fear was growing that] after seven spectacular years... the US economic boom was coming to an end. That fear, it turned out, was premature. Once we coped with the Russian crisis, the boom would continue for another two years, until late 2000, when the business cycle finally turned."
A decade earlier, Greenspan, in his first year as Chairman, faced the biggest one-day loss ever in the stock market (-22.5%). But, as he reflects on page 110:
"Contrary to everyone's fears, the economy held firm, actually growing at a 2 percent annual rate in the first quarter of 1988 and at an accelerated 5 percent rate in the second quarter."
Two years later the cycle finally turned.
********************************
Two things should stick out a mile:
1) financial crises occur with odd regularity;
2) these crises occur at the late (though not final) stage of the economic cycle.
What's all that about then?
Well, this is what brings me to suggest reading Manias, Panics, and Crashes in conjunction with Greenspan's memoirs.
Manias makes two key observations:
1) economic theory is incomplete and thus incapable of explaining what, why and how financial crises occur;
2) all financial market crises are similar to each other.
While 1) is more of an academic point, 2) isn't. Not only is it consistent with the pattern of many historical crises of both the 19th and 20th centuries, it also makes perfect sense. As the economic cycle matures, much of what caused asset prices (i.e. equities) to rise will inevitably reach a point of saturation or obsolescence, bringing with it a costly transition to the "next phase" of the economic cycle.
This should also suggest the following likely scenario after the financial market crisis we have just witnessed this past summer:
1) The Fed will continue to provide additional liquity to the markets, thus avoiding any sustained downturn in the stock market;
2) the economic cycle will turn in 2 years;
3) at that point, there is little the Fed can do to prevent the stock market from falling, which it will likely do in an orderly fashion.
4) Ben Bernanke will start taking a bath each morning from now on.
1) buy it;
2) buy it on Amazon.com;
3) also buy a copy of Manias, Panics, and Crashes: A History of Financial Crises;
thereby:
1) greatly improving your understanding of how policymakers react to economic and financial market volatility;
2) saving you some money;
3) suggesting to other people that they buy the same combination, potentially enhancing their (and your) understanding of how financial markets behave.
Reading both books will help sharpen your understanding of how financial markets and economic policy interact, helping to ensure you make more money when others are struggling to stay afloat or worse, living in fear of losing money of their own.
Luckily for you, the key messages contained within both of these books are summarised below.
For those of you with enough time to get through both books, you can stop reading here and go buy them now.
********************************
Memoirs often give famous people the first chance in their life to "come clean", revealing facts and tidbits that had until then remained a secret.
The first half of Alan Greenspan's "The Age of Turbulence" provides an unusual amount of information that was for the most part deliberately kept from the public during a period of almost 20 years.
One of the most important confessions that Greenpan makes about many of the issues he was presumed to be all-knowing is this:
"I really had no idea."
While Greenspan would (understandably) have been extremely reluctant to make this statement while Fed Chairman, he is now all too willing to reveal many of his inadequacies.
And even though we are being told this "after the event", much of what Greenspan says offer important insights into the way his successor, Ben Bernanke, is likely to be thinking about approaching the current turmoil in the financial markets.
A good example of Greenspan in honest, frank talk-mode, comes on page 156:
"Knowing when to start tightening [monetary policy], and by how much, and most important, when to stop was a fascinating and sometimes nerve-racking intellectual challenge... it didn't feel like "Oh, let's execute a soft landing", it felt more like "Let's jump out of this sixty-story building and try to land on our feet.""
Note these remarks were made in the context of the challenges facing the Fed during 1996, when the economy was cruising along nicely. During periods of financial market crisis, this uncertainty balloons. Being able to understand the mentality of policymakers in these circumstances is critical to formulating an investment strategy at such times.
And remember, the implications for monetary policy in reaction to certain events in the financial markets can be as important as the events themselves.
********************************
Greenspan's tenure at the Fed was marked by two distinct events, seperated by almost exactly 10 years: the 1987 stock market crash and the Asian/Russian financial crises of 1997/8.
Both of these events, as catalogued by Greenspan, both tell a story of a severe shock to the financial system coming at a time of a resilient economic expansion.
As a result, the emergency easing of monetary policy on both occassions were enough to prevent a pronounced and pervasive problem from becoming persistent. As Greenspan reflects on page 191, about the period following the Russian default in 1998:
"[the fear was growing that] after seven spectacular years... the US economic boom was coming to an end. That fear, it turned out, was premature. Once we coped with the Russian crisis, the boom would continue for another two years, until late 2000, when the business cycle finally turned."
