Don’t Panic

5 January 2009

Rethinking the Financial Crisis

Keep of the Grass, by Thomas Hawk, with Creative Commons licence (Attribution-Noncommercial 2.0 Generic)Writing in his very aptly named Unwritten Laws of Business, W.J. King implored his readers to “distinguish between isolated cases and real epidemics”, which is always a handy knack to master. “Most crises”, he explained, “aren’t half as bad as they appear at first”. That’s certainly food for thought these days, and it brings the psychology of market downturns to the fore. I’ve previously written about the extent of the world’s financial travails, and it’s easy to imagine that the worst is yet to come. But even if that is the case, and I have little reason to suggest it isn’t, just what will that worst case be?

Andy Singh has thought a bit about this, and over at Seeking Alpha he lays out a clear argument for thinking that the Great Depression should not be the model disaster at which we glance nervously. The size of the US economy has been shrinking for around 12 months, but the Depression lasted for 43 months. This, in itself, proves nothing, but given that the deep recessions of the past, including those covering the entire world economy, have ended with boosts in US consumer spending, there is less to worry about now. The European Union and the so-called BRIC countries – Brazil, Russia, India and China – offer much larger consumer spending blocks now.

The world doesn’t rely on just one economic hero any more.

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Money Changes Everything

30 December 2008

But You Might Not Like What You Get

"The filthy lucre", by helmet13, with Creative Commons licence (Attribution 2.0 Generic)Money can fool the most rational of people, lure them into the most egregious assumptions about wealth, how to attain it, and the ways it which it should be maintained. Take, for instance, the investors in Bernard Madoff’s Giant Lie, who really didn’t see it coming despite at least two respected analysts specifically noting that no hedge fund – or any other investment vehicle for that matter – could maintain almost identical returns, month in, month out. In retrospect the danger seems obvious. Perhaps those with less money to throw around have more of the wisdom that comes with caution, but hindsight is a beguiler and we’ll never really know.

In the late 1990s no-one questioned the capacity of Long-Term Capital Management to drag in bumper, low-risk returns with 50 times more debt than it had in assets. With two respected financial economists on board, a gaggle of market boffins who had defected from Salomon Brothers investment bank and an overwhelming arrogant belief that the market would work the way it should and no other, the company even managed to lure investment from central banks around the world. The returns were truly staggering for a while . . .

Another cautionary tale of American excess about to wind up, you might think. But, no, it’s bigger than that. In late 1998 Russia defaulted on its debt denominated in rubles, a few arbitrage trades went bad, and one small hedge fund came within a weekend of destroying the world’s financial system.

Hang Glider, by J0nB0n, with Creative Commons Licence (Attribution-Noncommercial-Share Alike 2.0 Generic)So, debt and arrogance dazzle – that’s the unfortunate nature of investment, the turbid mainstream of making money and making it work. Relatively few people make money investing, the risks are always as high as the returns and homespun wisdom is decidedly absent from many wealth-creation schemes. Even my mother knows that, and tells me I should take out a mortgage to buy a property. But I’m not particularly interested in debt and am furiously studying how to invest wisely. My mother counters with her argument that the stock market is, well, evil, and it’s hard to argue with that these days. But she stumbles and uses the example of Storm Financial, an investment advice company in my home town of Townsville. Now, I know something about that.

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