A decade earlier, Greenspan, in his first year as Chairman, faced the biggest one-day loss ever in the stock market (-22.5%). But, as he reflects on page 110:
"Contrary to everyone's fears, the economy held firm, actually growing at a 2 percent annual rate in the first quarter of 1988 and at an accelerated 5 percent rate in the second quarter."
Two years later the cycle finally turned.
********************************
Two things should stick out a mile:
1) financial crises occur with odd regularity;
2) these crises occur at the late (though not final) stage of the economic cycle.
What's all that about then?
Well, this is what brings me to suggest reading Manias, Panics, and Crashes in conjunction with Greenspan's memoirs.
Manias makes two key observations:
1) economic theory is incomplete and thus incapable of explaining what, why and how financial crises occur;
2) all financial market crises are similar to each other.
While 1) is more of an academic point, 2) isn't. Not only is it consistent with the pattern of many historical crises of both the 19th and 20th centuries, it also makes perfect sense. As the economic cycle matures, much of what caused asset prices (i.e. equities) to rise will inevitably reach a point of saturation or obsolescence, bringing with it a costly transition to the "next phase" of the economic cycle.
This should also suggest the following likely scenario after the financial market crisis we have just witnessed this past summer:
1) The Fed will continue to provide additional liquity to the markets, thus avoiding any sustained downturn in the stock market;
2) the economic cycle will turn in 2 years;
3) at that point, there is little the Fed can do to prevent the stock market from falling, which it will likely do in an orderly fashion.
4) Ben Bernanke will start taking a bath each morning from now on.
Thursday, October 04, 2007
A winning political slogan
David Cameron is trying to lead a revolution in British politics.
Unfortunately, most people see it for what it really is: a desperate bid for power.
This is why more people will continue to stay at home instead of going to the polling stations to vote.
And they'll remain there until there is a true revolution in the way politics 'works'.
********************************
The coming weeks will probably bring with it the opportunity for British people to choose the political party of their choice.
But what choice are they being offered?
Over the past couple of weeks, both Gordon Brown and David Cameron had the opportunity to set out their respective visions for the future of Britain.
As you would expect, both men made a very compelling presentation.
Cameron managed to set out the Conservative Party's case in a most eloquent (and even unscripted) way at Blackpool this week. What his argument boils down to is this:
'Vote for the Conservative Party so we can correct the mistakes that the Labour Party made after correcting the mistakes that the Conservative Party made before them!'
However much he glosses over it, it is this message which gets through loud and clear to me as a (potential) voter.
To get me to vote, not to mention actually getting my vote, what he should have said was this.
'Vote for me so that I can quit and then transfer the power back to you.'
The choice this presents to Cameron is exactly what he offers to us: none at all.
He has no interest in giving decision-making powers back to the people and we have no interest in giving it to him.
And around and around it will go, as an ever smaller proportion of the voting population will decide who governs over the rest of us.
Eventually something will be done by someone with enough vision to make a real change, but the chances of that happening in our lifetime are extremely remote.
********************************
Politicians are very smart people. They can absorb an enourmous amount of information, have excellent communication skills and make fantastic presentations.
Why not harness all of these skills and remove the powers they have to make decisions on our behalf?
I believe that the best role a politician can play is as a consultant to the people.
If a new law or budget is required to deal with a social problem or to build a new school, have politicans consult with people about the options available and have the public decide on which course of action to take.
This is politics that engages the public and gives the power back to them.
I'd vote for that. Wouldn't you?
Unfortunately, most people see it for what it really is: a desperate bid for power.
This is why more people will continue to stay at home instead of going to the polling stations to vote.
And they'll remain there until there is a true revolution in the way politics 'works'.
********************************
The coming weeks will probably bring with it the opportunity for British people to choose the political party of their choice.
But what choice are they being offered?
Over the past couple of weeks, both Gordon Brown and David Cameron had the opportunity to set out their respective visions for the future of Britain.
As you would expect, both men made a very compelling presentation.
Cameron managed to set out the Conservative Party's case in a most eloquent (and even unscripted) way at Blackpool this week. What his argument boils down to is this:
'Vote for the Conservative Party so we can correct the mistakes that the Labour Party made after correcting the mistakes that the Conservative Party made before them!'
However much he glosses over it, it is this message which gets through loud and clear to me as a (potential) voter.
To get me to vote, not to mention actually getting my vote, what he should have said was this.
'Vote for me so that I can quit and then transfer the power back to you.'
The choice this presents to Cameron is exactly what he offers to us: none at all.
He has no interest in giving decision-making powers back to the people and we have no interest in giving it to him.
And around and around it will go, as an ever smaller proportion of the voting population will decide who governs over the rest of us.
Eventually something will be done by someone with enough vision to make a real change, but the chances of that happening in our lifetime are extremely remote.
********************************
Politicians are very smart people. They can absorb an enourmous amount of information, have excellent communication skills and make fantastic presentations.
Why not harness all of these skills and remove the powers they have to make decisions on our behalf?
I believe that the best role a politician can play is as a consultant to the people.
If a new law or budget is required to deal with a social problem or to build a new school, have politicans consult with people about the options available and have the public decide on which course of action to take.
This is politics that engages the public and gives the power back to them.
I'd vote for that. Wouldn't you?
Monday, September 17, 2007
Sale still on!
All the scenes of panic in the UK high street will have given the public a first-hand view of a bank run.
At the same time, there is a lot of debate about whether or not the US economy will fall into a recession and what this might mean for the rest of the world.
It is tempting to think it will get much much worse before it gets any better.
*************************
While the bad news is far from over, it would be premature at this stage to conclude that a US recession is inevitable.
But this is exactly what financial markets all over the world did in August.
Trillions of dollars were wiped off the value of financial assets on speculation that companies around the world would report weaker earnings and the world economy would stagnate.
Well it hasn't, yet. And whether it will be as bad as some would have us believe is still an open question.
What this experience should teach anyone who is actively investing their own money in the financial markets (myself included) is that the underlying strength of the global economy is what determines whether financial markets are likely to perform well or not, and not the other way around.
*************************
In other words, when stock markets sell off out of blind panic (as they did in August), but the underlying economic data remains strong, this should present an opportunity to any investor; rather like buying clothes on sale.
And the sale is still on! The same jumper that looked a bargain a few weeks ago is still a bargain today.
But at some point the current stock will go bad and won't be as good a bargain as before.
When a US recession becomes unavoidable, it will be time to shop elsewhere. Government bonds will be all the rage then.
Watch this space!
Wednesday, August 15, 2007
Misleading hindsight
In case you've just spent the past few weeks on a desert island (or a very exotic one), you would have missed one of the most panic-driven sell-offs in financial markets in years, if not decades.
One unfortunate aspect of the latest rout is that most experts don't seem to know how much further markets are likely to fall.
This puts not just experts, but people who rely on experts (e.g. investors), in an extremely awkward situation. Without any conviction on which way to trade, markets can at best go sideways or at worst come crashing down.
In reality, we're simpy in the midst of something the world has witnessed ever since the dawn of time: an extremely rare and unexpected event with an uncertain outcome.
While we usually get to hear about why a major event such as this occured after it occured, we now have the rare opportunity to witness how truly limited our understanding of uncertainty in financial markets has remained despite all of the advances in mathematical modelling and trading strategies.
******************************
There's nothing new about a lurch downwards in markets, otherwise known as "corrections". They usually occur as the result of a market being "overbought", which then leads to an inevitable decline (usually around 10%) and a subsequent "bounce".
At the moment, the exact cause of the downturn is not fully understood, so making a prediction about when and how much of a bounce is likely, is more uncertain than usual.
One explanation doing the rounds is that market participants have failed to learn that they fail to learn, otherwise known as a "black swan" event. This describes how after something completely unexpected happens, we come up with an explanation that attempts to explain exactly what happened and why it was predictable after all, thus creating a false sense of certainty about future uncertainty.
This problem is compounded by people attempting to draw analogies with past events to try and guage how much worse it might get. This effectively uses a backward-looking explanation of the past to help predict what might happen in the future!
If you were to suggest, based on your experiences at the time, that the current episode is similar to the events of October 1987, most people who work in the financial industry would have to take you at your word, since they are unlikely to have been working (alive??) at the time!
The more recent the period with which you make the comparison the more people you are likely to convince. In the end, there is a story to satisfy everyone. However, every story will have one thing in common: a misleading reference to the past in an attempt the predict the future.
******************************
We are at one of those rare times when an expert will tell you exactly what they have always known about the future: very little.
At the end of the day all you can know is what you know. While it may not always be possible to know why something is happening, it is possible to guage the ability of the global economy to weather the storms that come along.
At the moment markets are falling while the global economy is resilient. If the environment were less bouyant than at present then the current turbulence in financial markets would have much wider ramifications than they currently do.
In the meantime all we can do is sit tight and hope for the best!
One unfortunate aspect of the latest rout is that most experts don't seem to know how much further markets are likely to fall.
This puts not just experts, but people who rely on experts (e.g. investors), in an extremely awkward situation. Without any conviction on which way to trade, markets can at best go sideways or at worst come crashing down.
In reality, we're simpy in the midst of something the world has witnessed ever since the dawn of time: an extremely rare and unexpected event with an uncertain outcome.
While we usually get to hear about why a major event such as this occured after it occured, we now have the rare opportunity to witness how truly limited our understanding of uncertainty in financial markets has remained despite all of the advances in mathematical modelling and trading strategies.
******************************
There's nothing new about a lurch downwards in markets, otherwise known as "corrections". They usually occur as the result of a market being "overbought", which then leads to an inevitable decline (usually around 10%) and a subsequent "bounce".
At the moment, the exact cause of the downturn is not fully understood, so making a prediction about when and how much of a bounce is likely, is more uncertain than usual.
One explanation doing the rounds is that market participants have failed to learn that they fail to learn, otherwise known as a "black swan" event. This describes how after something completely unexpected happens, we come up with an explanation that attempts to explain exactly what happened and why it was predictable after all, thus creating a false sense of certainty about future uncertainty.
This problem is compounded by people attempting to draw analogies with past events to try and guage how much worse it might get. This effectively uses a backward-looking explanation of the past to help predict what might happen in the future!
If you were to suggest, based on your experiences at the time, that the current episode is similar to the events of October 1987, most people who work in the financial industry would have to take you at your word, since they are unlikely to have been working (alive??) at the time!
The more recent the period with which you make the comparison the more people you are likely to convince. In the end, there is a story to satisfy everyone. However, every story will have one thing in common: a misleading reference to the past in an attempt the predict the future.
******************************
We are at one of those rare times when an expert will tell you exactly what they have always known about the future: very little.
At the end of the day all you can know is what you know. While it may not always be possible to know why something is happening, it is possible to guage the ability of the global economy to weather the storms that come along.
At the moment markets are falling while the global economy is resilient. If the environment were less bouyant than at present then the current turbulence in financial markets would have much wider ramifications than they currently do.
In the meantime all we can do is sit tight and hope for the best!
Sunday, August 05, 2007
If...
Traders who work in the financial markets don't have time for poetry.
This is unfortunate, since there's one poem that contains a lot of helpful advice for those who have been in the red these past few weeks.
The English writer, Rudyard Kipling wrote a famous poem in 1910 entitled, If. It opens:
"If you can keep your head when all about you are losing theirs..."
In the financial world this could be taken as meaning:
"A contrarian investor has much to gain". Or more concisely:
"Buy low, sell high".
But there is also a deeper message. It stresses the importance of self-belief and, more importantly, scepticism towards what other people are saying.
If you take any message from this poem, it should be that while sometimes you may be right and sometimes you may be wrong, if you stop believing in yourself, you might as will give up and go home.
*************************
The past two weeks have seen significant losses across equity markets around the world. At the same time there is a belief among many that not only was it coming, but it's only just begun.
If you stop and consider this for a moment you realise that anything anyone says about the financial markets will always have an implicit bias.
Anyone with an opinion about financial markets either has money, their reputation or both at stake. If someone had expected markets to fall then they are likely to say the markets have further to fall. If they hadn't expected markets to fall, they probably won't expect them to fall much further.
Who should you believe?
The first point to make is that until now a lot of people had been expecting a "correction" in the markets "at some point", so the appearance of such a move is proof to many that not only were they right, but they were right when others had not believed them. This "pride" effect takes time to subside and since pride is always expressed loudly, it tends to find its way into the mainstream media faster than Paris Hilton on her way to jail.
Then there are those who didn't expect it to happen and weren't prepared for the consequences. These people are more in shock than anything else and will be pretty much useless for providing advice until things recover completely, which could take days, weeks or months.
Finally, there are the select few who saw it coming a mile away. They knew exactly when a significant selloff would take place and positioned themselves accordingly. Unfortunately, these people rarely express their thoughts in public. Think about it, if you knew when panic would strike markets and everyone would rush for the exits at the same time, would you advertise that fact? Unlikely.
In reality, the only person whose judgement we can truly rely upon is our own. Today's winner is likely to be tomorrow's loser.
*************************
"If you can make one heap of all your winnings and risk it on one turn of pitch-and-toss, and lose, and start again at your beginnings and never breathe a word about your loss..."
Never breathe a word about your loss. In other words: a loser never says when they losing while a winner usually tells you when when they're winning!
Everyone is wrong some of the time, so when they're right and they let you know this, be wary of not only what they are telling you, but why as well.
This is unfortunate, since there's one poem that contains a lot of helpful advice for those who have been in the red these past few weeks.
The English writer, Rudyard Kipling wrote a famous poem in 1910 entitled, If. It opens:
"If you can keep your head when all about you are losing theirs..."
In the financial world this could be taken as meaning:
"A contrarian investor has much to gain". Or more concisely:
"Buy low, sell high".
But there is also a deeper message. It stresses the importance of self-belief and, more importantly, scepticism towards what other people are saying.
If you take any message from this poem, it should be that while sometimes you may be right and sometimes you may be wrong, if you stop believing in yourself, you might as will give up and go home.
*************************
The past two weeks have seen significant losses across equity markets around the world. At the same time there is a belief among many that not only was it coming, but it's only just begun.
If you stop and consider this for a moment you realise that anything anyone says about the financial markets will always have an implicit bias.
Anyone with an opinion about financial markets either has money, their reputation or both at stake. If someone had expected markets to fall then they are likely to say the markets have further to fall. If they hadn't expected markets to fall, they probably won't expect them to fall much further.
Who should you believe?
The first point to make is that until now a lot of people had been expecting a "correction" in the markets "at some point", so the appearance of such a move is proof to many that not only were they right, but they were right when others had not believed them. This "pride" effect takes time to subside and since pride is always expressed loudly, it tends to find its way into the mainstream media faster than Paris Hilton on her way to jail.
Then there are those who didn't expect it to happen and weren't prepared for the consequences. These people are more in shock than anything else and will be pretty much useless for providing advice until things recover completely, which could take days, weeks or months.
Finally, there are the select few who saw it coming a mile away. They knew exactly when a significant selloff would take place and positioned themselves accordingly. Unfortunately, these people rarely express their thoughts in public. Think about it, if you knew when panic would strike markets and everyone would rush for the exits at the same time, would you advertise that fact? Unlikely.
In reality, the only person whose judgement we can truly rely upon is our own. Today's winner is likely to be tomorrow's loser.
*************************
"If you can make one heap of all your winnings and risk it on one turn of pitch-and-toss, and lose, and start again at your beginnings and never breathe a word about your loss..."
Never breathe a word about your loss. In other words: a loser never says when they losing while a winner usually tells you when when they're winning!
Everyone is wrong some of the time, so when they're right and they let you know this, be wary of not only what they are telling you, but why as well.
Friday, July 20, 2007
America awakes from its dream
Around 8 out of 10 Americans don't own a passport but even those with one are unlikely to want to use it.
But this is not for the reason you might think (I'll leave that thought with you!).
The main reason why I believe no American would want to travel abroad this summer is because the value of the US dollar is close to the weakest it has ever been.
As I wrote over two years ago there is good reason to expect the dollar to fall further in value in coming years.
As always, people have two questions about the dollar: how much further can it fall and what does this mean for the rest of the world?
In short, it will keep falling as the Chinese yuan continues to strengthen (and when that will stop nobody knows). And it's not so much what it will mean for the rest of the world but what the rest of the world will mean for the dollar.
If there is a further diminishing appetite for US dollars by countries including China and Japan, then the dollar could fall even more rapidly, sparking a sell-off in US assets and a major crisis across global markets (fingers crossed that won't happen!).
In any case, there is the potential for people to make a LOT of money from the dollar's decline. After all, if you're going to bet, bet big.
**********************
I made two predictions in 2005, one that turned out to be right and the other one that is turning out to be right.
The best prediction I made was to expect the British Pound to strengthen, thus providing a "safe haven" against the likely decline in the dollar.
Up, Up & Away!
Since mid-2005, the Pound has strengthened by almost 20% against the dollar as money has flown to the high yield of British assets (bonds, real estate etc.). Over the same period the FTSE 100 share index has also gained over 30%.
So for investors who had to choose between markets around the world, owning UK shares in Pounds would have been a very wise move (Britsh people have just had to sit back and watch the money roll in... and out to the high street!). For now, this looks like a good strategy to continue for the rest of the year.
**********************
A forecast I made that is beginning to prove correct is a more rapid decline in the dollar overall.
Calm before the storm?
After I predicted a more rapid decline in the dollar in 2005, exactly the opposite proceeded to happen (perhaps some very influential contrarian investors read my blog after all!). For the first year since 2000, the dollar strengthened against the major currencies of the world.
But like most forecasts that are grounded in basic common sense, eventually it prevails and now marks the point where reality begins to "kick in".
Unfortunately, a decline in the dollar is a double-edged sword.
First is the obvious diminished purchasing power of American consumers. The second relates to China.
There has been a lot of pressure on China to strengthen the yuan. While this has happened, albeit gradually, it has come at a time when the dollar has weakened. And since the yuan is still partly pegged to the dollar, the Chinese currency has reflected this weakness, offsetting part of the strength.
So, if the dollar continues to weaken then not only will it hurt the purse of American consumers, US producers will also lose competitiveness to Chinese manufacturers. That's not to mention the fact that a weaker dollar reduces the value of US assets currently held by the Chinese government in the form of US government bonds, which adds to the incentive for the Chinese to diversify into other currencies (British pounds perhaps??). Either way, this does not bode well for the US dollar at all.
**********************
It is not the best time to be an American citizen.
Apart from a deteriorating reputation their country has in certain regions of the world (not mentioning any names!), the value of their home is likely to be flat or declining and they can't afford to go shopping for clothes in Europe.
At some point things will improve but at the moment it's difficult to see this happening any time soon.
But this is not for the reason you might think (I'll leave that thought with you!).
The main reason why I believe no American would want to travel abroad this summer is because the value of the US dollar is close to the weakest it has ever been.
As I wrote over two years ago there is good reason to expect the dollar to fall further in value in coming years.
As always, people have two questions about the dollar: how much further can it fall and what does this mean for the rest of the world?
In short, it will keep falling as the Chinese yuan continues to strengthen (and when that will stop nobody knows). And it's not so much what it will mean for the rest of the world but what the rest of the world will mean for the dollar.
If there is a further diminishing appetite for US dollars by countries including China and Japan, then the dollar could fall even more rapidly, sparking a sell-off in US assets and a major crisis across global markets (fingers crossed that won't happen!).
In any case, there is the potential for people to make a LOT of money from the dollar's decline. After all, if you're going to bet, bet big.
**********************
I made two predictions in 2005, one that turned out to be right and the other one that is turning out to be right.
The best prediction I made was to expect the British Pound to strengthen, thus providing a "safe haven" against the likely decline in the dollar.
Up, Up & Away!
Since mid-2005, the Pound has strengthened by almost 20% against the dollar as money has flown to the high yield of British assets (bonds, real estate etc.). Over the same period the FTSE 100 share index has also gained over 30%.
So for investors who had to choose between markets around the world, owning UK shares in Pounds would have been a very wise move (Britsh people have just had to sit back and watch the money roll in... and out to the high street!). For now, this looks like a good strategy to continue for the rest of the year.
**********************
A forecast I made that is beginning to prove correct is a more rapid decline in the dollar overall.
Calm before the storm?
After I predicted a more rapid decline in the dollar in 2005, exactly the opposite proceeded to happen (perhaps some very influential contrarian investors read my blog after all!). For the first year since 2000, the dollar strengthened against the major currencies of the world.
But like most forecasts that are grounded in basic common sense, eventually it prevails and now marks the point where reality begins to "kick in".
Unfortunately, a decline in the dollar is a double-edged sword.
First is the obvious diminished purchasing power of American consumers. The second relates to China.
There has been a lot of pressure on China to strengthen the yuan. While this has happened, albeit gradually, it has come at a time when the dollar has weakened. And since the yuan is still partly pegged to the dollar, the Chinese currency has reflected this weakness, offsetting part of the strength.
So, if the dollar continues to weaken then not only will it hurt the purse of American consumers, US producers will also lose competitiveness to Chinese manufacturers. That's not to mention the fact that a weaker dollar reduces the value of US assets currently held by the Chinese government in the form of US government bonds, which adds to the incentive for the Chinese to diversify into other currencies (British pounds perhaps??). Either way, this does not bode well for the US dollar at all.
**********************
It is not the best time to be an American citizen.
Apart from a deteriorating reputation their country has in certain regions of the world (not mentioning any names!), the value of their home is likely to be flat or declining and they can't afford to go shopping for clothes in Europe.
At some point things will improve but at the moment it's difficult to see this happening any time soon.
Friday, June 15, 2007
Learning from the past
Why are economists so bad at forecasting?
As I mentioned before, economists need to make assumptions about the future in order to forecast.
Unfortunately, these assumptions tend to be wrong, as do their forecasts, which is why forecasts tend to be revised on a regular basis.
But I've come to realise that bad forecasting is also the result of looking at what happened in the past and failing to learn from it in a way that will help and not hinder predicting what could happen in the future.
While we are used to hearing that "the past is no indication of future performance", it is still possible to glean from past data critical information that will help in making a forecast more accurate and less prone to revisions.
Economists fail to take away the right information from past observations and keep making the same mistakes over and over again.
*********************
So, how can the past help us to predict the future? It depends on how you look at what happened.
Imagine you travelled down a road at 8am and it becomes very heavily congested. Based on what you have observed, you might also expect that if you travel down the same road tomorrow at 11am then it will be congested again.
Of course, this fails to take account of the fact that before 9am the road is unusually congested, since it's in the middle of the rush hour.
Economists make a similar mistake when using past observations to help forecast the future path of the economy.
They tend to look back at what actually happened rather than at what caused it to happen. In other words, economists look back at backward-looking data to help predict the future!
*********************
In trying to predict a recession it would be better to look at what leading indicators were doing in the run up to previous recessions and compare this to what they are doing now.
Instead, economists look at what happened to GDP, unemployment and inflation, which give no indication about the future, to predict what will happen to GDP, unemployment and inflation!
Part of the reason why economists don't use leading indicators is because they don't trust their accuracy. Currently, the OECD and Conference Board produce the most widely-followed leading indexes but these have had a poor record at predicting recessions.
Another reason why economists are sceptical about leading indexes is because they don't fully understand how to accurately construct one of their own.
A lot of work has been done in this area by my former employers at ECRI and you can follow some of their leading indexes in the press. However, since they are a private firm only a small amount of information is made public. This is unfortunate, since they have a pretty decent record at predicting turning points and in particular, the timing of recessions.
*********************
The fact that economists make bad forecasts is not necessarily a problem (they can be useful in other ways too!). However, financial markets look to economists, either in the private sector, government or at central banks to guide expecations about the future. If these expecations prove to be inaccurate or plain wrong then stock and bond markets will be unecessarily volatile. In reality, this is what we observe.
Trying to understand what caused something to happen in the past can help predict what is likely to happen in the future.
It would be like saying that a road (economy) that becomes heavily congested (has very high gasoline prices) at 11am (when leading indicators are stronger) will be better able to deal with that congestion (avoid a recession) than a road (economy) that becomes heavily congested (has high gasoline prices) at 8am (when leading indicators are weak).
Wouldn't it be better if we could assess the future of the economy with as much clarity as congestion on the roads?
As I mentioned before, economists need to make assumptions about the future in order to forecast.
Unfortunately, these assumptions tend to be wrong, as do their forecasts, which is why forecasts tend to be revised on a regular basis.
But I've come to realise that bad forecasting is also the result of looking at what happened in the past and failing to learn from it in a way that will help and not hinder predicting what could happen in the future.
While we are used to hearing that "the past is no indication of future performance", it is still possible to glean from past data critical information that will help in making a forecast more accurate and less prone to revisions.
Economists fail to take away the right information from past observations and keep making the same mistakes over and over again.
*********************
So, how can the past help us to predict the future? It depends on how you look at what happened.
Imagine you travelled down a road at 8am and it becomes very heavily congested. Based on what you have observed, you might also expect that if you travel down the same road tomorrow at 11am then it will be congested again.
Of course, this fails to take account of the fact that before 9am the road is unusually congested, since it's in the middle of the rush hour.
Economists make a similar mistake when using past observations to help forecast the future path of the economy.
They tend to look back at what actually happened rather than at what caused it to happen. In other words, economists look back at backward-looking data to help predict the future!
*********************
In trying to predict a recession it would be better to look at what leading indicators were doing in the run up to previous recessions and compare this to what they are doing now.
Instead, economists look at what happened to GDP, unemployment and inflation, which give no indication about the future, to predict what will happen to GDP, unemployment and inflation!
Part of the reason why economists don't use leading indicators is because they don't trust their accuracy. Currently, the OECD and Conference Board produce the most widely-followed leading indexes but these have had a poor record at predicting recessions.
Another reason why economists are sceptical about leading indexes is because they don't fully understand how to accurately construct one of their own.
A lot of work has been done in this area by my former employers at ECRI and you can follow some of their leading indexes in the press. However, since they are a private firm only a small amount of information is made public. This is unfortunate, since they have a pretty decent record at predicting turning points and in particular, the timing of recessions.
*********************
The fact that economists make bad forecasts is not necessarily a problem (they can be useful in other ways too!). However, financial markets look to economists, either in the private sector, government or at central banks to guide expecations about the future. If these expecations prove to be inaccurate or plain wrong then stock and bond markets will be unecessarily volatile. In reality, this is what we observe.
Trying to understand what caused something to happen in the past can help predict what is likely to happen in the future.
It would be like saying that a road (economy) that becomes heavily congested (has very high gasoline prices) at 11am (when leading indicators are stronger) will be better able to deal with that congestion (avoid a recession) than a road (economy) that becomes heavily congested (has high gasoline prices) at 8am (when leading indicators are weak).
Wouldn't it be better if we could assess the future of the economy with as much clarity as congestion on the roads?
Sunday, June 10, 2007
Go fishing
It's not unusual to hear people complain about the rising cost of living.
Our grandparents and parents have seen a rapid increase in the cost of living throughout their lives.
But that was just the beginning. They could never have anticipated what would come next.
What was affordable to our parents is unaffordable to many of us now: buying a house, driving a car, going on holiday, even buying a cup of coffee.
What some might consider fundamental to living a 'normal' life has now gone beyond the reach of the average person.
How it became this bad has already entered the mainstream media: developing countries such as China and India have been using natural resources so intensely that it has pushed up the price of everything that developed countries use every day.
What is not often discussed is what this 'new world' will mean for the lifestyle of millions, if not billions of people all over the developed (i.e. rich) world.
***************************
As I mentiond, a rise in the cost of living is nothing new.
The process of industrialisation and technological change has improved everyone's standard of living.
But this improvement has always come at a price.
After all, any rise in the cost of living is an inevitable by-product of an improving standard of living: we all need to want more to be willing to pay and hence justify its production.
This is simple supply and demand, as illustrated in my nifty little chart below:
The price of growth
What this chart shows is the rapid and increasing cost of living seen over the past 100 years or so.
Over that time, whenever there was an improvement in the standard of living and an accompanying rise in the cost of living, there was always an increase in demand (D,D',D''' etc.) to match the increase in supply (S, S', S'' etc.).
This process has accelerated in the past 10-20 years, especially with the rise of computer technology and globalisation. Note the chart does simplify a trend (after all, there could arguably have been a fall in the cost of living line over some periods, although the trend is certainly up), but it still manages to capture the current problem: a rise in the cost of living that has created a mis-match between supply and demand.
Our grandparents and parents have seen a rapid increase in the cost of living throughout their lives.
But that was just the beginning. They could never have anticipated what would come next.
What was affordable to our parents is unaffordable to many of us now: buying a house, driving a car, going on holiday, even buying a cup of coffee.
What some might consider fundamental to living a 'normal' life has now gone beyond the reach of the average person.
How it became this bad has already entered the mainstream media: developing countries such as China and India have been using natural resources so intensely that it has pushed up the price of everything that developed countries use every day.
What is not often discussed is what this 'new world' will mean for the lifestyle of millions, if not billions of people all over the developed (i.e. rich) world.
***************************
As I mentiond, a rise in the cost of living is nothing new.
The process of industrialisation and technological change has improved everyone's standard of living.
But this improvement has always come at a price.
After all, any rise in the cost of living is an inevitable by-product of an improving standard of living: we all need to want more to be willing to pay and hence justify its production.
This is simple supply and demand, as illustrated in my nifty little chart below:
The price of growth
What this chart shows is the rapid and increasing cost of living seen over the past 100 years or so.
Over that time, whenever there was an improvement in the standard of living and an accompanying rise in the cost of living, there was always an increase in demand (D,D',D''' etc.) to match the increase in supply (S, S', S'' etc.).
This process has accelerated in the past 10-20 years, especially with the rise of computer technology and globalisation. Note the chart does simplify a trend (after all, there could arguably have been a fall in the cost of living line over some periods, although the trend is certainly up), but it still manages to capture the current problem: a rise in the cost of living that has created a mis-match between supply and demand.
What this means is that the current increase in the supply of goods and services has not, and will continue to not be matched by an equivalent increase in demand. (Note: this is the case for developed countries)
***************************
So, what does all this mean?
In reality, quite a lot.
Firstly, substitution.
Instead of buying houses, people will rent. Instead of driving cars, people will use public transport. Instead of going to Starbucks, people will bring a flask to work or just drink water (from the tap!).
Secondly, people will change their lifestyles.
In the chart, any increase in demand that matches the increase in supply has an associated "sacrifice" that must be made.
Once people decide that the necessary sacrifice is not justified, or affordable, they will opt for a different way to use their free time and spare cash.
One option might be to go fishing.
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